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What Type of Specialized Insurance Do Life Science Companies Need?

Jordon Dyrdahl-Roberts
Journalist
Matt Miller
Life Sciences Underwriter

During the public health emergency spawned by COVID, the government eased healthcare regulations, and health insurance and life science companies altered their policies to accommodate the new realities of life in a pandemic. Since then, the use of telehealth has surged, which was a vital step in maintaining continuity of care as well as limiting the exposure of both doctors and patients.

Life sciences is a rapidly growing field and shows no signs of slowing down. In 2020, the estimated market size for companies offering life science analytics was $7.7 billion. By the end of 2021, it's expected to reach $8.3 billion. Some health and wellness startups have seen massive growth over the last three years, including a couple of companies with more than 3,000% revenue increases.

Startups have pushed forward into new territory to overcome challenges presented by the pandemic, and investors continue to see the value in companies offering digital health services. However, operating on the cutting edge comes with many risks. Handling sensitive client data, offering medical advice, testing new drugs, or developing new treatments all expose you to massive liability. These conditions present unique risks for the life science industry, which require unique insurance coverage tailored to the company. Below, we discuss common questions for life science startups on mitigating their largest risks.

What specific types of business insurance do life science and digital health companies need that other tech companies do not?

The nature of the industry means that your business insurance policies will look different from that of a software as a service (SaaS) company specializing in cloud storage, for example.

When a SaaS company's products or services are disrupted by servers crashing or a ransomware attack, information isn't lost if they have proper procedures for backing up their data. It's still there. But you can't "back up" unique biological samples or vials of experimental medicine. A life science company's most critical assets can be perishable property. In that case, a malfunction that causes loss of power to refrigerators or freezers can be quite devastating for those companies.

The COVID vaccine storage requirements have shown how minor human errors can lead to huge losses. If your company has perishable property, change in controlled environment coverage is a must-have type of insurance coverage.

Similarly, if your products are susceptible to contamination by radiation, bacteria, mildew, mold, microorganisms, viruses, or pathogens, then you'll need to have specialized contamination coverage.

Companies using animals for research and development, breeding, or biological product harvesting need vivarium coverage to insure their scientific animals.

Another type of insurance that's unique to life science companies is condemnation of undamaged stock insurance. Certain events may occur that don't directly damage something like a pharmaceutical product. However, the FDA considers it compromised and condemns it.

For example, imagine that a warehouse has a small fire. It was put out right away, but smoke from that fire escaped and set off the sprinklers in the whole warehouse. Your product is still sealed and entirely functional, but the FDA declares it unusable. If water had breached the packaging and damaged your product, you could use your business property insurance to cover the costs. However, you need specialized insurance to recoup the costs of potentially functional stock condemned by the government.

Why aren't the needs of life science companies covered by something like general liability or errors and omissions insurance?

Because every life science insurance company has a variety of products or services they provide, there isn't a one size fits all “life science insurance coverage.” You may also have additional unique insurance requirements. However, your standard policies can be expanded to encompass your startup’s specific needs. If you only purchase a basic general liability or errors and omissions insurance, you will have coverage, but it likely will not be the right coverage. It is analogous to how a standard homeowners insurance policy doesn't cover flood damage, and a separate policy for that must be purchased.

For example, it’s necessary to have insurance coverage for clinical trials. If your general liability policy doesn't cover clinical trials, you more than likely won't be able to run your trial. Additionally, if a digital health company is giving medical advice, it creates some medical malpractice exposure, and there would be a need for malpractice insurance.

How highly regulated are life science and biotech industries?

Every tech company faces risks. However, there's an added layer of risk for life science companies in the heavily regulated health industry. In part, because of the decentralization of healthcare and the growth in the industry, companies with personal healthcare information (PHI) are facing increased cyberattacks.

In 2020, ransomware attacks on life science and healthcare organizations increased by 123%. If your servers contain medical information, it presents a pretty significant cyber risk given the max potential for ransom or attacks. That data makes a tempting target for hackers. Cyber insurance can help startups to weather the litigation and fines resulting from a data breach. If client data is compromised, you not only face a loss of customer trust but possible federal regulatory issues because of a lack of HIPAA compliance standards.

The Federal Trade Commission recently released a policy statement, putting health care apps on notice regarding the security and privacy of PHI. Companies must report data breaches and unauthorized sharing of data to consumers immediately. Otherwise, they face a $43,792 fine per violation per day.

A breach can cost millions between settlement costs and monetary penalties, especially if the government determines that you didn't implement sufficient cyber security measures. If a hacker steals clients' credit card numbers, that's terrible. But holding on to personal medical history puts you in a different tier of risk that requires specialized insurance.

While restrictions on life science companies eased at the height of the public health emergency, the future of those restrictions is uncertain and will have more state-to-state variation. Given those changes, it will be increasingly easy to find yourself outside of compliance with government regulation.

But while the regulatory intensity in the industry makes insurance needs greater, there are some advantages. Government certification approvals can ensure that the controls are in place to protect your business. It can cause headaches, but it's generally necessary, and it can sometimes be beneficial from an insurance point of view. Many of these certification approvals give us the information we need to evaluate the risks of these companies.

Are there any life science startups that Vouch can't insure? Can Vouch help connect these companies to the right insurer?

If Vouch doesn't offer your company the insurance protection you need, they can help you find the right coverage for you. However, as markets shift and change, Vouch will continue expanding their product offerings with clients’ needs being top of mind.

What should a life science company look for in their business insurance policies? Are there any exclusions that could affect them?

Each individual insurance policy comes with specific exclusions and coverage limitations, as is standard in the insurance industry. Policies like condemnation of undamaged stock insurance are meant to fill in the gaps where common exclusions exist. Most standard policies exclude something such as when your product is recalled or withdrawn from the market.

Standard General Liability insurance doesn't cover personal injuries arising out of clinical trials. There can be exclusions in Directors and Officers insurance that can become quite costly for a life science company. For example, it's not uncommon for investors to sue a board of directors if a clinical trial fails. The best solution is to find a carrier like Vouch that understands the space innovators are operating in.

What does Vouch do differently, and how does Vouch cater its policies specifically to digital health or life science companies?

Vouch develops unique products crafted for startup innovators. As Vouch’s startup clients grow, Vouch grows its capabilities with them and continues to identify the needs of the industries they serve. In the process, Vouch develops more products that better fit life science startups.

To avoid common insurance pitfalls, companies can do an internal audit to review what risks they feel they're facing and then speak to an Insurance Advisor. These advisors can help identify client coverage needs and recommend policies. They act as caretakers for protecting a company's founders and the company as a whole. Vouch can help you craft a policy that matches your needs and protects your business from the unique risks a life science company faces.

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January 9, 2022
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