Loss Control Webinar Series. Economic Injury Liability: What Is It And What Can Life Sciences Companies Do To Protect Themselves?

Transcription

1 Loss Control Webinar Series Economic Injury Liability: What Is It And What Can Life Sciences Companies Do To Protect Themselves? March 26, 2014

2 E&O Liability and Coverage for Life Sciences Companies Daniel E. Tranen Partner, Boston Office Hinshaw & Culbertson LLP

3 Discussion Overview E&O Coverage and how it differs from Product Liability Coverage Liability scenarios for E&O Coverage Economic injuries, in general, faced by Life Sciences Companies Avoidance and mitigation of economic losses

4 Product Liability Insuring Clause Insurer pays for damages insured liable to pay due to bodily injury or property damage Insurer has right and duty to defend Injury or damage must be caused by an occurrence Injury/damage occurs after retroactive date Claim first made during policy period (claims made policy); or Occurrence takes place during policy period (occurrence policy)

5 Key Definitions: Product Liability Policy Bodily injury sickness, disease, or bodily injury sustained by person, includes mental anguish Property damage physical injury to tangible property including loss of use of that property that is not physically injured Occurrence a much litigated term, but defined as "an accident"

6 E&O Insuring Clause Insurer pays for damages because of claim made by reason of a wrongful act Wrongful act causes economic injury Wrongful act takes place after retroactive date Claim for wrongful act is first made during policy period Insurer has right and duty to defend against claim

7 Key Definitions E&O Policy Wrongful Act negligent act, error or omission in your work or in the manufacture, design, production, etc. or your product Economic injury reasonable expenses related to loss of use of tangible property other than your product (1) that has not been physically injured; (2) that incorporates your product or your work known or thought to be deficient or defective. This includes product recall expenses and corruption of electronic data but does not include return of money or fees.

8 Product Liability Common Exclusions Intend/Expected/Willful/Illegal Acts Damage to your own property or product Recall of products Electronic data Professional services

9 E&O Coverage Common Exclusions Expected/Intended/Willful/Illegal Acts Bodily injury Property damage all property Damages arising out of the loss of use or physical injury of your product Professional services Data breach

10 Hypothetical #1 Manufacturer makes parts for medical devices Manufacturer sources components from supplier Supplier changes formulation without informing manufacturer that new formulation is vulnerable to higher temperatures Manufacturer incorporates component into its parts and its parts are incorporated into medical devices made by customer Medical devices are shipped to Arizona where they begin to fail due to the heat (but not causing any injuries) Customer recalls products and sues manufacturer for economic losses.

11 Legal Implications for Policyholder in Hypothetical #1 Customer sues manufacturer for breach of contract Customer has suffered damages from recall costs, lost revenue for unshipped products, and injury to relationship/goodwill with distributors Manufacturer looks to supplier, but supplier files for bankruptcy (and has no insurance)

12 Coverage Implications for Policyholder in Hypothetical #1 Coverage under the Product Liability Policy Is this property damage? Is this an occurrence? Exclusions Coverage under the E&O Policy Wrongful act Economic injury Good will/reputation

13 Avoidance/Mitigation Tips for Hypothetical #1 Quality agreements with suppliers Confirming supplier insurance Contract with supplier requires supplier to make your company an addition insured under supplier s insurance policy Testing supplier components Manufacturers are legally responsible for controlling their supply chain

14 Hypothetical #2 Company manufactures and sells wall-mounted x-ray machines for dentist offices Customers complain that units are detaching and falling off the walls causing damage Company sends customers longer screws to resolve detachment problems Several customers submit claims

15 Legal Implications for Policyholder for Hypothetical #2 Three types of damages asserted: Property damage to dentist offices Damage to the x-ray machines themselves Business interruption for dentist customers awaiting fixes for their wall mounted x-ray machines

16 Coverage Implications for Policyholder for Hypothetical #2 Property damage coverage under Product Liability Policy Business interruption coverage under E&O Policy Applicable policy exclusions

17 Avoidance and Mitigation Tips for Hypothetical #2 Assignment of losses in customer contracts: Consequential damages Specific to business interruption Pre-market testing

18 Hypothetical #3 Policyholder performed clinical testing on a variety of new devices for manufacturers and maintained electronic data for testing on a server The server is overloaded and the data lost due to a power surge Policyholder is sued for negligence in failing to maintain the electronic data Losses include need to re-obtain data and business interruption

19 Legal Implications for Policyholder for Hypothetical #3 Policyholder is claimed to have used an out-of-date system to protect against power surges Manufacturer clients sue for breach of contract and negligence against Policyholder Lost intellectual property and lost time to get products to market is valued by manufacturers in the millions Policyholder sues manufacturers for unpaid fees

20 Coverage Implications for Policyholder for Hypothetical #3 No coverage under standard Product Liability or CGL policy Coverages available under E&O policy for this situation. Lost data Business interruption Unpaid fees Stolen data is a different analysis

21 Avoidance and Mitigation Tips for Hypothetical #3 E&O coverage is necessary for companies maintaining electronic data for others Protection and/or maintenance of electronic data Assignment of risks in contract Identity theft

22 Hypothetical #4 Policyholder performs packaging services for Pharmaceutical company including installing tamperproof seals Routine batch inspections by Pharmaceutical company identify floating pieces of debris in the product which is determined to be caused by the seals Pharmaceutical company recalls products Hospital sues Pharmaceutical company for breach of hospital agreement and Pharmaceutical company seeks indemnity from policyholder

23 Legal Implications for Hypothetical #4 Policyholder s error is the cause of the violation of the hospital agreement No direct privity between hospital and Policyholder However, Policyholder may have indemnified Pharmaceutical Company against claims by third parties for injuries or damages arising from its work Policyholder may have to return payment for work performed for Pharmaceutical company

24 Coverage Implications for Hypothetical #4 Product Liability policy Is this property damage? Recalled product exclusion E&O policy coverage Return of fees

25 Avoidance/Mitigation for Hypothetical #4 E&O coverage vs. Product liability coverage Indemnity in contract with Pharmaceutical Company is it limited to bodily injury/property damage? Limitation for consequential damages

26 Final Thoughts on E&O Risks and Coverage Who needs this coverage? Component part manufacturers Distributors Contract services companies Risks focused on contractual relationships Risks diminished by assignment of risks in contracts

27 Questions???

28 Daniel E. Tranen Hinshaw & Culbertson LLP Office