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.

Conference · CFO

NJ Tech Council CFO Forum – An Overview of the Amneal/Impax Merger

Today I had the privilege of attending the NJ Tech Council CFO Forum at EY in Iselin (Metropark), NJ.  The featured speaker was Jim Mastakas (bio), the current Senior VP and CFO of Virtus Pharmaceuticals, and who previously worked at Amneal.  Jim was there to speak about his time at Amneal and the deal he helped close with Impax Labs valued at approximately $7 billion.

Amneal was a private generic drug company that merged with Impax Labs earlier in 2018.  Impax Labs was publicly traded company, but Amneal was the more valuable company. When the deal finally closed the split in ownership split was 75% Amneal and 25% Impax Labs, with the combined company retaining the Anmeal name and becoming a public company (AMRX).  The deal was transformational for both companies as the combined company became the 5th largest generic drug company in the US, with expected revenues of $2.6 billion.

Jim talked about the challenges of getting the deal across the finish line and what he thought CFOs need to pay particular attention to.  For a deal to close a lot of things need to go right and from an operational standpoint some of these are obvious.  Some of the less obvious things a CFO needs to be aware of are:

  • Making sure proper confidentiality was in place both externally and internally
  • Knowing you will need to manage a CEO’s expectations when it comes to the numbers
  • Assuming your company is like most, stretched pretty thin, being prepared to lobby for extra help in the due diligence
  • Managing employees’ motivation in getting the due diligence completed. This can be done through compensation and because employees know there is someone who does a similar job on the other side of the transaction
  • Making sure there is a person whose sole job is integration of the two companies so that those synergies are realized. You can expect this to be done correctly if this is a part-time job for a current employee, the person has to devote all of their time to this.

The one thing he would have probably done differently was not have updated Amneal’s forecast as frequently as he did.  The reason for this was two-fold.  First, a lot of time and effort was put into these forecasts every time they needed to be redone, time that he and his staff really did not have.  Secondly, it could have possibly undermined the confidence that Impax had in the numbers since they changed so often.  Ultimately, Jim did not feel that happened but felt it was a real possibility.

This was a great event and Jim did a wonderful job of walking through the transaction and what went down.  Kudos to NJTC for putting it on and EY for hosting.

Catastrophe · Monday Market Update · Property Insurance

Monday Market Update – What Will Hurricane Florence Mean to the Property Insurance Market?

Last week there were multiple named tropical systems in the Atlantic Ocean in addition to four others in the Pacific Ocean.  Florence of course generated most of the attention here in the United States and will continue to be in the news as the true destruction is sorted out.

We will most likely see losses in the billions for Florence with the amount of insured losses also in the billions.  Insured losses are the dollars paid by insurance companies for covered claims, whereas the headline loss number will be the total loss which is not all insured.  Insured losses will often not include indirect losses such as lost wages and delays, but some of these losses can be covered by insurance.  What will this mean for the insurance market?

If the past is any indication we will most likely see carriers try to increase rates and the insured that are renewing coverage within the next 45-90 days will see the largest impacts of this increase.  This is what we saw last year when multiple hurricanes hit the United States.  These rate increases ended up not holding up over time.  Insurance companies were saying to investors and analysts that the hurricane losses were “earnings events” and would not have a material impact over the long term.  On the other hand, they were telling insureds and brokers they needed to increase the premium or rate because of these same losses.  Insurance companies essentially used the storms to increase rates but told the analysts that cover their stocks that the losses were just a blip on the radar.  I remember underwriters asking for rate increases up to 40% in the immediate aftermath of these storms.

Rates returned to normal because there is so much surplus money in the insurance market and competition is fierce.  After the 2008 recession a lot of money flowed into the reinsurance sector where investors could secure a better return on money compared to US Bonds and this continues to be the case.  Couple the money that flowed into reinsurance with the stellar returns in the equity markets during this time and you now find insurance industry surplus near all-time highs despite pretty hefty losses the past few years (think hurricanes, earthquakes, CA wildfires, etc.). That is why if your policy renewed in April you probably saw no increase or at worst a minimal increase.

Over time these losses add up and could weaken the market and lower total surplus.  My personal belief is that as interest rates continue to increase you will also see some of the money move back into US Bonds.  Investors that traditionally did not invest in insurance but only started after 2008 will begin to exit the insurance market and invest in US Bonds where they can get a similar return with less risk.  If we see move money move out of insurance and into bonds, with losses continuing to mount, the property insurance market will at some point be impacted but that could still be a long way away.  If your property insurance renews in the next 45-90 days I suggest you ask your broker why insurance company CFOs and CEOs are saying these storms are just “earnings events” but then increasing your rates.

