Financial Loss · Insurance

Common Question Friday- Why Do I Need Cyber Coverage?

This week’s common question is – “Why do I need cyber insurance if I don’t sell anything and therefore don’t take personal information from clients?”

In the past this was asked by pretty much every company that did not sell directly to consumers but the tide is definitely shifting where almost every company needs some cyber coverage.  Cyber coverage is unique in that covers losses you incur (first party) and losses to third parties do to your negligence.  Some of the coverages include:

  • Notification Costs (1st party)
  • Extra Expense and Business Income (1st party)
  • Cyber Extortion Costs (1st party)
  • Forensic Costs (1st party)
  • Settlements and Damages related to a breach (3rd party)
  • PCI fines (3rd party)
  • Legal Defense (3rd party)

This is just sample of what a cyber policy covers and is not inclusive.  Some claims examples:

  • If you have employee information you have what is referred to as personal identifiable information and if that is compromised you would need to notify those possibly impacted and pay for credit monitoring.
  • A malicious party could use you as a gateway into hacking into a larger organization, much like what happened with the Target breach. Here the hackers got into Target’s system through the HVAC contractor.
  • If you have trade secrets a hacker could steal those secrets and then extort you. Your supply chain could be disrupted causing a business income loss much like we saw with Merck last year.

These are a few examples of claims that could happen to any company regardless if they have a commercial product or not.  Cyber insurance is relatively inexpensive and the risk is there for everyone.  If you are not at least getting quotes I strongly suggest you do as every day the world becomes more dependent on IT.

Financial Loss · Insurance · Property Insurance

How We Helped a Client After Their Product Was Condemned

I am going to share with you a story about a new client that left their prior insurance broker because of a bad loss they suffered that could and should have been covered.  I am going to explain why they choose us but I want to be clear, getting a new client because they suffered an uncovered loss is not a good way to win clients and not something we prefer.  We would much rather work with a client prior to a loss and uncover coverage gaps so that if they are unfortunate and have a loss and least it is covered by insurance.

The loss involved a fire at their premise that destroyed roughly 25% of their product.  The remaining 75% of the product was condemned even though it appeared not to be damaged.  The insurance company covered the 25% that was damaged but not the 75% that was condemned.  The condemned property should have been covered and could have for a very little amount of additional premium.

After the loss the client decided it was time to move on from their large fortune 500 broker that had a team dedicated to life science clients.  The client did an informal RFQ and asked the competing brokers to analyze their current coverage, current pricing, and coverages they might be missing.

What we found was pretty staggering.  From a pricing standpoint, they were in good shape, and they had most of the same coverages that we would have recommended.  The problem was that the coverage terms within those policies left the client significantly more exposed than they realized.  In addition to the condemned property coverage gap, we found a handful of other six and seven figure coverage gaps that the prior broker had missed and which our competition had failed to point out.  It is never pleasant when a loss uncovers a coverage gap and that is what we strive to avoid with our clients and prospects.  At the end of the day, our deep dive coverage analysis is what won us the business.  We had equal capabilities to the other brokers when it came to pricing and placement expertise, but we shined when it came to correctly identifying what their current coverage lacked and how to fix it.

If you are a life science company and would be interested in learning more about our coverage audit please email me at matt.corcoran@alliant.com.  We spend our time and resources doing this analysis, not yours.

Financial Loss · Insurance · Litigation

Common Question Friday – Why Do I Need D&O Insurance?

Each week, I take a common question I get from clients and prospects about insurance and answer it.  If you have a question you would like me to answer please feel free to shoot me an email at matt@mattcorc.com.

The question today is – “Why do I need Directors & Officers (D&O) insurance?”  A similar question is, “I don’t have a board of directors so why do I need D&O insurance?”

These questions which often get asked together are geared toward private companies.  It should be fairly obvious why a public company would need D&O insurance, but if not, the objective of both private and public company D&O insurance is the same…to protect the personal assets of Directors and Officers.  When you are a public company the risk is much greater.  Now let me explain why you need D&O and what it can protect you against.

