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The business of mass tort product liability claims: the death of insurance?

Posted on 25 November 2019

In recent years we have witnessed a startling growth in US mass tort product liability claims, both in terms of the number of lawsuits filed and in terms of the scale of damages awarded. Just ten years ago the life sciences and pharmaceutical sector had a sizeable pool from which to purchase its product liability insurance cover. As a result of the rising tide of claims the insurance landscape is now very different and the pool has shrunk, leaving many companies in this sector without affordable insurance.

Take the claims filed against Johnson & Johnson, alleging that its baby powder was contaminated with asbestos and that the company knew the contamination since the 1970s but did not act on it. It has been reported that the onslaught of litigation, which began in just 2016, had snowballed by December 2018 into an estimated 12,000 talc-related claims, with compensation payments reaching close to US$20 billion. Adverse verdicts in plaintiff-friendly 'judicial hellholes' meant that a further US$45 billion was wiped from the company's market value.

But Johnson & Johnson were not just fighting one fire. In October 2019, The New York Times reported that the company had settled pelvic mesh claims for US$117 million with attorney generals from 41 states and the District of Columbia. Johnson & Johnson are not alone. Pelvic mesh claims rank as one of the biggest pieces of mass tort litigation in the US in recent years. Several device manufacturers are reported as having paid in the region of $8 billion (so far) to resolve claims by more than 100,000 women.

New claims are still coming in. Whilst at this stage it is too early to tell, the pharmaceutical sector's exposure to opioid-related claims has been estimated to range from anywhere between $US50 billion to US$800 billion. One thing is undeniable, the numbers are colossal. To give this some perspective, total insured losses over the last 50 years resulting from the asbestos crisis are thought to be in the region of US$100 billion.

Without doubt, in recent years insurers and insureds have felt the effects of US jury verdicts. The insurance terms now offered to major players in the life sciences and pharmaceuticals sector with US exposures offers no real protection with wide-ranging exclusions, significant self-insured retentions and limited levels of liability commonplace. Premiums are sky-high yet at the same time the scope of cover has diminished. The insurance is no longer viewed as fit for purpose.

The lack of commercially viable product liability insurance cover has already resulted in some industry heavyweights deciding not to buy product liability insurance because when the big claims hit, the insurance fails to pay out. Insureds are increasingly choosing to self-insure through captives. Yet at the same time they are facing the very real and growing risk that even one product in their portfolio could undo everything by giving rise to existential losses.

Without adequate cover, companies forced to adopt this 'bet the company' style approach to risk and insurance will need to be ever more cautious about investment in R&D, which in turn means that innovation and production of life-saving medicines and healthcare products could be severely stunted.

This should be considered as a market failure because, despite the thousands of claims which continue to be filed against products manufacturers, millions of people globally continue to benefit from the products that these companies have produced.

The need for innovation within the insurance industry has never been greater.

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