Doom or boom?

It was a Monday afternoon in an ordinary hospital in an otherwise unremarkable part of north-west London. Yet, within hours of entering Northwick Park Hospital last month, six people were rushed to intensive care after taking part in the first human trials of a new anti-inflammatory drug manufactured by German pharmaceutical company TeGenero. Such was the severity of the reaction felt by the participants in the clinical trial that, according to trial volunteer Raste Khan: "some screamed out that their heads felt like they were going to explode."

As Professional Broking went to press, Scotland Yard said that its officers were talking to the Medicines and Healthcare Products Regulatory Agency and doctors, in an attempt to find out why this appalling error had occurred. The Medicines and Healthcare Products Regulatory Agency itself is looking at whether the reaction was caused by a manufacturing problem, contamination, a dosing error, or whether it was some "completely unanticipated side-effect of the drug in humans".

The six men were all healthy volunteers participating in the first stage of human trials of the drug, to establish whether there were any adverse side effects associated with it before it was tested on people suffering from the conditions it is designed to treat. However, after the first day of the drug trial all six men became seriously ill, including suffering from organ failure. Two other men who had been given placebos were unaffected.

What this incident highlights is the continuing vulnerability that humans can face when confronted with certain products, and serves as a pertinent and chilling remainder of the continuing importance of the product liability insurance market. The research unit where the trials were conducted in this instance is run by the US company Parexel, which contracts with various drug companies to recruit patients and run trials for its products. Although the company has so far not disclosed its insurance arrangements, the possibility of some form of compensation certainly lingers, given that an investigation is ongoing.

History of prosecutions

There is a long history of prosecutions in the UK regarding liability for pharmaceutical products. According to law firm Leigh Day and Company, which has successfully obtained compensation for several individuals injured in drug trials, the entitlement to compensation of those injured in drug trials is covered by guidelines issued by the Association of the British Pharmaceutical Industry. In the opinion of Leigh Day and Company's senior partner Martyn Day: "it will be important to confirm that those sponsoring the trial signed up to the ABPI guidelines, so that those people injured by the trials are compensated fairly and quickly rather being forced through an arduous court process."

Of course, although pharmaceutical product liability cases tend to be the ones that make the headlines, the market is actually much wider than that. According to the Association of British Insurers the Consumer Protection Act 1987 makes it a criminal offence to supply unsafe consumer goods, and the potential for a company to be held liable is actually very great. Therefore, if a company makes, repairs or sells products, it could be held legally liable for damage or injury arising from defects in their design or manufacture even if it has not been negligent. Product liability insurance covers a business in these circumstances up to a maximum amount each year.

Despite the current legislation leaving companies vulnerable to product liability claims, and leaving aside some of the more high-profile incidents in recent years, such as the furore over the banning of the food additive Sudan 1, this class of business has not actually been an especially problematic one for underwriters, according to Craig Bennett, underwriter at Lloyd's syndicate DA Constable 386, one of the leading insurers in this field.

"It's not especially specialist," he comments. "Most insurers provide liability cover in some way, shape or form and product liability tends to be underwritten on its merits and rated on turnover. It's been a good class for underwriters generally. The biggest change in recent years was after the thalidomide drug, when some of the pharmaceutical losses were horrendous. So, the class was changed, meaning that underwriters tended to aggregate limits of indemnity as they said they were no longer an open chequebook. Since then there has been much more controlled underwriting."

He says that most UK insurers that write product liability insurance are also extremely cautious when it comes to the areas they will cover, especially when it comes to US exposures because of the litigious climate that exists stateside.

Reasons for change

Although UK underwriters have managed to contain their losses from product liability claims, concerns have been raised in some quarters that the relatively comfortable position they have enjoyed could be set to change. The reason for this change, as with so much else that is affecting the UK insurance industry at the moment, is the impact of a European directive, the Product Safety Directive, which has only recently been incorporated into law in this country.

