As has been the trend in prior years, life sciences companies have seen a greater number of securities class action lawsuits than those in other industries. In 2015, of the 191 total class action lawsuits, 39 of them involved companies in the life sciences sector. No other sector experienced anywhere near this number of securities class action lawsuit flings.
There are several reasons for the high number of securities suit filings against life sciences and the frequency and severity of these lawsuits have important insurance implications, specifically with directors and officers (D&O) coverage.
Why Life Sciences Sector Has More Securities Suit Filings
Life sciences companies, by contrast to companies in other sectors, are more likely to get hit with industry-specific securities class action lawsuit allegations, as opposed to more general finance and accounting-related allegations in securities suits filed against companies in other sectors.
The kinds of allegations life sciences companies face include those relating to regulatory approvals and the timing and progress of clinical trials, as well as product safety, efficacy and manufacturing.
According to the Dechert law firm report, approximately 56% of the 2014 securities suits against life sciences companies involved these types of industry specific allegations, while claims of inaccurate financial reports/accounting improprieties were asserted in 44% of the 2014 life sciences securities suits.
The Impact on Insurance For Life Sciences Companies
In 2016, as a result of the ongoing heightened securities suit frequency in the life sciences sector, insurance underwriters continue to be concerned. Life sciences companies engaged in D & O insurance transactions are likely to experience a split between their primary and excess D & O coverage.
The market for excess D&O insurance for life sciences companies, by contrast to the market for primary D&O insurance, is different, due to abundance of excess capacity. As a result, rates for higher level excess and for excess Side A/DIC insurance declined in 2015. However, excess rates may already be at a minimum, and it is possible that rates will inevitably bottom out in 2016 as excess insurers are closely assessing the risk assumed for the premiums collected.
What this Means for Life Sciences Companies
Life sciences companies are facing a very challenging directors and officers market, specifically in trying to secure the levels of coverage necessary to address litigation claims at or below what they have been historically paying per million in coverage.
The specific experience of any life sciences company is dependent on its unique characteristics, as the primary premium levels are increasingly driven by their distinct risk profiles and market capitalization.
In particular, companies with complex securities litigation, ongoing investigations, or that are approaching commercialization or an IPO (particularly one-product biopharmaceutical companies conducting later stage clinical trials) may experience firmer primary pricing.
What Can Life Sciences Companies Do?
We are seeing fewer players for the primary layers of coverage with rates continuing to increase and retention levels continuing to rise. While there have recently been some new insurance carriers entering the space, their impact has yet to be seen.
While there may be a tendency to entertain these options, prudence is the word for the day. Life sciences companies should look to partner with tried and true insurance advisors and carriers as a wise strategy to navigate through the challenging market. Advisors should have experience in assisting clients in negotiating with carriers, designing state of the art coverage language and extremely strong in claims advocacy. Carriers should be experienced in underwriting the sector, claims paying ability, financial strength, and stability along with a strong commitment to the sector.
A portion of this article originally appeared in the post, “ Securities Suit Frequency Means Challenging D&O Insurance Market for Life Sciences Companies” on The D & O Diaries. The D & O Diaries is written by Kevin M. LaCroix, an attorney and Executive Vice President, RT ProExec, a division of R-T Specialty, LLC. RT ProExec is an insurance intermediary focused exclusively on management liability issues.
About the author Bruce Ball, Chairman, Britton Gallagher
Bruce brings his substantial insurance expertise to Britton Gallagher’s leadership team and is the producer council member for major Life Sciences underwriters. He is an expert at creating solutions for clients with difficult coverage.
Bruce is a driving force behind Britton Gallagher’s Life Sciences unit. He’s a subject-matter expert in this niche with extensive insurance industry experience. He is a client-focused, dedicated professional who has helped establish this niche as a critical business division at the firm.