An increasing number of companies are integrating nanotechnology into their products and services. From nanomachines in biomedical devices to nanoparticles of antimicrobial silver on product surfaces, nanotechnology is becoming common in businesses around the globe. To innovate with these products, companies need to be able to rely on insurance to hedge against the risk of property damage and liability. Although specialized insurance policies for nanotechnology are beginning to hit the market, it is important to recognize that many common insurance policy forms—already held by most companies—provide coverage for many risks caused by nanotechnology. This article briefly surveys the issue of nanotechnology risks and then describes how common commercial property and liability policies provide coverage for such risks.
Nanotechnology—Definitions and Risks
Nanoproducts and nanotechnology include products with a wide variety of applications, all of which contain at least some component operating on the “nanoscale” level—within the range of one to 100 nanometers, or up to 1/1,000 the width of a human hair. Most commercial insurance policies do not contain definitions, or any mention at all, of nanoproducts. Continental Western Group, one of the insurance companies to attempt to exclude losses relating to nanoproducts, focused its definition on “nanotubes,” which it defined as “hollow cylinders of carbon atoms or carbon fibers or any type or form of ‘nanotechnology’ [in turn defined as “engineering at a molecular or atomic level”] which contain remarkable strength and electrical properties used in any products, goods, or materials.” That definition is, obviously, quite vague and unsatisfactory for most applications.
Insurers have noted that nanoproducts hold the potential to lead to a variety of risks. Lloyd’s of London, for example, has hypothesized several possible risk scenarios:
- Pollution spill from a nanoparticle production facility
- Nanoparticle manufacture workers develop chronic illness
- Nanoparticles leach from products to accumulate in the environment
- Product recall due to research findings indicating product is a hazard
- Liability claims on a company, directors and officers regarding a product that was indicated by research to be unsafe, but subsequently released to the consumer market.
Many Existing Insurance Policies May Already Cover Nanotechnology
Although insurers have just begun offering policies specifically covering nanotechnology risks, many policies already in place provide the potential to cover those risks, as the insurers themselves acknowledge. Allianz, for example, admits that “[c]urrently, there are no specific policy exclusions or terms in regular use that are tailored to address risks from nanotechnologies,” and it notes that one reinsurer, GenRe, stated that “today most nanotechnology risks are written on occurrence policies”—a shorthand term for commercial general liability policies. Lloyd’s of London has written that nanoparticle toxicity “could impact a suite of liability covers” and that nanotechnology risks could “require the insurer to pay for:
- Clean-up costs of land and water contamination
- Medical costs of treatment of human exposure
- Liability claims from persons directly affected, environmental groups and shareholders
- Unexpected life, health and workers compensation
- Latent liability claims of persons affected
- Business interruption while facility is investigated
- Cost of product recall.”
In another paper describing options for insurers facing nanotechnology risks, a lead researcher on emerging risks for Lloyd’s of London writes that “[t]he insurer can accept that nanotechnology risks are included within the overall set of risks that the insurance policy covers and therefore may not need to mention nanotechnology specifically. The additional risk introduced is then reflected in the price of premium for the insurance.”
Despite these acknowledgments, it seems likely that insurers will balk at the first large nanoproduct-related claims. Allianz, for example, notes that part of its response to nanotechnology risks would be “posing questions about trigger of coverage.” Lloyd’s, in its description of nanotechnology risks and liabilities, employs terms designed to trigger common exclusions: “pollution spill,” “accumulate in the environment,” “product recall,” and “clean-up costs.”
As it stands today, then, most policies do not exclude risks from nanoproducts, and insurers acknowledge that policies already in place may cover such risks. Below, we offer guidelines for policyholders in assessing whether their property and commercial general liability policies provide such coverage.
Property. In order to meet its initial burden to show coverage under a property policy, a policyholder must show that it suffered property damage. For example, if real or personal property becomes permeated with nanoparticles in such a way that the property either cannot be used or loses value, that should constitute property damage under most common definitions contained in first-party property policies.
In policies that specify allowable causes of loss, policyholders will also have the burden of showing that the nanoproducts fall within one of the specified causes. Most so-called named-risk policies provide coverage for losses caused by fire, lightning, explosion, windstorm/hail, smoke, aircraft or vehicles, riot or civil commotion, vandalism, sprinkler leakage, sinkhole collapse, and volcanic action. In addition, so-called extended cause-of-loss forms cover losses caused by glass breakage; falling objects; weight of snow, ice, or sleet; water damage; and collapse. Although nanoproducts do not appear in either list, many courts look to the predominant or efficient proximate cause of a loss to determine coverage; therefore, a loss ultimately caused or predominantly caused by one of the listed perils would be covered even if nanoparticles or nanotechnology contributed to the loss, absent an exclusion.
