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					Product Liability
    Property/Casualty                                                                                                                     THIS IS IT: Mark Lanier, attor-
                                                                                                                                          ney for one of the plaintiffs in
                                                                                                                                          the most recent Vioxx trial,
                                                                                                                                          holds up a sample packet of
                                                                                                                                          the drug as he speaks during
                                                                                                                                          opening arguments of the pro-
                                                                                                                                          ceedings in March.




                                After Vioxx
                                The national focus on the Merck & Co. trials is calling attention to product liability
                                insurance and its future with large drug manufacturers.
                                by Bonnie Brewer Cavanaugh                                                                      • Underwriting for product liability
                                                                                                                                  insurance for pharmaceuticals and

                                I
                                     n April, jurors in the latest Vioxx       seeing the market somewhat
                                     trial in Atlantic City, N.J., delivered   stabilize, but at a much differ-                   related products has changed due
                                                                                                                                  to the ongoing Vioxx litigation.
                                                                                                                   Key Points




                                     a split decision. One plaintiff           ent level than [it was] at a few
                                emerged victorious with a $13.5 mil-           years ago.”                                      • Insurers are making lists, some
                                lion award, including $9 million in               Aon handles commercial                          several pages long, of drugs and
                                punitive damages.The second plaintiff          product liability for pharmaceu-                   compounds they are unwilling to
                                received what amounted to nothing.             tical, biotechnology, genomics,                    cover.
                                    At stake during the myriad of Vioxx        medical device and diagnostic                    • Major pharmaceutical companies
                                trials, however, is not just whether man-      companies. Merck, the world’s                      have begun to forgo product liabili-
                                ufacturer Merck & Co. of Whitehouse            third-largest drug maker, has                      ty coverage.
                                Station, N.J., will emerge mostly victori-     been a client of Aon and its pre-
                                ous or downtrodden. For the insurance          decessor firms since the late 1920s,Wal-          ed Mark Rahdert, a law professor at
                                industry, at stake is whether such high-       ters said.Aon is not involved in the cur-         Temple University’s Beasley School of
                                profile trials will trigger tribulations for   rent Vioxx litigation; the identity of            Law, Philadelphia. He teaches insurance
                                product liability insurers and those           Merck’s insurers has not been disclosed.          law, impact and regulations.
                                who seek liability protection.                                                                      The Los Angeles Times reported in
                                    “There’s no question that under-           Speed to Market                                   December 2000 that the demand for
AP/Wide World Photo/Mel Evans




                                writing has changed,”said Jim Walters,            “In recent years, going back to the            AIDS drugs changed the political cli-
                                national managing director of Aon’s            Clinton administration and continued              mate in the early 1990s, when Con-
                                life sciences and chemical group. But          by both the Bush administrations, there           gress advised the Federal Drug
                                clearly not just because of Vioxx; nega-       has been a push to get drugs into the             Administration to work closely with
                                tive trends in product liability have          market sooner and to reduce the                   pharmaceutical firms in getting new
                                been ongoing for years. “Most of the           amount of government-supervised test-             medicines to market faster. In 1988,
                                pain in our world was inf licted               ing and safety and effectiveness that             only 4% of new drugs introduced
                                between 2001 and 2004. Now we’re               goes in the drug approval process,” not-          into the world market were

48                                    BEST’S REVIEW • MAY 2006
approved first by the FDA. By 1998,
the FDA’s approvals had soared to
                                                                    “A single instance like the Vioxx incident—of
66%. By the end of the 1990s, the                                   a danger like that occurring,in theory—
FDA was approving more than 80%                                     ought not to have a substantial impact on
of the industry’s applications for new
products.
                                                                    liability insurance rates generally.”
    “If that is the case, that, I think, does                                                    —Mark Rahdert,
actually materially increase the risk                                                           Temple University
that undetected defects with drugs
will materialize once the drugs are             can adhere to every single government        could cause cardiac problems in some
mass marketed.That is a real change in          requirement, the entire FDA approval         patients.The FDA followed with a pub-
the risk profile of pharmaceutical              process, have it tested in multiple stud-    lic health advisory.
drugs,” Rahdert said.“If it continues to        ies and have the drug approved—and               Merck’s stock dropped by 3% in
be national policy, it should actually          then still be sued out of existence,” said   after-hours trading following the April
produce an increase in liability insur-         Robert Hartwig, chief economist at the       5 verdict, according to the New York
ance premiums—a sustained increase,             Insurance Information Institute. “From       Times. Lawyers for the plaintiffs fore-
because the risk of future liability is         a public policy perspective, is the          cast a surge in similar lawsuits follow-
actually greater.”                              greater good being done?”                    ing the multimillion dollar award, the
    Getting a new drug from the idea               Hartwig would like to see a cost-         second against Merck in the four cases
phase to the drug counters is a big             benefit analysis done for new drugs          that have reached juries. In mid-August
process; any drug manufactured in the           so consumers can take a particular           2005, the pharmaceutical giant’s stock
United States is developed under high-          drug if they choose to, with all the         plunged 7.7% in one day after a Texas
ly regulated circumstances and goes             risks exposed.                               jury delivered a $253 million judgment
through layers of FDA approval direct-             Vioxx, a Merck pain reliever taken        against the company in the death of a
ed toward the drug’s efficacy and safe-         by more than 20 million Americans,           man who used Vioxx. At last count,
ty, Rahdert said.                               was pulled from the market in late           Merck still faces some 9,600 total law-
    “The thing that’s thought of as per-        September 2004 after the company             suits, 4,000 of which will take place in
verse by the drug companies is they             revealed that the COX-2 inhibitor            federal court.




