If there were such a thing as a single insurance line that is a market barometer for wholesale brokers, products liability for small manufacturers might well be it.

Wholesale brokers say competition from standard lines insurers continues to increase as they seek entry into what they deem to be a profitable line of business.

More and more, the "good risks" are going to the standard market insurers, with prices dropping and the surplus lines market participants left with start-ups and the most difficult-to-place risks, wholesale brokers say.

Defining the coverage, Kevin Engelke, brokerage manager for wholesale broker Jimcor Agency based in Montvale, N.J., described it as having a "very, very broad definition in the insurance contract."

Essentially, if a user is injured while using a product, such as a piece of machinery, or property becomes damaged from a product's use, coverage may apply. The insurance comes into play for a multitude of reasons that could include malfunction, defective design, defective material, or improper use stemming from inadequate or deficient instructions.

Improper warnings or unclear directions that cause harm or damage can also bring the coverage into effect.

As soon as the product leaves the control of the insured or manufacturer, coverage goes into effect, Mr. Engelke explained. It can cover virtually any product out on the market, he added, such as drugs, thermometers, machinery, or toys.

"Once it is made and the manufacturer relinquishes title, then there is exposure," he said.

"The theory behind products liability is that the consumer is the dumbest guy around," unlike other coverages that assume a professional standing on the part of the claimant, Mr. Engelke added.

Surprisingly, with the United States' litigiousness, one would assume this line would remain in the surplus lines sector, but apparently not, according to wholesale brokers. Competition is becoming more intense as standard lines carriers increasingly come into the field, offering coverage as part of their general liability programs.

"This is one class that has really softened more than others," said Steve LoVullo, a commercial underwriter with LoVullo Associates based in Buffalo, N.Y.

Standard lines insurers, he observed, are viewing this as a very profitable line of business--one they are happy to include in their typical business coverages. From the wholesale side, however, it is still written as a separate cover.

"It has become very competitive, and our carriers can't compete," he said.

The current cycle began about a year to a year-and-a-half ago, he continued. For now, he said, surplus lines insurers will have to wait until the cycle changes before they can begin to recapture the business.

That does not mean all the risks are lost to the standard market, however, Mr. LoVullo noted. Tougher products, such as chemical manufacturers, pharmaceuticals and new ventures with no loss history, are finding a home in the surplus lines marketplace.

John Willsey, president of the Hartford, Conn., office of Colemont Insurance Brokers, headquartered in Woodland Hills, Calif., said national carriers are the primary competitors in this line because they feel this is a clean risk driven principally by severity and not frequency.

He noted that their appetite has been increasing over the past three-to-five years and does not appear to be abating. On the other hand, surplus lines insurers remain interested, but refuse to write accounts at prices they are not comfortable with.

"The bottom line is everyone loves manufacturers these days," he said.

Back in 1986, he went on, few wanted to write products liability due to exploding litigation nationally and expensive jury awards. While jury awards have only increased, he speculated that interest has grown because there is a perception among insurers that the worst is over, in part due to tort modifications at the state level regarding awards.

However, the line still faces volatility with lawsuits, he continued. Products can be and are sold nationally, and claims are generally filed in the state court system where the loss took place, Mr. Willsey explained. This means manufacturers are subject to differing standards of law, as each state is unique. The exact same loss circumstances can have very different outcomes in different jurisdictions, he observed.

Another potential drawback to the line, even though it has the benefit of low frequency, is that it can have a long tail. Lawsuits and claims are often not filed for anywhere from 12-to-36 months after the incident, Mr. Willsey pointed out. This makes it harder for a carrier to predict their profitability on the line in the short term, he said.

What defines a small manufacturer seems to fall into a range of $25,000 or less in premium, the brokers said. However, that definition is subject to change and isn't considered hard and fast.

Chris Hull, vice president of business development for Hull & Company, the wholesale subsidiary of Daytona Beach, Fla.-based insurance broker Brown & Brown, said that nationally the standard markets dominate this line, and wholesalers are filling a more traditional role of providing insurance for new ventures, new products and tougher lines.

The standard marketplace is writing products ranging from those made by "mom-and-pop shops" to more benign types of products produced by large manufacturers, Mr. Hull said in an e-mail. And even those risks which start out in the surplus lines market, as they mature and establish an acceptable risk history, often "drift back to the standard market," he noted.

Hull & Company, based in Fort Lauderdale, Fla., has 25 offices throughout the United States, with a major presence in a few states. Mr. Hull said Florida and Colorado have little in the way of manufacturing, but the broker does see a significant amount of business out of Texas.

"We are writing that line at a pretty good clip in Texas and are seeing--and writing--some of the larger accounts," he said. The Dallas office is so busy that Hull is looking at launching a marketing campaign on behalf of that office for this single line, he said.

"They have some excellent markets there," he remarked.

As the world increasingly moves to outsourcing, the E&S brokers said the new reality has not altered the application of products liability. Essentially, the end distributor is held as the responsible party, whether the individual used parts from an overseas manufacturer in the product that proved defective, or acted as an importer.

The major responsibility of the importer is to make certain the overseas manufacturer adheres to the same production standards as the importer would expect domestically, said Mr. Engelke. He added that it is equally important for the importer to be certain that the overseas manufacturer has products liability insurance, so in the event of a mishap the importer has recourse.

The U.S. reputation for litigation, however, means there is no easy extension of products liability insurance coverage from European insurers for an overseas manufacturer putting stakes down here.

Mr. Hull recalled one situation where a European manufacturer wanted to sell its products through a U.S. sales operation. In order for the manufacturer to have products liability coverage, he said, the firm had to set up a U.S. subsidiary and obtain separate coverage for that subsidiary based on anticipated U.S. sales.

Presumably, he said, the manufacturer's U.K. carrier would exclude all U.S. liabilities.

Special Reports /

Products Liability For Small Manufacturers Expands Beyond E&S Market

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