A manufacturer's insurance liability policy is 15 minutes? Really?
Spoiler – You can't be sure you have the correct insurance coverage for your manufacturing company within 15 minutes, especially if you're a small start-up.
I'm not sure if it can be physically performed to begin with, albeit think that over for a moment and ask yourself this very important question, "do you want an insurance agent that's willing to write a policy after learning about your business for only a few minutes?"
How is the wonder "I can sell you a commercial business insurance policy in 15 minutes" salesperson aka agent going to know what the optimal strategies are for protecting your manufacturing business, much less discuss the risks and costs, along with explaining the various options and perils in such a way that you as a business owner are being informed, instead of simply placing an order at a fast food resturant?
I know I'll lose some business by asking as many questions as I do, while taking the time that's actually required to get to know my clients, their risk tolerance, and especially the time I take to help my clients make informed decisions, albeit I also believe I not only gain more than I lose with my approach, I'm also able to sleep at night knowing my clients know more and have a greater comfort level than before speaking with me. That folks, is the difference between a sale's person and a consultant. A sale's person is interested in selling you, and the faster the better so they can move on to the next business prospect to sell them a commercial insurance policy. A consultant wants to understand your business and your goals so that as a consultant they feel they know your business, know you, and know what risks you face and how all the pieces come together.
Let me provide some examples of what can go wrong.
About a year ago, I received a call from a lady importing products from China and reselling them in (guessing) North America. I don't actually know where she marketed the products because I didn't get to know her well enough. As I proceeded to ask questions about her business to find out what her products are that she sells, she interrupts me and asks how long it will take. She adds that she only has about five more minutes and wants to get a quote before the call is complete.
I said that I was just beginning, and that as someone who has experience importing from China, I know there are a lot of "gotchas" that can destroy her business in a flash if she doesn't protect herself and isn't careful who she's doing business with in China. I said we should look at her supply chain because she isn't likely buying direct from the factory she thinks she is (the giveaway was the "factory's email" address, which didn't use the same domain name as the factory's website).
None of this mattered to her. She made it clear that others were able to provide a quote in less than 20 minutes and that she had a busy schedule and didn't have an hour to talk. In fact, she more or less said, if you can't give me a quote right away, I don't want one. I recall being taken aback. Here was a lady who was new to importing, and relatively new to marketing and she has the chance to pick the brain of someone who has imported well over 100 TEUs (twenty foot equivalent units – the metal containers that are on container ships used for international shipments) and helped with many more, and yet didn't even realize the value. I politely said I couldn't help her and let her know that if she changed her mind, she was welcome to call back. We ended the call and that was the last I heard from her.
My system automatically reminds me in 11 months after closing an account to reach out to businesses I talked to that didn't get a policy to see how they're doing and see if they would like to get a renewal quote. I remember calling and the phone number was no longer working, and the website was "for sale" on Godaddy. I don't know what happened to her business, albeit I do know that when a business is more interested in making a sale and marketing than making sure they're doing the right thing for their clients, it's just a matter of time before someone else comes along to take care of the clients. Her real problem was she didn't know what she didn't know, and didn't have the sense to surround herself with those that do.
In other words, it's ok to have a lot to learn, albeit it's never ok to assume you don't need to find those that can help your business avoid the endless plethora of landmines and pitfalls that await those who toss caution to the side.
Another example that comes to mind is a maker of a relatively simple device that in itself doesn't do very much, and is a common item. What makes this particular device a novelty is the build and the components that are made to perform in all kinds of weather and to last much longer. In other words, this was a manufacturer that created value by the design and selection of materials that made up the device he sells. Because this maker is still in business, I can't go beyond a description of "device" and it really doesn't matter because as an example, it fits with many different types of products and manufacturers.
As a client, I liked him and while I thought the total market for the device was limited due to the required pricing (about four or five times more than a product made with cheaper materials), I nonetheless believed a market existed for the "best in show" in his market space. We had talked about marketing, ways to improve his website, best practices for Facebook, and I offered to review it and promote it as well. The owner said he would send me an example piece so I could do so.
