What happens when a botanical producer is subject to a FDA enforcement action?  Or when a person claims to be physically harmed or injured by a botanical product? How do producers pay for the expenses incurred in responding to the FDA or prepare for a potential lawsuit?

Product Liability Insurance

Insurance is a critical risk management strategy. Even the safest botanical producers can be sued, and insurance provides a producer with the means and expertise to defend itself. In many ways, having insurance is like having an attorney on retainer. Usually when we think about insurance, we think about the funds an insurance company will pay out to the person who is injured for medical bills. But there is a lot that happens before getting to the point of paying bills and settling the claim.

First, insurance companies will try to make sure their client, the botanical producer, aren’t found liable. Insurance companies do not want to pay out on claims, so they have a vested interest in success. So, when producers consider whether it is worth it to add additional insurance policies to their annual budget, it is imperative that they contemplate all that an insurance policy will provide. It will help pay medical bills or other costs associated with a judgment that might be entered against the business. Attorneys from the insurance company will navigate the court process and advocate on the businesses’ behalf!

It can also help to think about insurance as a means of protecting customers. No business owner wants to harm their customers, and doing so causes a lot of grief. If unfortunate harm does happen, insurance provides means for the victims to be compensated and paid for their inconvenience or injury. Insurance can help make it “right”.

However, to receive these benefits, businesses must first select and pay for the correct insurance policy. When a crisis is in progress and a claim needs to be filed is the worst time to discover that one’s insurance policy falls short and won’t cover the current incident that needs a solution.

Typically, business owners secure a commercial general liability insurance policy. This is overall coverage and doesn’t always cover everything one might assume it does. First, it is best practice to confirm that a policy covers product liability. Product liability insurance can be purchased as a stand-alone policy but is often part of a generalized liability coverage plan. Either way, a botanicals business will want to have a solid products liability insurance plan. A products liability lawsuit can easily make a small business go under very quickly. The cost of defending a lawsuit is usually what spells the demise of the company, not payouts to any injured party. Therefore, even before a suit is settled a small business without proper insurance could have spent all its assets just to defend itself from the claims.

Producers will need to have detailed conversations with an insurance agent knowledgeable about insurance for dietary supplements and cosmetics. The following are aspects of the botanical producer business that need to be discussed with one’s insurance agent:

• What are my policy limits? Are there sub-limits for any specific type of claims? This is a threshold question, but you want to make sure you are clear on how much coverage you have. You’ll need to compare this with any data you are able to collect on the average cost of typical claims made against botanical producers.
• Are there company-specific dietary and herbal ingredient exclusions? These exclusions can vary from company to company and may or may not be based on reasonable, scientific information. If an ingredient you routinely use or want to use in products is excluded from the company’s policy, ask if you can get an endorsement for that ingredient. Be prepared to discuss the benefits and safety of the botanical, and potentially provide source materials to the insurance company. Don’t just ask this one time—review the list of ingredient exclusion on an annual basis—these change all the time!
  • Often bodily injury arising out of mold and silica are standard exclusions. If these threats are relevant to your business, make sure to ask about them specifically!
  • Some other examples of commonly excluded botanicals: kava, lobelia, comfrey, yohimbe, and magnolia. Any botanical that the FDA has issued a warning about is likely to be excluded from coverage.
• What additional insured coverage is included in the policy and how much would it be to add other insurance relevant to my business? If you sell at trade shows or farmer’s markets, you will want to include the entities that run these markets in your coverage, even if it isn’t required by the market itself. Ask, too, about landlords or lessors that share space and/or liability for the space in which you manufacture. If you don’t add these figures to your insurance policy, make sure they are carrying their own coverage.
• Is product recall coverage included? Some policies will include small amounts for recalls, so make sure to get an accurate picture of limits for recall coverage or get an endorsement for adequate recall coverage. You will likely need to share your recall plan with your insurer to get this endorsement. When considering limits, make sure to include a budget for reimbursing your customers in case of a recall as well as the technical costs of managing the return and destruction of your product.
• If I sell nationally or internationally will my products be covered? Products liability insurance usually extends nationally but confirm with your agent that this is true. If you sell online and have international customers, make sure to add worldwide coverage to your policy.
• Do you offer and how much would it be to have an additional claim expense limit? Given that the cost of defending a lawsuit is usually what would make a company go under, it might be a good idea to purchase additional claim expense limits that would add to the total limit. This will help in the case of a lawsuit that eats up most if not all of your coverage limits. These products usually add about 10% to the total annual premium. 
• Does the policy cover any injury stemming from my advertising or labeling? Oftentimes there are exclusions for intentional bad acts (knowingly violating a person’s rights), engaging in false advertising, or violating a copyright or trademark. Get clear on what your policy offers in case the FTC or FDA sends a warning letter or someone accuses you of trademark infringement. Ask if there are products they sell to cover these contingencies. 