Under a so-called all-risk policy, the insured would not have to show that nanoproducts were a covered cause of loss. An all-risk policy “extends to risks not usually covered under other insurance; recovery under an all-risk policy will be allowed for all fortuitous losses not resulting from misconduct or fraud, unless the policy contains a specific provision expressly excluding the loss from coverage.” Under such a policy, the policyholder needs only to show damage to or loss of covered property.
Once the policyholder has met its burden to show coverage, the insurer must prove that an exclusion applies to the insured’s loss. The common exclusion on which insurers most likely will focus is the pollution exclusion. Standard-form property policies (both named-risk and all-risk) purport to exclude losses caused by the “discharge, dispersal, seepage, migration, release or escape of ‘pollutants.’ ” “Pollutant,” in turn, is defined as “any solid, liquid, gaseous or thermal irritant or contaminant, including smoke, vapor, soot, fumes, acids, alkalis, chemicals and waste.” Although nanoproducts do not fit within any of the specific items listed, insurers are likely to argue that they constitute “irritants” or “contaminants.” Because these terms usually are not defined in insurance policies, courts will look to the normal and ordinary usage of these terms, typically by reference to dictionaries. Nanoparticles used in products do not fit a normal definition of “contaminant” or “irritant.”
Even if an insurer could show that nanoproducts fit within the definition of “irritants” or “contaminants,” it still might not prevail. Many courts limit pollution exclusions to traditional “environmental pollution,” on the basis that otherwise, the extension to any “irritant” is overbroad and ambiguous, extending to things no reasonable insured would expect to be considered a pollutant, such as common dust. The argument that the common pollution exclusion does not extend broadly enough to reach nanoparticles is also supported by the presence in nearly all modern property policies of a separate exclusion for losses caused by asbestos, which was added when courts held that asbestos was not a “pollutant.”
CGL. To recover under a commercial general liability (“CGL”) policy, a policyholder must show that it suffered losses based on, among other things, liability for property damage or bodily injury, caused by an “occurrence.” An “occurrence” is typically defined as an “accident, including continuous or repeated exposure to substantially the same harmful conditions,” which likely extends to several of the loss scenarios that Lloyd’s of London identified.
As with property policies, insurers are likely to argue that the pollution exclusions in CGL policies preclude coverage for losses caused by nanoproducts. The standard pollution-exclusion language in CGL policies is similar to that discussed above, applying to the “actual, alleged or threatened discharge, dispersal, seepage, migration, release or escape of ‘pollutants’ ” and incorporating the same definition of “pollutant.” This exclusion will not apply at all to liability for bodily injury. Insureds will want to make the same arguments against its application to property damage as discussed above for property policies. Policyholders will have the additional argument, however, that the pollution exclusion does not apply to products coverage, which likely would apply to damage caused by nanoproducts.
Future of Insurance Coverage for Nanotechnology
As more industries begin to incorporate nanotechnology into their products and services, the benefits and risks of nanotechnology will become more recognized and widespread. As they do, look for insurers to react in a number of ways:
Insurers May Attempt to Graft New Exclusions Onto Existing Policies. As the Lloyd’s of London lead researcher put it, “Insurers could, theoretically, exclude any liability related to losses caused directly by nanotechnology. As long as the exclusions are well worded and enforceable this reduces the risk to the insurer to near-zero . . . .” As mentioned previously, one insurance company, Continental Western Group, has already introduced into its policies exclusions for:
bodily injury, property damage, and personal and advertising injury related to the exposure of [sic] nanotubes or nanotechnology in any form. This includes the use of, consumption of, ingestion of, inhalation of, absorption of, contact with, existence of, presence of, proliferation of, discharge of, dispersal of, seepage of, migration of, release of, escape of, or exposure to nanotubes or nanotechnology.
But despite the possibility of an industrywide exclusion for nanotechnology exposure, other insurers have not yet followed suit. Allianz, for example, writes that “it seems neither feasible nor appropriate to start a debate about a general exclusion of nanotechnologies from the commercial and industrial insurance cover today” because of the variety of nanotechnology products and applications.
Insurers Will Draft Their Coverage and Exclusions to Track Emerging Language in Statutes and Regulations. Nanoproducts potentially fall within the jurisdiction of a number of government regulatory agencies. Although such regulation is in its nascent stages, look for insurers to key their coverages and definitions of nanoproducts to the definitions found in government regulations. At the same time, insureds should be attentive to efforts to add exclusions at policy renewals and work with their brokers to preclude the introduction of coverage limitations.
Insurers May Increase Their Offerings of Specialized Coverage Once They Have Had the Opportunity to Better Assess the Risk. If offered, such policies, like other specialized, single-risk coverages, will most likely provide relatively low coverage limits and demand high premiums.
In the near term, companies should review their existing insurance portfolios to assess the potential to cover their nanotechnology assets and should discuss any questions with experienced insurance coverage counsel who can assess the availability of coverage in conjunction with the undertaking of emerging regulations.