As far as commercial property and casualty coverages are concerned, it goes without saying that individual companies require specific types of policies to most effectively address risks inherent to their industries.
The biotechnology industry is no exception—on the contrary, it requires probably one of the most unique and highly specialized coverages of any sector, due to the very nature of the biotechnology business model, which for start-up firms entails posting operating losses for several years while a new drug or medical product is tested first on animals (pre-clinical) and then on humans (clinical)—a process riddled with liability risks, given the potential that some experimental pharmacological products could harm human subjects.
Furthermore, the biotechnology industry is one of the most well-traveled: Even though a biotech firm may be based in the U.S., its insurance policy would have to cover clinical trials regardless of where those take place. In short, biotechnology isn’t the easiest of coverages to write, or place.
Send in the specialists
Assessing the risks peculiar to biotech companies and fashioning adequate coverage requires a highly specialized underwriting process, like any other niche or program coverage. For this industry, policies are often written in excess and surplus markets, as well as by major insurers like AIG and Chubb. Chubb’s life sciences program, in fact, recently received an expanded endorsement by the Biotechnology Industry Organization (BIO), which represents biotechnology companies, programs and institutions worldwide.
Frank Goudsmit, Chubb’s life science and international property manager, explained the coverages available to biotech companies through the carrier. “Within the life sciences unit at Chubb, we insure biotech, pharmaceutical, medical device manufacturing, drug discovery technology, and product development organizations,” he explained. “The Biotechnology Industry Organization (BIO) focuses predominantly on the biotechnology segment of the market, which is an important segment for us … The coverages that we provide at Chubb are pretty comprehensive—all lines except for the directors and officers liability line, in which we’re not an active player. Within the core property and casualty arena, we underwrite property, general liability, as well as product liability and clinical trial liability. Auto, workers’ compensation, umbrella, international—pretty comprehensive across the board.”
Goudsmit elaborated on the peculiar risks posed by both pre-clinical and clinical trials: “Even some of the more traditional insurance policies like basic package policies need a very customized coverage in order to respond appropriately to the unique exposure to the industry. I think product liability and clinical trial liability are coverages that everybody recognizes are very specialized. Sometimes people don’t appreciate the degree to which even the standard products need to be customized in order to respond appropriately to the risk management issues. “For example, from a property standpoint, a typical property policy … will exclude animals,” Goudsmit continued. “Biotech companies obviously use research animals extensively prior to entering clinical trials. So we’ll insure the animals—we do that by endorsement to not only provide coverage for the animals—not just for the replacement costs of a pre-R&D animal, but also the R&D investment that’s made in the animal.”
Goudsmit said further, “For clinical trial liability, we respond to the bodily injury exposure (for subjects). If someone’s participating in a research study, then by definition the product has not been proven to be safe or effective for use in humans. It is inherently a unique and interesting area. We insure those trials—it takes a lot of training on the part of all of the people at Chubb. We’ve invested a lot in training our underwriting, loss control, and claims staff … it’s not the kind of thing that should be done by a generalist. We put them through some very extensive training. By the time our underwriters have gone through that, they are in a position to review the protocols and the Inform and Consent documents.”
Subject consent forms vital
Goudsmit pointed out that Inform and Consent documents, which are used to explain to test subjects exactly what the experiment in which they’re participating is about, as well as potential risks anticipated by the experimenters, can prove vitally important to both the biotech company and the underwriter determining the firm’s policy. “The Inform and Consent document is really the key document that should communicate in very clear, readily understandable non-scientific-jargon type language what the trial is about, what the risks of participating are, and there are some standards that have been set in terms of what kinds of information people should be provided with in order to be able to make an informed judgment whether to participate,” he said. “That’s one of the key documents we look to in underwriting this cover.
