Medical technology and life sciences company executives dedicate significant time and corporate resources to managing risks associated with their products. Typically, the first line of defense is the purchase of products and completed operations liability which provide coverage for damages that result from "bodily injury" and "property damage" included within a "products-completed operations hazard." While these policies are important purchases for protecting your firm's balance sheet, do they sufficiently offer comprehensive protection from other liability exposures that your products and operations create? There are several areas of risk of loss not covered by most products liability insurance forms which result from, or arise out of, an insured's product and thus could impact the financial health of a medical technology company. Purchasing manufacturer's errors and omissions, product recall expense and product liability coverage is a comprehensive approach to management of risk arising from products.
Most products liability insurance coverage forms grant coverage for "bodily injury" or "property damage" within the "products-completed operations hazard"1 for injury or damage occurring away from premises owned or rented by the insured and arising out of the insured's "product" or "work." "Product" is usually defined as the goods that are manufactured, sold, handled, and distributed by the insured, including the containers for the goods, as well as warranties on the product. "Work" is typically defined as operations and materials performed by the insured. These broad definitions of coverage are refined by the common exclusions contained in most products liability policies. Included are key exclusions which can have significant implications for some medical technology and life sciences companies. These are:
Property damage to personal property in the insured's care, custody, or control. This exclusion is significant if you repair or service others' property, as liability for damages to the property of others is not covered when that property is at the insured's location or under the insured's control and possession.
Property damage to the insured's product or work. This exclusion removes coverage for any damage to your product or work itself, generally meaning that the value of the product or work is not covered when settling damage or injury claims.
Property damage to "impaired property" or property not physically injured. In this exclusion, impaired property is tangible property which cannot be used or is less useful because your property or work, incorporated in the impaired property, is defective, deficient, or dangerous or impaired due to your delay or failure to perform according to contract terms.
Recall of products or work. The form excludes damages or expenses you incur due to withdrawal or recall of your products or work.
Acme Precision Manufacturing makes component electronic connectors for Quality Health's medical diagnostic and monitoring machines. Quality Health's products must be manufactured to precise specifications and tolerances so that the diagnostic device can maintain its sensitivity and accuracy.
Due to a change in processes at Acme's plant, the tolerances of the connectors were slightly off specifications, and they were shipped and incorporated into Quality Health's product. After Quality Health had released the product into the marketplace, the company received reports of erratic performance and discovered the malfunction was attributed to components provided by Acme Precision.
Quality Health sued Acme claiming property damages and recall expense. In turn, Acme submitted the claim to the insurance company providing products liability coverage to Acme. The insurance company stated the damages claimed by Quality Health were not covered by the products liability policy Acme purchased and cited the policy exclusions for property damage to impaired property and recall of products.
Goodwork Medical Technologies sells, repairs, and installs therapeutic medical equipment. The company takes equipment into its laboratory for calibration, testing, repair, or other service.
Goodwork Medical has a servicing contract with Bon Vivant, a large healthcare provider, for ongoing maintenance on some medical electronics equipment. After installing a new component part on a large piece of equipment, the machinery malfunctioned while in Goodwork's laboratory, damaging both the new component and the existing apparatus.
Bon Vivant presented a claim for damages to Goodwork and the company submitted the claim to its products liability insurer. The insurer denied coverage because the product liability policy Goodwork had purchased contained exclusions for property damage to personal property and to the insured's product or work.
If Acme Precision and Goodwork Medical had purchased manufacturer's error and omissions protection each company would have had coverage for the property damages claims made against them.
Further, if Acme Precision had purchased products recall expense coverage the expenses associated with Quality Health's product recall claim would have typically been covered.
Manufacturer's errors and omissions (E & O) is a unique product designed to offer coverages that the typical products liability coverage form excludes; specifically, coverages for "physical injury" to products or work and "business injury" which is the customer's loss of use of property not physically injured. In fact, some carriers refer to this coverage form as a "commercial general and products liability gap" coverage because the policy is intended to fill in gaps in the Commercial General and Products Liability offering.
Typically, manufacturer's errors and omissions liability coverage offers defense and economic loss that the insured would be obligated to pay as a result of covered "wrongful act"-that is, the insured's negligent act in the design, manufacture, and installation of the insured's product or a performance failure of the insured work or product that results in a defect or deficiency.
