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Managing the risk of insurance coverage denials.

In the new movie "The Martian," actor Matt Damon plays astronaut Mark Watney, who finds himself stranded on the Red Planet struggling to adapt to an alien world. Medtech firms can feel comparably disoriented when they land on Planet Insurance after filing a claim for coverage. Getting sued for an allegedly defective product is very stressful. The saving grace can be the safety net of liability insurance to cushion the blow and avoid monetary ruin for medical device manufacturers.

However, all nets have holes. Device firms can learn--often belatedly amidst product liability litigation--that they face unexpected insurance coverage headaches. Awareness of these problems before a crisis erupts helps sidestep traps during a product liability claim.

First--a disclaimer. The following observations draw from more than 30 years of handling product liability claims. These views do not constitute legal advice, but rather risk management practice tips for medtech companies and those representing them.

Let's examine four common insurance coverage pitfalls that can arise from product liability claims or suits.

1. Potential claim exposure exceeds your insurance limits. You bought $500,000 worth of product liability insurance coverage. You figured that was certainly enough. After all, you had never faced a claim or a lawsuit before, right? In fact, a $500,000 policy seemed like an excessively risk-averse, obsessive-compulsive purchase. However, now you face a product liability lawsuit alleging that your device's malfunction caused permanent injuries, past and future loss of income, past and future pain and suffering. The patient's attorney demands $1 million.

You, the chief financial officer of XYZ Medical Corp., have just received from the insurance company a letter insurers call an "excess ad damnum" letter. This is Latin for, "You may not have enough insurance." Essentially, the letter warns that the claim eventually could exceed your insurance limits. This makes you reach for a pain pill or a stiff drink.

2. The plaintiff demands to settle within insurance limits. In many jurisdictions, if an insurer can settle a claim within policy limits and unreasonably fails to do so, it may be responsible for sums above those limits if a jury delivers a whopping award. In this scenario, the plaintiff successfully "uncaps" the insurance policy limit and proceeds against the defendant device firm. In such cases, if the plaintiff recovers an amount exceeding the insurance, the plaintiff might take an "assignment" from the policyholder to not execute on the judgment in exchange for the right to sue the insurer for damages.

No medical device company wants to face possible uninsured liability above the policy limit. Your insurance company should inform you of any demand to settle the claim. If you face a claim, write to the adjuster, requesting that he or she notify you promptly of all settlement demands and offers.

3. The lawsuit alleges punitive damages, which the insurance company says are not covered by your policy. In cases alleging egregious conduct, plaintiffs may seek punitive damages, aiming to punish the device company and deter other firms from similar behavior. Many insurance policies exclude punitive damages. Some states, for public policy reasons, consider punitive damages uninsurable.

4. The lawsuit alleges injury date(s) falling outside of your insurance coverage. Your implant resided in patient Jane Smith for more than a six-year period. One day, you receive a lawsuit from Mrs. Smith alleging that, in an 18-month span, your device failed to alleviate her kidney problems and, in fact, worsened them.

During this 18-month span, you switched product liability coverage from one insurer to another. The timeline straddles two policy periods, each underwritten by different insurers. You puzzle about which insurer is responsible for claim handling and hiring an attorney.

Usually, the date of accident, loss or occurrence in a product liability case is easily identified. It has a specific date, time and place. Sometimes, though, the nature of the allegation makes it murky. This poses insurance coverage challenges. The "earlier" insurance company may say the case is the later carrier's responsibility. The current insurer may claim the loss is the prior insurer's responsibility. While the insurance companies play hot potato, the medical device firm is caught in the middle.

No device company facing a product liability claim wants to fight a two-front war, one with the plaintiff/patient and the other with one's own insurance company. Surviving a product liability claim is stressful enough without that additional drama. These hidden insurance land mines can detonate during a product liability claim.

Risk Mitigation Strategies

Let us turn to the following six strategies to help mitigate risks:

1. Read the policy. Yes, reading an insurance policy is up there on the excitement scale with scanning meeting minutes of the Federal Reserve Board. Nevertheless, the large print giveth and the small print taketh away. Find out before a claim arrives. What is covered and what is not?

