Are indemnities for vaccine makers a moral hazard in the making?

This note is part of a series that the lawyers of Reddy Charlton will issue on the major legal, personal and business issues that will confront us all during the Covid-19 crisis.

This short article highlights an emerging story that pharmaceutical companies (“Pharma”) are seeking to reduce or in some cases eliminate their potential civil liability in the event of damage or injury arising from the use of their vaccines for Covid-19. The implications of this are very significant from a health, economic and societal perspective. It is in effect a very large and real time case study of having to balance risk and reward through commercial contracts. The question posed is whether the limiting of liability for vaccine makers creates a moral hazard?

Background
The requirement for an effective and widely available vaccine for Covid-19 is indisputable given that it is reasonable to say that normality will not return until an effective vaccine is rolled out across the population. Vaccines normally take in excess of 10 years to bring to the market, following virus analysis, research, development, trialling and the regulatory acceptance process. However, given the scale of Covid-19 and its negative impact on our economy, society and our health and wellbeing, a much more condensed timeline is necessary. In pursuit of a vaccine, risks will have to be taken, but what level of risk is deemed acceptable and who will ultimately carry that risk – Pharma, member states or the individual?

The EU Strategy (Com (2020) 245)
The EU has set outs its approach to developing and supporting the production of a vaccine in a communication of 17 June 2020 ‘EU Strategy for Covid-19 vaccines’. In that paper, the Commission, stresses the need for the rapid development and rollout of a vaccine and indicates the Commission’s objective of “Ensuring the quality, safety and efficacy of vaccines…securing timely access…ensuring equitable access..” The trade-off triangle between these three objectives is a very difficult conundrum to solve – prioritising one, may be detrimental to the others. The key is finding the appropriate centre of gravity between speed, effectiveness and safety.

The EU, through commercial contracts known as ‘Advance Purchase Agreements’ (“APAs) with individual Pharma firms, are seeking to significantly condense the timeline of the vaccine development process. The EU Strategy states that the conditions of the APAs “will reflect the balance between the prospect of the producer providing a safe and effective vaccine quickly and the investment needed to deploy the vaccine on the European market”. The Commission will also enter into agreements with participating Member States to formalise their reciprocal commitments and furthermore all Member States will be represented on a ‘steering board’. This board will assist the Commission on all aspects of the APA contract before signature. It is proposed that the Commission and a small number of Member State experts (the paper is silent on their identity) will negotiate the APAs.

Liability is a very significant issue up for discussion in these APA negotiations. Whilst the Commission will be responsible for procurement, “the liability for the deployment and use of the vaccine, including any specific indemnification required by a given APA will remain with the purchasing Member States”. So, in effect, if something goes wrong with the use of the agreed vaccine, liability for such an issue will rest with the Member State, even though the Member State was not formally involved in the process of negotiating any liability provisions. ‘Liability’ and in particular “what special liability coverage, if any, companies, would require” is one of the key selection criteria for vaccine candidates. It is probable, and indeed is reported amongst some media, that the Commission will provide either a full indemnity or an indemnity for certain liabilities for Pharma. This is a very significant and risk laden balancing act that the Commission has to navigate. On one hand they need an effective vaccine developed quickly, whilst they must also consider citizen safety and the risk of undermining confidence in vaccines if they prove dangerous, ineffective or worst case – both.

What is an Indemnity and why would the Commission provide one?
It is widely reported that AstraZeneca has secured certain indemnities against future product liability claims on its vaccine candidate, which it is developing in partnership with the University of Oxford. It is likely that other Pharma will achieve similar or even more wide ranging indemnities.
In its simplest form, an indemnity is a promise to reimburse the indemnified party on the happening of a specified loss or event. An indemnity within a commercial contract, such as the APAs, would likely see Member States provide protection to Pharma companies against a financial liability (a claim by a vaccine user) which they may incur as a result of a potential act or omission by Pharma.

Whether a party to a commercial contract gives an indemnity will depend on the circumstances of the transaction and the party’s ability and willingness to do so. The Member States are undoubtedly the only ones with the ability to provide such indemnities. Their willingness to do so is driven by the impact that Covid-19 is continuing to wreak on society and the economy. The dangerous reality is that Member States and in turn the tax payers and not Pharma will have to carry a degree of risk for gaining vaccines quickly.

Will a Moral Hazard arise?
What is vitally important is that these indemnities or limitations on liability are not used by Pharma as a shield or guise to fast-track ineffective and dangerous vaccines. There is a distinct risk of a moral hazard arising if regulatory bodies do not insist on proper trials and quality assurances. Will it be the case that Pharma, knowing that someone else will pay for any mistakes they make, be incentivised to act in a riskier way? Only time will tell.

How can Reddy Charlton help?
During this Covid-19 crisis, Reddy Charlton Solicitors are eager to support, encourage and guide your business. If you have any queries or seek further information on the Commercial Contracts please contact Elaine McGrath at emcgrath@reddycharlton.ie