When You Can't Secure Product Liability Insurance

Our company sells a product kit for DIY auto enthusiasts. Because we don't yet have a storefront address or sales above $28,000 a year, we can't obtain product liability insurance. How can we sell a product without insurance? —TSM, Boulder, Colo.

You're caught in one of those classic chicken-or-egg dilemmas that frequently confront startups. Service providers, for instance, often have trouble attracting initial clients without testimonials or referrals, but of course those aren't forthcoming until one has clients in the first place. The workaround in most cases involves persuading someone to go the extra mile and take a chance on your company. For service providers, that might mean initial customers come from networking relationships, friends of friends, and others willing to give you a shot even without a proven track record.

In your situation, it may mean that you'll need to find an insurance broker who believes that your product can succeed and is willing to help you out personally. Or it may mean that you'll have to protect your personal assets through legal means, such as incorporation, until your sales grow large enough to attract insurers.

The problem is that going without insurance even initially can be quite risky in the auto parts industry, says Richard B. Hagemeier, executive vice-president of Bolton & Co., an insurance firm based in Pasadena, Calif. "If an automotive part fails, there is the possibility of significant harm to the vehicle's occupants. Even if your part did not fail, if an accident is large enough, lawyers will name anyone that may even be partially to blame," he says. "Auto products liability litigation is extremely expensive to defend, and the possibility of significant damage awards is always present."

High Premiums Relative to Sales

Of course, your liability will differ depending on what exactly you're selling. If it's a speed component, or ties in with control of the vehicle, it will obviously be much tougher to insure than if you're selling seat covers or a car radio system. In fact, if yours is a product related to vehicle performance, premiums could be so high that they would exceed annual sales at many startup firms. Minimum premiums for a low-risk product are likely to start at $2,500 to $5,000 annually, Hagemeier says, and go up to $5,000 or $10,000 a year.

Just finding a broker who will work with you may be difficult as well. "With commissions in the 7.5% to 10% range, you may not have significant revenue to generate a broker's interest," he says.

William Feldhaus, a professor who teaches insurance and risk management courses at Georgia State University's Robinson College of Business, recommends that you contact several independent insurance agents and find one who has good contacts with specialty market insurers in the automotive space. "They are the ones willing to consider startup operations and provide some product liability coverage via a commercial general liability policy," he says. "Trust me, there is an answer to this problem" if you look hard enough.

Hagemeier agrees, adding that he has insured many startup technology firms. "Most have failed within one to two years, some just survive, but a few have grown into publicly traded companies," he says. "I benchmark most of my startup businesses by their funding. If they are VC-backed, or have significant outside investment, then I will invest my time in assisting with their coverage placement."

Share your business plan with your broker and bring in some of your backers to help persuade him or her that yours is a serious venture with a good chance of success.

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