In 1993 the Technology Group was formed to address the unique insurance needs of the emerging technology industry.

Ask these Questions, Re-Analyze your Exposures, Protect your Assets

Michael E. Cremeans, Senior Vice President, Britton-Gallagher & Associates, Inc.

Although most medical device industry executives will readily agree that protection of corporate assets is of paramount importance, a review of our client engagements suggests that there are common issues to resolve:

• What are my risks?
• What resources do I have to analyze risks?
• How should I position myself in contract negotiations?
• What if the manufacturer goes bankrupt?"
• How much liability do I have?
• How much insurance should I buy?
• Where are my other vulnerabilities?
• What can put me out of business?

How sophisticated are my product design standards compared to my peers? How can I really know what the indemnification sections of my contracts mean-and perhaps more importantly-what are my options if something goes wrong? What remedies are available when a dispute arises? How do my "employment practices" stack up to the industry? How will my insurance policies respond?

Now what?

• The HOW & WHY of Risk Analysis are EQUALLY IMPORTANT.
• HOW + WHY = Quality.
• Effective Risk Analysis Forces a Corporate Consciousness to Develop.

Analyze your exposures based on these "Top Ten Ways to go out of business."

1. Employees.

The good news-you are growing and have to hire employees! The bad news-you are growing and you have to hire employees!

Lawsuits brought on behalf of prospective, current or past employees are at an all- time high. Do you know what the proper controls are to help mitigate suits from employees? Workers' Compensation costs are at an all-time high. Health Insurance…you get the picture. How do employee exposures affect your total cost of risk? What are you specifically doing to control your employee costs?

Real World Example: We were shocked to see documentation in one of our client's files re: the firing of an employee. It clearly outlined the worst-case scenario regarding lawsuit costs if the employee sued them for age discrimination. The language they used suggested that they WERE letting this person go due to the employee's age!

2. Failure to protect Intellectual Property.

What mechanisms can you put in place to protect your hard-earned (and expensive) IP?

3. Improper or misunderstood promises.

Customer contracts, service agreements, you promise the "gold standard service-24/7", use of independent sales reps. Are there controls in place to prevent misunderstandings? Do you have procedures (and…DO YOU FOLLOW THEM??) regarding representations and warranties about your products and services? Do you use standardized contracts? Are you monitoring their use?

Real World Example: An analysis of a client contract revealed that it was written in Japanese with no English translation, but it was signed by the company CEO!!!

4. Lawsuits from shareholders.

"You promised me I'd make millions on this venture!" Whether you actually made the promise or not is beside the point. Someone has alleged that you misrepresented yourself-now what do you do?

Real World Example: Lawsuits brought on behalf of shareholders are being filed at a record pace. Also, be careful of "major shareholder exclusions" imbedded in Private Company Directors and Officers policies.

5. Loss of senior management.

Nobody likes to talk about the loss of life or disability of a key employee or stockholder. Forget what you think about life insurance 'sales guys' for a minute and get serious about your plan-"what would we do if…"

Real World Example: You just signed a major deal to produce a new product line-milestones, deadlines, pressure to perform to the terms of the contract. Your Chief Scientific Officer dies-or simply leaves the company for a better offer-what's your backup strategy?

6. Failure to apply risk analysis to medical device manufacturing.

It's been said that the vast majority of all recalls are due to design errors or design deficiencies. QSR and ISO 9001 QMS internal and external auditors will not look at design documentation from a legal liability and risk management perspective. This is up to you.

Most product liability cases hinge on four basic questions about duties:

• Did the manufacturer provide a product that was free of design defects?
• Was the product suitable for the use for which it was sold?
• Did the company establish an effective system to monitor and analyze post-sale product problems and hazards?
• Did the company follow up on its knowledge of hazards with appropriate and adequate action?

7. Physical loss of property.

Fires or Windstorms-hopefully you'll never experience one, but have you decided exactly what you would do if you lost your manufacturing facilities? Have you quantified your plan through the used of an emergency response plan?

Real World Example: "Kinston, N.C. An explosion followed by a spectacular fire destroyed a North Carolina medical devices factory during the afternoon shift today, killing at least three people and injuring dozens, officials said."[The Washington Post Company, January 29, 2003] In a follow up article [Business Wire Feb 11, 2003]: "The responsiveness of our recovery and logistics teams has produced an initial assessment of our recoverable assets and a better understanding of our near-term customer needs," said Donald E. Morel, Jr, Ph. D., Chief Executive Officer and President of West (Pharmaceutical)." The company appeared to be ready for this kind of disaster.

8. Contracts that promise you something.

There is a class action lawsuit against the manufacturer, and your company is named as well. That company has to declare bankruptcy and you no longer have the benefit of the indemnification promised in the contract. The contract is not worth the paper it's printed on-what happens now?

Real World Example: Those of you who attended The Third Annual Symposium on The State and Future of the Orthopaedic Industry heard Richard F. Scruggs discuss his handling of the Sulzer litigation. We're aware that several subcontractors and distributors were concerned that they might have been held liable if a settlement wasn't reached.

9. Not controlling your independent sales reps.

One overlooked area of liability risk is the medical device sales force, whose activities are increasingly coming under scrutiny. Many of your products are now being sold direct to the consumer.

Real World Example: At last year's annual meeting of the MedMarc Insurance Company, Janet M. Richardson, ESQ. [Morris, Polich & Purdy, LLP] gave a presentation on "The Role of Sales Representatives in Risk Assessment and Management." She pointed out that "although the sales representative's job inherently involves liability risk, proper training and supervision can be the key to minimizing that risk.

10. Poor or careless communications recorded in all types of daily-use documents can be summoned in discovery and used against you.

Failure by Medical Device and Pharmaceutical manufacturers to maintain a well documented Quality Management System has potential regulatory consequences-formal warnings, fines, injunctions, consent decrees, criminal prosecutions and closing of the business. Whenever a regulatory sanction is levied, the information is posted on the FDA's website and is available through The Freedom of Information Act (FOIA). Frequently, regulatory sanctions are followed with plaintiff lawsuits using FDA findings.

Conclusion:

The following chart is provided as a guide for addressing communication problems in a manufacturing environment:

NOTE: This chart was developed by Tim Budacki and Jim Kolka, independent consultants to the medical device industry. For more information on their document management and retention program, visit the OrthoWorld website at http://orthoworld.com/consultants/profiles/britton-gallagher.htm.

Michael Cremeans is a Senior Vice President with Britton-Gallagher & Associates, Inc., a privately owned, independent insurance brokerage firm located in Cleveland Ohio. The firm specializes in Customized Insurance and Risk Management for Technology-Based Companies. Britton-Gallagher is the endorsed insurance broker of The Pittsburgh Technology Council, Edison Biotechnology Center of Ohio, The Northeast Ohio Software Association (NEOSA) and The Michigan Biosciences Industry Association.

Britton-Gallagher & Associates, Inc.

800.607.4711

www.britton-gallagher.com

michael_cremeans@britton-gallagher.com

Copyright 2005 Michael Cremeans, Britton-Gallagher & Associates, Inc. All rights reserved.