Let’s start with companies that are startups and have no Board.  There are no outside investors yet and perhaps no product, but even then you could be at risk because claimants can be much more than just shareholders.  Claimants can include competitors, regulators, creditors and even customers to name just a few.  Here are some examples of how a claim could arise from someone other than a shareholder:

  • Recruiting a top sales executive from your competitor who was under contract could result in your competitor filing a suit against you
  • Claiming your company has the only approved product in the marketplace when it is not and your sues alleging false advertising.
  • Creditors allege your devised a plan to divert assets prior to filing bankruptcy.

These are just examples and there are plenty more, but notice that none of these claims were shareholder claims.  Many times insureds have done nothing wrong but that won’t prevent a claimant from filing suit.  In that case the D&O policy will respond and pay your legal fees up to the policy limit.  As you can imagine, the costs just to defend claims, even if frivolous, can pile up quickly.  Remember the objective of the D&O policy is to protect your personal assets, a claim does not have to be successful for your personal assets to be at risk and bankrupt your company.

Oftentimes clients tell me, “I am just a small company and no one would bother suing us” or “I have run five companies prior and never had a D&O claim.”  First, if you cause financial harm to another company, a creditor or any other third party no matter how small, you are at risk because people do not like to lose money.  If they speak to an attorney the probability of action against you and your company increases exponentially as do the potential costs.  Just because you have never had a claim does not mean it won’t happen in the future, D&O claims are infrequent but when they occur they are expensive. The average claim cost (award and legal fees) is well into the six figures.  Most companies that have had D&O claims could have at one point said they never had a claim before either, but in a litigious world the odds of a claim occurring are only increasing.

Once you start raising money and have outside investors the opportunity for claims increases substantially.  A large number of companies fail or lose value and this can lead to claims even if you went out of business for reasons out of your control.  As you raise money you typically put together a board of directors and at this point you usually don’t have a choice on whether to carry D&O insurance, prospective board members will require you carry D&O and may even stipulate the limit you need to carry if you want them to sit on your board.

At the end of the day, D&O insurance should be in place if you have any personal assets (house, cars, etc.) to protect.  As an officer or director of a company you can be named in a suit so regardless of how your business is structured you are still at risk.  What is often overlooked by brokers is explaining to clients what D&O covers.  If clients knew the risks that are covered by a D&O policy they would be more open to securing this coverage and less confused on why they actually need it.

Feel free to reach out at matt@mattcorc.com or matt.corcoran@alliant.com.  You can also reach me via phone at (610) 635-3326.

Financial Loss · Insurance · Litigation

The Perils of Product Liability Insurance When Mass Litigation Strikes

Based on a report yesterday from the Cook County Register, a settlement has apparently been reached between Abbvie and plaintiffs in the testosterone replacement therapy drug cases.  Currently there are 25,000 cases pending and this settlement could bring to a close the latest chapter in life science mass product litigation.  What has most likely prompted this settlement is the cost and the fact that 5 cases have went to trial and ruled on.  Abbvie successfully defended three and two others are on appeal after Abbvie was deemed not liable for the plaintiffs’ health conditions but it still resulted in large verdicts against Abbvie because they misled doctors and consumers about their product.

What can we learn from this most recent settlement?  These claims happened over a number of years and resulted in a large number of claimants.  A large number of claims over a number of years emanating from a similar product brings up “batch coverage” which I have talked about in prior posts. For life science companies it is so important to understand how batch coverage works within your policy(ies) as it could greatly impact the amount insurance companies pay and how much your company could be personally liable for out of pocket when all is said and done.  To find out more about “batch coverage” I suggest you ask your broker how your policies are structured and how they address batch coverage or reach out me directly.

