Unit Operations / cGMPs

Building an Effective Pharmaceutical Product Liability Risk Management System

For pharmaceutical manufacturers, the answer to this menacing climate is not to get angry or embittered. The solution: strengthen corporate immune systems now, before claims appear. Winning the product liability game means few claims, modest payments, winning cases taken to court, leveraging the best terms on product liability insurance coverage and focusing energies on running a profitable business. Winning pharmaceutical manufacturers build strong product risk management systems. To win the product liability claims game, pharmaceutical manufacturers need sound blueprints.

By Kevin Quinley

“Survivor,” the long running TV reality show, features contestants struggling to compete and thrive in a remote location.  Winners each receive $1 million.  In the realm of product innovation and product liability, every pharmaceutical company wants to be the victorious survivor.  For pharmaceutical manufacturers, losing the product liability “game” does not mean being voted off the island.  Instead, it means paying large settlements, funding jumbo jury awards, shouldering budget-busting legal fees and jumping through legal hoops to defend claims instead of running your business. 

Many plaintiff lawyers see the pharmaceutical industry as a target-rich environment.  Entrepreneurial personal injury attorneys hunger for the Next Big Thing in product liability.  For some, that Big Thing is bisphosphonates.  For others, the Big Thing might be Accutane, or generic variations thereof.  For other lawyers, it might be lawsuits against diet drugs or hormone replacement therapy (HRT) medication.  Many lawyers and firms specialize in suing pharmaceutical companies.  Scouring the Internet, they track recall notices and adverse event reports.  They network with each other to compare notes and hone strategies.  They pay to attend seminars offering suggested approaches to suing specific drugs and companies. 

For pharmaceutical manufacturers, the answer to this menacing climate is not to get angry or embittered.  The solution: strengthen corporate immune systems now, before claims appear.  Winning the product liability game means few claims, modest payments, winning cases taken to court, leveraging the best terms on product liability insurance coverage and focusing energies on running a profitable business.  Winning pharmaceutical manufacturers build strong product risk management systems.  To win the product liability claims game, pharmaceutical manufacturers need sound blueprints. 

Just as a well constructed building has a solid foundation, so does an effective pharmaceutical risk management program have a strong footing.  Building effective systems to thwart product liability risks means constructing reliable “pillars.”   These will financially buttress pharmaceutical firms from the liabilities flowing from claims, lawsuits and adverse patient outcomes.  Failure to adroitly manage these risks can spell disaster for pharmaceutical firms in the form of:

  • Claim settlements
  • Jury awards
  • Legal/transactional fees
  • Higher insurance premiums
  • Degraded public image

By contrast, building an effective product liability risk management program can help strengthen a pharma firm’s financial health, build its “corporate immune system” and reinforce its brand as a maker of safe and effective drugs. 

Let us briefly discuss four key pillars of an effective product liability risk management program:

#1  Avoidance – firms may opt to shy away from entering certain drug product lines due to the perceived liability risks that can outweigh the financial payoffs.  Avoidance is a draconian risk management technique, but it may have its place. For example, litigation fallout from A.H. Robins’ Dalkon Shield and G.D. Searle’Copper-7 may have deterred companies from manufacturing IUD’s.   

Factors to ponder when considering avoidance as a risk management tool include:

  • The revenue and profit potential versus the downside litigation risk.
  • How close does the product or product line in question tie to the corporate identity?
  • Will competitors fill the void if a company decides not to enter a certain product line?    
  • Will the decision to drop a product come back to haunt you in pending or future litigation?  (Check with a product liability defense lawyer.  In some jurisdictions, removing a product from market is known as a "post-loss remedial measure" and may be admissible in court.) 

 #2  Retention – Retention occurs when a pharmaceutical firm funds its own losses instead of paying them through insurance or other means.  Some companies cannot afford insurance.  Others can buy it but may not like the terms and conditions available.  Still others don't want to delegate the handling of their claims to an insurance company. 

For many reasons, pharmaceutical firms may want to retain or self-insure their product liability exposure.  Some pharmaceutical firms self-insure for product liability exposures, both to save money on insurance and to exercise more control over the claims and litigation process.  This is especially true if the retention is going to be more than "no insurance."  One key factor is that pharma firms traveling down this path make sure that they have adequate assets to fund losses.  This could mean setting aside cash reserves to fund expected (and unexpected) losses.  It could also involve obtaining lines of credit sufficient for paying claims.

#3 Control – loss control aims to reduce both the frequency and severity of loss.  In the context of pharmaceutical product liability, four specific steps are: 

  • Safe design of drugs
  • Good manufacturing practices
  • Effective warnings and labels
  • FDA regulatory compliance

View these as the four pillars of effective product liability loss control.  If pharmaceutical firms have these components buttoned down, they have a good chance of either preventing product liability claims or successfully defending any claims and lawsuits that surface.  In the real world, it may be unrealistic to think that loss control can prevent all undesired patient outcomes, especially when adverse drug reactions are often anticipated, given a sufficiently large user population.  Nevertheless, drug manufacturers can aim to attain the lofty standard of zero claims and lawsuits. 

#4  Contractual transfer – may be the best known risk management technique.  One variant is to shift the financial costs of liabilities to a professional risk-bearer, i.e., an insurance company.  In considering this option, what key factors should pharmaceutical firms weigh?

Here are six:

  • Commitment of the insurer to the life science realm.  Does the insurer specialize in writing coverage on pharma firms or dabble in this niche?
  • Reasonableness of premium pricing.  How affordable is the premium, weighing the scope of financial protection offered?
  • Insurer size and financial stability.  Is the insurer solvent?  Does it have the size and strong balance sheet to pay claims when you need them to do so?
  • Breadth and coverage of the financial terms offered.  Does the policy reflect the unique needs of pharmaceutical manufacturers?
  • Claim service.  Does the claim staff truly understand the legal and regulatory environment of pharmaceutical firms?  Do they use defense attorneys who specialize in defending cases alleging adverse patient outcomes from drugs?
  • Risk management services.  Does the insurer offer seminars, workshops, loss control advice, webinars, site visits, checklists, podcasts or other resources that can help policyholders reduce loss frequency and severity? 

On TV’s “Survivor” show, a Tribal Council determines the contestants’ fate.  In pharmaceutical risk, that is called a jury.  Instead of voting someone off the island, jurors vote on whether the pharmaceutical firm is legally liable for a patient’s injury and, if so, for how much in damages.  A sound risk management program, represented by the preceding building blocks, can boost the odds that any pharmaceutical manufacturer will emerge as a survivor in today’s perilous tort, litigation and regulatory climate.   

Kevin M. Quinley, CPCU, ARM, is Vice President - Risk Management Services, Berkley Life Sciences, Ewing, NJ.     You can reach him at kquinley@berkleyls.com.    Views expressed here do not constitute legal advice, are the author’s own and do not necessarily reflect those of Berkley Life Sciences or its customers.   Discussion of insurance policy language is descriptive only. Coverage afforded under any insurance policy issued is subject to individual policy terms and conditions.

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