Then something happened. A big box chain offered to carry his product. I thought to myself, this is great, a chance to work with a small manufacturer at the ground floor that may spin this product into others and have a full-line of products in 5-10 years representing millions in sales.
What actually happened turned out to be much different. The big box store required a greater level of insurance coverage. So far so great, albeit this created a problem because manufacturing insurance is expensive and as a component of this particular company's sales, was increasing more than the manufacturer was prepared to spend. So they shopped the insurance out to different agents to see if they could find a lower price. They did find a lower price for insurance, only the policy that was described to me wasn't for manufacturing, it was for a reseller.
As a store, or reseller of any given product, the cost of insurance is much lower because it's usually the manufacturer and then the wholesaler (if any) that bears the majority of risk from defects.
Because the manufacturer was having another company produce the product for them, a process known as sub-contracting or OEMing the goods, the other agent believed (wrongly), that the company actually producing the product was the manufacturer, and my client was simply reselling the device. It's easy to understand why the agent would think so, especially considering the agent was primarily a home and auto agent, and likely has zero or little manufacturing knowledge, and obviously little to no manufacturing insurance risk assessment knowledge or understanding. This brings up another point when it comes to selecting an insurance agent for your manufacturing business.
If your insurance agent doesn't fully understand manufacturing and can Identify risks beyond the obvious, the agent isn't likely qualified to take on the role of protecting your business. In short, if the agent is sending postcards to local homeowners stating he or she can save them money on their car insurance, they're not the right agent to help you protect and grow your manufacturing company.
Now, in all fairness, the other agent had one part of three correct. There are three liabilities that are strictly held to manufacturers. The first one is the obvious one, manufacturer's defects. If you place an item (goods) into the stream of commerce, and it doesn't matter if you're the maker, wholesaler, or retailer, you're on the hook, or at least you should assume you are on the hook for any defects. My client was advised that as a "reseller," he had his OEM that he contracted with to bear the primary risk of the product. And while that may or may not be true, let's assume it is for a moment, and assume the actual OEM had $1 million or more in general liability, including products completed insurance coverage. The big box stores require $2 million, so my client could be in violation of the contract terms there, albeit again, let's assume the best and say the OEM has $2 million or more. In other words, from a contractual point of view, the OEM meets the requirements of the big box.
That doesn't mean the OEM has enough coverage, however, since we don't know what the coverage level is, we can only speculate. That said, the only reason why I felt $1 million was enough for the client was because sales couldn't support greater coverage. It was a classic chicken-or-the-egg problem of not enough sales to support appropriate coverage, and having a product that if it failed and caused a law suit, could easily go over $1 million. After all, this is an "industrial strength" item used for serious work, not something you may easily find in the backyard or garage.
So the first of the three defect risks are assumed covered, albeit what about the other two? When you place goods into the stream of commerce, you should assume three types of defects risks that you need to protect against. And by protect against, I mean either you self-insure, or you transfer the risk to another party, such as an insurance company. They are manufacturer risk as described, design defect, and warning defects. Depending on the state and the user, and you have to assume the worse-case scenario, or you're likely going to get bitten, there's no way around the liability risk.
Design defect is the for my client, in my opinion, one of the biggest liability risks they face. As a first generation product, there is a greater chance that product design improvements can be made. If it happens that one of the required improvements or defects in the product causes bodily injury or property damage, you can bet that a reseller insurance policy isn't going to cover the product by design. As a reseller, yes the policy will (or likely) pay out for product design defects, albeit the client isn't a reseller, even if the other agent thinks they are. I didn't know excuses that may work for consumers don't hold nearly the amount of water for naive business leaders, aka merchants that are expected to know what they're doing.
