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.

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 · Risk Management

How Changing the Reporting Period for Public Companies to Semiannual Could Impact the D&O Market

Last week the issue of public companies having to do quarterly reports popped up in the news in a big way with the President tweeting and then speaking on the possibility of ending quarterly reporting.  There are a lot of opinions out there on whether this is a good idea or bad idea.  Some people believe this would help companies think more long term rather than operating quarter to quarter.  Others believe it is too long and it allows companies to be less transparent.  I see pluses and minuses on both sides.  For example, I previously worked for a Fortune 500 company and I saw firsthand that companies do operate to an extent knowing they have quarterly numbers to meet.  On the other hand, investors want to know what is going on and there could be much bigger surprises if investors are only updated every six months.

I am not hear to argue that either way is better but talk about how this could impact D&O insurance if it were to be implemented.  I think the first thing to be concerned about is guidance, the further out you forecast and provide guidance for the more inaccurate you become.  Another danger is that a CFO or CEO that has a longer time horizon could inevitably fall behind where they projected they would be but believe they can right the ship because they have more time.  As we saw a couple of weeks ago with the Sonus Networks case (CFO Magazine), CFOs can do creative things to meet the quarter end (I am not saying CFOs blatantly mislead or act in a criminal way but the article demonstrates how numbers can be moved around to appease analysts). I am not sure why that would change with extending the reporting period out to six months, in fact it could exacerbate the issue because they feel they have more time to make up for lost revenue or cost savings.

Conversely, there is a lot of merit to the idea that meeting quarterly deadlines can lead to practices that might not be to the benefit of long term growth.  We can look at companies that had founders/CEOs that controlled enough shares that they did not have to be bound by the share price nearly as much and could think long term.  A great example of this would be Amazon, they have historically operated at a loss but that was because they invested in the business and now they are one of the most valuable companies in the world.  They reported courtly earnings but were far less concerned about the volatility around the stock if they failed to meet analysts’ expectations.  They were playing the long game.

How this could impact the public company D&O space is uncertain.  If companies are still required to report quarterly earnings but not provide guidance I think that would result in the D&O insurance marketplace remaining stable.  A company’s balance sheet is one of the most important drivers of D&O insurance pricing and terms; if this information was still available quarterly it would eliminate some uncertainty.  I think carriers would take a deeper look at corporate governance and also compare past guidance to the actual results, essentially underwriting the CFO.  In the end, insurers like certainty and the less there certainty there is the more cautious they are resulting in higher premiums, more restrictive terms and higher deductibles.

You can find a couple of good write-ups on the implications both broadly and in the D&O insurance marketplace here and here.

Financial Loss · Insurance · Risk Management

Your Insurance Broker Has No Incentive to Retain You as a Client!!!!

Skin in the game – that means your insurance broker actually having a vested interest in your success and the level of service you receive year in and year out.  Skin in the game does not mean your broker having a greater financial interest in year one compared to subsequent years yet that is how most brokers are paid. Most brokers get paid a set percentage for new business and then see that drop significantly after year one, and at some of the largest brokers that percentage might actually go to zero.  If your broker is always looking for the next deal to maintain their income how do you think that aligns with your interests?  You might say that the service team is incentivized to keep the account, but that is rarely the case, the service team’s is usually paid a salary and a small component of their bonus might be based on how well they service the customer.

At Alliant we believe that we should have a vested interest in your success and that your success leads to our success.  How do we do this?  We as individuals get paid the same percentage every year as long as we retain you as client, we don’t get paid more to bring in new clients or take a haircut after year one.  In fact, if we lose you as a client we feel that in our wallets because that income is gone.

Why am I telling you this?  I tell you this because it demonstrates that we value our existing clients just as much as our new clients.  A lot of brokers come in and tell you a story about service and how good their service is but can’t point to a reason as to why that service level will continue – we can.  We can point out that we actually get paid or, if the service is not good, not paid based on how we service your account – we put our money where our mouth is, we have skin in the game.  How many times has your service fallen off, even just a little bit in each year (cumulatively this could add up and you might not even recognize what good service is anymore), from the initial engagement?  Unfortunately, this is just considered part of how insurance works and what one can expect but it shouldn’t be.  That is why my firm strives to be different, we are not interested in a slow deterioration of service for our clients but a firm and consistent model of service that is the same in year one as it is in year eight.

I probably will get emails from brokers saying you shouldn’t be sharing this information but if we are being transparent about how much the firms are getting paid shouldn’t we be transparent about know how the individuals servicing your account are being compensated?  I am not saying W2’s need to be shared but knowing the structure and how it aligns with a service model I believe are good pieces of information to have because it can be a predictor of the future.  Maybe you are different than me, but when I deal with a “service” provider I want those individuals servicing my account to have repercussions if the level of service is not there but sadly in the insurance industry that is seldom the case.  With Alliant that is exactly the case, if the service drops we feel it in our wallet.

Investment · Life Sciences · Risk Management

Why Securities Class Filings are a Reality for Publicly Traded Companies

A great mid-year report by Cornerstone Research on Securities Class Action Filings for the first half of the year.  I recommend you check out the full report which you can find here.

These visuals really speak for themselves but the big takeaway is that if you are publicly traded company the chances of being subject to a Securities Filing are rising.  In 2017, 8.4% of exchange listed companies were subject to a filing and in 2018 it is projected to be 8.5%.

Pct of US Exchange Listed Companies subject to Filings

If you are a member of the S&P 500 the chances of a filing are even higher at 9.6%.

Pct of SP 500 Companies Subject to Core Filings

Breaking this down even further, the industry you are in can change the odds dramatically as well as the chart below demonstrates.

Heat Map

The clients I work with are in the Life Science and Healthcare space and this is how filings breakdown in that group.

Life Science Filings by subgroup

I will dig a little deeper on this at a later post, but I believe companies need to believe a Securities Class Action filing is inevitable and prepare accordingly.

Once again I recommend you check out the full report from Cornerstone Research which you can find here.

Daily Reads

Friday Morning’s Top Articles

Happy Friday!  Here is what I am reading as we head into the weekend:

  • Talk about hitting on a lot of points, super insightful article – Regeneron’s Billionaire Founder Battles The Drug Pricing System (Forbes).
  • Bio Roundup: An Alzheimer’s Head-Scratcher, OUTBio, GSK & Gilead Shakeups (Xconomy)
  • When healthcare devices go over the counter. An important trend contributing to the consumerization of healthcare is the transformation of select prescription categories to over-the-counter (Med City News)
  • Six big things: Funding for females and cash pouring into China shape the week in VC (Pitchbook)
Daily Reads

Wednesday Morning Headlines

Here is what I am reading this morning:

  • Glaxo’s New Research Chief Loves Big Pharma. Now He Has To Fix It (Forbes) – Highly recommended read!
  • 23andMe is raising up to $300M on top of what they have already raised, valuing them at $2.5B (PitchBook).

23andMe

  • Venture capital firms invested more than $738 million in Medtech during the second quarter of 2018, $1 million less than the first quarter (Medical Design & Outsourcing)
  • Today is the big day – Biogen’s Spinraza zooms through blockbusterland, but analysts are fixated on Alzheimer’s data (FiercePharma)