A Primer on the Increased Risk of Harm for Insurers from Pharmaceuticals

The national news media was recently captivated by the staggering multi-million dollar verdict reached by a Texas jury regarding the alleged connection between the use of Vioxx® and the death of an individual.

By way of history, Merck & Co., Inc. voluntarily withdrew Vioxx® from the market on Sept. 30, 2004, in light of the questions being raised between use of the drug and an increased rate of heart attack and stroke. The potential now exists for thousands of lawsuits that similarly contend that the use of Vioxx® led to unexpected circumstances. The Vioxx® situation serves as just one example of how there is an increasing pressure associated with the development and marketing of certain pharmaceuticals.

With the Federal Drug Administration under constant pressure to approve drugs in a more expeditious manner, some maintain that certain drugs are not being examined closely enough before they are put on the market. When something is alleged to have gone wrong, there is the potential for allegations by thousands of individuals that these drugs are causing them unintended harm.

In turn, insurers must be cognizant of this burgeoning area of claims. Notably, the panoply of claims may implicate many different lines of coverage.

The most obvious claim is the third-party liability claim that is advanced directly against the drug manufacturer. The allegations in such claims involve patients and their families complaining of unintended bodily injury and false or misleading advertising associated with the marketing of the drug. Such claims may be covered by the drug manufacturer’s CGL and umbrella insurance carriers. The coverage afforded by these policies is narrowly tailored based on insurance forms developed by specific companies for this market.

The policies contain terms and conditions that may serve to modify or exclude coverage for certain pharmaceutical claims. For instance, coverage may be limited or excluded based on a policy’s “products-completed operations hazard” provisions as well exclusions for “expected or intended” injury and “impaired property” may limit coverage. More specialized policies may alter the operation of the “expected or intended” injury exclusion as well as other terms in the policies. Nonetheless, as with all mass tort litigation, the opportunity exists for insureds to seek coverage under novel and imaginative approaches.

Unfortunately, the mere threat of potential litigation for a particular drug can drastically affect the market valuation of a pharmaceutical manufacturer. Taken to its logical conclusion, the potential for hundreds or thousands of lawsuits that may result in multi-million (never mind multi hundred million) verdicts affects the views held by the investing public for the company. The result? Stockholders and retirement plan participants file suit. The allegations involved in such suits are far reaching and range from a breach of fiduciary duty to gross mismanagement.

In many instances, these suits may implicate Directors & Officers Liability Insurance Coverage. This type of policy may provide coverage for: (1) claims against individual directors and officers for losses for which the corporation does not indemnify them; (2) claims against corporations for amounts that the corporation lawfully expends in indemnifying directors and officers for losses; and (3) claims made against the corporation for wrongful acts committed by directors and officers.

In addition, any suits initiated by retirement plan participants involving ERISA violations can also implicate Employee Benefits Liability coverage. Again, these policies contain a variety of exclusions that may serve to limit coverage, but the mere threat of lawsuits may ultimately lead to many significant coverage questions. A discussion of potential claims in this arena would be incomplete without a short identification of the claims that may be advanced against all of the other individuals and entities involved in the process for providing the drug to the tort claimant (i.e. medical professionals, hospitals, and pharmacists).

All of these individuals and entities are typically covered by Errors and Omissions policies intended to provide coverage for acts and omissions involved in providing professional services. While each state’s law may differ slightly as to what obligations each of the individuals and entities may have in a situation where it is alleged that a drug has caused unintended harm, the errors and omissions policy is where they will seek coverage for such claims.

In addition, concurrent with all of the litigation turmoil that often results from allegations that a particular drug is the cause of unintended harm, pharmaceutical manufacturers are also presented with a significant expense associated when there is an actual recall of the drug from the marketplace. It is not uncommon for insureds to forward claims related to such costs to their first-party properly carriers.

In sum, claims such as those arising from the Vioxx® related litigation can implicate many lines of insurance coverage. While other mass torts involving asbestos and environmental matters are predicted to decline in number, mass tort drug litigation is expected to significantly increase.

In turn, it is a fair guess that the number of coverage disputes will also increase as insureds seek protection for what could amount to significant liabilities.

Andrew S. Boris is a partner in the Chicago office of Tressler Soderstrom Maloney & Priess. His practice is focused on litigation and arbitration of insurance coverage and reinsurance matters throughout the country, including general coverage, directors and officers liability, professional liability, environmental, and asbestos cases. Questions and responses to this article are welcome at aboris@tsmp.com.