Biotechnology companies and organisations display distinctive features and, from an insurance perspective, uncommon risks. Quite apart from liability risks associated with the testing of investigational drugs, biotech companies are faced with some unique exposures that could delay development, and possibly, the achievement of milestones. Such delays could hamper the ability of the company to raise additional funds and therefore its ability to continue as a going concern. These exposures stem from the physical assets of the company, which could consist of buildings, equipment, compounds and consumables, and products in development. Traditional insurance markets are cautious and tend to shy away from providing cover for some of the risks associated with these assets, however, there are specialist insurers offering protection specifically designed for companies operating in this space. Below is a summary of four key exposure areas where cover is not generally available under standard insurance products. 1. Basis of Valuation on Research Materials Many property insurance policies are unclear on how they will respond to a loss of materials which do not have a market value and are not easily replaced. The definition of contents or stock may be ambiguous in relation to, for example, samples, consumables, and documents & electronic data, and the basis of valuation applied in the event of a loss may not be appropriate. To ascertain the level of cover being provided, the definition of property (contents or stock) should be broad enough to cover the items at risk, and the amount payable in the event of loss should cover the cost to reinstate or reproduce the materials, including materials and labour. Where your compounds are climate sensitive, you should investigate whether cover is being provided, or available for losses as a result of a change in climate beyond the stability profile of the materials. 2. Supply Chain Partners Many biotechs rely on third party suppliers to progress the research and development of products and therefore may have property at risk at premises located around the world. While there may be protection under the contracts and/or agreements with CRO's, CMO's, providers of storage facilities, trial sites etc, if there was a loss, it may be necessary to prove negligence on the part of the supplier responsible for your goods. Furthermore, where a third party has agreed to provide insurance coverage, you would be reliant on their ability to recover from the insurer in a timely manner. Another consideration is whether the third party will cover the full recreation costs (as discussed in point one) and whether any resultant business and/or financial implications caused by the loss of the materials is covered. To avoid these issues, it is recommended that biotechs protect their own goods, taking out separate cover over and above what may be provided by the third party supplier, to ensure control and certainty of the cover in place. This way, any loss is first covered by your own insurer, who can then seek recovery from any responsible third parties. This may also protect your commercial relationship with suppliers, reducing the potential for disputes. 3. Transit Risk Any materials being transported - be it from storage to manufacturing sites, onto packaging/labelling locations, or finally onto trial sites for testing - are at constant risk of damage. Furthermore, at each step in the process, the cost to replace these items may increase. Similar to third party suppliers, relying on the carrier terms and conditions or the insurance they arrange may not provide adequate protection. Disputes may arise surrounding the carrier's legal liability or the value to be compensated. This risk is heightened where materials require special transport conditions, such as a set temperature environment and/or timeframe for delivery. Maintaining your own insurance policy covering goods in transit will help ensure you are adequately covered in the event of an incident, and that you are compensated in full for any loss or damage. If a claim were to occur, the basis of settlement should cover the full cost of replacement (see point one) and, where your materials require a controlled environment, cover spoilage caused by temperature variation as a result of, for example, incorrect packaging or delay. 4. Business Interruption Perhaps the biggest risk to a biotech's survival is its ability to raise additional capital. As touched upon, any disruption to the development process due to physical loss or damage would hinder the company's progression towards its next milestone, while continuing to incur operating expenses. Traditional business interruption insurance will cover the loss of profit (or increase in expenses) for an agreed period of time resulting from interruption or interference with the business following insured damage to a physical asset. The obvious issue for a Biotech company is that there is generally little to no revenue to begin with, and there may not be an increase in expenses, so no protection is afforded. For this area, it is recommended biotechs investigate tailored insurance products that are able to protect the company on a first loss basis (meaning cover is available up to the sum insured without under-insurance or average being applied) for the outgoings of the business for the period the research and development activities are interrupted (subject to indemnity periods and the sum insured). This way, a company can recommence progression of research & development from the same (cash) position it was at, prior to the loss occurring. Cover is available following loss or damage to assets at the Insured's own premises, at the premises of a supply chain partner, or interruption as a result of damage to materials in transit. Biotech professional should carefully examine their overall risk profile and, where insurance is chosen as a risk management tool, ensure that the coverage being provided is suitable and matches the intent for which it was purchased. To obtain adequate protection, your insurance provider should have a solid understanding of the markets and products available to cover the unique nature of life science businesses.
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