Final Word: Insurance for Biotech Companies

Biotechnology and life sciences companies come in all shapes and sizes. Some are multinational companies with vast resources and others are small companies working with a few new compounds. Regardless of size or market position, these companies should all have one common question of those that handle their insurance: Will their current insurance program protect their assets and investments in the event of a significant loss? Understanding the nature of risks, acquiring suitable insurance, and comprehending policy issues when claims arise are essential to protecting assets and obtaining reimbursement when losses occur.

Ira M. Gottlieb, Esq.

Although having the right insurance program is not a panacea, it can certainly ease the financial burden of a company faced with lengthy and costly lawsuits and judgments. In general, there are a variety of risks for which different types of insurance may be obtained. Some examples include general liability, workers compensation, employment liability, property and casualty, premises liability, directors and officers liability, and intellectual property coverage for claims brought by others for infringement.

General liability policies may cover a broad range of potential liabilities arising from occurrences that result in bodily and personal injuries as well as property damage to third parties. Certain risks may be more common for biotech companies. Clinical trials may expose a company to substantial risks of liability for personal and bodily injuries to those participating in tests. Clinical trials also often involve a number of different people and organizations, including the company sponsoring the test, investors, the test's subjects, doctors administering the test, hospitals, review boards, and researchers. Insuring every stage of testing and managing contractual risks are critical. General liability policies, the mainstay of any corporate insurance program, may exclude coverage for clinical trials when the insured is a biotech company. For these types of risks it may be necessary to procure specialized forms of coverage or policy endorsements.

Optimal coverage may include an endorsement to a general liability policy covering bodily injury arising out of clinical testing or protocols conducted by or on behalf of the insured. A policy should also provide coverage against the company's exposure to claims by the subjects of clinical testing involving the product and administration of the test. Products liability coverage, with a worldwide geographical scope, may also be necessary to cover claims by consumers that the drug allegedly caused bodily injury. The policy should insure against any such claims arising out of products sold, handled, or distributed by the insured company.

Recently, directors and officers of biotech companies have been sued by shareholders for unexpected financial losses and drops in share prices. Claims may come in the form of shareholder suits based upon clinical drug failures, allegations of mismanagement and erroneous accounting or other events that impact a company's stock price. It is important to have an appropriate directors and officers (D&O) insurance policy that is properly tailored to fit the risks and that applies to potential financial losses.

Typically, the insuring clause of a D&O policy provides for the payment of any loss resulting from the wrongful act of an officer or director. This often includes, but is not limited to, damages, judgments, settlements, costs, and the defense of legal actions, claims, and proceedings. The defense of legal actions or proceedings is a particularly important piece of the coverage because directors and officers are often named as defendants in complex and expensive litigation, aimed primarily at the corporation or other parties.

There are a multitude of other insurance issues facing the biotech industry. Insurance coverage in any particular case will depend on the type of policy; its terms, conditions, and exclusions; and the facts of each situation. Risk management personnel, brokers, and counsel are all an integral part of ensuring that a company is well-protected to continue its important mission and business.

Ira Gottlieb is a partner of McCarter & English, Louis Chiafullo is an associate of McCarter & English, Four Gateway Center. 100 Mulberry Street, Newark, NJ 07102, 973.622.4444, fax 973.624.7070, igottlieb@mccarter.com, lchiafullo@mccarter.com