In addition to the business injury coverage grant, manufacturers' errors and omissions typically also covers liability for "product physical injury" which is defined as sudden or accidental physical injury to the insured's product after it has been put to its intended use, or damage to the personal property of others in the insured's custody or on the insured's premises for the purpose of performing work.
In the above case studies the loss of use and the loss of economic value due (Acme) and damages to personal property (Goodwork Technologies) claims would typically be covered by a manufacturer's E & O policy.
This coverage is most often available as "claims made," meaning the claim must be made during the policy period, with defense costs and indemnity within the limits of insurance and policy limits range from $1 million to $10 million. The pricing of this coverage is often based upon annual gross sales.
Product recalls of healthcare technology products take place on an almost daily basis. The Food and Drug Administration (FDA) monitors and regulates medical device recall events, listing open recalls on their website2, with the most serious recalls, Class I, receiving oversight and attention. There are also many voluntary recall products which may be defective, or may need to be checked, adjusted, or withdrawn because of risk to the health of the users. The economic cost of conducting such voluntary or regulatory recalls is huge, with price tags between thousands of dollars per unit up to millions of dollars in cost per event. These estimates do include liability costs associated with injury or negligence. Many medical device companies purchase product recall expense insurance as a way of managing the risk associated with product recalls.
Product recall expense insurance is generally reimbursement coverage for costs that an insured incurs during a recall event. Coverage for costs can include physical removal of products from the marketplace, communications in print or other media notifying the public about the recall, third party expenses such as those of a distributor on behalf of the insured, and additional costs for advertising to regain customer loyalty after a damaging recall event.
In the Acme case study the product, incorporated in Quality Health's equipment, had to be withdrawn from the marketplace due to a defective component provided by Acme. The company's liability for the costs of the recall would typically be reimbursable if either or both companies had this insurance as part of the risk management approach.
This coverage exists in a variety of forms and grants; some are independent policies, while others are endorsements to existing coverages. Generally, this insurance solution provides coverage based on a per event limit, subject to a deductible and often a participation percentage, in which the insured shares in some of the specific costs of the recall event. The policy may also have an annual aggregate and offer extension such as reimbursement of costs to replace product in the marketplace.
Insuring agreements may have unique terms and conditions. Some coverage forms apply only to government or regulatory mandated recalls; other options may include voluntary withdraw based on the insured's reasonable and good faith determination to withdraw the product. In addition, many product recall expense forms also reimburse costs of product withdrawal due to actual, alleged, or threat of product tampering.
The cost of this coverage is also determined by a rate applied to gross sales; rates are usually determined by the complexity of the product, the history of recall, and limits of insurance, deductible, or participation. Most coverage offerings begin with a $50,000 limit which can be increased accordingly.
Medical technology and life science company executives invest a substantial amount of time and money managing risk that is associated with the products of their companies. While most buy products liability coverage, they may also find that these products liability policies have gaps in coverage that expose their companies to financial loss from their products and services. A more comprehensive approach to products risk management can include purchase of manufacturer's errors and omission and products recall expense coverage or a constellation approach to risk management in which all insurance solutions work together to protect the insured and provide value for their premium dollars.
For more information on this topic, please contact The Hartford at medtechlifesci@thehartford.com.
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Joseph A. Coray is the Vice President and Leader of The Hartford's Technology & Life Science Practice and Marine Practice. He is responsible for all execution activities of the two groups, including overseeing field sales, underwriting and strategy for The Hartford's insurance work for biotechnology, medical technology, and pharmaceutical industries.Joe joined The Hartford in 2005 and has been in the insurance industry since 1987. He has a bachelor's degree from Saint Francis University, and master's degree from St. Bernard's Institute. He has earned Associate in Insurance Management designation from the Insurance Institute, and is certified Six Sigma Green Belt. 
Sara E Dyson, Esq. is the Assistant Vice President of Loss Control for the Medmarc Insurance Group. Her primary responsibility is to develop products and services to assist companies control products liability risks, losses, and associated costs.In 2012, Sara was invited to join the Health Sciences Council for Underwriter's Laboratory (UL). She will advise UL on safety trends for medical devices.Sara received her law degree from the University of Wisconsin Law School and is a member of the Wisconsin and Virginia Bar Associations. She is also a graduate of the University of Michigan, where she received a bachelor's degree.
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