As a small business owner, you wear many hats to operate your business: sales, operations, finance, distribution, etc. It can be very consuming. Finding or renewing your product liability insurance sometimes gets put on the back burner until the last minute, but that may not always work in your favor.
There can be a variety of underwriting criteria that may need to be met based on your business operations and/or products on the market. Sometimes quotes can be turned around within 24 hours, others may take weeks depending on the complexity of your insurance needs.
As a business owner, gaining a better understanding of the quoting and underwriting process will help you communicate your needs to your agent—which will help you obtain the most competitive pricing for your insurance portfolio.
1. Finding The Right Agent
Not all agents are created equal. Each will have their strengths in areas that others will not. Much like any other professional field, you look for those that have specialties to fill your needs. This is the same with insurance. Working with someone with a strong knowledge of and focus on product liability insurance, insurance carrier relationships, or specialized programs is essential.
Your agent’s responsibility is to understand and evaluate your exposures so they can suggest coverages to meet your needs. The only way to accomplish this is to have a conversation with them and help your agent understand your business operations, your product, where it’s manufactured, the ingredients, the end user, and distribution channels.
Discuss your short-, mid-, and long-term goals with your agent. Talk to them about your plans for new products or discontinued products and the timing of these products. The more your agent is informed about your business, the more options can be provided. Your agent should be your advocate.
Some of the key factors you should be discussing with your agent while acquiring your product liability insurance are:
- Is product liability insurance a key industry you serve?
- Correct insurance classification for your business
- Estimated gross sales and how to calculate it
- The policy limits or amount of insurance needed
- Contractual requirements (distributors, landlord, bank)
- Do you have foreign exposure (sell products outside the United States)?
- How long will it take to get quotes?
- What insurance carriers they will be approaching?
- Do you have any special programs catering to manufacturers, importers, and distributors?
If you are not having an open dialogue with your agent, it is time to start. It will help avoid pitfalls in the future as your business expands and additional products are offered. When communicating with your insurance professional, it becomes easier to make better-informed business decisions.
2. Checking Your Class Codes
What may seem insignificant can be problematic if you are not classified correctly on your product liability insurance policy. This is a common mistake we see in the industry. Sometimes it is done unintentionally, but in rare cases, we see it done intentionally.
One problem with misclassifying a business is that some product liability insurance policies will have an endorsement that limits coverage to the classification designated on the policy. If you have this restriction and you are misclassified, you may have an issue if a bodily injury or property damage claim, suit, or incident arises from your products.
Another possible negative side-effect of misclassification is the insurance carrier could change the class code on an audit—which means if your policy was issued with one specific class code that had a lower rate, and the audit changes the class code to something with a higher rate, you could owe more money to the insurance carrier at the end of your policy period.
Some carriers and insurance policies are more forgiving when it comes to class codes. My question is, why take a chance? Do it correctly initially to reduce problems in the future. It is important to discuss how the agent is classifying your business.
3. Estimating Gross Annual Sales
It is important to understand most product liability insurance policies’ premium development is based upon your estimated gross annual sales. It is a measure the insurance company uses for the amount of exposure your business has. The more sales = more product on the market = more exposure to the insurance company.
You notice we used the term “estimated gross annual sales.” This is because most businesses will not accurately calculate their sales in the next 12 months. Therefore, the insurance company will audit your policy at the end of your policy term—typically 12 months—to verify the estimated sales you provided them when you purchased the policy. If the sales are higher than estimated, they will charge you for the additional exposure.
If you grossly underestimate your sales, the audit could create a significant additional premium. If you underestimate your sales, you could pay more premiums during the year than you need to. Many product liability policies will not return premiums if you underestimate sales.
So how does the insurance company define gross sales? “…the gross amount charged by the named insured, concessionaires of the named insured or by others trading under the insured’s name for all goods or products, sold or distributed; operations performed during the policy period; rentals; and dues or fees.”
We recommend taking a conservative approach to your estimated gross sales when completing your product liability application. We also recommend discussing your growth plans with your agent. Is there a contract that will increase your sales significantly in the future?
Review plans can be established to monitor and adjust your gross annual sales during the policy term. This will help reduce a large audit at the end of the policy period. (This is also another reason why you should have an agent that understands and can communicate these nuances of product liability insurance with you.)
4. Meeting Contractual Requirements
It is a commonplace for eCommerce sites, Amazon sellers, and big box stores to have insurance and indemnification requirements within their contracts. Some of the requirements may include:
- Additional Insured Status
- Primary and Non-Contributory Wording
- Waiver of Subrogation
- 30-Day Cancellation Provisions
- Higher limits of Liability (It’s not uncommon to see $5 and $10 million limit requirements)
Some carriers will charge an additional premium for these requirements, or, in rare cases, the insurance company may not be able to provide the requirements. It is important to provide this information to your agent with the initial product liability insurance application to reduce any delay in getting the insurance you need.
5. Start Your Search For Product Liability Insurance Early
When we say “early,” we mean start looking within 90 days of the date you will need to have your coverage begin. If you submit a quote any sooner, it may not be valid by the time you need the coverage. Wait too long, and you might end up with a gap in coverage or missing deadlines agreed upon in contracts.
Many product liability insurance carriers will put an expiration date on their quote; typically, this is 30 days. If a quote is older than 30 days, the underwriter can:
• Refresh the quote
• Re-underwrite the exposure
• Require a new application
• Change premium from the original quote
• Decline to quote the risk
When requesting a quote, let your agent know where you are in the process of your business and provide an anticipated start date for your coverage. This is also an opportune time to discuss business and/or product strategies that may be in the ideation phase but could impact the eligibility of your product liability insurance.
We understand many start-ups and new ventures may still be creating a business plan and need to budget for their product liability insurance. Asking your agent for an indication instead of a formal quote is a great solution for businesses still in the early stages of growth and development. Depending on the experience level of your agent, they should be able to provide you with an indication, or an “estimate,” of what the insurance may cost.
Is it mandatory to give an agent 90 days to quote? No. Agents have turned quotes around and put coverage in place on the same day—but it can be challenging. To reduce stress levels and any surprises during the underwriting process, the more time is better. Most small businesses shop or renew their product liability policies less than 30 days before their policy expiration or business start date.
Get The Most Out Of Your Insurance Buying Experience
To get the most out of your product liability insurance purchase experience, work with a seasoned insurance professional that understands your industry. Be informed on how the policy functions, verify class codes, gross sales, etc. Keep an open dialogue with the agent; if they are not your advocate, look elsewhere. Give your agent time to explore markets to get the best deal possible for your business. This is how you will get the most out of your purchase experience.
