Prepare a Risk Management Plan Now, Avoid Juries Later

How to identify, solve potential liability exposures

Michael Cremeans
Britton-Gallagher & Associates

“How do I anticipate risks, what are my options, and how can I integrate these considerations into my long-term strategic plans?”

Whether you’re an OEM of an orthopedic implant or a contract manufacturer of surgical tools, you are no stranger to risks in your business. Some examples include lawsuits brought on behalf of patients who believe they were injured by your product, “wrongful employment practices” such as allegations of discrimination or harassment and loss of valuable “time to market” due to a loss of physical property.

For example, if you suffer a physical property loss, you may find that it’s relatively easy to transfer operations to another site, but the ongoing costs of keeping employees while recovering lost revenue can cripple a company if you’re not careful. Standard property insurance may not pay for lost income or ongoing expenses between the time you are ready to produce and when the FDA gives you clearance to do so.

The one major risk that seems to keep most CEOs up at night is the threat of a product liability lawsuit—and with good reason. No matter how meticulously you design the product and follow all regulatory guidelines, an allegation of injury can still be filed against you in a lawsuit, and you must be able to defend yourself.

For many companies, managing the potential for product liability lawsuits has historically been a low priority. However, if you are going to spend time, effort and money on regulatory and other compliance, doesn’t it make sense to apply the same diligence into preparing a risk management plan?

This article is intended to simplify the process of identifying potential liability exposures and what to do about it.

Contractual Obligations

Here is where you first get exposed to indemnification and liability. I have reviewed many contracts stipulating that one or both parties will indemnify each other for “any and all losses or costs associated with the product or service provided.” Those are pretty strong words.

You probably know that insurance will never pay for “any and all” claims, and you will have to assume certain risks. This is especially true when it comes to allegations against you for infringement of intellectual property rights—these are specifically excluded under most policies.

You’ll find that “general liability” policies cover liability for premises, products and property damage and have some coverage for “contractual liability” exposures. Most general liability polices consider the term “insured contract” to include that “part of any other contract or agreement pertaining to your business … under which you assume the tort liability of another party to pay for ‘bodily injury’ or ‘property damage’ to a third party or organization. Tort liability means a liability that would be imposed by law in the absence of any contract or agreement.”

Under the insurance section, it’s probably a good idea to get a clear understanding of exactly what the other party means by “contractual liability.” You need to review the language of most (if not all) contractual obligations and confirm with the insurance carrier that the contract is an insured contract.

Noncontributory or primary means that your policy would cover your customers first before their policy would respond. Additional insured means your customer asks to get certain rights under your insurance policy. (If possible, you should consider offering the most restrictive coverage grant, thus reducing the chances that your policy would respond).

Note: under general liability policies, the insurer agrees to pay sums that you become legally obligated to pay as damages, and probably provides the right and duty to defend yourself against any suit seeking those damages.

This duty-to-defend provision does not automatically apply to contractually assumed defense costs, so you must be careful about how the policy will respond to the claim.

Distributor/Sales Rep Liability

An important trend in medical product litigation is increased scrutiny of distribution activities, especially when a manufacturer uses independent representatives to sell its products.

Most medical device lawsuits are “failure to warn” cases, and if litigation ensues, the plaintiff’s attorney is sure to discover a distributor or sales representative’s involvement. Then the fight begins.

These days, plaintiff attorneys are looking more closely at how companies market their products and then attempting to use those marketing efforts to prove liability.

How far will an OEM go to defend its independent sales force or distributor? Should the distributor purchase its own insurance policy?

The distributor or reps may be forced to defend themselves if an OEM alleges “sole negligence,” which means the claim for damages was a result of the rep’s activity alone—perhaps an off-label recommendation not allowed by the manufacturer (see sidebar on p. 46).

Poor Documentation

“There seems to be an innate need in all of us to document what we do for all types of reasons—to demonstrate our work, our professionalism and our diligence to fulfill a legal need,” said Tim Budacki of Budacki Risk Management in Pittsburgh, PA.

He added that, although government requirements create a climate in which considerable rigor is expected regarding proper documentation, the systems used by manufacturers are intended to comply with FDA rules and regulations. “They are not intended to deal with the risk management and legal aspects of document control,” Budacki noted.

He also said failure by medical device manufacturers to implement a well-documented Quality Management System that includes risk management could lead to big problems with juries.

