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Insurance Coverage For Pharmaceutical Product Recall Losses And Liabilities

By Joshua Gold and Rhonda L. Johnson

Introduction

Policyholders in almost all industries require reliable insurance protection sold by a dependable insurance company. This is particularly true for those policyholders in the business of making, licensing and distributing pharmaceutical products. Like the food and beverage industry, the automobile industry, and other product makers and distributors, the pharmaceutical industry is exposed to the considerable perils and significant costs that are associated with product recalls and product liability claims. In order to manage and protect against these perils, it is helpful to examine some of the important coverage issues relating to some of the newer insurance products sold to provide insurance protection against product recall claims.

Product Recall Insurance

Fairly New and Largely Untested

One of the newer insurance products being sold to pharmaceutical companies, among other policyholders, is product recall insurance. Several insurance companies now market and sell product recall insurance policies which promise insurance coverage for, among other things, the costs associated with product contamination claims, product tampering claims and product extortion claims.

Specifically, certain product recall policies promise to cover the policyholder’s costs incurred in recalling a product that has been contaminated, tampered with or has been the target of extortionists. Product recall policies may also provide insurance coverage for business interruption losses and for costs to restore the product to its intended levels of quality or to re-establish the product’s market share to the level existing before the contamination, tampering or extortion took place.

Product recall policies have obvious appeal to policyholders — especially those who have already endured the significant costs associated with removing a product from the market pursuant to a government ordered recall or voluntarily due to potential product contamination. Indeed, the recent misfortune of many product makers and their customers underscores the serious consequences of a product recall.

Because the product recall policy is a relatively new insurance product, policyholders should be mindful of certain issues that may arise when a claim is made, and be careful to avoid the pitfalls that are built into certain of these insurance policies. While claims under product recall policies have already been battled by insurance companies in litigation,1 the provisions and promises contained within product recall policies have gone largely untested thus far.

Purchasing the Right Insurance Policy

As a general matter, it is important to be familiar with the claims handling philosophy of a given insurance company before purchasing any of its insurance products. Policyholders should refrain from purchasing insurance from insurance companies notorious for poor or unfair claims handling practices. One of the best sources of information on insurance company claims handling practices is the insurance brokerage community. Unfortunately, policyholders usually must specifically initiate the dialogue about claims handling issues with their brokers, as many insurance brokers are unwilling to offer this information without being asked. Inquiring about an insurance company’s claims handling history is particularly important with product recall policies, as few disputes have actually been made public through the court system. Accordingly, there is currently little openly available information regarding what kinds of claims disputes are ensuing from product recall losses. Insurance broker insights, therefore, are extremely useful.

It is also important for policyholders that their insurance companies and their insurance brokers sell to them the appropriate insurance policy for the risks faced in the policyholder’s particular business area. While insurance companies are presumed to know the business and the associated risks for the policyholders to whom they sell insurance, some insurance companies seek to limit greatly the scope of coverage under their insurance policies by defining terms within the policy to erode the coverage that the policyholder requires and anticipates having. Insurance companies also attempt to include in their insurance policies broadly written insurance policy exclusions.

Accordingly, prior to actual purchase of a product recall insurance policy, it is often helpful to obtain a specimen insurance policy and review the basic terms, conditions and exclusions to understand whether the insurance policy is suitable for the policyholder’s business and corresponding risks. It is also recommended that policyholders obtain and keep any marketing material that the insurance company or insurance broker maintain regarding the insurance product that is being purchased.

Time Sensitive Insurance Policy Provisions

Almost all property insurance policies contain time-sensitive provisions, essentially calling for the policyholder to provide notice, submit a proof of loss and provide other forms of information within a certain time frame. Moreover, in the context of property insurance, it is common for the insurance policy to impose a shortened statute of limitation for the filing of a lawsuit against the insurance company should a dispute arise over insurance coverage. Many insurance companies seek to impose a statute of limitation under their insurance policies as short as one year. While such a short statute of limitation is unenforceable under the laws of many states, some states will nevertheless find such a provision enforceable against a policyholder. This can lead to devastating consequences for a policyholder.

Policyholders should be mindful that product recall insurance policies contain time-sensitive provisions similar to those contained in a commercial property insurance policy, including: (1) a notice provision; (2) a “statement of loss” provision; and (3) a suit limitation provision. Policyholders are well-advised to address these time-sensitive provisions very carefully, as even a slight delay by a policyholder in responding to these terms is frequently used by insurance companies to argue for a complete forfeiture of the policyholder’s insurance coverage.

