Inventor's World: Choosing Liability Insurance

Barry Wilfahrt, the former executive director of the now-defunct South Dakota Inventors congress, tells of an invention that ruined a long-standing, reputable company. The company decided to diversify by adding an independent inventor's creation to its line of products. The invention injured someone who sued, bankrupting the firm. "That was the end of the 100-year-old company," says Wilfahrt. The moral of the story: No matter how ingenious the invention, if it spawns a liability claim as a result of an injury, everyone associated with that invention (the inventor, manufacturer and licensee) may end up in bankruptcy court.

Liability insurance and the underwriters who offer it provide a "life preserver" in the event of such problems. Unfortunately, finding suitable liability insurance isn't all that easy, according to Alan Tratner, founder of Inventors Workshop International, an inventors' networking organization. In fact, he says, the inability to obtain liability insurance keeps many inventors from getting their products to marketplace.

Tratner contends liability insurance brokers are often unwilling to deal with independent inventors, not so much because of the risks associated with new inventions, but because of the time-consuming nature of giving price quotes to inventors who never bring their products to market. Thus inventors are often hard-pressed to find a broker who will take the time to research insurance for them - -no matter how serious the inventor is about getting his or her product on the market.

One insurance broker in Canoga Park, California, disagrees with Tratner. He says that provided an inventor has the money to pay the premiums "insurance is available for just about any product." But therein lies the central deterrent: cost.

"With all the costs involved in starting a business, insurance is something inventors mentally set aside until their product is successful," the agent adds. Inventors don't want to shell out large amounts of cash to insure a product that may not even make it in the marketplace.

Nevertheless, product liability insurance may be something you can't do without. Often, manufacturers refuse to deal with inventors until the proper liability insurance has been secured.

MAKING A DEAL
While liability insurance may exist for every product, the trick is to find a company willing to insure your particular product at a price you can afford.

More than 15 years ago, Steve and Barney Jankowski of Pittsburgh invented "Close Tight, a device that uses a system of strong, woven panels, secured by Velcro fasteners, to enclose outdoor scaffolding on construction sites. Construction companies normally enclose scaffolding with plastic, but this often rips. Close Tight panels, on the other hand, are durable and reusable.

Unlike many new inventors, the Jankowskis sought liability right from the start, but didn't have much luck at first. Price proved the major hurdle. They received quotes as high as $25,000 for liability insurance, but finally they found a company that provided liability insurance for just under $2,400 per year. For that price, both the product and the company were protected from lawsuits stemming from injuries associated with their product, or even from accidental damage to clients' property. Almost all inventors insure their product and their company for liability because if a customer is determined to file a lawsuit against your product, he or she is just as likely to come after your company.

FINDING A BROKER
When you are looking for an insurance broker, don't let your fingers do the walking in the telephone directory. Instead, ask around for referrals, or ask other small-business owners who handles their business insurance.

Before you approach an insurance representative for liability insurance, you should be aware of certain terms. An insurance "agent" generally represents on company. An insurance "broker," on the other hand, represents the client, and deals with several insurance companies. Once you describe your invention to a broker, he or she looks for a suitable company to insure your product.

If you have a highly-specialized or unusual product, ask the broker if any insurance companies specialize in your field. Cost is directly related to an insurance company's knowledge of a product, so finding an expert could help you obtain insurance at a more reasonable rate.

The price of liability insurance fluctuates according to the subjective evaluations of insurance underwriters solely on the likelihood of your invention causing them a lawsuit. The greater the likelihood of a lawsuit, the higher the risk, and, invariably, the price of insurance. Now you can see why it's vital to choose a broker who takes the time to become familiar with your invention.

PASSING THE TEST
When you visit a broker, you'll be asked a series of questions that gives the underwriter a basis for evaluating your product and the risk to them. Some of the questions you may be asked include:

Who will manufacture your product? If you plan to manufacture your invention overseas, be aware that the money you save in manufacturing costs may have to be spent on additional liability insurance. This is because, should your product be named in an injury lawsuit, the injured party cannot collect from a foreign market. Instead, he or she must collect the entire sum from your insurer.

What claims are you making about your product? The Jankowskis were careful not to make any claims saying that they product increases a construction worker's safety. They discovered this would increase their liability insurance drastically. Instead, they emphasized that the product could be reused many times.

Has your product been independently tested? The Jankowskis presented their broker with specifications on strength given to them by their manufacturer. They also included the manufacturer's warranty.

Liability insurance is costly because there are many unknowns connected with inventions. But in today's litigious society, liability insurance should be a basic part of your budget as long as your product is on the market.