When a company signs an insurance policy that states they're reselling a product (and not that they're manufacturing it), the company is stating the information is correct so the insurance company can properly assess the amount of risk and appropriately price the insurance policy premium. One would think and hope the agent would be honest and say that he/she advised the manufacturer that they could buy a reseller policy because he/she was mistaken on status due to hiring a sub-contractor to manufacturer the product..
albeit if the carrier declines the claim and it's up to the insurance agent's errors and omissions policy to pay out based on the agent saying it's their fault, it's not a place any business owner wants to be in. If the agent simply says "they told me they were reselling the product," the client has a tough battle to fight proving they acted upon the agent's guidance.
Meanwhile, the maker is potentially going to look very bad due to the insurance issues, and if the big box insurance winds up paying out, you can guess what the future contract value along with the company as a whole is going to look like. In other words, the company is likely only one lawsuit away from folding the doors, despite paying for the insurance premium. Which, in my opinion is the most expensive type of insurance, namely one that you pay for, albeit can never rely upon or use to save your backside.
The next type of manufacturing defect is the warning defect. This little gem is the reason why when you buy a product, especially one that has a motor or plugs into a wall socket, will have countless pages of warnings of what not to do with it. Some of which may make you laugh as you think to yourself, "who in the world would do that?"
Apparently, there's someone in the world as each lawsuit or potential lawsuit is weighed by corporate counsel to decide if another warning should get added to protect the company from being sued for not telling the buyer to "not do something."
While I don't think the risk for warning defect liability is as great as the product's design defect liability, I really don't know. What I do know is once again, the company is crossing its fingers hoping that a warning defect lawsuit doesn't arrive at their doorstep, because if it does, they're likely going to be out twisting in the wind without coverage. As a new company highlighting all the great uses, features, and power of their device, it's reasonable to think perhaps they may not be tempering all the greatness with a healthy dose of product warnings. The type of product warnings that help protect the company from a user thinking the device can do more than it really can (and wasn't warned in advance).
That's the really sad thing happening here if you haven't figured it out yet. Namely, that if the product does reach success and winds up selling much more than anticipated, the product will also invite those seeking to cash in on the success through the civil court system. With so many people that are best described as "professional litigants," any mistakes made will surely get exploited. Even if it doesn't happen, hope isn't a good business strategy when it comes to risk mitigation.
There's no doubt in my mind that in the example number two above the agent didn't spend the time or energy to fully flesh out the risk. And I suspect (unfortunately) the client, or former client now, performed a little of the ostrich strategy because they wanted to believe the other agent's advice they don't have to consider the business as a manufacturer because they sub-contracted the actual product manufacturing to another company.
That would be akin to thinking Kenmore isn't on the hook for its product design or warning defects because GE made the product as an OEM. Hopefully, once viewed in this light, it becomes clear not all risk can contractually be transferred when the primary named company is the one who is the actual designer and marketer of the product.
The key takeaway here is that if you're a manufacturer, you must have an insurance agent that understands your industry and product risk. Having some product liability risk knowledge is a major bonus too because "why not." This is especially true when the cost of an agent is normally a part of the cost of insurance, and you don't pay anything different regardless if you have the best and most knowledgeable agent, or one green-behind-the-ears and doesn't know the first thing they're doing.
Regardless if you want business insurance or manufacturing insurance, you will want to spend more than 15 minutes explaining your business and processes to your agent if you expect them to provide the advice and guidance required to protect your company and future.
pictures by Yerson Retamal
Robert Weinstein is a husband, dad, stock market junkie, real estate broker, and of course…Insurance agent. Interests include my family, economics, marketing, technology, real estate, finance/investing, history, and Asia.
Robert’s insurance expertise includes having the designation of Certified in Long-Term Care (CLTC) and assist in asset protection for families with members entering retirement.
Robert is also an accomplished syndicated writer whose work can be found in TheStreet, MainStreet, CNBC, Forbes, Yahoo Finance, Seeking Alpha, MSN Money, The Money Show, Stock Saints, Motley Fool, Fidelity, Minyanville, RealMoney Pro, and many national and international newspapers.