2. Request independent counsel. If the insurance company flags potential coverage exclusions or reasons to contest coverage, immediately request that the insurance company provide you with independent counsel. Often, an insurer's decision to reserve coverage rights reflects a conflict of interest. A reservation of rights letter does not deny a claim. Instead it flags a coverage issue, which could eventually lead to the insurance company disclaiming coverage. It buys time for the insurance company to investigate the claim without being accused of having accepted the claim by investigating. It's a way for the insurance company to tell the policyholder, "We are investigating the claim, but don't assume from that activity that you are fully covered for the loss."

On one hand, the insurance company has a financial interest in not paying the claim by denying coverage. On the other hand, the device firm is interested in having the most vigorous defense possible. The initial attorney hired by the insurance company cannot fulfill both roles in defending the device manufacturer and assessing coverage issues. Demand independent counsel of your choice.

3. Persist and don't take no for an answer. Have legal counsel review any reservation of rights letter seized by an insurance company. If the reasons in the letter do not make sense or lack a factual basis, send a reply challenging the reservation of rights and requesting that the insurer remove its reservation.

If you disagree with the reservation of rights, promptly tell the insurer of your reason(s). This paper trail will help if the case goes to court. Maybe the insurer has misinterpreted a law. Or perhaps its interpretation of "occurrence" is unduly narrow in light of policy language. Explain your rationale, send it to the claims rep certified mail (return receipt requested), and set a deadline for a response. This turns up the heat on the insurer to reassess its position.

4. Press for specifics. Some insurers have the philosophy that reservation of rights letters should be vague. "Throw it up against the wall and see what sticks." Others seem to quote virtually the entire policy but offer little or no explanation of the interplay between the claim's facts and the policy language that might negate coverage. This is unacceptable.

Challenge vague reservation of rights letters. Do not tolerate letters that fail to specifically refer to policy language and policy provisions, chapter and verse, or fail to follow up with an explanation of how the facts of the case relate to the policy language. Squishy reservation of rights letters may signal the presence of an inexperienced or incompetent adjuster on your claim. In any event, do not passively accept the coverage reservation. Go up the insurer's chain of command to a claim supervisor or manager.

5. Start the stopwatch. Once an insurer reserves rights, it eventually should declare whether it is covering a claim or not. In other words, reservation-of-rights letters have limited shelf lives. An insurer must eventually" get off the fence." Policyholders deserve a prompt insurer ruling on whether or not it will deny or grant coverage, even if the insurer defends under a reservation of rights.

6. Use the insurance broker to the max. This is important at the pre-purchase stage, when you compare different insurance policies and proposals. Have the broker analyze different insurance company policies and recommend two or three candidates that provide the broadest coverage at the lowest cost. Trade-offs may exist, however. The broadest coverage may not be the cheapest. In such cases, don't be penny wise and pound foolish. It's pointless trying to save a few thousand dollars in insurance premium if the "savings" expose the company to thousands (or millions) of dollars or saddle you with a cut-rate insurer in financial distress. In product liability insurance as in other purchases, things often are cheaper for a reason. Insurance brokers are steeped in insurance policy analysis and interpretation. Leverage their expertise to help you analyze and to plug any coverage gaps, to maximize your financial insulation from liability.

Remember that insurance is no panacea, no more than is medicine. Insurance cushions and mitigates the financial consequences of loss. However, it may not totally insulate a device manufacturer from monetary pain. Knowing the soft spots in the safety net, areas where the net frays or sags, can help life-science firms and their attorneys navigate effective product liability defense. As is the case with Mars, Planet Insurance can be a cold and forbidding place when product liability claims knock device companies off their stride. View these tips as lifelines to maximize your odds of survival.

Kevin M. Quinley, CPCU, ARM, is the principal of Quinley Risk Associates LLC, a risk-management consulting firm. He can he reached at or at (804) 796-1939.
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Title Annotation:Risk Management
Author:Quinley, Kevin M.
Publication:Medical Product Outsourcing
Date:Oct 1, 2015
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