Originally Published MDDI January 2004
Insurance for Medical Device Firms: What You Need to Know
In the wake of this summer's Hurricane Isabel and the days-long blackouts on the East Coast and in the Midwest, medical device firms may want to reconsider the importance of choosing appropriate insurance coverage. But the exposures and needs of established firms could be very different from those of emerging R&D-based firms, say representatives of some major insurance providers.
Now may be a good time for device makers to rethink their property exposures and product liabilities. Among the property-driven risks are fire, windstorm, and water damage; transit losses; theft; and vandalism. These are the issues most often faced by R&D-focused start-ups, since these firms are not at the point where they are manufacturing product.
In response to property-exposure considerations, Chubb Insurance Companies (Warren, NJ) has recently introduced a new product, called Innovator, which is specifically tailored to the needs of the emerging R&D firms, says Frank Goudsmit, life sciences property and international manager at Chubb. “Many R&D-stage companies are typically placed with insurance companies who don't have a specialty in these classes of business,” he says. “They get a standard, off-the-shelf policy. On the flip side, Innovator offers core coverage, including coverage for their personal property and their R&D property. We've modified a standard, off-the-shelf insurance contract to make it appropriate for an emerging medical device company.”
The R&D property, he says, includes prototypes and all documentation pertaining to a new product. “So from a property standpoint, the insured firms enjoy very broad protection by breaking that out into a separate limit of insurance for R&D property.” He adds that Innovator coverage will also pay for a start-up's net profit plus continuing expenses, regardless of whether that firm is operating at a loss.
For larger manufacturing firms, on the other hand, so-called self-insurance is common. A company will often assume a certain amount of risk itself before insurance kicks in. “There's a certain level of claims activity that many device companies choose to retain through a deductible or a retention. In these cases, the insurance companies will handle catastrophic losses only,” says Marialuisa S. Gallozzi, partner, Covington & Burling (Washington, DC). “That's sometimes by the company's choosing and sometimes at the insurer's insistence.”
One particular type of property-based exposure that is somewhat specific to the medical device industry, Chubb's Goudsmit says, is that of plastics. “A lot of [medical device] accounts have significant plastics exposures,” he says. “We often find clients who will move into a building and start manufacturing, and they don't realize that the sprinkler system is not designed to control a fire related to plastic injection molding or high-rack storage of plastic.” As a company matures, he says, plastics and warehousing exposures can become more prevalent. “Chubb will do some very detailed engineering analysis of the facility to see what's working and what's appropriate” with regard to plastics, he says.
In terms of product liability, R&D-driven start-ups can be faced with tremendous uncertainty and high premium costs. The reason is that underwriters “can't look into a base or pool of similar companies and say what these products do,” says Thomas A. Konopka, senior vice president of Medmarc Insurance Group (Chantilly, VA). “There's no history.” So, generally speaking, underwriters will be forced to charge these companies higher premiums to make up for the risk of the unknown.
He points to silicone breast implants, when they first hit the market a few decades ago, as lacking operating history. “Who would have thought back in 1970, 1975, that when you hit 1990, there would be these phenomenal allegations of people being harmed, and negligence on behalf of the manufacturers, and the outcome being that millions and millions of dollars were expended into defense costs and settlement payments? [For those insuring the manufacturers of such implants,] that was a classic example of someone getting involved in something without having a history.”
Because almost half of Medmarc's applicants each year are emerging R&D-stage companies, Medmarc has plenty of opportunities to pick and choose with whom it wants to enter into a relationship. To make decisions about companies that lack operating history, “we look carefully at who's managing those companies and who's funding them. Then we will spend time trying to understand if we like the potential for the technology,” says Medmarc's chief underwriter for life sciences technology, Francis Stockwell.
For both property-exposure and product-liability coverage, big and small medical device firms alike should select a broker and an insurance company that have experience working with life sciences or healthcare technology companies and “will not be surprised by the types of claims and losses medical technology companies experience,” Medmarc's Konopka recommends.
One significant fact of interest to medical device companies, however, is that premiums have been going up on all types of insurance. This rise in cost results from low investment earnings on premium dollars, Stockwell says. “We're at a point now where we can no longer cut-rate our prices, because we can't make up the difference on investment earnings or capital gains.” Fortunately, he adds, “The insurance industry is generally healthy and can meet its obligations.”
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