“As far as the product goes, it’s very similar to a product liability policy with a few modifications,” Goudsmit said. “For example, there’s an expected or intended exclusion, which can prove problematic. A lot of times, the adverse effect that results in a loss during the human clinical trial may be something that manifested itself in the prior research, in the animal pre-clinical model, but may be simply a more severe reaction than was anticipated. In that kind of situation, you don’t want an off-the-shelf product liability policy where the expected or intended policy exclusion might be imposed. That’s an example of how the form is modified to more specifically provide cover for clinical trials.”
Short term business losses the norm
One of the most distinguishing characteristics setting biotechnology apart from most other industries—generating losses for the short and medium term as products are designed and tested—also requires special coverage.
“Another aspect is the traditional definition of business income,” Goudsmit said. “In an off-the-shelf policy, it’s net profit or loss plus continuing expenses. And these companies (biotechs) don’t generate any revenue until about year 12 in the life cycle, if they’re lucky. Until they get regulatory approval, they don’t generate revenue. These companies generate very large operating losses by design. That’s part of the business model. But a typical off-the-shelf business income policy would potentially not provide any coverage for continuing expenses because you’d start up with such a large net loss.
“So we’ve amended the definition of business income to eliminate that problem,” he continued. “We’ve also expanded our business income policy to respond to grants, endowments, financial contributions by third parties—many of these companies rely on, say, a big pharma company for funding, where they will establish the milestone payments … If as a result of a covered physical loss or damage, the insured is unable to earn a milestone payment they would otherwise have earned, our policy could respond to pay that milestone payment to the insured. If their research continues and they ultimately re-earn it, then they would have to reimburse us for that. It can be a very critical feature because these companies really rely on those milestone payments. If they miss one, they could go under.”
Rates depend on firm’s size, subjects
Goudsmit explained that Chubb’s life sciences coverage is tailored for companies at various stages of development, from two-person start-ups in Massachusetts to multi-national biotech firms with multiple drugs already brought to market.
“We are a market for companies at every stage of their life cycle,” he noted. “So we’ll take an emerging life science company with just a couple of scientists in a lab with an idea. We have the ability to grow with them through every stage of their development … Our interest is in insuring them at every stage.
“Generally speaking, people are surprised to learn that we can insure all lines … in the early stages of a company’s development for maybe, say, $5,000 as a starting point for all those coverages,” Goudsmit said further. “I think a lot of times, historically, that this industry has gravitated towards the excess and surplus lines marketplace for the specialty liability lines. But if you have a Phase I clinical trial, you’re typically talking 10 or fewer healthy volunteers. That’s a relatively low-exposure trial, where the minimum premiums for the trial alone need not be significant, either. It may be a couple thousand dollars, for example, for a single trial. The premiums obviously can become much larger as the number of drugs being studied increases, as the number of trials increases, and … as the number of participants increases. This can quickly escalate as companies grow—it can become a five or six-figure premium. But in the early days, the premiums can be pretty modest. I think a lot of times that surprises people.”
Coverage better have a passport
Because clinical trials may be conducted just about anywhere a reasonable amount of people may be found, many biotech companies conduct such trials overseas—but their insurance has to conform to whatever requirements are imposed by the host country.
“The international issues are significant,” Goudsmit said. “That’s another key reason that BIO endorses the Chubb program—we have the capability to issue contracts globally. Oftentimes, I think, in standard industry, companies that expand internationally do it at a later stage in their life cycle than perhaps a life sciences company would. Most companies have an established domestic market and then they get into foreign distribution—first they do it through distributors, and then they build their own bricks and mortar. Whereas life science companies—the FDA will accept data from a clinical trial wherever it’s held in order to support an application. Many companies choose to conduct research overseas.”
Goudsmit continued, “Many foreign countries have requirements for statutory admitted coverage for human clinical trials liability. Product liability tends to be an optional coverage that you can choose to either insure or not insure, but when it comes to human clinical trial liability, many countries, including the vast majority of Western European countries, require admitted insurance. When we insure even a relatively small biotech company, they have a need for admitted clinical liability insurance in, say, Holland, Germany, Spain, France … and so it can add up, the servicing requirements. Through our global network, we’re able to coordinate those placements.”
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