ERPs May Help Avoid Legal Battles

ERPs May Help Avoid Legal Battles
by Matthew W. Lippman

Oncethe Food and Drug Administration (FDA) issues a warning about a potentiallyharmful product or forces companies to withdraw products from the market,insurance carriers will not delay in excluding the product from a policy.

Several years ago, during negotiation for an insurance policy renewal for alarge nutraceutical distributor, I received notice that the insurance carrierwas going to exclude ephedra. Fortunately, the companys policy included anExtended Reporting Provision (ERP); ERPs extend the period of time, beyondpolicy expiration, during which a claim can be made against the insured andreported to the company. This client also had a Supplemental Extended ReportingProvision (SERP), which offered a lifetime extension for a percentage of thelast annual premium, and a provision about restoration of limits. Thedistributor purchased the SERP and stopped distributing ephedra prior to therenewal; by opting for the SERP, the company limited its exposure to thepossibility of a future lawsuit.

As in most product liability policies written for the life sciences industry,this client had a claims-made coverage form, designed to pick up coverage forclaims that occur over a period of time and are reported at some point afterinsurance coverage expires. That being the case, this new exclusion wouldprevail for any previous injuries on ephedra since the client began selling theproducts.

Most manufacturers of health-related products have insurance policiescontaining some type of basic ERP as part of a claimsmade coverage form. Whilethis coverage extends the period of time beyond the expiration of the policyduring which a claim can be made against the insured, it may not be enough toprovide the necessary protection if a potential lawsuit is looming.

When considering the purchase of an ERP, there are four primary aspects toevaluate: duration, price, cancellation provisions and when to activate the ERP.

Duration: Usually the insurancecarrier will define the longevity of the ERP. Most carriers offer a one-yeartail. In some instances, options will be offered when activating the ERP.

Price: The cost of an ERP can befixed in the policy, based on the annual policy premiumsometimes running ashigh as 125 percent of the annual premium for a oneyear protection periodordependent upon the insurers rates at the time of activation of the provision.The options and costs are usually shown in the body of the policy or in aseparate declarations section. Premium payments are usually due on activation ofthe ERP.

Cancellation Provisions: Generally,when the insurance company cancels the policy, for reasons other thannon-payment of premiums, the policyholder may purchase a one-way tail or atwo-way-tail, depending on the individual insurance companys regulations andthe category of the business being insured. In some cases, a two-way-tail may bepurchased when the insured cancels the policy. In most situations, bestprotection for the insured lies within the Two-Way-Tail option.

Activation Timing: ERP purchasewindows vary and are defined in the policy. Some contracts call for the purchase to be made during the life of thepolicy. Commonly, a 10- to 30-day purchase period is allowed, but in someinstances the period is extended to as long as 60 days after the expiration ofthe policy.

An additional item to consider is a SERP, the optimal safeguard againstpotential loss from a future lawsuit. SERPs come in many shapes and sizes. Somehave lifetime extensions and may include a provision for restoration of limits,which reinstates the full benefit limit and is especially valuable if thecompany has already had a claim. The cost of a SERP is usually a percentage ofthe premium, depending on the scope of coverage.

When creating a plan, companies should review such options as lifetimeextension, restoration of limits and percentage of annual premium. It is alsoimportant to check the insurance carriers current financial condition andfuture outlook for assurance that the company will be in business over the longhaul. Some positive indications would be a rating of A-XV or higher by AM Best; experience in underwriting policies in your companys industry; andcoverage over multiple geographic areas.

With so many variables in the process of purchasing an ERP, it is critical tospeak with an insurance professional to effectively manage risk. As with allinsurance, the key is to balance the proper rate with the appropriate protectionfor the company.

Matthew W. Lippman is an executive vice president with theHalland Companies and is based in Plainview, N.Y. He has more than 15 yearsexperience in the insurance industry, specializing in product liabilityinsurance for the life sciences industry. He can be reached at (516) 333-3000 orat [email protected].