In some respects, firearms dealers are similar to other retailers. Customers enter their establishments to inspect, compare, and purchase various types of merchandise. This means that all of the common property and liability exposures are present. As retailers, firearms dealers also look to the manufacturer as having the primary responsibility for a product-related lawsuit.
While there are many similarities in exposures, there is a critical difference: A firearm is one of the few products sold to ordinary citizens that can be used to kill or maim. Although firearms may be used for a variety of nonviolent purposes, all are designed to fire a round when the trigger is pulled.
Robert V. Chiarello, president of Joseph Chiarello & Co., Inc., says, "We arrange coverage for commercial retail firearms stores, which may also include gunsmithing and shooting ranges. Distributors are generally involved with shooting, hunting, and fishing sports and may also import directly from foreign countries.”
The appetite at Philadelphia Insurance is similar. Brent Skiles, assistant vice president-underwriting at Philadelphia Insurance Company, explains, “We are looking for retail gun shop operations with true retail storefronts. These include operations that sell new firearms, used firearms, ammunition, archery equipment, firearms accessories, hunting accessories, fishing equipment, and clothing. In addition, we are looking for operations that also conduct other activities, including shooting ranges (firearms and/or archery), kayak/canoe rental, guiding exposures (hunting and/or fishing), or firearms instruction. We are also looking for operations that conduct gunsmithing operations, including (but not limited to) bluing, re-stocking, bore sighting, scope mounting, trigger jobs, barrel modifications, and so on. We are also interested in wholesalers that sell new firearms and accessories. These can include operations that have distributor or wholesaler special edition firearms, distribute to individual federal firearms license (FFL) holders, transfer, or distribute to retail gun shops.”
Among the markets for this coverage are Admiral, Chartis, Granite State, Lexington, New Hampshire, and Philadelphia Indemnity.
A firearms retailer’s product liability exposure arises from two primary sources, according to Mr. Chiarello: (1) injury resulting from the use of guns that may not have been checked for safe operation; and (2) injury to the shooter or others caused by the shooter’s own improper use of the firearm and for which the shooter does not feel responsible. He makes the important point that, although a claim may be without merit, a lawsuit must be defended. “The retailer and/or manufacturer are usually successful in these matters, but insurers spend large amounts of money to defend these suits.”
Mr. Chiarello explains how a firearms retailer may be brought into a product liability lawsuit. “The manufacturer has gone bankrupt or may have exhausted its liability insurance due to claims. If the distributor also imports directly from a foreign manufacturer whose insurance may exclude sales in the U.S. and Canada, the distributor will be primary. The manufacturer’s coverage may be claims made, which presents a problem if it goes out of business and has unreported claims.”
Property exposures also must be considered, explains Ken Rice, underwriting director at Atain Insurance Companies. He says, “On the property side, for a local retail store in a smaller community that sells firearms, ammunition, and sporting goods to hunters, the standard market could easily write the building and contents coverage. Firearms are a target for theft and crime, so for larger retailers and those in major metropolitan areas, the property coverages may need to be placed in the surplus lines arena. This is especially true in areas where security may be an issue.”
According to Mr. Skiles, the key property exposures are theft, increasing regulation, and severe weather. He observes that the greatest severity in 2011 resulted from weather-related cat losses that shut down operations and caused business income losses in addition to damaging building and contents.
Underwriting this class of business starts with hazard identification. Mr. Rice says, “In addition to loss history, key factors are the location of the business, management experience, training and experience of employees, and the security measures in place. Another concern is the types of firearms available for sale. Handguns are more heavily regulated than hunting rifles and shotguns and are also a more attractive target for criminals. Some firearms dealers have shooting ranges on premises. Others also provide repair and gunsmithing services. Many dealers transport firearms to gun shows and other venues where security may be less than ideal.”
Mr. Skiles adds, “A valid federal firearms license (FFL) in the proper class for the operation is essential. Other key factors are loss ratio and loss history, as well as staff training and management experience. Common red flags include ATF suspensions of the FFL, frequency of theft losses, and lack of training to prevent straw sales.” (A straw sale is an illegal transaction in which the actual buyer of the gun is unable to pass the required background check and uses a proxy buyer who can pass the check to purchase the weapon on his or her behalf.)
Theft protection is an important part of preventing liability claims, according to Mr. Chiarello. “Key underwriting factors include central station alarms, video monitors, and appropriate storage of firearms and ammunition/black powder. Burglary protection is important because it may prevent a property claim. More important, if the insured does not take strong action to prevent the theft of firearms that may later be used to commit a crime and injure a third party, a civil claim may be filed against the dealer for negligence because it may have been foreseeable that the stolen firearm would be used in a crime.”
He explains that it is also important to comply with all regulations. “Dealers must train sales personnel to properly complete federally required sales forms as well as provide training such as the “Don’t Lie for the Other Guy” program*. The National Shooting Sports Foundation (NSSF) and local police departments sponsor this program to prevent straw sales and purchases.
Our experts agree that liability coverage should have no sub-limits, and that all of the dealer's operations should be covered. This could include shooting ranges, packing ammunition, gunsmithing, and customizing or renovating firearms.
There is ample capacity for this exposure, but our experts emphasize that retailers should work with carriers that understand the intricacies of this market and have a history of providing the coverage and defending claims. The market is moderately competitive without any particular geographic concerns.
Mr. Chiarello has a cautionary reminder for retail agents who want to pursue this class of business. “It is important to understand that defending a firearms claim is not the same as defending an automobile accident claim.”
Carriers are available that have the expertise to provide your firearms dealer clients with excellent underwriting, loss prevention and claims service. Their prices may not be the lowest, but when coverage is needed, they have the knowledge to respond appropriately.
*Refer to the National Shooting Sports Foundation website at www.nssf.org for more information on this important program.