When a regulatory sanction is levied, the information is posted on the FDA’s Web site and is available through The Freedom of Information Act. “Frequently, regulatory sanctions are followed with plaintiff lawsuits using FDA findings,” Budacki explained.

Central to product liability litigation is the ability of a company to prove that it makes a safe product.

Proof of product safety begins with design.

Related documents must be able to demonstrate that safety was a key issue when the product was designed. Since lawsuits most often occur years after the product was designed, the quality of the design files is critical.

Further, the people who create these files likely will have moved on to other positions, other companies or retired when the files are used in a lawsuit.

The files must be able to stand on their own merits when called into a lawsuit.

The Plaintiff

The plaintiff’s cause of action against a manufacturer typically alleges one of the following:

• Manufacturing Defects in which the product departed from its intended design and is physically flawed, damaged or incorrectly assembled.

• Design Defects due to foreseeable risks that could have been reduced by the adoption of a reasonable alternative design (ie, this omission created an unsafe product).

• Defective Design due to nonconformance with state-of-the-art design development or the allegation that alternative technologically feasible and practical designs were not used, resulting in an unsafe product.

• Defects in Warnings because foreseeable risks in the use of the product could have been reduced at the design stage by providing reasonable warnings and instructions, and the omission of these warnings and instructions rendered the product unsafe.

Malpractice Tort Reform

Currently, 48 states have introduced more than 400 tort reform bills, and I believe approximately 29 states have passed over 50 bills.

A federal bill has been passed by the House of Representatives, but many say it is unlikely to pass the Senate anytime soon.

These new laws put caps on both economic and noneconomic damages, and expressions of sympathy are usually not admissible.

Medical device insurance carriers are very concerned about being dragged into lawsuits in which plaintiffs don’t receive the compensation they want and it is alleged that the liability actually exists with the device itself. Here’s a clue: if the insurance carrier is concerned, then you need to be as well.

What You Can Do

First, you need to control what you reasonably can. Work exceptionally hard on reducing potential risks by identifying shortfalls in your risk management programs. If you are looking for a competitive edge in the market, consider forming a risk management team. This team usually includes your CEO or CFO, quality control manager, attorney and insurance broker or risk manager.

Insurance Market

In the realm of orthopedics, you have several choices. Specialty insurance carriers (those with specific policies for medical device exposures) provide more than just policies. You need to take advantage of the value-added services they offer, including loss control and risk avoidance advice. Other examples of services include:

•  Web-based risk control product offerings (this may include on-line training, white paper discussions or specific loss control tips and other practical guidelines)

•  Benchmarking services  

•  Personalized risk management reports based on interviews done by insurance employees

•  Guidance for establishing internal and external litigation teams

If you are not interested in these kinds of comprehensive services (many of which are automatically included with the premium), you can access the “excess and surplus lines market.” Start-up companies may find the “excess market” more attractive because it offers lower minimum premiums; however, the rate per thousand of sales (a portion of the method used to determine final premium) will likely be substantially higher.  If you are on a fast-track growth pattern, you’ll quickly outgrow these markets and an insurance carrier assessment will be in order.  Specialty companies require the completion of a more detailed application for coverage. Don’t be intimidated by the length of these applications, and use them to your advantage! They give very clear insight into what you should strive for regarding quality systems, document control, product safety and other important standard procedures. If you want to be a “world class risk” in the eyes of the insurance market, it only makes sense to start planning for it! My advice is to have your insurance professional match your company’s risk tolerance as well as strategic and financial goals to the insurance carrier that meets those needs. While that may seem obvious, experienced brokers can identify the appropriate insurance carrier very quickly.

Back to the Contracts

Have your insurance professional match contractual requirements with the insurance in place to avoid future misunderstandings. Although insurance will never pay for “any and all” losses, specialty insurers are more likely to consider adjustments you need to stay in compliance. And here’s another tip: just because you require the other party to treat your information as confidential, make sure a specific procedure is in place to prove compliance! Trust, but verify.

Conclusion

Take the time to ask lots of questions when it comes to assessing product liability risk. A little risk management planning will reduce your liability, improve your competitive position in the market and ultimately save you significant dollars.

Michael Cremeans is a senior vice president and principal at Britton-Gallagher & Associates, Cleveland, OH. He has published several articles on risk management and insurance for orthopedic and other medical device companies. He can be reached at (800) 607-4711 ext. 2703 or [email protected].