About the Author
Brian Mahon, Account Executive at BioOhio member firm Avatar Brokers, joins us with biotech-related insights from the insurance field. Outside of Avatar, you can catch him DJing weddings around the greater Cincinnati area, working on renovating a 100 year old duplex, and relaxing with his Fiancé, pet rabbit, and cat. Avatar is a global insurance brokerage with extensive biotech experience and a very specific mission – offering exclusive risk management services and insurance products solely for companies focused on innovation.
Launching a life science company is difficult to say the least. Balancing funding, investor relations, Intellectual property, personnel, lab space, product development, the list goes on and on. It can get overwhelming, especially when you start thinking about how to de-risk all these activities. From a risk prospective, it’s easiest to think about your life science venture in stages.
Early Stage Companies
The “Early Stage” or startup phase, is characterized by companies in their infancy, often with no outside funding, possibly operating from grants, but essentially are only R&D organizations. They often are working out of universities. In this phase, there is a minimal if not zero employee base and often there is no testing on humans, only animals. At this stage, a small Business Owner’s Package or Commercial Package policy can suffice in order to comply with any standard commercial lease requirements, insure slips & falls in the lab, and cover any damaged property like office or lab equipment. Typically, the cost of this can be less than $1,000 in annual estimated insurance premiums.
The “Developing Stage” is characterized by companies starting to receive outside funding. All items in the “Early Stage” still apply, some worker’s compensation insurance might be added to cover a larger employee base, possibly some raw material manufacturing can be going on for a phase I trial, so property insurance would increase as well. However, the big exposure here with raising funds is Directors & Officer’s (D&O) liability. Often when outside funding is brought into a life science venture a board of directors is put in place. Most board members are (and should be) reluctant to join the board if D&O coverage is not in place. D&O provides three coverages, A, B, & C. Side A is personal coverage for a director or officer against a suit if the life science company fails to provide indemnification. Side B is company coverage for a director or officer where indemnification is provided via the company’s D&O policy. Side C is Direct Company coverage for claims against the company. The most common D&O claims are employment related claims and shareholder disputes. Costs vary greatly on limits, deductibles, and geography. More litigious areas like California, can be difficult to get decent terms.
The “Maturing Stage” is characterized by companies entering clinical trial testing. Often, they may be doing additional rounds of outside funding, partnering with larger organizations, and homing in on their product. With a Phase I or Phase II clinical trial, clinical trial product liability insurance comes in to play. After all, inputting a new medical device, or injecting humans with a new drug is risky business. It’s not surprising the most frequent losses life science companies face is injuries to third parties (a product liability exposure). Product liability for life science companies is extremely unique and can cost anywhere from $5,000 to millions in estimated annual premium. The underwriting factors typically are based around how many participants are in the trial and the type of product. For example, A heart pump would likely be rated higher than a therapeutic lotion and thus cost more. Underwriters often ask for a copy of the Informed Consent Form, Clinical Trial protocol, any CRO agreements (or contractual insurance requirements) and a completed product liability application.
Finally, the “Developed Stage” is characterized by a product now being sold to the public. An IPO or additional rounds of funding may be on the horizon, the company is established, and upper management is in place, including Human Resources. At this point the business is valuable, there is an asset to protect, and a full suite of insurance products should be considered. However, only three are worth mentioning. The second most frequent loss life science companies face is product/property loss due to spoilage or change in temperature. In this phase, a new drug or product is being shipped all over the world, often with great care, but human error can always occur. In most cases, it can take months to create another batch of a new drug or product. Not to mention many of these products can be worth tens of thousands of dollars per unit. An inland marine/cargo property insurance policy should be considered with a close eye on the terms and conditions regarding change in temperature.
The second coverage developed life science companies should consider is Employment Practices Liability (EPL). An EPL lawsuit is the third most frequent loss life science companies face. It protects against claims of wrongful hiring, wrongful firing, harassment, sexual harassment, and discrimination. It is an HR director’s best friend. What is nice about this coverage is even if a claim is baseless in nature, it still provides defense costs. The last coverage worth mentioning, (which isn’t a surprise) is Cyber insurance. Cyber insurance is a relatively new product, so it varies drastically between insurance carriers. The main goal of cyber insurance is to protect from the financial repercussions of a data breach. It helps pay for computer forensics, business interruption, reputational harm, notification costs, credit monitoring, breach of privacy, and fines/penalties. An entire post could be dedicated to just cyber insurance, but the top 2 causes of loss when it comes to cyber is ransomware/extortion and e-mail spoofing/social engineering attacks. Ransomware/extortion is where a hacker locks a business’s computer systems demanding a ransom payment (often in form of bitcoin) A spoofing or social engineering is where a hacker fraudulently impersonates someone in the company, often the e-mail address of someone in upper management. The hacker then sends fraudulent instructions to a finance controller to wire funds outside the company.
The Currency of Business
Overall, insurance is often looked at as the cost of doing business or “the currency of business.” At first, companies just need it to comply with requirements in leases or contracts. Insurance is an afterthought, it just checks a box and time is focused on more important things like developing the cure to cancer. Once the company develops, (more investors and employees are brought on board, products are out in the marketplace) it’s best to get aligned with a knowledgeable independent insurance agent that focuses on the life science space to oversee coverage nuances and help find the best insurance carrier fit for the truly unique products coming out of the life science industry.