Perils of Products Liability Underwriting
Underwriting product liability has gotten easier over the last 10–15 years. Certainly, the explosion of the Internet and company websites provides a better look at an insured's product line than when I started in the business 20 years ago. In fact, I can still remember asking clients to fax (gasp!) me a copy of the insured's products brochure. Snazzy websites touting the greatness of an insured's product line have become common. In some instances you can see a 360-degree picture of the product or a short video highlighting product features. Still, the cynical underwriter in me asks, "What lurks in the closet?"
Product liability is extremely long-tailed in nature. Think about consumer products in homes. Perhaps you are still using a toaster, hair curling iron or piece of outdoor garden equipment that is 20–25 years old; (my Dad used the same chainsaw for close to 40 years). Some machines built 30+ years ago are still in operation at manufacturing plants. Farmers could be using equipment that is 40–50 years old. Products stay in the stream of commerce for a very long time. That length of time makes it difficult to fully assess an insured's products exposure. Today's products, as shown on a website, might not accurately reflect the product that could cause a loss in the current policy year.
What if the insured significantly shifted its product offerings years ago, and didn't translate the changes in the liability policy? What about the small product they made for 10 years in the early 90s that is no longer manufactured? Basic hidden perils can be unearthed in just a few brief questions to the insured. The questions revolve around acquired companies, discontinued products and recalled products. For example:
1. How are the exposures from acquired companies being handled? Did the acquisition include assets and liabilities, or assets only? What about the loss history provided? Do the loss runs include the product losses for the acquired company, prior to being purchased by the insured? If the sale is assets-only, will an endorsement be added to the policy to exclude all products manufactured, sold or distributed prior to the sale date?
2. Has the insured had any discontinued products? The follow-up question, if answered yes, has to be "Why?" Some companies will discontinue products for low sales volume; the concerning answer is that a product was discontinued due to product malfunction or injuries to consumers.
3. Has the insured had any recalled products? If so, why? If the product has been recalled, how effective was the recall? Is the insured able to trace the amount of recalled product that was never returned? Is this product causing widespread injuries to the general public?
A flashy website will laud today's product line. In many ways it is easy for underwriters to "get our arms around" current products by looking on a site. However, any product ever manufactured by the Named Insured(s) can come back to wreak havoc. The extra questions above will help unearth potential skeletons that exist and help the underwriter wholly assess the risk.