Vaping: Smoking Gun
SCENARIO: It’s 2040, and there were not quite as many attendees of the 25-year high school reunion party as expected. Gossip begins to circulate just as it did around the cafeteria and corridors a couple of decades earlier.
“Is John coming tonight?” one man asked an ex-classmate.
“No, didn’t you hear? He’s in the middle of chemo treatments right now,” she responded solemnly. “Esophageal cancer.”
“Hey Kelly!” another alumnus shouted. “I don’t think I’ve seen you since Nationals senior year. How are you? Still running?”
Kelly was a standout miler on her high school and university track teams, known for her strong finishing kick.
“No,” she responded, exhaling a cloud of raspberry-flavored vapor as she lowered her still-glowing e-cigarette.
“I haven’t been able to run much lately, not without an inhaler, anyway. Developed asthma a few years ago.”
In 2015, when this group was graduating, “vaping” was the latest and greatest trend. It delivered the soothing effects of nicotine without the carcinogens of tobacco smoke, tasted much better, and there were no age restriction laws.
The litigants claim their health issues stem directly from the dubious concoction of chemicals in the e-liquid his company imported from China and sold in their branded vape pens.
E-cigarette advocates predicted that vaping would dramatically decrease the rates of lung cancer and other smoking-related diseases. But 25 years later, the effects of the e-liquid’s various chemicals and concentrated nicotine are clear. Rates of lung cancer, which had been decreasing steadily in the U.S., are rising again, along with heart disease and other types of cancer.
That same night, the CEO of a national e-cigarette distributor is staring at a subpoena. His company is being sued by the families of a few hundred of his most loyal customers who have developed respiratory and heart problems.
In fact, a recent longitudinal study of “vapers” by the Centers for Disease Control and Prevention found strong positive correlations between high use of e-cigarettes and incidence of heart disease and cancers of the respiratory system.
The litigants claim their health issues stem directly from the dubious concoction of chemicals in the e-liquid his company imported from China and sold in their branded vape pens.
Tests of several batches of the liquid by the FDA revealed inconsistent concentrations of nicotine, propylene glycol, and other flavor additives and preservatives. The levels of nicotine found in the vapor were also inconsistent with the label.
The class-action litigants were seeking punitive damages totaling $20 billion, half of which would be used to create a medical treatment fund. The number is staggering, but not out of line with some of the lawsuits that emerged against “Big Tobacco” companies in the late 1990s, the highest of which sought damages of $23.6 billion. Other smaller distributors had already been knocked out by smaller settlements, still in the millions.
The CEO had already talked to his broker. The contractual protection they had in place pinned product liability to the manufacturer, based in Shanghai, but did not address risks of long-term health effects. That liability was all theirs.
ANALYSIS: In 2015, the retail vaping industry is forecast to reach $3.5 billion, more than twice the $1.7 billion estimated for 2013, according a Wells Fargo Securities report on tobacco trends in the U.S.
E-cigarettes, which deliver a nicotine hit without tobacco combustion — and the carcinogens that come with it — attract customers from the traditional cigarette market looking for a healthier or safer alternative to their smoking habit, and from the youth market, drawn to the sleek styling and fun flavors of vaporizers, as well as the claim that they are far less dangerous than combustible cigs.
According to the CDC’s National Youth Tobacco Survey, “the number of never-smoking youth who used e-cigarettes increased from 79,000 in 2011 to more than 263,000 in 2013.”
According to “Monitoring the Future,” a study from the University of Michigan analyzing drug and tobacco trends among teens, there were twice as many e-cig users than smokers of combustible cigarettes among eighth, 10th and 12th graders. Sixty-two percent of eighth graders surveyed said that cigarettes are very harmful to health, while only 15 percent reported feeling that way about e-cigarettes.
And there is basis for these beliefs. Studies of e-vapors show that the amounts of toxic chemicals they contain are negligible, compared to traditional cigarettes, and their concentrations are nearly equal to those already present in the air we breathe. Many public health advocates laud e-cigs as a long-term tool to reduce smoking rates and the respiratory illnesses that come with it.
“There’s no question that e-cigarettes are much safer,” said Michael Siegel, a professor at Boston University’s School of Public Health.
“The risks are minimal, compared to tobacco smoking.”
But the danger in any new product lies in the unknown. Vapors produced from e-liquids may not be as harmful as smoke, but the composition of those liquids varies widely.
“A lot of these devices are made in countries that struggle with quality issues in the manufacturing process,” said Mark Wood, president and CEO of LifeScienceRisk, a subsidiary of RSG Underwriting Managers.
