Drug Mania and a Vortex of Losses

Ever since the Ontario government legalized class action lawsuits in the 1990s, Canadian consumers have started taking on the pharmaceutical industry for millions of dollars in compensation. Consumers allege to have suffered serious injuries from using the drugs in question and are seeking damages collectively. Naturally, the situation has put Canada’s insurance industry on high alert.

“It really doesn’t matter how frivolous a lawsuit is,” says Glenn McGillivray, assistant vice president and head of corporate communications at Swiss Reinsurance Insurance Co. Canada. “As long as it goes to court, it can rack up quite a bit of money in legal costs and insurers pay for those through the liability policy. It’s called ‘duty to defend’ — it is the duty of the insurance company to pay for the defence of the insured. And that can easily cost millions.”

Contaminated blood

Perhaps the most famous class action lawsuit to hit the Canadian courts in recent years was the tainted blood scandal. In 1993, the federal government established a commission of inquiry to investigate the contamination of the blood supply during the 1980s, in which hundreds of Canadians were infected by the AIDS virus and thousands contracted the hepatitis C virus from the blood supply. The Krever Commission, named after the Ontario judge who led the investigation, held more than eight months of public hearings that heard from more than 350 witnesses. It cost millions of dollars.

While Canadians may be fairly new to the class action game, Americans have been playing it for quite some time. A simple Internet search of the term medical product liability conjures up a slew of U.S. law firms that are making a business out of class action cases. Some of the more notable cases of late:

Fen-Phen, a diet/drug combination allegedly causing heart or pulmonary conditions;

Baycol, a cholesterol-lowering heart drug that allegedly causes muscle damage, acute renal failure or death;

Ponderal, a diet pill alleged to cause heart and lung diseases, and;

Prepulsid, an heartburn treatment allegedly causing cardiac rhythm abnormalities.

A number of class actions have also been launched against hip, jaw and breast implants. Many of these drugs and devices, and more, are listed on a U.S. website www.recalledproduct.com which is devoted to product recalls of all kinds — food, toys, cars, chemicals, medical products, and drugs.

As more class actions go before the U.S. courts and eventually settle, similar cases are beginning to pop up across Canada. Cases involving Fen-Phen, Prepulsid, Baycol and various implants have already made their way across our border, and by all accounts more class actions are expected to follow. “It’s safe to say that if there’s a settlement in the U.S. for a drug or a medical device then generally there will also be an action in Canada on that,” says Mark Freeman, a lawyer with the Calgary-based law firm Docken & Co. “It’s usually simultaneously, but sometimes a settlement does prompt an action being filed up here…They’re proven claims, to some extent.”

Americans are usually the first group to file claims against pharmaceutical companies, says Freeman, simply because there are more people involved in the suits, there are more lawyers to deal with the claims, and drugs usually get admitted into the U.S. long before they’re approved in Canada.

Canadian regulation

Health Canada does its part this way: any product that’s offered for sale in Canada to treat or prevent diseases or symptoms is regulated as a drug under the Food and Drugs Act. Health Canada’s “Therapeutic Products Directorate” (TPD) is responsible for evaluating and monitoring the safety, effectiveness and quality of pharmaceutical drugs and other therapeutic products available to Canadians. Health Canada lists information about drug recalls at www.hcsc.gc.ca/english/protection/drugs.html. As for medical devices, they are described by Health Canada as products used for medical purposes, modifying body function or structure, diagnosing pregnancy, or used in the care of offspring. They also include contraceptives (there is a medical devices hotline at 1-800-267-9675).

Docken & Co. recently represented the government health provider in Alberta in a class action suit involving the Fen Phen drug Pondimin. The settlement, worth approximately $11 million, was approved by the Ontario courts last summer. All appeals were exhausted by end of 2001, says Freeman. The law firm is also involved in a similar class action suit for the Fen-Phen drug Ponderal involving a pharmaceutical company from France. Freeman says lawyers in the Ontario class action suit are currently preparing examinations for discovery, with the case set to go to trial in fall 2002. A number of individual class actions are being filed in Ontario, Alberta, British Columbia, the Yukon and the Northwest Territories.

“We’ve been fortunate that we have not been involved in any of the larger claims in Canada, because we avoided medical product manufacturers for the most part,” says Christine Fernandez, assistant vice president and technology insurance specialist at Chubb Canada. “In the past, the provincial health plans didn’t necessarily subrogate against the medical product manufacturers. But now, with some of the cutbacks and concerns in health funding, we see hospitals bringing the manufacturers of the products into claims and law suits.”

Risky business

Given the risks, it is no wonder there are only a small number of insurance companies in Canada that cover pharmaceutical companies for medical product liability. Creechurch International Underwriters, a Lloyd’s underwriter, got into the business in 1996 and today specializes in insuring small to mid-sized corporations rather than large multinational ones. Zurich North America Canada discontinued its coverage in the early 1990s but reemerged as a major player about six years ago to cover drugs, drug contract manufacturers and clinical trials. Chubb Canada officially launched its life sciences initiative in 2000.

“There are only three or four insurers who do this [in Canada],” says Michael McLachlan, president of Toronto-based Creechurch International Underwriters. “It’s perceived as potentially hazardous — and in fact it can be. If something does go wrong, the repercussions can be quite serious. Most insurers would prefer to insure more predictable events such as auto insurance or homeowners, where there’s a large number of insurers and a predictable loss ratio.”

