Greg Doherty, Bolton & Company03.02.15
Five years ago I wrote an article about the existence—or lack thereof—of false advertising insurance. Unfortunately, there is still a widespread perception that a commercial general liability policy provides defense and settlement costs for false advertising lawsuits. Further, class action lawsuits against dietary supplement companies for false advertising are becoming increasingly popular among plaintiffs’ attorneys.
Most people who purchase a commercial general liability policy (which includes the more popular terminology and coverage for “product liability”) understand that the most important coverage provided is for allegations of bodily injury due to the consumption or use of their product. However, another coverage area of a standard liability policy, called Personal and Advertising Injury (PAI), has created some confusion among many people. To some, the name itself implies coverage for any and all kinds of advertising activities, including false advertising. However, this is not the case—not by a long shot.
What is Covered by PAI?
In two words: not much. For the most part, PAI covers torts that were intentional acts where the legally protected rights of others, if violated or infringed, may result in a financial loss to them. Some examples of what is covered by PAI are:
As you can see, there is nothing in these examples that comes close to stating that an allegation of false advertising would be covered by PAI.
There are also certain exclusions that apply to PAI, which further clarify what is and isn’t covered. One of these exclusions was pivotal in a recent U.S. District Court case involving a dietary supplement company, Driven Sports, Inc., which sued its insurance company (General Star), claiming it should be covered for false advertising class action lawsuits under the PAI section.
The specific exclusionary wording, relied upon by General Star in this case, is virtually standard in all commercial insurance policies sold in the U.S., and is called the Failure to Conform Exclusion. Essentially, it says no coverage is afforded arising out of the failure of your goods or products to conform with any statement of quality or performance made in your advertisement.
The court ruled in favor of General Star, deciding the exclusion barred coverage for Driven Sports’ class actions. The underlying suits were filed in California and Illinois and alleged that the pre-workout product “Craze” was advertised as containing a natural extract as its active ingredient, when in fact the supplement contained a potentially dangerous methamphetamine analog.
This decision only reinforces what I tell clients all the time: if you think you have false advertising insurance coverage, think again. Is it available? No it is not. There is liability insurance available for companies actively involved in mass media advertising, called Advertisers Liability insurance, but it only offers somewhat broader coverage than PAI, and does not cover allegations of false advertising.
Also note that Prop 65 claims fall squarely into the category of false advertising claims. Again, do not expect your insurance company to defend you or pay a settlement for a Prop 65 claim, with one exception. One carrier is touting $100,000 of Prop 65 coverage in its policy. However, in the proverbial fine print, the coverage is actually limited only to reimbursement for civil fines and penalties, which statistics show is usually about 15% of total Prop 65 litigation costs.
New & Dangerous Questions on Insurance Applications
Underwriters of product liability insurance for dietary supplement companies are constantly trying to improve their underwriting process, in an attempt to separate the “good” risks from the potentially “bad” risks. You can’t fault them for having this goal.
Recently, though, one carrier has amended the application by asking questions that could erase your coverage later on.
These questions require a “yes” or “no” answer. There is no space provided on the application for an explanation of your answer. Thus, when you answer the question, you have warranted to the carrier that your answer is true and correct. Subsequently, if you have a claim, the carrier will immediately look at your application to see if you misrepresented anything on the application. If they feel you have, then they will attempt to rescind the insurance policy and leave you without coverage for the claim. We have seen this happen.
Here are two questions that are now part of one carrier’s application for product liability insurance:
Remember you have to answer “yes”or “no.” Do you see how dangerous these questions are? What does “fully compliant” mean? GMPs are a function of regulations arising out of the Food, Drug and Cosmetic Act (FDCA) and the Dietary Supplement Health and Education Act (DSHEA), not FDA, so the question is flawed. And what exactly are “all applicable federal regulations and industry standards?”
What if you answer “yes” to the first question, and then three months later have an FDA GMP inspection that results in some “inspectional observations” (as FDA calls them), and three months after that you have a product liability claim? Will this carrier then argue that you have effectively lied on your application and use that as a weapon to rescind your policy? Do not dismiss the possibility.
Be very careful when completing your next product liability application. Well-meaning but dangerous warranty questions are becoming more common and could pose a hazard for you at the worst possible time—after a claim comes in against you.
Greg Doherty
Bolton & Company
Greg Doherty is a commercial insurance broker with Bolton & Company Insurance Brokers and Employee Benefits Consultants, Pasadena, CA. He is the executive vice president and managing director of the Dietary Supplement Practice Group for the firm, which specializes in the nutritional product and dietary supplement industries, including but not limited to contract manufacturers, raw materials suppliers, distributors/retailers. Mr. Doherty has four decades of experience as a broker, focusing solely on the dietary supplement industry for the last 14 years. He can be reached at gdoherty@boltonco.com; Phone: 626-535-1409; Website: www.gregdoherty.net.