“When using foreign contract manufacturers, you don’t always know who exactly is making the product.”
Inconsistent manufacturing leads to variability in nicotine levels. Byproducts of the manufacturing process, flavoring and other preservatives also potentially introduce other carcinogens into the mix. But the final composition is largely unknown.
Adverse health effects of those unknown chemical mixtures could range from allergic reactions to cancer.
The heating element of e-cigarettes also poses a threat. If it gets too hot, it can “trigger a thermal breakdown” of the materials used to make the e-cig, creating carbonyls like formaldehyde and acetaldehyde. These compounds are delivered in nano-sized particles directly into the airways, where they trigger inflammation that can lead to the development of chronic conditions.
Little clinical research has been conducted on the safety of these vapors, and the long-term health effects may not be seen for another 20-30 years.
“From the FDA’s point of view, they’re waiting to see if e-cigarettes can reduce the number of smoking deaths. They want to see the whole picture before they take a firm stance on the issue,” said Markus Kalin, head of casualty risk engineering at XL Group.
Another problem is the lack of age restrictions, coupled with flavorings like cherry vanilla and blue raspberry, which make these products highly appealing to those under 18.
In a customer base that has never or rarely smoked traditional cigarettes, long-term use of e-cigarettes could increase, rather than reduce, the likelihood of health issues.
“The purpose of e-cigarettes is to get people off smoking in a safer way. They are not absolutely safe,” Siegel said.
Current high-school vapers could be in their 40s or 50s before any ill effects emerge. It may not be lung cancer or emphysema, but perhaps higher rates of asthma, bronchitis, cystic fibrosis or other inflammatory pulmonary diseases.
And distributors of vaping products could be held liable, in much the same way tobacco companies faced massive lawsuits after smoking was definitively linked to lung cancer.
The fact that most e-cigarette manufacturers are based in China also “puts distributors and retailers in the U.S. at higher risk,” said Randy Nornes, executive vice president at Aon Risk Solutions.
“If you’re the only link between a non-U.S. manufacturer and the customer, you’re an obvious target for plaintiffs.”
Wood said that distributors “can subrogate that claim against a contract manufacturer or supplier, but it’s more difficult to do that against an entity in a different country subject to different laws.”
Given the huge settlements with tobacco companies, plaintiffs’ attorneys will be more than willing to take on the e-cigarette industry.
“They look for market opportunities,” Nornes said, “anything that potentially has harm in it and involves a lot of people.”
Vaping distributors could face product liability suits for improper labeling of e-liquid cartridges or false advertising concerning its health benefits. Kalin of XL Group said parents of e-cigarette users could pursue advertising litigation against distributors for failure to protect young people.
“But the next stage will be, if you start to see health issues emerge and more studies trickling out, and younger people developing diseases like lung cancer, that will be the catalyst for mass tort,” Nornes said.
E-cigarette distributors and retailers need proactive risk management, experts said.
“You really have to understand your supply chain,” said Aaron Ammar, risk manager at XL Group. “Make sure you have appropriate age restrictions and proper labeling about potential health effects. Where are the component parts coming from? Do you understand it?”
“I’m sure they’re all doing contractual risk management, to make sure risk stays with the manufacturer,” Nornes said.
“The second issue is making sure the manufacturer has adequate levels of insurance in the event you get sued for distributing someone else’s product. That’s where issues will creep in, because you’re relying on a third party’s insurance.”
Complete coverage of 2015’s Most Dangerous Emerging Risks:
Corporate Privacy: Nowhere to Hide. Rapid advances in technology are ushering in an era of hyper-transparency.
Implantable Devices: Medical Devices Open to Cyber Threats. The threat of hacking implantable defibrillators and other devices is growing.
Athletic Head Injuries: An Increasing Liability. Liability for brain injury and disease isn’t limited to professional sports organizations.
Vaping: Smoking Gun. As e-cigarette usage rises, danger lies in the lack of regulations and unknown long-term health effects.
Aquifer: Nothing in the Bank. Once we deplete our aquifers, there is nothing helping us get through extended droughts.
Most Dangerous Emerging Risks: A Look Back. Each year since 2011, we identified and reported on the Most Dangerous Emerging Risks. Here’s how we did on some of them.
A far-reaching new rule proposed by the Food and Drug Administration has the nation’s generic drug manufacturers in a stir.
The proposed rule would require makers of generic drugs to update their warning labels for the first time.
Historically, generics manufacturers were shielded from liability, because they were required to use only the warning label language used by the branded drug maker from which the generic was derived.
