Astute life sciences companies purchase products liability insurance to assure the protection of their assets and reputations in the event a claim arises alleging their product caused bodily injury or property damage. In selecting appropriate coverage, these companies, with the sound guidance of their brokers weigh several considerations including the reputations of the various carriers, the size of the appropriate policy (in terms of limit), and the amount of premium owed. Despite the attention devoted to insurance selection, however, several factors seem to go overlooked during this process, and the result can be a policy that functions in ways that are inconsistent with the policyholder’s expectations.
Perhaps it is the hope of these companies that they will never have to use their products liability insurance or the assumption that most policies’ terms are relatively similar and all non-negotiable that account for this oversight, but regardless of the cause, too often companies find themselves surprised at the various coverage issues that may not crop up until litigation is imminent.
This article explores some of the most common of those issues with the aim of providing life sciences companies a better understanding of potential provisions of their products liability coverage before they are in the midst of a crisis, when alternatives may be foreclosed to them.
Relation Language and Batch Clauses
One of the provisions of a products liability (or commercial general liability) policy that can become central to determining the coverage available to the life-sciences-company insured is the “batch” clause. (Also and otherwise known as relating language, e.g., “related claims,” “related occurrence”.) 1 Batch clauses can be within the policy as a standard term or included by endorsement. Correspondingly, they can be standard for the carrier, included at the underwriter’s discretion or, occasionally, added at the option of the insured.
A batch clause generally follows this form:
With respect to products liability, all damages arising out of one lot of goods or products prepared or acquired by the named insured or by another trading under his name shall be considered as arising out of one occurrence or accident. 2
The function of a batch clause is to group multiple claims (which may span multiple policy periods) by product, time, production lot, and/or defect into one claim, such that they are all subject to one deductible (or SIR) and one limit in one policy period. Although the goal of the carriers in grouping (or “relating back”) several claims to the first claim is the same—to avoid the exposure of multiple limits—the mechanism by which they accomplish this varies from carrier to carrier and policy to policy. The most significant characteristic of the batch mechanism is the breadth of “relation.” That is, batch language should be evaluated on how causally or circumstantially the claims must be “related” to one another in order to be treated as the same “occurrence,” and thus as occurring under the same policy. The breadth of a batch clause is a function of: (1) how general or specific the similarity among the claims must be in order to be grouped, and (2) how far into the future (and sometimes, the past) losses can be telescoped into the one “batch” claim.
Because of the significant variance in how the batching mechanism operates among various policies as well as the sizable impact its operation has on an insured’s available coverage, it is crucial for companies to understand its scope in their particular policy at the time of policy inception.
Too often, the product that gives rise to a company’s claim turns out to be one for which the carrier has excluded coverage in the policy under what is frequently termed the exclusion du jour. The term refers to those products and materials for which carriers add exclusions in response to some recent or current problem associated with that product or material. For instance, products (or product types) that have been the subject of products liability litigation or a government or regulatory investigation are often excluded. Such a product history may be one well known to the industry or could merely be the individual experience of that particular carrier.
Moreover, the product problems do not have to have been experienced by the particular insured or the insured’s own products. Instead, problems with a product which the carrier deems similar enough to the insured's products (whether in material, design, or function) can be enough to cause a carrier to exclude coverage for all similar products going forward. Then, even if the problem that gives rise to a claim for the insured is not the same problem that the carrier drafted the exclusion to preclude, coverage will still be denied on the basis of the broad exclusion. Current examples of these types of exclusions found in many PCO policies for life sciences companies today include those for silicone, metal-on-metal joint implants, and hormone replacement therapy products.
Deemed-Known/Prior Knowledge Provisions
Another clause that can cause life-sciences insureds and their brokers serious headaches when a claim arises is what is called “deemed-known” language. This language functions to exclude coverage of claims of which the insured is “deemed” to have had prior knowledge. While this sounds reasonable, it is in its application that divergence from coverage expectations can take place, and a claim that a company would reasonably assume would be covered under their current policy can turn out to be excluded.
Moreover, this provision is a significant source of a gap in coverage for many life-sciences insureds, who may have become aware of a potential problem in one policy period but did not report it as it had not materialized into a claim, only to have it excluded in the policy period in which it does become a claim on the basis of prior knowledge.
This clause can work independently or in combination with another provision that can impact a claim’s coverage and crop up in litigation: what is often called “notice of circumstance” language. This language appears in claims-made policies only, and broadens the insured’s option and duty to report incidents before they actually become true “claims.” Policies differ in what they deem circumstances or happenings that require reporting. This can be advantageous to insureds in that by reporting such circumstances, they can effectively secure coverage even if those circumstances develop into a claim only after the policy period in which the circumstance was reported.
However, if there is a lack of clarity over what circumstances need be reported, policies that require notice of circumstance can function similarly to those with “deemed known” language and exclude claims materializing out of circumstances that occurred, but were not reported, in a prior policy period.
Control of the Defense
One more aspect of the policy that can play a significant part in litigation and, thus, should be explored carefully when purchasing products liability insurance, is the insurer’s right to control the defense in the event of a claim. Although control-of-defense language is relatively uniform among carriers, the specifics are distinct and deserving of attention.
At the outset, this provision will have different significance depending on whether the coverage operates on a self-insured retention (“SIR”) or a deductible basis—that is, whether the insured assumes the initial defense of a claims unless and until the SIR is exhausted, or whether instead, the carrier assumes the defense from first dollar and the amount of the deductible is simply reimbursed by the insured. If the policy is of the former type, and the insured is expected to defend all claims within their SIR, it becomes especially important to scrutinize the language in the policy dictating the insured’s obligations within the SIR and the carrier’s duties and expectations upon the exhaustion of the SIR. In this context, the following should be considered:
- selection of defense counsel and the carrier’s right to change counsel upon assuming the defense;
- attorney’s fees and whether the fee arrangement reached between the insured and their chosen defense counsel will be permitted to continue or if fees; and
- the existence of a claims-handling protocol which companies are mandated to follow even within the SIR.
Companies that play an active role in managing their own litigation or that have strong preferences for certain litigation strategies may find their options limited by these types of policy terms.
Insurance should make claims and litigation for life sciences companies significantly less stressful and burdensome in time and cost. However, if their policy’s treatment of the various items enumerated in this article are unknown to the insured prior to a claim, the opposite may be true. It is important to understand that not all products liability policies contain the same terms, and in fact policies differ widely in their handling of the areas above. Coverage should operate in line with the insureds’ and brokers’ expectations, but those expectations should be formed only after a thorough read and discussion of its various moving parts.
1 I use “batch clause” throughout this section to refer generally to any policy mechanism of grouping claims. That is, used here, “batch clause” refers to actual “batch” clauses as well as to other “relation” language that effectively groups claims brought in different times by different plaintiffs into one.
2 Ostrager, Newman: Handbook on Insurance Coverage Disputes , Seventeenth Edition (Wolters Kluwer, 2015).