Background
Next year, I will have been qualified as a barrister for 30 years, and specialising in legal practices in the life sciences sector for 24 years. Yet only a few months ago, during a typical negotiation for contract research, I came across a subject on which I had not previously advised, or not, at least, given a great deal of thought: the subject of insurance. Business insurance, to give it a generic reference, is a client matter not a legal matter, or so I had always told myself. It began with the usual trite old squabbling over risk limitations, indemnities, and super caps: super caps, incidentally, are limitations reserved for certain events, but are set with higher cap levels than other limitations.
Unlike exclusions, limitations only work to limit a party’s liability, and may be capped at the fee level, often as multiples of a specified fee: x1, x3, and x5 are commonplace, though they may extend to the insurance level of cover held by a party. Frequently, limitations are used in a combination of the greater or lesser value of the two levels. It goes without saying that no party should accept an unlimited liability or a limitation of liability that goes beyond the insurance level of its cover, especially if the limitation is given in the context of an indemnity: security given by a party for losses suffered by the other party.
The phrase ‘defend, indemnify and hold harmless’, is also commonplace. The term ‘defend’ relates to claims made by third parties: it would be absurd for an indemnifying party to defend an indemnified party against its own claim, and will oblige the indemnifying party to take action to defend claims and pay resulting damages or settlement. The term does not operate as an indemnity, and may be to the detriment of the indemnified party. The term ‘hold harmless’ is to absolve a party from responsibility for liability arising from a transaction, and can operate to exclude liability altogether, and may be to the detriment of the indemnifying party.
During my negotiation, an unlimited indemnity was introduced, though without the added wording, intended as a supposed compromise for extremely low caps agreed, on an indemnity basis, regarding certain other liabilities arising. The unlimited indemnity was to apply solely in relation to liabilities arising for breach of confidentiality and infringement of third party intellectual property (IP): standard stuff. It was clear a super cap was around the corner. The unlimited indemnity was, of course, a red line and quickly dispatched, and morphed into the predicted super cap at the insurance level, on an indemnity basis: a natural next step down, but it too withered, in favour of a (not so super) cap at the fee level, on an indemnity basis: so what happened?
At the super cap stage, it became necessary to consider the insurance held by the client, and so the lid to a Pandora’s box was opened. I cannot say why it occurred to me to request sight of the policy: I had never done so before, and like I say, not a legal matter. There was in place a standard package of insurance tailored, albeit somewhat loosely, for a start-up in the life sciences sector: apart from cover in respect of life sciences property (lab equipment and animals) and clinical trials, the policy could just as easily have applied to any business in any sector. The range of insurances chosen from the package included, among the usual covers, professional indemnity. With GBP 1,000,000.00 worth of cover worldwide, the package was nice on the outside but quite useless in the circumstances.
The first unexpected trouble out of the box was contractual, and a surprise to me: a general exclusion of cover for claims regarding, among others, any actual or alleged liability under any oral or written contract or agreement, including but not limited to express warranties or guarantees, which necessarily included indemnities: ouch! The second unwelcomed trouble lay hidden at the back, under professional indemnity, namely cover in respect of any claim in relation to any act, error or omission committed by the client in the rendering of professional services, which means negligence, but excluding protection against alleged or actual infringement of any IP rights, save for any unintentional breach of confidentiality: again ouch!
Business insurance
Business insurance is a predictive, cost effective means of transferring risk from a business to an insurer: it is often borne from a requirement to insure, whether that requirement is legal/regulatory, contractual or third-party. The extent of the requirement depends upon the business: the greater the risk to a business the more there is a requirement for insurance, and vice versa. Enhancement of the business will often be a trigger for more insurance, and premiums become a direct consequence of the various underlying exposures faced by the business. In terms of its insurance, the balance for any business should be to keep the insurance and premiums commensurate with the exposures, not way out in front and not playing catch up.
Packaged insurance is intended to be all-inclusive, but as with packaged holidays, it is never quite as nice as the brochure says it is, with covers for most bases, but not all, and the devil is in the detail. In the case of the client, its insurance was taken out some 9 years earlier: it has not outgrown its current package, which remains useful, but it became necessary to consider other insurance: plug the rather gaping hole. Several other policy considerations later, I discovered that top-up or bolt-on cover for third party IP and contractual claims is almost impossible to come by, at least for a premium that is affordable. By chance, on the 12th May, I joined a JLABS (Johnson & Johnson) Insurance and Benefits webinar, and I asked a few questions around insurance cover for third party IP and contractual claims.
According to Kevin Mirsky of the Marsh & McLennan Agency, serving the risk prevention and insurance needs of middle market companies of America, despite IP often being heralded as the top prize in the life sciences, certainly at the start-up stage there was no meaningful solution of IP insurance. Apparently, this was fundamentally due to the unquantifiable risk associated with IP valuation, and the consequential loss due to infringement. The lack of a solution was also due, in part, to the business tactic, common down Silicon Valley way, of using IP insurance (it does exist for a certain type of client) as a litigation tool to stymie growth. Thus, there was a vicious circle: for insurers to be profitable, and not over expose themselves to unquantifiable risk, the premiums are deliberately set high, in an off-putting sort of way, which means very few start-ups can afford to purchase third party IP insurance.
The explanation for a lack of insurance regarding contractual claims was different, but made sense: it says the availability of such insurance would represent a moral hazard to insurers in that, should the urge take a party, it would prove a temptation to purposely breach an obligation, in the knowledge that an insurer would pick up the tab. Whereas I like the idea that insurers would look out for the moral well-being of their clients, and the justification that insurance is founded on the premise of there being an unanticipated event is surely a reasonable one, as otherwise the whole viability of insurance would collapse, that does cause an issue in that contractual claims often hold hands with claims in negligence, regardless of the written word.
Conclusion
Some pretty fundamental gaps have now appeared on my radar: in all my years, it never occurred to me to carry out an assessment of the insurance risks, but only the legal risks. After almost 30 years in the job, I have learned to query a party’s business insurance, so that it may be legitimately married to that party’s liability in a given transaction. My examination does not need to include my client and should take account of all parties, nor does it need to be forensic: just enough to set the alarm bells ringing.
Fishing around forever looking for affordable, appropriate insurance is not my client’s priority, especially given other issues affecting business insurance in the COVID-19 era. It is necessary, therefore, in order to limit risk that: (1) the insurance is reviewed at some point; (2) caps on liability, especially indemnities, are put in place; (3) indemnities on liabilities that are not covered by insurance (such as third party IP and contractual claims) are removed; and (4) any provision declaring valid insurance for claims arising under an agreement are removed in the event no such insurance, in fact, exists.