Notice Provision — Notice provisions in a product recall policy typically call for the policyholder to provide notice of an actual or potential claim within a certain period of time. The notice provision of one product recall policy provides that the policyholder “will make every reasonable effort to … give immediate oral notice and written notice to the Company with periodic and timely updates concurrent with activity occurring during the incident [.]”

Policyholders should be aware of the specifics of their insurance policies’ notice provisions, as insurance companies routinely argue that they are entitled to deny insurance coverage for a covered claim where the policyholder has furnished “late” notice. It is also important to know that the law in a few states permits insurance companies to escape their insurance coverage obligations where the policyholder’s notice is deemed “late,” even when the insurance company has suffered absolutely no prejudice or other harm as a result of the “late” notice.

Statement of Loss Provision — Another time-sensitive provision contained within certain product recall insurance policies is a statement of loss clause. Specifically, under one product recall policy form, the policyholder is to “submit to the Company with reasonable promptness an initial statement of loss, stating the full particulars of the Loss and its initial calculations and/or projections of the elements and composition of the Loss.” Moreover, some product recall policies call for a “final statement of loss ... in writing no earlier than twelve (12) months and no later than twenty-four (24) months after an Insured Event first becomes known to the Insured.”

Insurance companies may take the position that “statements of loss” are akin to a proof of loss requirement under a property insurance policy, calling for the policyholder to furnish information under oath regarding the extent of the loss suffered and associated costs incurred. As with the “late” notice discussion above, insurance companies often argue that all insurance coverage is forfeited should the policyholder fail to file a proof of loss within the time prescribed by the insurance policy. Insurance companies may argue for the same rule of insurance coverage forfeiture should the policyholder fail to provide the “statement of loss” within the time demanded by the insurance company. Policyholders should proceed carefully as they provide information to their insurance companies, so as not to provide ammunition to an insurance company’s defenses regarding the time-sensitive provisions of an insurance policy.

Suit Limitation Provision — Product recall insurance policies also routinely contain suit limitation provisions which insurance companies employ to shorten the time by which a policyholder can commence an action under the insurance policy where the insurance company disputes a claim. Specifically, under the terms of one product recall insurance policy, the insurance company states “No suit, action, or proceedings for recovery of any claim under this policy will be sustainable in any court of law, equity or other tribunal unless all the requirements of this policy are complied with and the same be commenced within twenty-four (24) months after a final statement of loss has been submitted to the company by the insured.” If an insurance company unduly delays its insurance coverage determination with regard to a product recall claim, policyholders must be extremely careful that they address the shortened statute of limitations provision in the product recall insurance policy. Many courts have found such provisions enforceable against policyholders where the shortened statute of limitation does not violate any state statute or insurance code provision regulating actions under insurance policies.

Policyholders, who find themselves in the position of either being unsure about when the statute of limitations under the insurance policy begins to run, or coming close to expiration of the shortened limitation period, should seek a written tolling agreement with the insurance company, so that the policyholder’s rights to commence an action are not prejudiced under the policy. If an insurance company refuses to enter into such an agreement, or attempts to place unacceptable conditions on doing so, then the policyholder may have no other choice but to commence an action in order to safely preserve its rights to insurance coverage.

Choice of Law, Choice of Forum and Arbitration Provisions

Time-sensitive provisions are not the only potential pitfalls for policyholders purchasing product recall insurance. Many of the product recall policies currently being sold to policyholders expressly call for the application of New York law to any dispute under the product recall insurance policy. Moreover, many of these product recall insurance policies contain provisions selecting New York federal or state court as the forum for any litigation that may ensue between the insurance company and its policyholder.

By way of background, New York law is notoriously anti-policyholder. This is especially true when it comes to insurance company arguments on late notice and late proofs of loss. Under New York law, notice that is deemed late by days or weeks can result in a complete forfeiture of insurance coverage. One court recently characterized New York law on notice as follows: “The provisions of New York law allowing insurers to disclaim coverage for reasons of that have caused no harm are draconian and in a fading minority.”2

Also problematic for policyholders under New York law is the recourse, or lack thereof, that policyholders have when insurance companies employ unfair, deceptive or misleading claims handling tactics to their detriment. Under New York courts rarely award bad faith damages against insurance companies for unsavory claims handling practices. In effect, this means that insurance companies can engage in improper claims handling conduct with little concern over liability for bad faith claims handling. Indeed, insurance company lawyers have even remarked that “few courts demonstrate the remarkable reluctance of the New York Court of Appeals to impose extracontractual liability for insurer claims handling practices.”3

Similarly, insurance policies which include arbitration clauses present a trap for the unwary.4 Arbitration is a good idea that simply does not work in the insurance context. Insurance companies benefit by the secrecy involved in arbitration rulings. Policyholders cannot say the same. Arbitration can prove very policyholder unfriendly. This is especially true where the arbitration provision requires that the arbitration panel be composed of current or former insurance industry executives.

