What might happen if you were to receive a warning letter from the FDA? Or if a person claimed to be physically harmed or injured by a product of yours? How would you pay for the expenses incurred in responding to the FDA or prepare for a potential lawsuit?
i. Product Liability Insurance
Insurance is a critical risk management strategy. Even the safest botanical producers can be sued, and insurance provides a producer with the means and expertise to defend itself. In many ways, having insurance is like having an attorney on retainer. Usually when we think about insurance, we think about the funds an insurance company will pay out to the person who is injured for medical bills. But there is a lot that happens before getting to the point of paying bills and settling the claim.
Much of what happens before that is that an insurance company will fight to try to make sure you, the botanical producer, isn’t found liable to avoid having to pay out on the claim. So, when you think about adding additional insurance policies to your annual budget, make sure you are contemplating all that an insurance policy will give you—it will help you pay medical bills or whatever other judgment that might be entered against you, but almost more importantly attorneys from the insurance company will navigate the court process and advocate on your behalf! It can also help to think about insurance as a means of protecting your customers. If the unthinkable does happen, then you will have secured for them a means for them to be paid for their inconvenience or injury.
However, to receive these benefits, you need to select and pay for the correct insurance policy. When you are in crisis and need to file a claim is the worst time to discover that you have a policy exclusion that won’t cover the incident that you’re trying to resolve.
Typically, business owners secure a commercial general liability insurance policy. This is overall coverage and might not cover everything you think it will. First, you’ll want to confirm that your policy covers product liability. Product liability insurance can be purchased as a stand-alone policy but is often part of a generalized liability coverage plan. Either way, you will want to have a solid products liability insurance plan. A products liability lawsuit can easily make a small business go under very quickly. The cost of defending a lawsuit is usually what spells the demise of the company, not payouts to any injured party. Therefore, even before a suit is settled a small business without proper insurance could have spent all its assets just to defend itself from the claims.
As a producer, you will need to have detailed conversations with an insurance agent knowledgeable about insurance for dietary supplements and cosmetics. The following are aspects of the botanical producer business that you will want to ask your insurance agent about:
- What are my policy limits? Are there sub-limits for any specific type of claims? This is a threshold question, but you want to make sure you are clear on how much coverage you have. You’ll need to compare this with any data you are able to collect on the average cost of typical claims made against botanical producers.
- Are there company-specific dietary and herbal ingredient exclusions? These exclusions can vary from company to company and may or may not be based on reasonable, scientific information. If an ingredient you routinely use or want to use in products is excluded from the company’s policy, ask if you can get an endorsement for that ingredient. Be prepared to discuss the benefits and safety of the botanical, and potentially provide source materials to the insurance company. Don’t just ask this one time—review the list of ingredient exclusion on an annual basis—these change all the time!
- Often bodily injury arising out of mold and silica are standard exclusions. If these threats are relevant to your business, make sure to ask about them specifically!
- Some other examples of commonly excluded botanicals: kava, lobelia, comfrey, yohimbe, and magnolia. Any botanical that the FDA has issued a warning about is likely to be excluded from coverage.
- What additional insured coverage is included in the policy and how much would it be to add other insured relevant to my business? If you sell at trade shows or farmer’s markets, you will want to include the entities that run these markets in your coverage, even if it isn’t required by the market itself. Ask, too, about landlords or lessors that share space and/or liability for the space in which you manufacture. If you don’t add these figures to your insurance policy, make sure they are carrying their own coverage.
- Is product recall coverage included? Some policies will include small amounts for recalls, so make sure to get an accurate picture of limits for recall coverage or get an endorsement for adequate recall coverage. You will likely need to share your recall plan with your insurer to get this endorsement. When considering limits, make sure to include a budget for reimbursing your customers in case of a recall as well as the technical costs of managing the return and destruction of your product.
- If I sell nationally or internationally will my products be covered? Products liability insurance usually extends nationally but confirm with your agent that this is true. If you sell online and have international customers, make sure to add worldwide coverage to your policy.
- Do you offer and how much would it be to have an additional claim expense limit? Remember how we emphasized that the cost of defending a lawsuit is usually what would make a company go under? It might be a good idea to purchase additional claim expense limits that would add to the total limit in case of a lawsuit that eats up most if not all of your coverage limits. These products usually add about 10% to the total annual premium.
- Does the policy cover any injury stemming from my advertising or labeling?
Oftentimes there are exclusions for intentional bad acts (knowingly violating a person’s rights), engaging in false advertising, or violating a copyright or trademark. Get clear on what your policy offers in case the FTC or FDA sends a warning letter or someone accuses you of trademark infringement. Ask if there are products they sell to cover these contingencies.
