Take a Hybrid Partnership Out for a Spin First

Due diligence and risk-management assessment are keys to avoiding product liability in convergent medical technologies.

By: Kevin Quinley

As anyone who has paid above-sticker price for a Prius knows, hybrids are in hot demand. In the life sciences, hybrids that blend elements of medical devices and pharmaceuticals are also hot-ticket items. Such combination products or convergent technologies often marry the best innovations of drug development with highly sophisticated delivery systems. Convergent technologies include innovative products such as drug-eluting stents, bone graft scaffolding/sponges coated with growth protein, implantable pumps that deliver drugs or biologics, transdermal patches, and implantable polymer wafers for chemotherapy.

When plaintiff lawyers survey convergent technologies, though, they see dollar signs of a different kind. When lawyers see drug-eluting stents, they run to studies of late-stage thrombosis. When they read about implantable pain pumps, they seize on reports of shoulder injuries. When they notice pain patches, they advertise for injured patients on their Web sites. Plaintiff attorneys, in other words, see opportunities for litigation, jury awards, and personal injury settlements for aggrieved consumers.

Companies developing convergent medical technologies can mine veins rich with opportunities, but, as you can see, they also face steep product liability perils if products cause patient injuries, have defects, or fail to perform as intended. These outcomes can trigger lawsuits that financially drain companies through jury awards, skyrocketing insurance premiums, exorbitant settlements, or eye-popping legal fees.

Risks Are Manageable

Such risks are manageable, however. Examining product liability risk factors and strategies can help to insulate convergent technologies against financial meltdown. While some convergent technologies are the product of a single company, often they are the fruit of collaboration between a medical device firm and a pharmaceutical company or biotech enterprise. For the purposes of our discussion here, the cross-sector partnership model will be the context for the following risk management commentary.

Companies developing convergent technologies should realize that, to some insurance underwriters, combination products may represent a different, higher risk profile for product liability. Underwriters who willingly write coverage on medical equipment may pause before placing coverage on convergent technologies.

At least five reasons for such reticence exist. First, many insurance underwriters view drugs as riskier than devices from a product liability standpoint. Second, the possibility of having a bad batch of drugs heightens the potential for mass tort, class-action claims. Third, introducing pharmaceuticals into a product can invite later coverage tussles over pinpointing the date of loss. Fourth, often the large pharma partner in a convergent technology alliance may represent deep pockets to the personal injury bar. Finally, underwriters may worry that multicompany collaboration adds to the honeypot attracting personal injury lawyers and complicates case defense.

Defending product liability claims for convergent technologies is fraught with risk management issues. Among the thorny challenges are:

• Situations in which both companies are sued and both have insurance. Which one's insurance is primary? In other words, which policy gets tapped first and which comes second?

• Injured patients who sue both companies. Which party picks legal counsel and controls the defense? Selection of legal counsel can be a sensitive matter and the pharma partner might not be comfortable with the choice made by the device firm and vice versa.

• Reconciling insurers' settlement orientation with corporate defense philosophy. If plaintiffs assert product claims that an insurance policy covers, insurers may want to curb legal defense fees by paying off claimants. Companies producing convergent technologies may want to defend their product, though, and settle only selectively. They may worry about the business ramifications of being seen as an “easy mark.”

• Coordinating defense efforts. One party wants to pinch pennies; the other wants to spare no expense. Which view prevails?

Management must address such questions in any convergent technology partnership. Spotting potential pitfalls before signing an alliance is a key step in a successful collaboration involving hybrid device technology.

Due Diligence Duty

In this regard due diligence is crucial in averting product liability risk. Management must assess the risk-management resources and skills of its business partner. These abilities or deficiencies will surface when claims and lawsuits arise from a combination product's alleged defects. It's best to learn about potential risks at the courtship phase, rather than enter a partnership, encounter choppy legal waters, and then learn that one's business partner bailed on product safety.

Careful investigation and evaluation of business partners apply to both the pharma and the medical device entity. Consider spot visits and independent product testing at various stages of the production process, for example.