Loss Mitigation Insurance Coverage

Costs To Avert or Minimize Claims Typically Covered By Insurance

Almost all insurance policies provide coverage for the costs of mitigating or avoiding losses. Whether by virtue of express provisions in the insurance policy or public policy reasons, the law clearly favors insurance coverage for the costs of minimizing and preventing losses. As such, insurance policies often protect policyholders for costs incurred in taking steps to minimize or avert claims of property damage or bodily injury.

Typically, loss mitigation coverage is expressly5 provided for in first-party property insurance policies (such as product recall insurance), and implicitly provided by third-party insurance policies. Efforts undertaken — and associated costs incurred — by policyholders in averting or minimizing property damage claims or bodily injury claims in connection with an allegedly harmful or potentially dangerous product should be covered in many instances under both liability insurance policies and property insurance policies, such as a product recall policy. For example, efforts undertaken by a manufacturer, distributor, vendor or retailer in withdrawing a product that is potentially harmful to individuals or property should be covered in many instances by liability insurance, as such mitigation efforts almost invariably reduce the number of property damage and bodily injury claims.

Similarly, policyholders who have purchased a product recall or contamination policy often have loss mitigation insurance for efforts that they take to avoid or mitigate a loss under the insurance policy. Even if the property policy lacks an express loss mitigation-type provision, courts have held that implicit in all insurance policies is an affirmative grant of insurance coverage for loss mitigation and loss prevention costs.6 Indeed, under the terms of some product recall insurance policies, the insurance company specifically calls for certain loss mitigation efforts by the policyholder. For example, one product recall insurance policy provides that the “Insured will exercise due diligence to do all things reasonable and practical to avoid any happening or circumstances covered by this policy and to make all reasonable efforts to mitigate any Loss arising as a result of an Insured Event.”

With any efforts to mitigate or avert losses or damage, policyholders are well advised to maintain specific records of their mitigation costs. Insurance companies will often attempt to battle a claim where the supporting documentation is incomplete or vague. Accordingly, good record keeping is extremely helpful for policyholders seeking loss mitigation insurance coverage.

It is also important, under the appropriate circumstances, to discuss with an insurance company the policyholder’s plans for averting or minimizing losses. Holding discussions early on can help stem miscommunications and undermine subsequent insurance company efforts to second-guess the policyholder’s approach to dealing with a potential or actual product recall loss or related claim.

Loss Mitigation Efforts Before Any Actual Injury or Damage

Fortunately, many product recalls take place before the products actually reach the end-user. Often, policyholders adopt proactive measures to withdraw a product before it causes injury or damage. One question that must be asked is how does a product recall policy respond when there are no clearly documented or reported injuries or damage. An insurance company may adopt a claims position that where the product has been recalled prior to injury or damage, the product is not “contaminated” pursuant to the terms of the product recall policy.

For example, under the “accidental contamination” section of one product recall policy, the insurance company promises coverage in pertinent part for:

Any accidental or unintentional contamination, impairment or mislabeling of an Insureds Product(s) or any Adverse Publicity implying such, which occurs during or as a result of its production, preparation, manufacture, packaging or distribution; provided that the use or consumption of such Insureds Product(s):

a. has resulted in or would result in clear, identifiable, internal or external, visible physical symptoms of bodily injury, sickness, disease or death of any person(s), within one hundred and twenty (120) days following such consumption or use, or

b. has caused or would cause physical damage to (or destruction of) tangible property, including animals and/or livestock.

Where the policyholder has been proactive to remove a product from the market place before the onset of injury or damage, an insurance company may seize upon the argument that the policyholder cannot demonstrate that the pharmaceutical product, if ingested or otherwise used, would have led to “clear, identifiable, internal or external, visible physical symptoms of bodily injury, sickness, disease or death ... within [] 120 days.” This is an area of product recall coverage where, from the perspective of the policyholder, good and fair claims handling by the insurance company is absolutely essential. A policyholder should not have to ever be put in a situation where, in order to secure insurance coverage, it has to argue that its product or a product that it has involvement with is contaminated to the extent that it would cause injury or damage. A policyholder forced to make such assertions would potentially be prejudicing its own case against third-party claimants or other businesses in the supply chain of the product who may seek to sue the policyholder for alleged injuries or damages as a result of the pharmaceutical product.

