The U.S. Food and Drug Administration (FDA) issues notifications known as “untitled letters” and “warning letters,” based on the significance of a regulatory non-compliance.
In recent years, letters like these have been issued more frequently by the FDA with nine total letters in 2019, up from seven in 2018 and five in 2017. The letters are sent whenever pharmaceutical companies fail to follow quality system regulations that relate to methods used to design, manufacture, package, label, store, promote, sell, install and service drugs and devices.
“Clinical holds” are another action the FDA leverages during the clinical trial phase. The FDA defines a clinical hold as an order issued to the sponsor to delay a proposed clinical investigation or to suspend an ongoing investigation. Clinical holds can cause significant financial damages when delays are introduced to the drug approval process.
Failing to comply with FDA warning letters may lead to severe repercussions such as product seizures, withholding of regulatory approvals and in some cases civil penalties. Warning letters may also be admitted as evidence in a product liability case. Additionally, clinical holds can also open up drug companies to significant financial losses in the form of business interruption, product recalls and much more.
As the FDA continues to deploy untitled letters, warning letters and clinical holds, it’s worth considering the impact on potential liability and the availability of coverage under liability insurance policies issued by most insurance companies serving the life science industry.
Understanding Insurance Options & Implications
Most life science companies purchase claims-made product liability policies that provide certain insurance for bodily injury or property damage arising from a multitude of events or occurrences. These policies apply to claims that occur during the policy period and typically are made against the company during the policy term so long as the claim is reported to the insurance carrier within any specific claim reporting provisions specified in the policy.
Product liability claims can be complex, particularly for life science companies. Months or even years can elapse between an injury, the company’s awareness of that injury and a product liability claim or suit. Claims-made policies typically won’t cover a claim related to events before the retroactive date written in the policy or after its term has expired, with exception of a situation where an extended reporting period may have been purchased or the policy provides a post policy reporting period that usually allows a 30 to 90 day additional reporting window.
It is important to consider how coverage for an incident would be affected if a company changes insurers, or simply renews its liability insurance with the same insurer, where untitled letters, warning letters or clinical holds have been received by the insured.
Liability insurance policies contain protections to the advantage of the insurance company and potential detriment of the insured if important details are overlooked when renewing or replacing a policy upon its expiration, all having to do with knowledge of events. Obvious events that common sense suggests reporting to the insurer such as suit papers filed against an insured for alleged injury from the insured’s product are self -evident. We have a claim and we need to report it to the insurer if we expect overage to apply. But what about the less obvious situations? Does an untitled letter, warning letter or clinical hold pose a challenge to the availability of coverage should a claim arise in the future? Indeed it does and it goes back to the issue of knowledge the insured possessed and failed to disclose to the insurer, even when simply renewing the same policy with the same insurer for another year. A word of caution here as well: it may not be enough to believe the insured had a dialog with an insurer or broker about the situation. Specific policy language dealing with knowledge, events deemed known, critical facts and a variety of similar insurance policy phraseology must be specifically excepted to ensure a clear intent to cover when these more subtle events arise.
In practice, many companies overlook these issues and may not think of them as reportable under their liability insurance policies, or a matter to negotiate prior to renewing or moving the policy to another until it’s too late.
Covering the Bases
Claims professionals and lawyers will uniformly suggest that a life science company report any circumstances involving events to them as soon as practicable. Providing as much detail as possible will help the insurance company determine whether the circumstance ultimately gives rise to a claim, what policy the circumstance is associated with and how that claim will either telescope back to the policy in which the circumstance was first deemed known, or a specific provision be negotiated allowing coverage to prevail in a future policy period.
Life sciences companies should verse themselves in the regulatory risks they face as well as the financial and legal implications of experiencing different kinds of events. Especially if a company is renewing its insurance or chooses to change insurance carriers, it is critical they work with their insurance broker to understand a proper roadmap and their rights under the policy where untitled letters, warning letters, or clinical holds are known.
About the Author
Managing Director, Life Science and Technology Co-Practice Leader, Conner Strong & Buckelew
With nearly 30 years of risk management and insurance experience devoted exclusively to the life science and technology industries, Dan Brettler is responsible for the effective delivery of risk management & insurance products and services to life science & technology companies.