If the rule becomes law, it will lead to significant insurance changes, including higher premiums, more clinical tests, more lawsuits and greater staffing, as well as heightened attention to risk management issues.
“I think it’s going to be even more important for the generic drug companies to differentiate themselves because there’s going to be much more scrutiny on them from an underwriting perspective.” — Darlene Villoresi, managing director, Marsh life sciences practice
“I will say that anything like this that creates uncertainty in the litigation climate can have a negative effect on premiums, rates and availability of insurance coverage,” said Jim Walters, Philadelphia-based managing director of the life sciences and chemicals practice at Aon Risk Solutions.
“That historically is what has happened when uncertainty reaches the litigation climate,” Walters added.
Having to do their own clinical studies to support label changes will create a tremendous amount of expense for the generics industry, Walters said.
Alison J. Renner, CEO of Chicago-based A.J. Renner & Associates, a wholesale pharmaceutical specialty broker with a strong suit in generics, said that generics manufacturers will need to be aggressive about adverse event reporting of their own products, as well as conduct extensive independent review of reported events and information from the FDA and all other sources available to them.
In addition to legal concerns, said Renner, it is more than likely that certain high-risk products that are currently “insurable” due mainly to the current legal climate will become generally excluded.
“They will need to demonstrate to underwriters that they have best-in-class procedures,” said Renner of the generic drug makers.
“Being able to demonstrate near perfection in labeling will also form a cornerstone of defense of product liability actions going forward.”
John Parente, Boston-based assistant vice president of life sciences at Berkshire Hathaway Specialty Insurance, said the generic manufacturers’ fears center on how they will make labels consistent for each product.
“When you have multiple generic pharmaceutical manufacturing companies producing Tylenol, with the generic name acetaminophen, you could have many different labels warning of multiple or different side effects versus having one consistent label that the medical community can look at and agree upon,” Parente said.
The FDA and supporters of the proposed rule say that the rule change will pressure generic drug makers to be more proactive in discovering when drugs are harming patients and to provide accurate labeling for those drugs.
Generics Save Billions
Generic drugs, which account for more than 80 percent of all drugs manufactured in the U.S., were brought into existence by the 1984 Hatch-Waxman Act, which ensures the safety and affordability of generic drugs by requiring manufacturers to duplicate the effectiveness and labels of FDA-approved brand-name drugs.
One of the most attractive things about generic drugs is their relative cost. A generic industry trade organization points to the huge savings generated by generics.
VIDEO: Even with the current FDA regulations, some are worried about the safety of generic drugs. This CBS report looks at an Indian company that falsified data as part of regulatory approval process.
“The world’s leading health care analytics firm, IMS Institute for Healthcare Information, found that generics saved $239 billion in the U.S. in 2013 (a 14 percent increase in savings from 2012) and more than $1.6 trillion over the recent decade,” according to the Washington, D.C.-based Generic Pharmaceutical Association.
The association is threatening to sue the FDA if the agency finalizes its labeling regulation in its present form.
Critics of the proposed new rule argue that it would increase drug costs by $4 billion a year and lead to a confusing array of labels for the same drug.
But Janet Woodcock, director of the FDA’s Center for Drug Evaluation and Research, said the proposed rule would create parity among application holders and “would speed the dissemination of new safety information about generic drugs to health professionals and patients.”
The FDA’s controversial new rule was expected to be finalized last December, but will not be published until the fall of 2015, an agency spokeswoman said.
If adopted, the FDA rule would put in doubt two landmark U.S. Supreme Court decisions that currently protect generics manufacturers from most liability lawsuits.
In PLIVA vs. Mensing, a woman who took a generic drug had a horrible reaction to it. In June, 2011 the Supreme Court ruled that the generic manufacturer, under federal law could not alter the label, therefore it was not liable.
In a similar case, Mutual Pharmaceutical Co. vs. Bartlett, the Supreme Court held in June 2013 that federal law pre-empted a state law that would have required the generic manufacturer to make a safer drug, either by altering the drug’s composition or through changes in its labeling.
One well-regarded industry observer noted that the erosion of the Mensing and Bartlett defenses could increase claim expenses and potential judgments, which would likely impact the availability and affordability of generics product liability policies.
“In the event the rule went through as proposed, the degree and scope of the increased litigation might not only impact the cost of insurance but also the amount of capacity available,” the expert said.
