Contract Manufacturing – Beyond Products Liability

Pharma Manufacturing

It is no surprise that more and more companies are looking to outsource all or at least a portion of their manufacturing processes to leverage unique manufacturing advantages around the globe.

Contract manufacturing can provide significant advantages to companies in many industries including:

  • greater flexibility
  • quicker time to market
  • reduced cost
  • lower capital requirements
  • access to expertise and perhaps proprietary technologies

The complexity of supply chains has grown and this is especially true in the life science arena where quality and regulatory concerns are paramount.

The contract manufacturing strategy opens up a host of issues from a risk management perspective. In a low-margin environment, inventories are kept low and leave little room for error in the event of any disruption in the supply chain.

Safety and Regulatory Risks?

There are, of course, safety and regulatory risks to consider.

  • Has the contract manufacturer maintained compliance with GMP (Good Manufacturing Processes), ISO, FDA or other standards?
  • Has the product been tainted in any way?
  • Is the facility secure?

Often times, companies will attempt to transfer liability for product injury back to the contract manufacturer to the extent they are liable and this will be followed by a product liability insurance requirement. While product liability insurance may address claims for patient injury and back some contractual indemnifications, product liability coverage alone is insufficient in addressing the risks related to what can be a critical and at times complex relationship.

For example, in the life science sector, the possibility of some type of “financial” injury, unrelated to patient injury is a very real scenario. While product liability insurance may cover patient injury, product liability insurance will not address pure financial injury allegedly caused by a contract manufacturer. Often times, contract manufacturers provide engineering advice or expertise along with their contract services. What if the materials were not engineered properly and the component part failed to perform as expected? What if it was found that a contract manufacturer failed to adhere to GMP and the customer needed to initiate a recall out of safety concerns or to comply with a regulatory requirement? What if the contract manufacturer was taken off-line due to a regulatory audit or they were unable to provide the amount of product or level of service within the required period of time?  (See GSK vs. Hospira.)

A tight supply chain, regulatory scrutiny and complex manufacturing requirements all work to heighten the exposure of a contract manufacturing failure. In addition to products liability, manufacturers Errors and Omissions (E&O) insurance and product recall insurance are available to help mitigate certain  risks.  Manufacturers E&O should be considered by the contract manufacturer to defend against claims for financial injury. On the other hand, companies may want to consider requiring contract manufacturers to carry E&O to help ensure assets are available if a claim is made. Lastly, both the contract manufacturer and client company may want to consider obtaining  product recall insurance to cover the direct costs of a recall and further mitigate the risk of a complex supply chain in a heavily regulated market.

About Steve Schoenberger

Steve Schoenberger is Vice President of Corporate Property & Casualty, based in Willis’ Boston office. He joi…
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