The individual cases involved what appears to be punitive damages based on the large initial verdicts that went against Abbvie, $140MM and $150MM.  Insurance in many states is not permitted to pay punitive damages but if your policy is setup correctly there are workarounds. The first thing you should always do is have “most favorable venue” wording on your policy, this will allow your policy to respond according to the law of the jurisdiction most favorable to the insurability of punitive damages as long as certain conditions are met.  The second thing you can do is add what is called a “Puni-Wrap” to your program.  This is provided by an offshore insurance carrier and allows punitive damages to be paid by the insurance carrier regardless of the state.

Finally, all companies who have any connection to testosterone or any other hormones should pay close attention to their policy.  Almost every carrier now excludes these type products in their policy form automatically so it is something that needs to be something that is given consideration.  There are a long list of products that insurance companies exclude from the outset that many life science companies are not made aware of and end up being very costly.  As part of our due diligence when engaging with a new prospect we always offer to do an insurance audit of their current policies at no cost to them.  Let me know if you would like to find out more.

Biotech · Financial Loss · Insurance · Risk Management

Arbitration or Shareholder Suits – Would a Change Lower your D&O Premium?

Directors  & Officers liability has been a popular topic as of late for me.  Every day there are new headlines and the one that could have the biggest impact would be the recent story about shareholders losing their right to sue corporations.  The headline came from The Intercept and was titled, “Will Shareholders Lose the Right to Sue Over Corporate Fraud?

There is a lot that can be discussed here, the first thing to mention is that Fraud is often excluded if it is a deliberate or criminal act and there is a final judgement against such conduct.  A company cannot deliberately act in a fraudulent way and expect insurance to pay, this would create a moral hazard which insurance companies are not in the business of insuring.  However, this article uses the word “fraud” in a broad matter and some of these so called frauds could in fact be covered by an insurance policy.

Assuming that these “frauds” are covered by insurance let’s take a look at how this could impact D&O insurance.  When there is a D&O claim, a large chunk of the costs are for legal expenses and these can become rather large even when a case is without merit.  Many carriers, at least for public companies, have pushed for higher retentions (similar to a deductible but an insured incurs the cost upfront instead of at the backend) because the number of small claims that were piercing the retention were increasing in frequency.

If you are a public company biotech it is not uncommon for insurers to not offer any retention below $1M, whereas a couple of years ago a $500k deductible was definitely available.  If shareholders can no longer sue for “fraud” this could cut legal expenses down tremendously.  The quicker a case makes its way through the system the lower the legal costs.  The bad news is that insurers are quick to increase retentions but not lower them.  Every now and then I see a retention lowered but it is because the risk profile has changed dramatically for the company.

How about price?  Again, I think carriers will resist price decreases because when we look at pricing historically it has been trending down for year but claim costs have increased tremendously.  This softening of pricing is not as true for the life science industry which has been ticking up in pricing, but rates are still low.  This was accelerated because AIG in effect stopped writing life science IPOs and that drove the pricing way up for that segment of the market.

At the end of the day, this would be good for companies but insurers would work hard to now allow this change to have any meaningful impact on D&O pricing or terms.   Your broker should make the argument that at the very least it would warrant either a lowering of the retention or a premium reduction if not both.  Your broker should remember that the underwriter justified an increase in retention and/or premium because the policy was being used for small frequent claims instead of a large, catastrophic claims as it was intended.  If the frequency issue is eliminated or greatly decreased it is the job of your broker to advocate on your behalf why that warrants a lowering of premium or retention.

Financial Loss · Insurance · Risk Management

Possible Opioid Settlement and the Role of Product Liability Insurance

The recent headline, “Opioid Lawsuits Look More Like A Tobacco Settlement Every Day” in Forbes grabbed my attention for reasons I will explain.  As you know, I help life science companies develop and implement insurance programs that enables them to transfer risk to the insurance company.  So when you see a headline that reads like the clients you serve will be suffering a financial loss it makes you stand up and notice.  Granted, the fact that companies involved in opioids agreeing to a settlement does not come as a surprise to anyone but there are definitely things we can learn from this.  Different insurance policies could play a role in such a settlement but let me explain from a high-level how Product Liability insurance might respond.

