Obstacles to Product Liability Insurance

I'm a paramedic who has developed a new, nondiagnostic product for use by first responders. I'm looking for product liability insurance, but in shopping around, I've been asked for crazy stuff like $10,000 in premiums and a list of all my assets. The broker says I would have to sign a contract and pay for coverage before I got a copy of the policy for my lawyer to examine. Is this normal, or am I getting taken for a ride?—N.A.B., St. Louis

It sounds like you're getting something of a runaround. It could be that your broker is dealing with large insurance companies that don't want to bother with a startup company like yours. Or it could be he's contacting agencies that aren't familiar with medical products coverage and don't want to get into it.

"If your broker is not taking this seriously, that may be why you're not getting a good response," says Bill Feldhaus, associate professor of risk management and insurance at Georgia State University's Robinson College of Business. "You need to find an agent who will take your idea to a wholesaler who has access to smaller, specialty insurers who are already in the health-care sector doing medical devices."

Talk to some new agents or independent brokers and see if you get a better response. "With a broker, you're probably going to have to pay a fee for their services," says Jane L. Cline, president of the National Association of Insurance Commissioners and West Virginia's insurance commissioner. "With an independent agent or an agent that represents only one company, you generally will not pay a fee."

Before you pick a policy, get quotes from several companies. And always call your state insurance department to confirm that your broker, agent, and insurance company are licensed to sell insurance in your state, Cline says. Your state officials can also tell you what information is required to be provided to you. Most companies will provide a "specimen copy" of your policy before your sign on the dotted line. "All policies contain limitations and exclusions, and without reviewing the actual policy wording, you could be purchasing a policy that may specifically exclude the risk that creates the concern," says Richard B. Hagemeier, executive vice-president of Bolton & Co., an insurance broker in Pasadena, Calif.

Concerns About Your Assets

It's not unusual for a startup entrepreneur to be asked for financial information before a policy is sold, so that's probably what's behind the request for a list of your personal assets. "Many underwriters want to review the financial condition of an insured. If a business does not have adequate funding to support its operations, there is a temptation to reduce costs on materials or testing, which can place the insurance company at greater risk," Hagemeier says.

It may help you to prepare a business plan and solicit testimonials about your product's effectiveness, Feldhaus says. "Since you're working in the industry, you should be able to go to some organizations or local paramedic departments and ask them to field test your product." If they find it useful, get some quotes from beta testers as to the utility, effectiveness, and demand for the product. "Anytime you can get independent confirmation of your idea, it's good," says Feldhaus. "Insurance companies that might be skeptical and aren't sure how to price the risk could be positively influenced by good feedback."

While $10,000 a year sounds excessive, pricing for life science products varies sharply, depending on the degree of risk involved. "Product liability policies can vary from as little as $1,000 a year up to tens of thousands or more, depending on the type of product and annual sales," says Tim Gaspar, founder of Gaspar Insurance in Los Angeles. "For most startups, the premium is less than $5,000, unless for some reason this product has 'lawsuit' written all over it," he says.

Something that might be named in litigation—such as a new neck brace or back board design—could easily rack up a $7,500 to $10,000 premium, Hagemeier says. "We have life science underwriters that provide minimum premiums in the $5,000 range," he explains, "but the risk must be extremely low to qualify."

Along with product liability insurance, don't forget that you may also need general liability, property, or workers' compensation coverage, depending on your company's needs. Check out the NAIC's Insure U for Small Business site to help determine what kind of coverage is best for your new business.

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