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Importance of insurance during product liability and recall scenarios that play out in pharmaceutical sector

Amit Agarwal
Wednesday, March 1, 2023, 08:00 Hrs  [IST]

As the domestic pharmaceutical industry witnesses significant expansion in line with the growing international demand, insurance products that cover against risks globally have become increasingly important to ensure sustainability of operations.
India has earned the title of ‘World’s Pharmacy’ with its excellent cost-efficient drug production capabilities while maintaining the highest quality standards. This status was further reaffirmed during the Covid-19 pandemic, where India not only emerged as the ‘Vaccine Capital’ of the world but also demonstrated its supply chain brilliance.  India has managed to support many countries in vaccinating their citizens, even while administering more than two billion doses to its own burgeoning population. The domestic pharmaceutical industry is slated to witness high double-digit growth rate.

The growing market demand has encouraged our pharmaceutical companies to expand their operations to cater the growing global audience, with the total industry size having already flourished by more than ten folds in the past two decades. While the domestic market has witnessed a compounded annual growth rate (CAGR) of ~11%, exports have increased by ~16% in the same period. In fact, according to a joint report by EY and FICCI, the Indian pharma industry is expected to grow by ~12% by 2030 and cross $130 billion in revenue.

This acceleration however makes our thriving pharma industry exposed to many uncharted risks and also equally susceptible to negative growth.  It is important for companies within the pharma sector to safeguard against operational, reputational and product liability risks, that could otherwise jeopardize long-term sustainability. With the government fast-tracking initiatives that are aimed at making the Indian pharma industry globally competitive, let us look at why domestic players need to embrace Insurance solutions that offer financial protection against known perils.

Importance of identifying product recalls early to avoid financial risks
With one eye on catering to the growing global demand for quality medical and healthcare products, many Indian firms have established manufacturing facilities in developed countries such as the USA. While this provides them with more opportunities in terms of improving their reach, it does necessitate that they conform to stringent manufacturing norms as decided by the country’s governing body for public health. Additionally, India is home to 100 plus US FDA approved manufacturing sites that are subject to periodic evaluations, failure in which could even result in penal action.

This is accurately demonstrated by a recent incident in which an Indian pharma major had to issue a Class II recall, initiated in situations where manufacturing lapses could result in adverse health consequences, for its New Jersey-based production of hyper tension medications. Not surprisingly, the same company had also issued another recall for an anticoagulant injection due to subpotent drug specifications. The financial implications associated with such recalls goes beyond just the cost of production and includes legal expenses, reputational damage and other administration expenses such as that of distribution.

For pharmaceutical companies therefore, it is imperative that they meet all local and international manufacturing conditions in order to avoid such expensive product recalls. However, this is easier said than done, with even a single sporadic incident being enough to significantly dent profitability and even threaten operations. In this context, the role of an insurance product that covers financial expenses involved in a product recall is gaining increasing relevance and importance for the Indian pharma industry.

Dealing with product liability issues an overhanging concern
If a pharmaceutical company fails to identify and recall defective products in time, it could lead to serious consequences, for their product users and for the firm at large. One notable example from the recent past is the case of an Indian cough syrup manufacturer that is under investigation for its role in the deaths of 70 children in the African country of Gambia. The ramifications of this unfortunate incident have reached an international level, with both India and Gambia instituting panels to investigate the cause of death and the role played by the pharmaceutical company in question.

While the jury is still out on whether manufacturing lapses were responsible for these deaths, in most cases it is the pharmaceutical company that ends up being held accountable for third party claims and related damages. In some cases, it could lead to loss of production and even terminating the product altogether in order to prevent bringing indelible disrepute on the manufacturer. This was exactly what unfolded with a world leader in baby powder products, that has been drained for years in terms of litigation costs arising out of a mountain of lawsuits due to traces of asbestos being found in its products.

Despite the company insisting on the safety of its products, the resulting public backlash has forced them to permanently stop production of its baby powder products, replacing it with a corn-starch-based version to avoid further run-ins with federal prosecutors. For Indian pharmaceutical companies supplying to a global audience, it is therefore vital to insure themselves against litigation expenses and third-party settlements that may arise in the unpleasant scenario where their product has been deemed hazardous to the public.

Insurance solutions remain critical to sustainable operations
Considering the above examples and combining it with India’s increasing pharmaceutical exports, players within the Indian pharma industry needs to secure themselves with comprehensive insurance solutions that are available for the entire product lifecycle. This includes coverage against material and financial risks associated with the manufacturing process, cyber-attacks that are becoming rampant against advanced drug manufacturers today and even directors’ liability claims against top management officials.

A recent Madras High Court judgement emphasizes the risk of criminal proceedings being initiated against officials of a pharmaceutical company that has been alleged to be supplying drugs below the prescribed quality levels. In fact, the Court went as far as to include the board of directors in liability proceedings, quashing their arguments that they weren’t involved in the actual manufacturing. This case sets a precedent that could have a far-reaching impact on the Indian pharmaceutical industry and further highlights the importance of having an insurance cover to cushion against business risks.  

Mapping out risks and selecting the appropriate insurance cover
Pharmaceutical companies will have to map out the relevant risks they may be subject to, depending on the markets and segments they operate in, to then identify which insurance covers would provide the requisite financial coverage in different crisis scenarios. For example, in cases where a Class I recall has been mandated by a relevant governmental regulatory body, a Product Recall Insurance cover would help the affected company in covering costs incurred on transport, warehousing, manpower, public relations, advertising, restoring, and redistributing the product.

Although a commercial general liability insurance is a contractual requirement for most export-oriented manufacturing companies, it is highly advisable to extend it to cover products and complete operations.

In scenarios where there is a risk of third-party bodily injury due to business activities, operations, and premises damage due to products manufactured by the company itself or by a sub-contractor at the latter's premises, a product liability insurance cover would be most suited. Under this cover, claims arising out of damages, supplementary payments such as for investigations and even medical expenses can also be submitted.

To safeguard against major contamination incidents, occurring either accidentally or due to malicious intent, a contaminated product insurance policy would be ideal to protect the company against the associated financial impact. Additionally, it isn’t uncommon to hear of company servers being attacked and data being stolen, resulting in mounting expenses on account of civil fines, ransom money, loss of profit, and legal costs. To protect against these cyber risks, companies would do well to take a cyber insurance policy and team it with a crime insurance policy that will indemnify them against direct financial loss due to employee or third-party fraud. Other options include warranties and indemnity insurance policy to protect against warranty claims and an environmental impairment liability insurance to protect against pollution incidents related to the manufacturing process.

For multi-national pharmaceutical companies or those supplying to international firms or markets, a Global Risk Cover programme can offer ample protection from the above discussed risks, ensuring business is not affected on account of the associated financial expenses. It is very critical for every business to establish a relationship of trust and dependability with their insurance broker and provider.

Moreover, since the key to risk mitigation is to identify the right insurance solutions to suffice every complex exposure, insurance brokers are better positioned to advise on the risks involved in conducting business or setting up operations overseas. For Indian pharmaceutical companies that have only just begun to spread their wings with the intention to tap into the $1 trillion global pharmaceutical industry, the benefits of a comprehensive insurance cover far outweigh the cost of additional premium and provide a vital safety net in times of need.

(Author is with Liability & Specialty Risk, Howden Insurance Brokers India Private Limited)


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