The factors listed above only address product liability plans and their potential limitations. There are other areas of your business that need insurance coverage as well. Property insurance, auto insurance, worker’s compensation, employee benefits and employee injury insurance are all types of insurance that should be seriously considered. We recommend you fully describe your business and all your activities to your insurance agent—from a description of your facilities to your production procedures, to whether you ever invite the public to your business. This can be a daunting task and some insurance agents will not respond well. We think taking the risk of asking these questions is more important than bearing the risk later—of not knowing if your business has adequate insurance coverage.
Talk with your botanical community to get support in taking on this huge task! What companies do others work with? What have their experiences been? Do you know anyone who is in the same demographic as you and has a similar business who has asked the types of questions we suggest? What was their experience? Go further, too, ask your botanical community how they balance risk: are they purchasing all these additional endorsements? Or are they purchasing what coverage they can afford now, expecting to increase coverage as their business grows? What are people’s theory of insurance—and what are other’s plans for achieving full coverage?
ii. Other Risk Management Strategies
Outside of increasing your insurance coverage, there are good business practices that will help you reduce risk and the likelihood of claims being filed in the first place. First and foremost, the Current Good Manufacturing Practices (cGMPs) for your product set the baseline for production safety. If you were to be accused of negligence, this is likely the standard against which your production practices will be judged. Therefore, if you follow the cGMPs and keep the records that are required of you, you will have a good defense against any claims of negligence. Simply following cGMPs isn’t perfect protection, of course, but it is the smallest first step you can take to increase your resiliency. See the cGMP section of this guide for an overview of what cGMPs entail. In short, the cGMPs that apply to dietary supplements require an extensive cleaning and sanitation program, clear specifications for your products with testing to confirm the products are meeting your internally set specifications, recall procedures, and verification on input procedures. You can see how learning how to effectively implement cGMPs would increase the verifiable safety and consistency of your product.
But cGMPs are just the starting point. Being attentive to the rules around making your label truthful and not misleading will also build your resiliency. This will likely mean including only conservative claims on the label or getting review from a trusted source—a mentor or potentially an attorney—if you want to make a stronger claim. Consider doing a trademark search on phrases, words, or symbols that you want to use on your product. Search the internet for the name of your product to make sure there aren’t identically named products with which you would be competing.
Keep abreast of the dietary ingredients and herbs that the FDA is concerned about and consider not using those ingredients. And remember, not all incidents are the fault of the producer. Allergic reactions, unanticipated side effects, or negative interactions with prescribed drugs are all quite possible and very difficult to protect against. Do not assume you are without risk. Continue your botanical education, especially around the safety of herbs and drug interactions that might occur. The best way to do this is to stay connected to the herbal community so you hear news alerts and have trusted people to whom to turn if something goes awry.
Finally, let’s talk briefly about protecting your personal assets. All the strategies we’ve discussed above protect your business assets. If you don’t take steps to properly separate your business and personal assets, then any debts your business takes on can be satisfied out of your personal funds and possessions. In order to properly separate your business and personal assets, one would file a business entity that provides liability protection. A LLC or a S-Corporation are the most common examples, but cooperatives and non-profits achieve the same liability protection.
This is a very different type of liability protection than you receive via insurance. Insurance will pay your bills and forming a limited liability company will stop those business bills from being paid with your personal funds and material goods. You can see why this is important! Imagine the worst—battling a lawsuit and losing your business. How much worse would it be if you also lost your personal savings account and your extra car or other belongings to satisfy the any judgment that was entered against you?
Forming a limited liability entity is a relatively simply process that can protect certain of your assets if the worst were to happen. There are upfront and annual costs involved, and decisions that need to be made in conjunction with your accountant. Each year you will also be responsible for filing an annual report—essentially documenting your contact information with the state. It is important to bear in mind that the separation between business and personal assets can be destroyed even if you have a limited liability entity. For example, you cannot combine business and personal funds. A court won’t respect the boundaries between your business and personal assets if you don’t respect them throughout the life of the business. Practically, this means you need to have separate bank accounts and keep up with business formalities like annual meetings and proper documentation.
Action Steps for the Botanical Producer
There are specific questions a producer will need to pose to a farm insurance agent to make sure their value-added botanical products business is fully covered.
The Action Steps for this chapter are:
- Pose the questions listed here to my insurance agent.
- Apply for or obtain liability insurance appropriate for your botanical operation.