Most people who purchase a commercial general liability policy (which includes the more popular terminology and coverage for “product liability”) understand that the most important coverage provided is for allegations of bodily injury due to the consumption or use of their product. However, another coverage area of a standard liability policy, called Personal and Advertising Injury (PAI), has created some confusion among many people. To some, the name itself implies coverage for any and all kinds of advertising activities, including false advertising. However, this is not the case—not by a long shot.
What is Covered by PAI?
In two words: not much. For the most part, PAI covers torts that were intentional acts where the legally protected rights of others, if violated or infringed, may result in a financial loss to them. Some examples of what is covered by PAI are:
- False arrest or detention
- Malicious prosecution
- Wrongful eviction
- Oral or written publication of libelous or slanderous material
- Use of someone else’s advertising idea in your advertisement.
As you can see, there is nothing in these examples that comes close to stating that an allegation of false advertising would be covered by PAI.
There are also certain exclusions that apply to PAI, which further clarify what is and isn’t covered. One of these exclusions was pivotal in a recent U.S. District Court case involving a dietary supplement company, Driven Sports, Inc., which sued its insurance company (General Star), claiming it should be covered for false advertising class action lawsuits under the PAI section.
The specific exclusionary wording, relied upon by General Star in this case, is virtually standard in all commercial insurance policies sold in the U.S., and is called the Failure to Conform Exclusion. Essentially, it says no coverage is afforded arising out of the failure of your goods or products to conform with any statement of quality or performance made in your advertisement.
The court ruled in favor of General Star, deciding the exclusion barred coverage for Driven Sports’ class actions. The underlying suits were filed in California and Illinois and alleged that the pre-workout product “Craze” was advertised as containing a natural extract as its active ingredient, when in fact the supplement contained a potentially dangerous methamphetamine analog.
This decision only reinforces what I tell clients all the time: if you think you have false advertising insurance coverage, think again. Is it available? No it is not. There is liability insurance available for companies actively involved in mass media advertising, called Advertisers Liability insurance, but it only offers somewhat broader coverage than PAI, and does not cover allegations of false advertising.
Also note that Prop 65 claims fall squarely into the category of false advertising claims. Again, do not expect your insurance company to defend you or pay a settlement for a Prop 65 claim, with one exception. One carrier is touting $100,000 of Prop 65 coverage in its policy. However, in the proverbial fine print, the coverage is actually limited only to reimbursement for civil fines and penalties, which statistics show is usually about 15% of total Prop 65 litigation costs.
New & Dangerous Questions on Insurance Applications
Underwriters of product liability insurance for dietary supplement companies are constantly trying to improve their underwriting process, in an attempt to separate the “good” risks from the potentially “bad” risks. You can’t fault them for having this goal.
Recently, though, one carrier has amended the application by asking questions that could erase your coverage later on.
These questions require a “yes” or “no” answer. There is no space provided on the application for an explanation of your answer. Thus, when you answer the question, you have warranted to the carrier that your answer is true and correct. Subsequently, if you have a claim, the carrier will immediately look at your application to see if you misrepresented anything on the application. If they feel you have, then they will attempt to rescind the insurance policy and leave you without coverage for the claim. We have seen this happen.
Here are two questions that are now part of one carrier’s application for product liability insurance:
- Are you fully compliant with FDA current Good Manufacturing Practices (cGMP)?
- Do you have a formal, written internal Quality Assurance program that is fully compliant with all applicable federal regulations and industry standards?
Remember you have to answer “yes”or “no.” Do you see how dangerous these questions are? What does “fully compliant” mean? GMPs are a function of regulations arising out of the Food, Drug and Cosmetic Act (FDCA) and the Dietary Supplement Health and Education Act (DSHEA), not FDA, so the question is flawed. And what exactly are “all applicable federal regulations and industry standards?”
What if you answer “yes” to the first question, and then three months later have an FDA GMP inspection that results in some “inspectional observations” (as FDA calls them), and three months after that you have a product liability claim? Will this carrier then argue that you have effectively lied on your application and use that as a weapon to rescind your policy? Do not dismiss the possibility.
Be very careful when completing your next product liability application. Well-meaning but dangerous warranty questions are becoming more common and could pose a hazard for you at the worst possible time—after a claim comes in against you.
Greg Doherty
Bolton & Company
Greg Doherty is a commercial insurance broker with Bolton & Company Insurance Brokers and Employee Benefits Consultants, Pasadena, CA. He is the executive vice president and managing director of the Dietary Supplement Practice Group for the firm, which specializes in the nutritional product and dietary supplement industries, including but not limited to contract manufacturers, raw materials suppliers, distributors/retailers. Mr. Doherty has four decades of experience as a broker, focusing solely on the dietary supplement industry for the last 14 years. He can be reached at gdoherty@boltonco.com; Phone: 626-535-1409; Website: www.gregdoherty.net.
