By Kevin Quinley
Circus performers flirt with risk. Tightrope walkers strive for balance. Trapeze artists count on impeccable timing. Mitigating their risk, though, is the safety net stretched out below them. Life science professionals may feel comforted when they have the safety net of insurance.
This feeling can lend a false sense of security, though, if firms overlook potential pitfalls, coverage gaps, and key policy provisions. Each life science leader is like a business version of a trapeze artist. They fly high at times, but an element of risk lurks below. Every safety net has holes. The key is to examine the net BEFORE gravity kicks in to make sure you don’t drop through any gaps! Let’s look at six gaps which can land life sciences firms in hot water, jeopardizing their insurance coverage or imperiling their company’s assets:
Excluded clinical trials. Many product liability policies for life sciences companies require policyholders to report clinical trials to the insurance company at the start of the policy period. Often, they also require that the life sciences firm report any new trials initiated during the insurance policy term. New business opportunities often arise, however, which prompt a life sciences company to launch new rounds of clinical trials. Life sciences firms are understandably focused on running their businesses and may inadvertently fail to report each new development or clinical opportunity to their insurer.
Problems can arise when later, during the insurance policy term, the company initiates new clinical trials. If, through oversight, the company neglects to report those new clinical trials during the policy period, the insurance company may deny insurance coverage for any bodily injury claims arising from the new clinical trials. This imposes an onerous burden on the life sciences company and exacts a stiff penalty for the lapse. Moral: Seek insurance coverage that imposes no requirement to report new clinical trials during the policy term.
Punitive damages gaps. Let’s say you have a big claim that seeks punitive damages. Assume that, among the documents unearthed in a lawsuit’s discovery phase, is an email from your quality affairs director.
I realize we have received 127 AERs [adverse event reports] since June 1st, but it’s probably cheaper to pay these claims as nuisance matters rather than change our warnings or have a field recall … Doing either would crater our quarterly financials.
Viewing this “smoking gun” document, a jury socks it to you. Due to ill-advised wording of an internal company memo, a plaintiff attorney persuades a jury to hit you with $10 million in punitive damages. You just dug out your insurance policy for the first time and read the fine print; it excludes coverage for “punitive or exemplary damages.” Now you have big problems!
Solutions: Read the insurance policy’s fine print ahead of time to see if it covers or excludes punitive damages. If the policy is silent — don’t take the risk — make sure the policy affirmatively covers such damages. Further, find out before you have a claim if the states where you do business allow insurance to cover punitive damages. Some do not, regardless of an insurance policy’s wording.
If you conduct business in states where punitive damages are uninsurable — California, New Jersey, and Pennsylvania, for example — factor this into a self-funding program to address this contingency. Finally, do not put yourself in a position where your company is vulnerable to punitive damages. Good conduct is a terrific risk management tool.
No coverage for personal injury arising from clinical trials. Insurance companies are often specific in defining bodily injury and distinguishing it from personal injury. The terms are defined in most insurance policies and often are not synonymous. Bodily injury, as the phrase implies, suggests actual physical trauma to a patient or some physical pathology. By contrast, personal injury is more mental and psychological — pain, suffering, embarrassment, humiliation, etc. In some clinical trials, however, subjects may suffer from activities that qualify as “personal injury” but do not fall within the definition of “bodily injury.” Some life sciences liability insurance policies do not cover claims for personal injury liability. Tip: Seek a liability insurance policy that covers both bodily injury and personal injury from clinical trials.
Excluded product withdrawal expense. Periodically, life sciences companies withdraw a drug from the market due to a Class 1 recall. This can involve significant expense: consultants, attorneys, public relations firms, transportation and storage of the recalled product, etc. Many product liability insurance policies exclude coverage or protection for such financial expenses. Moral: Ask about this before placing coverage with any new or incumbent insurance company. Seek coverage that provides product withdrawal expense and a broad definition of such expense to include the preceding types of costs.
Recall exclusions for biological implants. Biotech companies may initiate a Class 1 recall of implanted/transplanted tissues, organs, or biological material. Explantation or removal of such items can cause bodily injury. Surgery, an invasive procedure, is required to retrieve the recalled product. However, some liability insurance policies exclude coverage for injuries due to recall. Remedy: Look for insurance coverage that exempts from the “recall exclusion” bodily injury claims caused by removal or explantation of transplanted tissues, organs, or biological material due to a Class 1 recall.
Late loss reporting. Let’s say you did not immediately report a loss or potential claim to your insurer because (choose any of the following):
- you wanted more information
- the claim was ridiculous, and you did not want to dignify it with an answer
- you thought the claim probably would not amount to anything and would go away
- you thought you could talk the lawyer out of pursuing a lawsuit against you
- you feared the insurance company would raise your insurance premium if you reported a loss.
A year later, the claim becomes a lawsuit. Reconstructing the chronology, the insurer learns you had prior knowledge of this case but suppressed the reporting. The claim may not be covered because it was first made before the beginning of your insurance policy term.
Tip: Understand the conditions to coverage under your insurance policy. They are not onerous. Typically, they require that you report claims and accidents promptly and cooperate with the insurer in defending and investigating claims. Once, the president of an implant company justified a late-reported lawsuit by telling me he tried phoning the plaintiff’s attorney to explain why the life sciences company had no business being involved. Did the CEO talk the lawyer out of it? Hardly! In the real world, few claims simply evaporate, as much as insurers would like them to. Fewer still simply disappear because the CEO phoned the claimant’s attorney, a well-meaning gesture that might even inadvertently give the lawyer more ammunition.
“White-knuckle moments” lurk for many life sciences firms in the fine print of their insurance policies. Understanding the dangers is the first step in avoiding them. Life science executives and managers can help bulletproof their firms from such mishaps by noting — and preventing — these common pitfalls.
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