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Proposition 65: How are you exposed?

Imagine your company receiving a 60-Day Notice of Violation related to California Proposition 65. Are you familiar with this Proposition? The Notice alleges that one of your products contains lead and as a result of the sale of this product, exposures to lead have been occurring without clear and reasonable warnings on the product as required by Proposition 65.  The Notice also contends that California residents, through the act of buying, acquiring or utilizing the product are exposed to the lead in this particular product.

According to the Notice, this particular product was purchased via a major retailer.  The lawyers trace the product to you as the distributor (a US domiciled company) who had the products manufactured in China.

A little bit of history as this is not something new. “In 1986, California voters approved an initiative to address their growing concerns about exposure to toxic chemicals. That initiative became the Safe Drinking Water and Toxic Enforcement Act of 1986, better known by its original name of Proposition 65. Proposition 65 requires the State to publish a list of chemicals known to cause cancer or birth defects or other reproductive harm. This list, which must be updated at least once a year, has grown to include approximately 800 chemicals since it was first published in 1987.”

What really becomes a problem for companies is that once the process begins – a notice filed (by a consumer advocate) and later a lawsuit – it becomes a hidden cost you didn’t anticipate. What I mean is, there will be no insurance coverage to offset legal representation, fines and penalties that will be assessed as a result of violating Proposition 65. And don’t forget the internal cost of changing your internal operations. Settlements can range from $5,000 to $700,000 ….view here the various settlements of 2012.

Risk management tip – if you are doing business in California, review the chemical ingredients going into products being manufactured, distributed and sold to determine if there are any that may be on the Proposition 65 list. Review contracts with suppliers of goods/ingredients being sold to determine how the transfer of risk issues may or may not be addressed in this regard.

Don’t think you are immune, Pepsi seems to be in exactly this situation… “Study Found that Pepsi Contains Potentially High Levels of a Reported Carcinogen”

Approaches to Risk Management: Part 1 The Basic Concepts

To get a flavor of where to start in the analysis of how to save time and money on an insurance program, a basic understanding of a few concepts is necessary. The first is the idea of “Risk Management”.

Risk Management is the practice of protecting an organization from financial harm by identifying, analyzing, and controlling risk at the lowest possible cost.

 

To begin, ask yourself 3 basic questions:

1) What can go wrong?
2) What will we do (both to prevent the harm from occurring and in the aftermath of an “incident”)?
3) If something happens, how will we pay for it?

This is obviously a very simplistic approach, however it is a very practical place to start. When an attempt is made to answer these questions more and more questions result. There is virtually no way a company can begin to reduce insurance-related and risk-management related costs without recognizing and evaluating what the company’s true risks and exposures are.

Below are some of the major components we would recommend being addressed as part of the risk management process.

  • Identify and measure all exposures to loss – this is the single most important function and the one most often slighted or only paid lip service. Without this step, there is no rational way to put in place a meaningful insurance risk management program.
  • Develop risk management strategies – this requires top level buy-in – it is indispensable for consistency and helpful to establish the extent of the risk management program and what it is that you want to accomplish. This provides the framework for the company’s goals.
  • Choose risk finance alternatives – through knowledge of the company’s financial structure, organization and risk appetite, the risk manager (you) selects methods of funding risk. Funding includes an appropriate mix of expensing, reserving, transferring by contract, setting up lines of credit, using a captive insurer, pooling with others, and insuring.
  • Negotiate insurance – the term “purchase” when referring to insurance is antiquated and not the recommended approach. Today we say “negotiate” and “buy” as it more aptly describes what should be done. This involves, first of all, deciding what insurance is needed, and then going to the insurance marketplace to obtain the best conditions of coverage and cost. In most cases, this involves working with one or more brokers. However, the key to purchasing insurance is being well informed regarding coverage availability and appetite of insurers, limits and pricing options available as well as creating a competitive atmosphere via a well thought out process and strategy.
  • Adjust and monitor claims – reporting procedure should be instituted, and tracking methods developed, to ensure timely closure of claims. This is a very important function. If claims are left unmanaged then the loss experience will not have true meaning. If there is not true meaning relative to loss experience, then the purchase of insurance will always be skewed.
  • Keep & Analyze records – a very important tool is a complete, well organized record of insured and self-insured losses and all other risk related correspondence and information. This serves to document the plan, problem areas and what is working. It also goes a long way to help mitigate any potential future problem that may arise. In this way, should things change you are ready to adjust at the drop of a dime.
  • Oversee loss preventative activities – this involves the selection of the most appropriate loss prevention support services designed to reduce exposure to loss. Overall employee safety plans, ergonomic studies, driver safety plan, fleet safety plans are some of the types of programs that should be investigated. An important aspect here is to be proactive about loss control…stay ahead of the curve and plan to utilize various services in advance of losses.

While the above are all steps in a process none of these independently will satisfy an overall approach to addressing risk. All the above steps overlap and are inter-related. They tell a story about your company and how it approaches risk and insurance needs. My advice would be to learn to tell a good story about how your company approaches risk and protecting its assets…. ultimately doing so will go a long way to reduce your insurance costs. In our next post we will dig a little deeper into areas of risk to be addressed.