Urs Uhlmann, senior vice president, corporate business at Toronto-based Zurich North America Canada, has similar thoughts. “In most cases we’re either on the risk or we know why we’re not,” he says. “There’s a limited number of insurance companies that dabble into it, which is always good to keep the premiums and conditions at bay. You need the specific skills and tools to underwrite it, whether the tools are just engineers that used to work in those industries available to the underwriter. But not every company has that or is willing to invest in that. Probably the biggest reasons [for avoiding this type of coverage] are the drastic or catastrophic events that happen.”

Suffice to say the underwriting process in this field is quite extensive, making it relatively costly to underwrite a risk altogether. According to Uhlmann, it requires a completely different underwriting approach than other product lines, involving thorough research into the applications and risks of the actual products — sometimes on a product-by-product basis. “The more litigious we get, the more burden is put on the insurance industry to pay for the legal costs of these settlements,” says McGillivray.

Profit dilemma

Fernandez describes the whole area of medical product liability coverage as “extremely complex” due to the “class action potential” as well as increased media attention, pressure for faster regulatory approvals, television advertising, and concern about clinical trial controls. Pr operty exposures are equally complex, she adds, especially when dealing with research animals, cell cultures and micro-organisms or other temperature sensitive property. Additionally, companies involved in research and development are also not generating any profits, which further complicates the insurance process. “The loss of income is not straightforward, so standard insurance products will not necessarily address their needs or properly protect them for any loss of expenses and financial milestone payments.”

Chubb Canada has insured some companies involved in medical devices or pharmaceuticals in some capacity, whether primary or excess, for a number of years yet only recently began fully marketing its insurance policies and services to the industry. The company has been successful in other target markets including high-tech, energy and mining, and financial institutions and felt the time was right to move into a market with mounting global opportunities, says Fernandez. “With the improvements in the technology world, biotechnology business is really growing now. There’s a lot of demand for improved products for medical devices, biotechnology and pharmaceuticals.”

Zurich, too, saw some opportunities when it reemerged as a player in medical product liability coverage. However, the company likes to play it safe by putting restrictions on the types of drugs and devices it will insure, says Uhlmann. All potential coverage is reviewed in detail by Zurich’s engineers or by a reliable external consultant, he explains. “There’s a lot of time and money invested in analyzing the exposure, probably to a much larger extent than what you would see on a regular manufacturing risk. We’re obviously afraid of the large claim or the class action. We want to make sure we deal with quality insurance with quality products and that we are not getting into product areas like drugs that we don’t feel comfortable with.”

According to Uhlmann, Zurich prefers to be involved in what he calls “therapeutics” rather than in dietary products such as diet pills and performance enhancing drugs. His rationale: treating healthy people drastically increases the exposure. “As silly or strange as it sounds, the sicker the patient you’re treating the better we feel about it…If you treat somebody for cancer, somebody that’s already terminally ill, as sad as it sounds we feel the liability exposure is somewhat limited than if you have healthy people who just take drugs or dietary supplements to grow muscles.”

Selective exposure

Zurich is “very cautious” about insuring vaccines and blood products, says Uhlmann. A list of safeguards is included in Zurich’s standard policy form, “and we typically go from there”. Given that there are so few large drug manufacturers in Canada, he adds, much of Zurich’s business in Canada is underwritten by its sister companies in the U.S. or Europe. Still, Zurich finds it increasingly difficult to get the capacity together to cover the product liability exposure to the extent that Zurich’s brokers and customers feel they need.

Creechurch, on the other hand, does not have many restrictions, though McLachlan admits that “anything to do with birth control” is one of the hardest classes to buy insurance for. He says there’s a market for virtually all medical products, with insurers’ coverage remaining fairly standard since 1996 despite the rise in class action suits in recent years. “Class actions haven’t impacted the medical products industry that much. There have been some highly publicized ones, like breast implants, but the brunt of those were born by fairly large international medical product manufacturers who probably were not insured in the Canadian domestic market substantially. So in my opinion and experience, I don’t think it shows that this line in Canada has really suffered…[though] that may change in the future.”

Covering the bases

McLachlan urges risk managers to consider more than just medical product liability before signing on the dotted line. Often, he says, medical product class action lawsuits have a medical malpractice element to the claim as well. It’s not just the product itself that can pose problems, he explains, but also its use — or misuse and the failure of the practitioner to advise the patient of potential hazards.

Fernandez, too, has words of advice for setting up insurance policies. Is the insurance company financially stable? Can it provide adequate coverage in all jurisdictions? Does the insurance company understand the medical products industry? And, perhaps most importantly, is it committed for the long term? “Does the insurance policy address the unique needs of the company? Since the likelihood is that injuries will not happen in the near future, it is prudent to look for an insurer with a long-term approach.”

Richard Horak, a defence attorney with Hughes Amys in Toronto, says it’s imperative that pharmaceutical companies make the best arrangements they can to ensure they are as fully covered as possible. “In some situations that may mean they may have to self-insure for part of the risk and limit their exposure or the insurer’s exposure to a smaller percentage of cases. You may get situations where claims under a certain value will be paid by the manufacturer if there’s liability, whereas claims in excess of a certain amount are covered by the insurance policy. So you have a very high deductible in some cases.”

More thorough testing and adequate warnings, too, will help companies stay out of court, observes Freeman. “Recently we’ve started to see manufacturers putting more accurate warnings on these prescription drugs and that decreases their exposure to liability as well. The biggest problem for them was that they weren’t warning people of these problems and, in fact, the testing itself was faulty. If they correct the testing and put proper warnings on the drugs, that will certainly reduce their exposure to litigation significantly.”