                                                                                                      BEST’S REVIEW • MAY 2006      49
                     “The phenomenon that we’re faced with                                 now they have basically looked at the
                                                                                           pharmaceutical products and any
                     here is major pharmaceutical companies                                product they think has had a problem,
                     have basically stopped buying product                                 even if it’s not on the major list, or if
                     liability insurance.”                                                 they believe it may have some prob-
                                                                                           lems in the future, they’re starting the
                                                   —Jim Walters,                           insurance negotiations on those drugs
                                                       Aon Corp.                           with absolute exclusions.”
                                                                                              Yet, several pharmaceuticals have
 Seal of Approval                             have been improving, they’re still           been excluded for a long time, he said.
     What pharmaceutical manufactur-          not very good, Hartwig said. “Phar-          “Thalidomide, DES, the swine flu vac-
 ers ultimately would like to see is          maceuticals is a very tough business         cine are all standard exclusions on insur-
 immunity from litigation for products        in every respect. It can cost hun-           ance policies,” Walters said. “But now
 that already have been approved by           dreds of millions of dollar s and            again,the list is longer than your arm.”
 the FDA, Hartwig said.                       decades to bring a new drug to mar-             One of the bigger problems loom-
     “If they’ve adhered to all the FDA       ket. It’s a very, very risky business.       ing over the marketplace is that some
 guidelines in the approval process,          You get a blockbuster drug, which            large pharmaceuticals have decided
 clinical trials and so on, the govern-       happens very rarely, and it winds up         they can live without coverage.
 ment effectively, by rendering that          blowing up because of medical con-              “The phenomenon that we’re faced
 decision, would have to say,‘We under-       cerns. The loss of revenue simply            with here is major pharmaceutical
 stand that this drug has some great          can’t be replaced by insurance.”             companies have basically stopped buy-
 benefits but also has some side                  This continued assault on pharma-        ing product liability insurance,”Walters
 effects,’” Hartwig said. “And for the        ceutical manufacturers and medical           said.That’s because insurers are telling
 greater good, put the drug on the mar-       manufacturers means that product lia-        pharmaceutical companies they must
 ket with full disclosure.”                   bility rates will remain high, but by no     retain the first $300 million to $500
     “I think it’s actually getting through   means as high as they were three-to-         million or more of risk. “Upwards of
 to juries and justices around the coun-      four years ago, he added. Yet, he fears      eight of the top 10 [pharmaceutical
 try,” Hartwig added. “We’re in a some-       American drug companies could wind           manufacturers] have stopped buying
 what different tort environment today        up like the U.S. vaccine business,           conventional product liability insur-
 that is not so automatically predis-         which “has been sued out of exis-            ance,”Walters said. Major pharmaceuti-
 posed to produce enormous judg-              tence,”Hartwig said.“We can’t produce        cal companies are finding that paying
 ments against a particular defendant.”       vaccine for flu in this country.We have      $10 million to $20 million for $100
     The National Law Journal report-         to get it from France or Canada or           million of insurance coverage that
 ed in its annual review released Febru-      somewhere else.”                             excludes half their products is no
 ary 20 that total awards among the top           In 1967 there were 26 companies          longer a viable transaction, he added.
 100 verdicts in 2005 decreased for the       in the United States manufacturing              If the current tort environment con-
 third straight year, indicating that         vaccines until “a litigation crisis in the   tinues,“Major pharmaceuticals, the large
 “juries are becoming ever stingier           1980s drove many companies away              companies, will continue to basically
 toward plaintiffs, at least with regard to   from the vaccine business,” according        stop buying insurance,” Walters said.“As
 the punitive damages they dole out.”         to Congressional findings supporting         we experienced with the insurance
 Juries awarded $8.2 billion in compen-       the National Childhood Vaccine Com-          crisis of the mid-’80s, once companies
 satory and punitive damages in 2005,         pensation Act of 1986.Today, there are
 the lowest total since NLJ started track-    just four companies that make the vast       Product Liability
 ing the top 100 verdicts in 2001.            majority of vaccines used in the Unit-
     However, U.S. tort costs, which          ed States.
                                                                                           Combined Ratio
                                                                                           The average combined ratio
 grew to a record $260 billion in 2004,                                                    1995 to 2004 is 180.0. 355.2
 are expected to climb at a higher rate       Adding Exclusions
 for 2005 and 2006, according to a               Part of what’s happening in the
 recent report by consulting firm Till-       pharmaceutical product liability are-
 inghast.The company forecasts growth         na is that carriers and reinsurers have
 rate in U.S. tort costs would increase       changed the way they are underwrit-                                                        215.4
                                                                                           189.5
 from 5.9% in 2004 to 6.5% in 2006 and        ing the business,Walters said. Insurers              179.1
                                                                                                                                                      167.2 159.8
 2007. The firm believes 2005 costs           have made multiple-page lists of                                           156.4
                                                                                                           131.9 138.8           133.3
 could reach $277 billion.                    drugs and compounds they are
                                              unwilling to cover.
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 Rates and Withdrawals                           “They’re starting the negotiations
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   While product liability results            with an exclusion,”Walters said.“Right       Source: Insurance Information Institute, A.M. Best