As always, fee free to reach out with any questions or comments.  You can reach me at matt@mattcorc.com or matt.corcoran@alliant.com.

Insurance · Life Sciences

Common Question Friday – Why Do Pre-Clinical Companies Need Insurance?

One of the most common questions I get asked comes from Pre-Clinical Life Science companies is why do I need insurance?

I agree that pre-clinical life science companies have about as little risk as a company can have.  Why they need insurance really comes down to contracts, investors and statutory regulations.

If the company enters into a lease the lessor will typically require general liability insurance.  This insurance is very inexpensive and it usually makes sense to bundle this with property insurance as any additional cost would be negligible.  The property insurance can include research equipment, scientific animals, office furniture, and R&D Business Income among other things.  A typical policy can start under $500 depending on the total value of your property.

If you have employees you will be required by the state you are domiciled in to have workers compensation insurance.  This will cover your employees if they get injured at work for medical costs and lost wages.  Again, this should be low cost and is based on your total payroll, benefits should not be included when calculating wages.

Product Liability insurance for pre-clinical companies is sometimes required if the technology is being transferred from a third party such as a university.  It drives me nuts when third parties require a pre-clinical company to put this into place before a trial will commence because there is .001% exposure and it is expensive for my clients compared to the other coverages.  If you cannot negotiate this out of the contract it is very important that your broker knows which carriers have flexibility on their minimum premiums for scenarios like this.  If your broker tells you that the minimum premium is $4,000 they are mistaken.

D&O insurance, this would be needed if you have raised capital and have a board of directors.  This coverage protects the personal assets of directors and officers of the company and outside board members typically require you have this in place.

These are the coverages that are usually required even when you are pre-clinical.  If you are close to signing a lease or transferring tech I would recommend you have an insurance broker to review the insurance requirements in the contracts and ask them to pencil out what the economics would look like.  Your broker should also be able to tell you if certain requirements are excessive to what the industry norms are so that you can try and negotiate them down.

Feel free to reach out to me here if you have questions or comments.

As always, I appreciate any feedback and if you have topics you would like me to talk about please send me an email.  You can email me at matt.corcoran@alliant.com or matt@mattcorc.com.

Catastrophe · Insurance · Property Insurance

Hurricane Florence – Property Insurance Tips

Hopefully Hurricane Florence weakens and has a minimal impact on the East Coast of the United States, but if we are not so lucky I wanted to share some coverages that you might have available in your property policy that will help mitigate the financial loss.

  • Debris Removal – often this has a sub-limit but it can help with cleanup costs
  • Catastrophe Allowance – not standard in all policies, but can give you some additional coverage if your limit is not sufficient to replace your property
  • Denial of Access – Can pay Business Income in the event you cannot access your premise because of damage to a nearby property
  • Expediting Expense – an additional coverage that responds when you make temporary repairs to get back into business
  • Equipment Breakdown – can be especially important if your HVAC system gets damaged and you have temperature sensitive product
  • Claims Expense – Can pay for a third party to help you work through the claim, especially important in business income claims
  • Ordinance or Law – Can help pay for demolition, increased cost of construction, loss to undamaged portion of the building
  • Preservation of Property – the safeguards you put in place to protect against loss can be covered
  • Business Income and Contingent Business Income – provides coverage for income lost while your premise is down from a covered cause of loss or a key supplier/customer
  • Civil Authority – provides coverage for loss of income because the government deemed a road or bridge unsafe or closed it due to a covered peril
  • Extra Expense – added cost to relocate

These are just a few examples of where coverage can be found.  You do want to be aware that not all policies will have these coverages, but most of them should be found in even the most basic of policies.

A couple of things to be aware of that can work against insureds.

  • Coverage can be impacted by deductible, particularly wind deductibles that might differ from your regular deductible. In wind prone areas you might incur a percentage deductible instead of a flat dollar amount.  For example, your deductible might be 5% of total insured values subject to a minimum of $50,000
  • Wind deductibles could also impact Business Income and Contingent Business Income
  • Flood is often excluded
  • If you have National Flood Insurance Program (NFIP) coverage they adjust the loss on an “actual cash value” basis, meaning it is replacement cost minus depreciation.
  • NFIP coverage is limited in total limits available
  • If you are in a flood zone but have no NFIP coverage but have flood coverage through your insurance carrier it could be subject to a deductible equivalent to what NFIP would have covered.

I hope this is help that is ultimately not needed.  For those in the states that could be impacted, I wish you the best and hope there is little or no impact to you, your business and your families.

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.