Insurance contracts for biotechnology companies: issues for consideration
In brief: Articled Clerk Clare Cunliffe examines the problems that face biotechnology companies when trying to obtain suitable coverage through a standard insurance contact, and then suggests possible solutions.
Introduction
The biotechnology industry offers significant opportunities. But those opportunities are accompanied by significant risks.
There is a widespread acceptance that it is appropriate to insure against the risks that arise in any enterprise. But in the case of biotechnology, insurance has raised special problems. Insurers can be sceptical (particularly in the field of gene technology) and there is a perception in the insurance industry that the two main components by which risk is assessed: (namely the probability of loss and the probable loss amount), are virtually unquantifiable, given the lack of available statistics. This article, based on issues arising out of a paper given at a recent Australian Insurance Law Association Convention, raises issues which arise when reviewing the insurance held by biotechnology clients. Frequently, this insurance is ill adapted to their needs.
Biotechnology clients should always be aware of the need to have appropriate insurance coverage. This will involve consideration of the regulatory framework in which the client operates (including, in some cases, a consideration of their client's international market) as well as a consideration of the specific risks which might arise from the client's business. These opportunities should be kept in mind especially in the context of companies which are starting up or seeking to expand operations.
Example of biotechnology claim – Starlink
Starlink is a genetically modified corn, which contains a pesticidal protein. The US producer of Starlink only had permission to market Starlink for animal feed or industrial uses, and only within the US.
It was discovered that Starlink had been mixed with crops for food supply and exported all over the world. The protein in Starlink was also present in another variety of corn, either from cross pollination or from mishandling during distribution.
A massive product recall was undertaken. Food manufacturers had to shut down their lines for almost two weeks to ensure there was no Starlink in their systems. Prices went up enormously for Starlink-free corn. It is expected that it will take several years to get Starlink out of the food chain. There are actions pending from farmers in relation to the crop value and from companies who have had to test for and recall Starlink, and pay higher prices.
Other actions could arise in the future, such as:
- third party recalls;
- grain handlers for identifying and rechannelling corn; and
- consumers.
It is estimated the incident will cost Starlink's producers $US280 to 500 million. The actual cause of the contamination is still not known. The case highlights some of the issues facing biotechnology clients looking for appropriate insurance.
Issues for industry
Given the growth in the biotechnology industry, insurers are increasingly turning their minds to the issue of insurance coverage and biotechnology. In the future, this will probably mean that risks arising out of biotechnology businesses will be explicitly excluded from the scope of standard policies and will only be available by endorsement or by excess cover.
But even before insurance policies are redrafted to exclude risks arising from biotechnology practice, the standard policies available through insurers may have significant gaps in coverage which will adversely affect biotechnology. In particular, these are a few standard clauses with potentially worrying implications:
- Product recall: In most cases, the costs of product recall will not be covered in the context of product liability cases. In a case like Starlink, product recall costs can be massive.
- Consequential loss: There is a distinction in insurance law between direct loss (eg damage to a building from a fire) and consequential loss (eg subsequent loss of rent from the building as a result of the fire, or claims by third parties whose property was in the building). Consequential loss may not be covered by a primary policy, but can represent an enormous expense - again, in the instance of Starlink, there was almost no direct loss, but huge consequential losses from claims by third parties.
- Pollution hazards: Often, policies will not extend to environmental hazards caused through the negligence of the insured. Given the breadth of the term 'environmental hazard', this again has relevance in a biotechnology context, particularly for producers of GM goods like Starlink.
- Animal Loss: Some policies place very small limits on the losses recoverable relating to animal loss (including consequential loss from animal loss). For laboratories conducting animal experimentation, particularly where there is a contractual obligation to provide this research to third parties, the potential for consequential loss implications of damage is quite high.
- Limits on recovery from foreign claims: Policies frequently place a low upper limit on the amounts recoverable for claims from the North American continent (ie the US and Canada). For biotechnology companies looking to deal with businesses located in the US, there are potentially large liabilities for consequential loss which may arise from claims.
These are just some of the pitfalls which have been identified from an analysis of insurance contracts in the context of biotechnology. Others may arise from the specific facts of each case.
In the context where there is an international market, it should also be remembered that there are requirements of minimum insurance for biotechnology or GM-related work in other countries, particularly in the EU. This should be considered when assessing the overall context of insurance coverage.
Possible solutions
Once a weakness in an insurance contract is identified, it may be appropriate for lawyers to consider:
- Supplementary insurance, either in specific areas (excess) or overall (umbrella)
- Endorsement of the specific policies to override the exclusions
- Alternative arrangements: for example, provision of indemnities
These options can, however, prove quite expensive.