General Insurance Considerations for Life Science Organizations Amidst the COVID-19 Pandemic

The 2019-nCoV pandemic has exposed vulnerabilities in our globalized economy and localized healthcare systems; and is creating massive uncertainty in the realm of insurance as a result. One thing firmly remaining, however, is that intrepid life science organizations are working hard to meet the devastating virus head-on with innovation. Drug discovery, diagnostics, and medical device organizations remain vital while digital health is emerging as a game-changer. The mission of life science organizations, which we see as maximizing quality of life, has never been so important.

Questions regarding coverage for enterprises of all kinds, life science organizations among them, will likely see a long-winded set of answers come out of court proceedings. Some will be settled preemptively by case law, others by tort liability shields like the Public Readiness and Emergency Preparedness Act (PREPA). All of that notwithstanding, the key coverage components that have long existed for life science companies will continue to be the cornerstones of well- designed risk-management strategies for companies who are now helping wage war against COVID-19.

Contractual Compliance and Basic Coverages for Emergent Companies:

 Companies in their infancy without outside funding tend to make up the majority of those in need of only the most basic of coverages. Yet life science organizations of any size are vulnerable in the event of physical damage. The costs to replace damage to buildouts within lab space, or lab equipment generally, tend to be simple to evaluate and are thus a straight- forward component of an insurance strategy. Other tangible items such as consumables and scientific animals, however, may need more complex consideration. Perils like spoilage come into play with risk to refrigeration equipment by loss of power, or contamination from foreign materials. Given that these perils are commonly sub-limited (or even excluded) from insurance policies, deeper evaluation should be performed.

Less than tangible losses might include those losses that underly damaged property. For instance, recreation costs associated with restoring an experiment, ongoing operating expenses, and missed milestone payments due to a disruption in a company’s operations. The availability and scope of these coverages vary greatly from policy to policy.

Management Liability & Cyber Liability for Funded Operations:

Emerging life science companies who rely on angel and venture firms to fund operations will tend to see a deepening risk profile. Term sheets from investors outline the size of a capital raise, ownership structure, and obligations from each party.  In addition, term sheets commonly require the purchase of Directors & Officers (D&O) coverage. D&O protects directors and officers from claims alleging mismanagement of the company. When seeking cost and availability of D&O insurance, it is important to understand the main risk factors on which insurers base their underwriting assessment. First and foremost is the financial integrity of the company.  A strong balance sheet with the ability to meet cash burn for at least 12 months is critical.  Insurers are most interested in high sustainability and low probability of insolvency during the policy term.  Insurers also want to understand the ownership of the company by reviewing a capitalization table, including confirmation that parties owning more than 10% of the company have a board position.

Companies of all sizes should consider cyber liability given mounting cyber threats, and organizations at this level can begin to truly see and understand its value.

Supply Chain Exposures and Contingent Business Interruption Coverage:

The need for maintaining a secure and efficient global supply chain presents risk to life science companies despite technologies that increased security. Supply chains are increasingly complex and add to an organization’s volatility. Simply put, companies should seek the type of Contingent Time Element coverages to indemnify losses attributable to interruptions in supply chain that extend far beyond direct suppliers and customers. Identifying and guarding against the costs to simply reroute a shipment when damage to a transport system is incurred should not, however, be overlooked.

COVID-19 has shown the vulnerability of supply chains and has caused innovative life science organizations to deploy their abilities and resources like never before. This very fluid conversation is now inclusive of economic costs in addition to the human costs. Disrupted global supply chains, pessimism in economic forecasts, and a major stress test of financial markets are all underway. Individuals, nations, and corporations are all existing in a new normal. What was once speculation among Keynesian economists of a large fiscal stimulus is now a reality. The value of core insurance products and working with an experienced insurance broker is now, more than ever, critical for the companies working to fight the pandemic.