Pharmaceutical companies are increasingly the target of securities litigation, making it a difficult risk to insure, but the market is generally still very favorable for buyers seeking product liability coverage.

Six years ago, the key exposure for pharmaceutical companies was “failure to warn” claims, meaning the company’s product labeling did not reflect the risks that existed, said John Connolly, North American practice leader of life science and pharmaceuticals for Willis Towers Watson P.L.C. based in Radnor, Pennsylvania.

However, a 2011 U.S. Supreme Court decision that generic drug manufacturers could not be sued for failing to warn as long as their labels followed the brand-name version led several insurers to enter the space because the ruling made it difficult to sue under that product liability claim, Mr. Connolly said.

Large pharmaceutical and biotech companies generally self-insure the risk, but the market remains “very buyerfriendly” for firms wanting coverage with numerous primary insurer options, including Chubb Ltd., CNA Financial Corp. and W.R. Berkley Corp., and flat to lower pricing, he said.

However, a small number of costly catastrophic claims define the product liability market. For example, Merck & Co.’s pain killer Vioxx, which was pulled from the market in 2004 because of increased heart attack and stroke risks, led to nearly $5 billion in product liability lawsuit settlements and $830 million to settle a federal class action lawsuit by shareholders.

Insurers are concerned about a spike in securities-related litigation claims against pharmaceutical companies, brokers say.

These lawsuits generally revolve around milestone events such as clinical trials or drug approvals that make insurers nervous, Mr. Connolly said.

“When these events happen and the news isn’t positive, the plaintiffs bar tends to sue on behalf of shareholders,” he said.

“On the converse, they are suits that are very easy to foresee and defend with strong corporate governance. What you see in the D&O market is a large volume of claims against these companies, but very few of them go as far as costing a lot of money, because for the most part they are defensible.” 

The primary directors and officers layer for a public life science company “is hairy because there are a lot of claims, but the excess D&O is often very good to write because most claims don’t generate enough damages to hit the excess layers,” he said.