Risk Management Needed
Kati Ballantyne, Whitehouse Station, N.J.-based assistant vice president and life science underwriting manager for Chubb Group of Insurance Cos., said that if the rule goes through as proposed, generic drug companies will face material changes in labeling and may consider adopting practices similar to those used by the innovator drug companies to help ensure that they’re doing all they can to identify potential patient issues that belong on the label.
“The changes may come at a cost for generic drug companies and could potentially have a downstream impact on the ultimate consumers,” Ballantyne noted.
Ballantyne added that if the rule is adopted, some best practices in risk management that would be critical include effectively managing adverse events, identifying trends in adverse events, and executing rapid escalation plans for external and internal early reporting to the FDA of adverse event trends that may warrant a label change.
“In addition, generic drug companies will need to make manufacturing adjustments to ensure the timeliness of changing labels,” Ballantyne said.
Allison Zieve, general counsel and director of the litigation group for the Washington, D.C.-based advocacy group Public Citizen, said, “The way the regulating scheme is set up, the drug manufacturers have the primary responsibility for ensuring the adequacy of the labeling. That makes sense because the FDA doesn’t have the resources to monitor the thousands of drugs on the market.
“Most of the labeling changes are based on adverse-event reports submitted to the FDA, and the FDA makes those reports available to any manufacturer,” she said.
If the FDA rule goes through as proposed, there are a couple of important impacts, said Darlene Villoresi, Morristown, N.J.-based managing director with Marsh’s life sciences practice.
“One is all about differentiation,” she said.
“I think it’s going to be even more important for the generic drug companies to differentiate themselves because there’s going to be much more scrutiny on them from an underwriting perspective.
“They’re going to get many more questions about underwriting data more in line with the branded drugs.”
Right now, she said, they’re protected from failure-to-warn claims so the underwriters don’t focus as much on pharmacovigilance.
If the proposed rule is adopted as planned, or in some form close to its current structure, Villoresi also envisions an impact on pricing.
There will be more pressure on generic companies to implement new programs to detect early warning signs for adverse events, and that’s going to cost money, she said.
“And underwriters will evaluate how successful they are in their plans, including how well they’re tracking their adverse events, their safety signals, how well they are identifying safety trends in the products that are out there,” Villoresi said.
In the risk management realm, Chubb’s Ballantyne said that the key to successful management of the FDA proposal is the implementation of best practices by the generic drug companies going forward.
“Since the FDA proposal first became known about a year and a half ago, we’ve been working with our customers in anticipation of the change to help them achieve best practices,” Ballantyne said.
“We’ve utilized our loss control expertise in the area of post-market surveillance and anticipate that our resources in this area will grow in value to those drug companies if the proposal goes through,” she said.
Aon Risk Solutions’ Walters said his team’s advice for generic drug manufacturers is to beef up their staffs and urge them to have the necessary tools to monitor adverse events and trends more effectively.
“There are lots of third parties that can help with monitoring adverse events, and we would look to advise our generic manufacturer clients with help from companies like these,” Walters said.
Healthcare: The Hardest Job in Risk Management
Radically changing cost and reimbursement models.
Rapidly evolving service delivery approaches.
It is difficult to imagine an industry more complex and uncertain than healthcare. Providers are being forced to lower costs and improve efficiencies on a scale that is almost beyond imagination. At the same time, quality of care must remain high.
After all, this is more than just a business.
The pressure on risk managers, brokers and CFOs is intense. If navigating these challenges wasn’t stress inducing enough, these professionals also need to ensure continued profitability.
“Healthcare companies don’t hide the fact that they’re looking to reduce costs and improve efficiencies in practically every facet of their business. Insurance purchasing and financing are high on that list,” said Leo Carroll, who heads the healthcare professional liability underwriting unit for Berkshire Hathaway Specialty Insurance.
But it’s about a lot more than just price. The complexity of the healthcare system and unique footprint of each provider requires customized solutions that can reduce risk, minimize losses and improve efficiencies.
“Each provider is faced with a different set of challenges. Therefore, our approach is to carefully listen to the needs of each client and respond with a creative proposal that often requires great flexibility on the part of our team,” explained Carroll.
Creativity? Flexibility? Those are not terms often used to describe an insurance carrier. But BHSI Healthcare is a new type of insurer.
The Foundation: Financial Strength
Berkshire Hathaway is synonymous with financial strength. Leveraging the company’s well-capitalized balance sheet provides BHSI with unmatched capabilities to take on substantial risks in a sustainable way.
For one, BHSI is the highest rated paper available to healthcare providers. Given the severity of risks faced by the industry, this is a very important attribute.
But BHSI operationalizes its balance sheet in many ways beyond just strong financial ratings.