Some other due diligence steps meriting consideration include the following.

Trust, but verify. Confirm that the business partner doing the manufacturing is making products in accordance with your guidelines. In addition, specify the quality of the materials. When a company faces a product liability claim, plaintiff attorneys will scrutinize the manufacturing agreement. Therefore, outline in the contract, not the purchase order, the process for changing specifications and sign-off procedures.

Require each convergence partner to carry liability coverage. Mandate contractually that each party obtain its own product liability protection from reputable insurance providers. Insist that each list the other as “additional insureds” on each other's insurance policy. Partnering does not mean you can safely forgo insurance coverage because the business partner has coverage. There are still many valid reasons why you need your own policy. Some examples:

• The partner's insurance policy may have inadequate coverage limits.

• The partner may have coverage with an insurer that has weak financials.

• Its insurer's claims-paying ability is suspect.

• Its insurer's claim service is inept.

• The partner's insurer has no business relationship with you and cannot be relied on to protect your interests if a claim occurs.

There are many reasons why you should not consider yourself fully protected just because your partner has insurance. Make sure that your business partner is adequately insured for product liability. If your business partner insists that it is self-insured, make sure it has the financial means and liquidity to pay claims as they arise.

Vet your partner's insurer. Not all insurance coverage is created equal. A business partner with an insurance policy from a shaky financial institution may be of little help when claims and lawsuits arise years after patients start using the product. Check the financial rating of the insurance company that your business partner utilizes. Rating services include A.M. Best, Moody's, and Standard & Poor's. In addition, check the policy limits written by the insurer on your business partner. A product liability insurance policy with a $1-million limit may sound sufficient, but in product liability litigation, it may be bare bones.

Create dispute resolution procedures in advance. What if one party thinks a manufacturing defect exists and the other party thinks it received flawed specifications? What if each party points the finger at the other when a patient injury occurs and there is a serious claim? These are not purely theoretical concerns. When deals are done, handshakes and high-fives abound. Later, when a claim arises or a product meltdown occurs, shaking fists and finger-wagging are often the result. Remember: Even promising marriages can begin with prenuptial agreements.

Be Safe, Not Sorry

Even if conscientious management has taken the above steps, liability problems from convergent technologies may still crop up. There are four additional tactics that can help to avert these risks:

Verify QA/QC systems. Make sure that your business partner has sound quality assurance and quality control systems. Your business fortunes and reputation may ultimately hinge on the soundness of these. Verify that such structures exist and are not just “paper systems.”

Assess safety program effectiveness. Does your business partner have a product safety program? Is it supported from the organization's C-suite or is it largely symbolic? Does your business partner see product safety as a “one-and-done” effort or as part of an ongoing, recurring process? Find out before joining a combination technology partnership.

Examine risk management programs and processes. How risk management-savvy is the business partner? Does your business partner have a full-time risk manager? Are processes in place to gather intelligence from the user environment regarding adverse events, trends, off-label use, physician or hospital feedback, and related matters? Are MDR procedures and adverse drug reaction reporting systems in place to provide distant early-warning signs of incipient problems?

Explore loss and claim history. Assess the claims history of one's business partner, whether the business partner is from the medical technology sector or the pharmaceutical arena. Request copies of your partner's loss runs for the past three to five years. Loss runs are similar to spreadsheets, and insurance companies issue them regularly. These documents list open and sometimes closed claims, amounts paid for claims, and sums set aside for future expected liabilities. This report is a barometer of loss activity in the past. Needless to say, the briefer the listing, the better.

As you can see, product liability claims in convergent technologies can highlight in stark relief the divergent interests of business partners. By paying close attention to insurance coverage and risk management, however, collaborative partners can keep their hybrid partnership on the road to success in a post-loss environment.

Kevin Quinley CPCU is vice president, risk services, Berkley Life Sciences LLC (Ewing, NJ). He can be reached at kquinley@berkleyls.com [3].