Subrogation Risks

Policyholders purchasing product recall insurance should also consider risks associated with insurance company subrogation rights and negotiate a waiver of subrogation where appropriate. Subrogation may offer policyholders the up-front benefit of lower insurance premiums. Unfortunately, subrogation may complicate greatly life for a policyholder by leading to additional litigation, making claims more difficult to resolve and jeopardizing key business relationships between the policyholder and other parties.

Subrogation, in the insurance context, permits an insurance company to step into the shoes of the policyholder and bring a lawsuit against a party who may be legally responsible for some or all of the costs the insurance company has expended on behalf of its policyholder in paying a claim. All too frequently, however, the target of the subrogation lawsuit is the policyholder, or a party with whom the policyholder does business. Subrogation, in effect, often works to the disadvantage of the policyholder, by engaging it in additional litigation or undermining important business relationships the policyholder has with other parties.

Even when an insurance company pays a claim under the product recall insurance policy, the insurance company may commence litigation against the policyholder’s business partners including joint-venturers, distributors, licensors, licensees, and others who may have some liability in connection with the loss covered under the product recall policy. These parties may then file actions against the policyholder seeking contribution or indemnification, leading to even further claims with which the policyholder must confront. Tellingly, many savvy risk managers seek waivers of subrogation when purchasing insurance.

Conclusion

Insurance coverage should be a key consideration for those who produce, label, package and sell pharmaceutical products. Equally important in purchasing insurance is avoiding insurance companies with poor claims handling track records. Policyholders often must be vigilant in order to secure insurance coverage for the significant costs and claims associated with product recall losses. 

Notes
1 See, e.g., National Union Fire Ins. Co. v. Stroh Cos., Inc., No. 98 Civ. 8428(DLC), 1999 WL 1267461 (S.D.N.Y. Dec. 29, 1999).
2 First Brands Corporation v. American Int'l Specialty Lines Insurance Co., et al., No. 95-3587 (Mass. Super. Ct., Middlesex, Sept. 13, 1999)
3 James A. McGuire and Kristin Dodge McMahon, “Issues For Excess Insurer Counsel In Bad Faith And Excess Liability Cases,” 62 DEFENSE COUNS. J. 337, 338 (1995).
4 See Barry Meier, “In Fine Print, Customers Lose Ability To Sue,” N.Y. Times, Mar. 10, 1997, at A1; David Garfield Roland, “Arbitration—A Good Idea That Does Not Work,” Ins. Advocate, June 8, 1996, at 23 (the author is a lawyer with Anderson Kill & Olick, P.C.); Roger Parloff, “Kaiser Arbitration: Waiting For Judge Godot?,” Am. Law., July 1996, at 84; Lorelie S. Masters, “Arbitration Clauses In Liability Policies: A Ticket To Ride?,” John Liner Rev., Winter 1996, at 33 (the author is a lawyer with Anderson Kill & Olick, P.C.); Margaret A. Jacobs, “Policies Requiring Arbitration Challenged,” Wall St. J., Oct. 16, 1995, at B5; Eugene R. Anderson and Paul Liben, “The Perfect Insurance Or The Perfect Crime,” Metro. Corp. Couns., Jan. 1995; “Editorials: Surprise Packages,” N.J. Lawyer, Apr. 7, 1997, at 6; Madelaine and Theodore G. Eppenstein, “An Arbitration Albatross,” N.Y. Times, June 8, 1997, at F12.
5 Loss mitigation coverage under first-party insurance policies also exists implicitly. See Witcher Constr. Co. v. St. Paul Fire & Marine Ins. Co., 550 N.W.2d 1 (Minn. Ct. App. 1996).
6 See, e.g., Witcher Construction Co. v. St. Paul Fire and Marine Insurance Co., 550 N.W.2d 1, 8 (Minn. App. 1996) (holding that even absent an express loss aversion provision in the property policy, an insurance company is still liable for its share of reasonable and necessary costs of preventing an imminent covered loss to the insured property).

ABOUT THE AUTHORS

Joshua Gold is a partner in the New York office of Anderson Kill & Olick, P.C., which has offices in Chicago, IL; Newark, NJ; New York, NY; Philadelphia, PA; and Washington, DC. Mr. Gold regularly advises policyholders with regard to insurance coverage and litigation issues and represents policyholders in insurance coverage disputes.

Rhonda L. Johnson is a litigation assistant in the New York office of Anderson Kill & Olick, P.C.

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May 2003