For example, BHSI has never relied on reinsurance. Without the need to manage those relationships, BHSI is able to eliminate a significant amount of overhead. The result is an industry leading expense ratio and the ability to pass on savings to clients.
“The impact of operationalizing our balance sheet is remarkable. We don’t impose our business needs on our clients. Our financial strength provides us the freedom to genuinely listen to our clients and propose unique, creative solutions,” Carroll said.
Keeping Things Simple
Healthcare professional liability policy language is often bloated and difficult to decipher. Insurers are attempting to tackle complex, evolving issues and account for a broad range of scenarios and contingencies. The result often confuses and contradicts.
Carroll said BHSI strives to be as simple and straightforward as possible with policy language across all lines of business. It comes down to making it easy and transparent to do business with BHSI.
“Our goal is to be as straightforward as we can and at the same time provide coverage that’s meaningful and addresses the exposures our customers need addressed,” Carroll said.
Claims: More Than an After Thought
Complex litigation is an unfortunate fact of life for large healthcare customers. Carroll, who began his insurance career in medical claims management, understands how important complex claims management is to the BHSI value proposition.
In fact, “claims management is so critical to customers, that BHSI Claims contributes to all aspects of its operations – from product development through risk analysis, servicing and claims resolution,” said Robert Romeo, head of Healthcare and Casualty Claims.
And as part of the focus on building long-term relationships, BHSI has made it a priority to introduce customers to the claims team as early as possible and before a claim is made on a policy.
“Being so closely aligned automatically delivers efficiency and simplicity in the way we work,” explained Carroll. “We have a common understanding of our forms, endorsements and coverage, so there is less opportunity for disagreement or misunderstanding between what our underwriters wrote and how our claims professionals interpret it.”
Responding To Ebola: Creativity + Flexibility
The recent Ebola outbreak provided a prime example of BHSI Healthcare’s customer-centric approach in action.
Almost immediately, many healthcare systems recognized the need to improve their infectious disease management protocols. The urgency intensified after several nurses who treated Ebola patients were themselves infected.
BHSI Healthcare was uniquely positioned to rapidly respond. Carroll and his team approached several of their clients who were widely recognized as the leading infectious disease management institutions. With the help of these institutions, BHSI was able to compile tools, checklists, libraries and other materials.
These best practices were immediately made available to all BHSI Healthcare clients who leveraged the information to improve their operations.
At the same time, healthcare providers were at risk of multiple exposures associated with the evolving Ebola situation. Carroll and his Healthcare team worked with clients from a professional liability and general liability perspective. Concurrently, other BHSI groups worked with the same clients on offerings for business interruption, disinfection and cleaning costs.
Ever vigilant, the BHSI chief underwriting officer, David Fields, created a point of central command to monitor the situation, field client requests and execute the company’s response. The results were highly customized packages designed specifically for several clients. On some programs, net limits exceeded $100 million and covered many exposures underwritten by multiple BHSI groups.
“At the height of the outbreak, there was a lot of fear and panic in the healthcare industry. Our team responded not by pulling back but by leaning in. We demonstrated that we are risk seekers and as an organization we can deploy our substantial resources in times of crisis. The results were creative solutions and very substantial coverage options for our clients,” said Carroll.
It turns out that creativity and flexibly requires both significant financial resources and passionate professionals. That is why no other insurer can match Berkshire Hathaway Specialty Insurance.
To learn more about BHSI Healthcare, please visit www.bhspecialty.com.
Berkshire Hathaway Specialty Insurance (www.bhspecialty.com) provides commercial property, casualty, healthcare professional liability, executive and professional lines, surety, travel, programs, and homeowners insurance. It underwrites on the paper of Berkshire Hathaway’s National Indemnity group of insurance companies, which hold financial strength ratings of A++ from AM Best and AA+ from Standard & Poor’s. Based in Boston, Berkshire Hathaway Specialty Insurance has regional underwriting offices in Atlanta, Boston, Chicago, Los Angeles, New York, San Francisco, Toronto, Hong Kong, Singapore and New Zealand. For more information, contact email@example.com.
The information contained herein is for general informational purposes only and does not constitute an offer to sell or a solicitation of an offer to buy any product or service. Any description set forth herein does not include all policy terms, conditions and exclusions. Please refer to the actual policy for complete details of coverage and exclusions.
This article was produced by the R&I Brand Studio, a unit of the advertising department of Risk & Insurance, in collaboration with Berkshire Hathaway Specialty Insurance. The editorial staff of Risk & Insurance had no role in its preparation.