Law firm Lovells says there are several changes that are currently taking place in terms of how businesses relate to product liability risks as a result of the new set-up. It claims that companies will need to have systems in place to be able to meet their new obligations, and that producers and distributors will want to be assured that the enforcement authorities will, when notified of a risk, adopt a reasonable and practical approach to what action needs to be undertaken to deal with the issue.

According to the firm, "companies will be concerned about how these new powers will be used by the enforcement authorities, particularly in those cases where the regulations do not provide for compensation in the event that the powers have been improperly used". It adds that there is also little protection for confidential information in the proposed laws, warning that businesses "will be concerned about the prospect that their confidential information that will become available to the enforcement authorities may not adequately be protected under the new laws".

Naturally it is not just the UK businesses themselves that need to be wary of the new regime according to one London market broker, that says "there's definitely an increased risk of product liability claims as far as we are concerned", which it says is "partly driven by the media, which has helped raise awareness of consumer rights".

It is not just scaremongering to think that the new regime could have a worrying impact on the bottom line of insurers. Already the provisions of the new directive are already starting to have this impact in the EU, and the enforcement powers in the UK are among the strongest in Europe. Indeed, since the new directive has been in force in some EU member states, the rate at which dangerous products are notified to the commission has already increased.

Howard Watson, a partner at law firm Herbert Smith, thinks there could be other ways in which UK businesses might be affected by the regulations: "Manufacturing companies should consider reviewing their terms and conditions of business with distributors to ensure that either a contractual obligation is placed on the distributor to comply with the terms of the 2005 Regulations and/or that a civil remedy is provided if they fail to comply and claims are brought against the manufacturers as a consequence."

Despite the doom and gloom, there is however the suggestion that the new product liability currently emerging in the UK could actually provide an opportunity for insurers and brokers, in the opinion of Watson. As he explains, at present product recall insurance is generally only offered by insurers as an extension to a product liability policy, and this extension could prove increasingly popular: "Manufacturing companies usually purchase product liability insurance but, under the new regime, may wish to consider extending this to include product recall insurance, which will cover some of the costs of a product recall." Whether the purchase of such extensions turns out to be a blessing will be a moot point in the coming months.

A RECENT NOTABLE PRODUCT LIABILITY CASE

Law firm Leigh Day and Company, which is one of the most high profile claimant law firms in the country with an impressive track record of taking on noteworthy causes, is currently investigating the cases of hundreds of service veterans who underwent testing of chemical warfare agents at the Porton Down military establishment from the 1950s to the 1980s. The majority of the veterans state that they were not informed about the substances to which they were subjected. Many suffered immediate adverse side effects and a significant number claim to have suffered long-term injuries as a result of their exposures.

In a group of related claims, MI6 recently awarded compensation to service men to whom it had administered the hallucinogen LSD without their consent.

UK GENERAL PRODUCT SAFETY REGULATIONS

More than 18 months after the deadline for implementation in the European Union of the General Product Safety Directive, the UK's General Product Safety Regulations finally came into effect on 1 October last year. The key changes include:

- New notification obligations

Producers and distributors now have to notify the authorities as soon as they know that there is a product safety risk. It will be an offence not do so, punishable by three months imprisonment and/or a £5000 fine. Directors, managers and other officers can also be subject to these penalties. There has never been an obligation such as this in the UK before for consumer products generally.

- New powers for authorities to recall dangerous products

The authorities will now have new powers to initiate and conduct recalls of dangerous products, and then claim the costs back from the producer, importer or distributor. The authorities will also have new powers to issue 'notices to warn' and 'notices to mark', requiring producers or distributors, at their own expense, to provide specified safety information to consumers.

- Publicity of dangerous products

Under the new regime, information about 'serious risks' created by dangerous products on the market will be made available to the public, and will be publicised throughout the EU, via the 'Rapid Alert' system operated by the European Commission.

- Penalties for non-compliance - companies, directors and managers

Under the new law breaches will attract penalties of up to £20,000 and/or up to 12 months imprisonment. If the offence can be linked directly with the action or non-action of any director, manager or other officer, that officer can also be individually penalised and imprisoned.