50     BEST’S REVIEW • MAY 2006
                                                                                                               Product Liability
                                                                                                        Property/Casualty
get comfortable retaining more of their       They’re on the Internet and so much         help their individual cases as well.”
risk, they tend to never return to the        more willing to share their expertise          “The balance of power has shifted
insurance industry. I think that creates a    on these cases. Look them up on the         from the hand of corporate America to
big hole in their premium volumes that        Internet; Google any one of the ‘prob-      the plaintiffs and the trial attorneys a
will probably never return.Whether that       lem’ drugs and up will pop attorneys        great deal,” Walters added. Fifteen
will ultimately hurt or benefit smaller       and seminars where they will explain        major products have been withdrawn
companies remains to be seen.”                their litigation strategies and give oth-   from the market between 1997 and
    Merck said previously that it gave        er lawyers a road map on how to try         2005, compared with only eight with-
up seeking product liability insurance        these cases. They’re very willing to        drawals in the previous 26 years, he
last year for certain products, after eval-   share.The common belief is if there is      said.“The market was concerned long
uating its risk and determining that the      a groundswell of victories, that will       before Vioxx was withdrawn.”          BR
cost of obtaining insurance outweighs
the likely benefits of the available cov-
erage. Currently, the drug maker has
product liability insurance for claims
brought in the Vioxx lawsuits of up to
approximately $630 million after
deductibles and coinsurance, the com-
pany disclosed in regulatory filings.
    “A single instance like the Vioxx
incident—of a danger like that occur-
ring, in theory—ought not to have a
substantial impact on liability insur-
ance rates generally across the indus-
try,” Rahdert said.“It should have been
taken into account with the calculus
of the premium to begin with. It ought
not to have an appreciable effect.”
    Drug recalls and lawsuits are an
inevitable part of the market of phar-
maceutical drugs; therefore, they
should be an inevitable part of the
insurance industry’s calculus of premi-
ums for liability insurance, he added.
    “This is not unusual,” Hartwig said.
“There’s always some drug out there
that’s under a microscope; there’s
always someone being sued.” He does
not expect insurers will shy away from
providing product liability insurance
for pharmaceuticals and other govern-
ment-regulated products.“Whether it’s
Vioxx or Fen-Phen or a variety of oth-
er drugs that have been brought to the
market, there’s always something like
this going on.”
    “If Merck can be successful in this
litigation, then effectively, trial lawyers
will lose interest in this,” Hartwig said.
Then,“hopefully, with the approval dis-
closure, [such] drugs would be avail-
able to people around the world who
have no other means of relief.”
    The plaintiff lawyers who are pre-
senting these cases seem to now have
the upper hand, Walters said. “Clearly,
they are so much better organized.

                                                                                                   BEST’S REVIEW • MAY 2006      51

				
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