Avoiding Gaps in Clinical Trials Liability Insurance

Medical Device & Diagnostic Industry Magazine
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An MD&DI January 1999 Column

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When companies test high-risk procedures or devices, the potential for costly liability claims skyrockets. Having the right liability insurance can be vital to a company's success.

When developing an insurance plan, a biomedical or medical device company must take its clinical trials department into special consideration. It surprises most people to learn that while their company may be covered for general liability, it might not be covered for clinical trials liability—a specific, high-risk area that requires unique coverage to provide the maximum insurance protection. A company needs to purchase additional liability insurance specifically designed to cover clinical trials.

Even if it does have separate insurance for clinical testing, a company must be certain that the policy is accurately tailored to cover all of the additional exposures and liabilities that clinical testing always brings to a company.

The terminology and design of clinical trials liability insurance can vary considerably from policy to policy; knowing exactly where a company does and does not have coverage can mean a difference of millions of dollars in a potential judgment. What follows is a general breakdown of clinical trials liability insurance—information that every company should understand to ensure that it receives the best coverage possible.

Finding the right insurance plan for clinical trials liability can be difficult and time-consuming, but it is crucial. In the long run, selecting the best plan will save the company time and money. Good clinical trials insurance not only protects the company from liability exposure, it also provides an increased level of comfort for investors by demonstrating prudent financial management. Assessing the company's specific insurance needs and then choosing the right coverage plan, however, is easier said than done.

The first step to obtaining full insurance protection from liability occurs within the company. In addition to identifying precisely where it needs specific coverage, a company must make sure it has done everything possible within its clinical trials department to minimize the risk of a lawsuit. Even the best insurance plan cannot protect a company that strays from safety measures, informed consent rules, or proper test procedures. While consistently following procedures cannot guarantee a company immunity from all liability claims, it can considerably decrease the risk involved. To avoid unnecessary risk, a company must establish and maintain a policy of strict adherence to the required clinical trials protocol. All personnel should be fully aware of the issues concerning informed consent, safety measures, and testing procedures. In an already high-risk business, failure to follow regulations greatly increases a company's odds of being successfully sued and leaves potential juries little cause for sympathy on that company's behalf.

Once a company has verified that it follows all protocol regulations to the letter, it is time to search for possible insurance carriers. Remember, a company needs clinical trials liability coverage in addition to its general liability and products liability coverage. With that in mind, a company should consider only those carriers that have demonstrated financial security and shown a commitment to serving the unique claims of the biomedical and medical device manufacturing industries.

Clinical trials insurance is a highly specialized product, and because of this, not every carrier can fulfill the needs of companies searching for such specific coverage. However, if the company's current insurance provider offers clinical trials insurance, it is worth analyzing and considering the specifics of its policy, depending on how encompassing the coverage is. Although there are occasional reasons to use separate insurers, it is generally safer to have both products liability and clinical trials coverage with the same carrier. This avoids coverage disputes over claims, and reduces the possibility of gaps in coverage.

It is crucial to understand that clinical trials liability coverage is uniquely formatted to fit clinical testing and is not a general-coverage plan. Once in place, the plan should cover bodily injury and/or property damage resulting from the insured's negligence while testing the product. The insurance is limited to the clearly specified trials of clearly listed products and for no other tests or products. Before purchasing a plan, a company must be certain that the policy covers all necessary areas and should know what areas are not covered.

After choosing the most appropriate policy, the company must decide on a coverage limit. There is no set rule for establishing coverage limits or minimums, but the consensus in the insurance community is that a clinical trials liability policy should carry a minimum limit of $1 million and can have upper limits of $10 million through $20 million or more. Of course, a company's specific needs—and sometimes the needs of the testing facility and its risk levels—will dictate an acceptable range for these limits.

When setting a figure, it is wise to consider the time period addressed by the policy and the possibility that future claims against the company might increase considerably over time. Remember, there is often a long process involved in developing a product and having it approved. Because of this fact, what initially may have seemed to be adequate limits may later fall substantially short. Furthermore, it is not uncommon for claims to be filed several years after the clinical trials are completed, during which time the amount of an average claim may have risen. A company should consider all these factors when deciding on a limit and choose one that will cover both its present and future needs adequately.

