In many instances, though, the financial impact of a lost shipment far exceeds its replacement costs. A lost batch of active drug that causes the interruption of a $3 million clinical trial could be ruinous for a young company burning venture capital. Even if the company has the financial reserves to repeat the trial, the delay in getting the product to market could mean a loss of market share. And this could occur due to nothing more than a refrigeration breakdown in a contractor's storage area or a carrier's van. When the threat to the business is this great, many companies insure for the cost of this "business interruption." Who's Responsible In outsourcing situations, liability for loss in transit or in storage usually is stated in the contract or the purchase order terms and conditions governing the engagement with the vendor. It is most typical that the owner (the outsourcing party) retains that risk--and, thus, the insurable interest--throughout the process. Most contract manufacturers ship "FOB point of origin", meaning that the minute they put the goods on the truck, they no longer have responsibility for them. Whether the recipient of the shipment is the owner or another contractor, the owner will need to ensure that coverage is in place, either by providing it directly, or indirectly by building the cost of the insurance premiums into the outsourcing agreement and having the contractor purchase the coverage. Non-Owned Location Coverage Additional coverage issues arise when materials are stored at a non-owned location, e.g., a contractor's site. Again, this is a function of the contractual terms and conditions. Usually, the contractor's liability is limited to the value of the contract--often an amount that falls well short of the value of the goods. Product damaged while being stored		can be insured under the bio/pharmaceutical company's personal property insurance policy or added to its transit insurance. Covering Common Exclusions It is important to note that loss in storage is entirely different from loss during processing ("blown batch"). Most policies exclude damage to the product suffered during processing. Exclusions are also typical if the goods are susceptible to spoilage. Some insurance companies will write only limited spoilage coverage, defining the types of events that would lead to a covered claim, such as a refrigeration breakdown or improper handling by a shipping company. "What you want is a policy that broadly says 'we'll cover any losses due to spoilage or changes in temperature,' but you'll find there are a series of exclusions or exceptions," says Edmundson. Insurance for business interruption costs, such as the cost of repeating a clinical trial, used to be hard to come by. But that is changing. "If you can describe and quantify that exposure to underwriters, we have found a willingness from certain underwriters to insure that type of risk," says Edmundson. "The important matter is that those issues be raised ahead of time, be negotiated and be explicitly made part of an insurance policy." Edmundson says underwriters will often provide coverage for this type of risk at a rate somewhere under one-half of one percent of the insured value--unless there is a spoilage issue, in which case the rates could double. Weighing the Options Depending on the company's exposure and its appetite for risk, coverage can range anywhere from self insurance to the types of full business interruption coverage mentioned above.
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One coverage option that's a step up from self-insurance is to pay the carrier/freight forwarder based on the "full value declared." The shipping cost will be higher, but the full value will be insured (at least up to the limit the carrier will insure). According to Dick Haverlin, Vice President of Willis--Corroon Marine North America, this may be the best alternative for shipments valued under $1,000,000. An alternative is to purchase transit insurance through the broker handling the rest of the company's insurance needs. "Transit insurance coverage can be made part of a property policy and it typically would have a separate rate and a separate premium assigned to it," says Edmundson. "Or, when the exposure gets larger or more complex, it is typically written on a separate policy." Transit insurance can be provided on an annual basis or a per-shipment basis, and can be written to cover all risks or only "named perils." The choice between an annual and a per shipment policy is largely a matter of cost. Per-shipment insurance is sold at a higher rate because volume discounts don't apply, but the minimum cost of an annual policy may still make the per-shipment option cheaper for an upstart company with only a few shipments a year. According to Jane Panzica, Vice President of Marsh & McLennan, Inc., cost in either case "would depend on what the value of the shipment was, where it's going, whether it's susceptible to spoilage or not, what kind of deductible the owner wants to pay, what kind of control measures they have." For shipments that pose less risk, the company might decide to self-insure, she says. An option available primarily to large companies that have work-in-progress inventory on a continuous basis is the "stock throughput policy," which covers the stock throughout the production and distribution process. This type of policy covers the stock from the raw		material stage until the finished product becomes the legal responsibility of a customer, a distributor or other third party. Haverlin, of Willis-Corroon, warns that risk and cost determinations are made by underwriters individually, thus risk can be viewed very differently by different underwriters. As a result, both availability and cost of coverage can vary widely among underwriters. This is where a good broker can help. A broker familiar with the bio/pharmaceutical industry will not only help companies determine their risk and provide coverage options, but will also explain the company's risk to underwriters. A good broker will also know which underwriters have experience insuring the bio/pharmaceutical industry, which is crucial to getting a good rate. Most insurance companies, Barrengos says, don't understand bio/pharmaceutical companies and their unique needs. "And when an insurance company doesn't understand something, it either walks away from it or it charges more money for it." Extra Measures In addition to obtaining the proper transit insurance, there are a few other steps companies can take to protect themselves from loss. Companies that don't have continuous coverage should establish a system of planning in advance for coverage. Haverlin advises companies to make decisions about the carrier when they schedule the batch, and to review the bill of lading at that time and decide how to insure the product. In addition, to ensure coverage, the company must inform the broker whenever it has a shipment going out. "Even if it's not product to customers, you've got to tell us," Barrengos says. Failing to inform the broker of shipments is one of the most common oversights companies make, he says.
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CHECKLIST   Preventing Catastrophic Losses When Your Product is Out of Your Hands Determine your loss coverage requirements when planning your outsourcing program. Be sure to calculate the full economic exposure from loss of the material, including cost of business interruption. Never depend on the carrier's or vendor's coverage to protect your company. Get the responsibility for loss spelled out in the contract with the vendor. Use an insurance broker experienced in dealing with the unique needs of the bio/pharmaceutical industry. Inform your insurance broker whenever you have goods in transit or stored at a vendor site. Use a shipper experienced in handling pharmaceutical products, particularly when there is spoilage exposure. Have your legal counsel periodically review all contracts with carriers and vendors. Keep redundant back-up lots of shipped materials whenever possible.