First, product liability is structured to provide coverage when a third party suffers bodily injury or property damage, it does not provide coverage for financial loss.  This is important because if it the settlement is for the financial loss suffered by the government then Product Liability would not respond and the companies would be responsible to pay the settlement.  Most likely this settlement is for the financial loss suffered by the government and therefore no insurance proceeds will be used.

Conversely, if this was a class action lawsuit by individuals who suffered bodily injury this could possibly be covered.  This is no slam dunk though.  Many insurance carriers have put opioid exclusions on their policies so companies that did not think they had an opioid exposure but were somehow involved could find they don’t have coverage.  Companies could also run into issues with “batch” coverage and this can be a positive or a negative; it is a thorny issue and varies by carrier and even policy period.  “Batch” coverage is essentially treating all similar claims as one claim instead of individual claims.  This can be good or bad.  On the positive side it means there is one deductible instead of a separate deductible for each individual claim.  The negative is that depending on when claims occur and are reported you could run into and exhaustion of limits, meaning you have no insurance left because they are lumped into one policy period.  This can be even more problematic when you change carriers and have large excess programs where carriers might not be in agreement with how their policy responds.

All too often earlier stage companies are under the assumption that all insurance policies are pretty much the same, but when it comes to the life science industry that is not the case.  Because Product Liability policies are structured as claims made policies it is even more important that companies set their policies up correctly from the start so they do not have any surprises years down the road.  If your broker is not well versed in the life science space you could be leaving yourself vulnerable to uninsured losses down the road.

Financial Loss · Insurance · Life Sciences

How to Mitigate Supply Chain Disruption

Every time I read a headline like the one I saw yesterday on the FiercePharma website, “FDA bans products from another Chineses API maker,” I cringe.  This is not the first time I have written about these type losses and it won’t be the last as I believe supply chain risk is at or near very top of the risks life science companies face.  These articles remind me how vulnerable life science companies are to supply chain risk.  If you are sole sourced company and your API was coming from this plant or any other plant that was shut down by the FDA or was damaged in a fire it would cripple your business.  Most likely your stock price would be crushed, people would be fired, and confidence in your company would be destroyed among other things.

There is no good that can come out of a situation like this, but there are ways to salvage this situation.  First, a company can be dual-sourced.  This is typically the best solution but it takes time and money so it is not always feasible.  The second solution, admittedly not as good as dual sourcing, would be to insure the risk.

One way to insure it is through Contingent or Dependent Business Income (CBI).  This coverage can be found in your property policy and should not be confused with Business Income, the intent of both are similar but they are not the same.  I have seen new clients believe the terms are interchangeable or that their business income covers financial losses as a result of claim at a third party location but that is not the case.  CBI covers financial loss you incur because of a covered peril (think fire, wind, lightning, etc.) at a third party location.  Insurance companies are cautious to provide this coverage because these locations are not controlled by the insured.  Many insurers require these third party locations to be listed on the policy.  That can cause problems depending on where these sites are located.  For instance, locations outside the US might not be covered or certain perils such as wind could be excluded if your manufacturer is in Florida to name just a few red flags.  If structured properly, and I emphasize if, this can be a viable solution for physical losses to third party manufacturers and suppliers.

The issue described in the article was not a disruption due to a physical loss but was instead a regulatory issue.  Non-Damage Business Income (NDBI) basically provides coverage when a manufacturer suffers either a regulatory or voluntary shutdown.  If the FDA shuts down your main manufacturer or supplier and you suffer a business income loss you could find coverage under an NDBI policy.  These are typically stand-alone policies and are not cheap, but when you have one product and are sole-sourced it makes sense to explore.  I often see CBI not covered adequately but that pales into comparison in to how rarely I see regulatory business income covered at all.

Business Income is an issue I harp on over and over again because it is such a big risk for life science companies.  Unlike a product liability claim that can take years to litigate, a business income loss will impact cash flow almost immediately and as we all know, cash it the life blood of any company.  Through the use of risk management and properly structuring your insurance program we can greatly reduce this risk.