The factors listed above only address product liability plans and their potential limitations. There are other areas of your business that need insurance coverage as well. Property insurance, auto insurance, worker’s compensation, employee benefits and employee injury insurance are all types of insurance that should be seriously considered. We recommend you fully describe your business and all your activities to your insurance agent—from a description of your facilities to your production procedures, to whether you ever invite the public to your business. This can be a daunting task and some insurance agents will not respond well. We think taking the risk of asking these questions is more important than bearing the risk of finding out your business does not have has adequate insurance coverage.

Talk with your botanical community to get support in taking on this huge task! What insurance companies do others work with? What have their experiences been? Do you know anyone who is in the same demographic as you and has a similar business who has asked the types of questions we suggest? What was their experience? Ask your botanical community how they balance risk: are they purchasing all these additional endorsements? Or are they purchasing what coverage they can afford now, expecting to increase coverage as their business grows? How do other botanical producers plan to achieve full coverage?

Other Risk Management Strategies

Outside of increasing insurance coverage, there are good business practices that will help botanical producers reduce risk and the likelihood of claims being filed in the first place. First and foremost, the Current Good Manufacturing Practices (cGMPs) set the baseline for production safety. If a botanical producer were to be accused of negligence, this is likely the standard against which the production practices will be judged. Therefore, if producers follow the cGMPs and keep the records that are required of their product, then they will have a good defense against any claims of negligence. Simply following cGMPs isn’t perfect protection, of course, but it is a critical step in the right direction. See the cGMP section of this guide for an overview of what cGMPs entail. In short, the cGMPs that apply to dietary supplements require an extensive cleaning and sanitation program, clear specifications for your products with testing to confirm the products are meeting your internally set specifications, recall procedures, and verification on input procedures. You can see how learning how to effectively implement cGMPs would increase the verifiable safety and consistency of your product.

But cGMPs are just the starting point. Being attentive to the rules around making labels truthful and not misleading will also build resiliency. This will likely mean including only conservative claims on the label or getting review from a trusted source (a consultant, mentor, or attorney). While not an FDA concern, producers would benefit from also doing a trademark search for key phrases, words, or symbols that they want to use on their products.

It is also a beneficial practice to keep abreast of the dietary ingredients and herbs that the FDA is concerned about and consider not using those ingredients. But remember, not all incidents of harm are the fault of the producer. Allergic reactions, unanticipated side effects, or negative interactions with botanical ingredients (as well as foods and prescribed drugs) are all quite possible and very difficult to protect against. Assuming a botanical business is without risk can lead to owners letting their guard down. Best practices are to continue botanical education, especially around the safety of herbs and drug interactions that might occur. The best way to do this is to stay connected to the herbal community to hear news alerts and have trusted people to whom to turn if something goes awry.

Finally, let’s talk briefly about protecting your personal assets. If botanical producers don’t take steps to properly separate their business and personal assets using legal and tax procedures, then their business debts can be satisfied out of their personal funds and possessions. That means that if someone sues a botanical producer for something their product did, they can come after the personal assets of the producer. In order to properly separate business and personal assets, producers need a business entity that provides liability protection. An LLC or a Corporation are the most common examples of legal entities used, but cooperatives and nonprofits can achieve the same liability protection of personal assets. It is smart to consult with legal advisors and accountants if that is financially feasible. Most local communities also have a small business development center or county extension offices that can provide legal and tax education, as well.

Legal entity protection is a very different type of liability protection than you receive via insurance. Insurance will pay your bills, and forming a limited liability company will stop those business bills from being paid with your personal funds and material goods. You can see why this is important! Imagine the worst: battling a lawsuit and losing your business. How much worse would it be if you also lost your home, personal savings account, and your extra car or other belongings to satisfy the any judgment that was entered against you?

Forming a limited liability entity is a relatively simple process that can protect certain of assets if the worst were to happen. There are upfront and annual costs involved, and decisions that need to be made in conjunction with your accountant. Each year entities are responsible for filing an annual report, which essentially documents ownership and current contact information with the state. It is important to bear in mind that the liability protection from the entity (i.e. the shield between your business and personal assets) can be destroyed. For example, one cannot combine business and personal funds. A court won’t respect the boundaries between a person’s business and personal assets if that person also don’t respect them throughout the life of the business. Practically, this means the business needs a separate bank account and to keep up with business formalities like annual meetings and proper documentation of income/expenses, decision making, taxes, etc. Business entities must be treated like they are their own autonomous person.