After selecting a limit, a company is typically required to decide the amount of the deductible. At this point, it is worth considering the development of a self-insured retention plan (SIR) for the company, as opposed to accepting one of the insurance carrier's deductible plans. With a standard deductible, a company loses much of its input and consultation rights when certain claims are brought against it. For example, if the claim is up to or less than the amount of the deductible, the insurance carrier has little vested interest and will often simply settle the claim. The insured must accept the settlement without any chance to protest or provide input. But if the insured company has an SIR, they can use their own legal counsel to make any settlement up to the amount of the SIR. This provides significantly more control over settlement claims than a deductible affords, and the insured can work to arrange a settlement that might be more beneficial, for diverse reasons, to the company and to the injured parties. Too often the only concern that an insurance company has is the bottom line cost. Selecting an SIR gives insureds, not the carrier, the ability to negotiate to the betterment of all concerned. Depending on how comfortable a company is with its level of risk, it typically selects an SIR with a lower range between $10,000 and $50,000 and an upper range as high as $150,000—$200,000 or more.

After all these decisions have been made, the insured will be presented with the often-confusing language of the various options regarding the terms and extents of coverage. The first choice to consider is whether the coverage should include defense within or outside the policy limits. If a company selects defense within coverage, the cost of defending the claim is included in the policy limit. The carrier will only pay for the cost of defending against a claim up to the coverage limit and not beyond. This option can decrease premium payments but will erode the total amount available for claims because of the legal expenses. The concern is that there may be inadequate coverage remaining to pay for any judgment or settlement levied against the company. With a defense outside the policy limits, the insurance carrier will provide for the cost of defense in addition to its coverage of the judgment or settlement ultimately made on the claim up to the full limits of the policy. This option increases premium payments but can significantly decrease the amount paid by the insured should a claim arise. A company should do careful research before deciding whether to accept defense within or outside the policy limits.

The next important condition determines the coverage structure of the policy. There are basically two forms under which liability policies are written: the "claims-made form" and the "occurrence form." Unfortunately, insurance carriers do not often allow the insured to make a choice about this aspect of coverage, but it is still important to understand each form. A claims-made form provides coverage only if the claim is filed during the policy period. As long as the claim is registered within the agreed-upon coverage dates, the insurance carrier is responsible; if, however, the claim is filed at any time after the coverage period—even if the accident occurred during that coverage period—the insurer is not responsible.

With an occurrence form, on the other hand, the insurance carrier provides coverage for incidents occurring during the coverage dates, regardless of whether the policy is still in effect when the claim is made. This is the much broader and more prudent route for a company to take, and in the unlikely event that a choice is presented, the company should opt for an occurrence policy. In the case of nearly all companies with high-risk exposure, however, insurers will not allow a choice, and the company will be automatically assigned a claims-made policy form.

Even when obliged to accept a claims-made policy, a company can still ensure that it is covered for claims filed after the policy has expired. Whenever the company buys a new policy or renews its current one, it is imperative that the retroactive date be exactly the same as it was on the original policy. This makes the insurer responsible for any incidents that occurred while the company was under coverage, regardless of when the claim was filed.

If a company changes insurance or decides not to renew a claims-made policy, it should purchase what is referred to as tail coverage or an extended reporting period. This will provide coverage for any claims that are reported after the policy period has expired or elapsed. Before selecting an insurance carrier, companies should verify that all these options are available.

Clinical trials bring with them substantial risk, and unavoidable accidents can occur. Companies that take the time to obtain the right clinical trials liability insurance will find it well worth the effort. Failure to do so exposes the company to needless risk and can cost a fortune in money, time, and other resources.

Glen B. Carlson is a vice president of Calco Insurance Brokers & Agents Inc. (Orange, CA). He has more than 15 years of insurance experience and specializes in the biotechnology, biomedical, and medical device industries.

Illustration by Ken Corral

Copyright ©1999 Medical Device & Diagnostic Industry