All-Star Briefing Thought Provoking Insights That Will Keep You At The Top Of Your Game

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Laura A. Foggan (Wiley Rein LLP) discusses emerging risks in insurance

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Kim M. Bryan (New York City Law Department) Laura A. Foggan (Wiley Rein LLP) assesses the insurer's view of top, current coverage issues

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Laura A. Foggan (Wiley Rein LLP) discusses emerging risks in insurance coverage

PLI: Can you talk about some of the emerging risks in insurance coverage these days?

LAURA A. FOGGAN: This year, the emerging risks seem like old friends. By now, we have all given some thought to catastrophic losses from events such as 9/11 and Hurricane Katrina. But have you familiarized yourself with the growing discussion about potential liability from man-made losses of global warming? Also, food and product safety failure issues have dominated the news in the past year, with lead paint toy recalls and the largest beef recall in history in the headlines. There are interesting coverage issues that deserve a closer look here, too. And toxic substances have spawned a whole "toxic tort" specialty in tort and insurance law. Some toxic claims – such as those stemming from lead paint and welding rods – have thus far remained contained exposures. These substances may prompt large dollar verdicts in the future, however – and other toxic exposures, such as MtBE, asbestos and even nanotechnology present serious risks for the future. Below is a summary of the reasons why [I think] claim trends in the CGL area includes...more litigation from natural and man-made catastrophic loss, food and product safety failures, and toxic exposure claims.

Natural and Man-Made Catastrophic Losses: Difficult coverage issues are being posed by the application of insurance policies to catastrophic losses stemming from terrorism and natural disasters. The events of 9/11 spawned not only a series of cases on the application and scope of business interruption coverage, but also a number of significant liability coverage claims. In the aftermath of Hurricanes Katrina and Rita, key issues have arisen over the application of widely-used flood exclusions in both homeowners and commercial policies, the factual cause of losses in "flood vs. wind" disputes, and the scope of business loss coverages.1 Hurricane Katrina also prompted unusual liability claims. For instance, Comer v. Nationwide Mutual Insurance Co., No. 1:05-cv-00436-LG-RHW (S.D. Miss.) (filed Sept. 20, 2005), involved homeowners' claims against insurers for allegedly failing to pay claims related to Hurricane Katrina. However, plaintiffs added oil and energy companies as defendants, alleging that the strength of Hurricane Katrina was a direct result of global warming and that the oil company defendants engaged in activities that led to the development of and increase in global warming. Although these claims were dismissed as non-justiciable under the political question doctrine, plaintiffs have appealed.

In the future, there may be an increase in liability insurance coverage claims from policyholders who are sued for contributing to man-made climate change.2 Plaintiffs are attempting to hold individual companies or industries liable for climate change that causes property damage or bodily injury. In California v. General Motors Corp., No. 3:06 CV 5755 MJJ (N.D. Cal.) (filed Sept. 20, 2006), for instance, the California Attorney General filed suit against automakers, alleging that vehicle emissions have contributed to global warming and harmed the resources, infrastructure, and environment of the state of California. These claims also were dismissed on the basis of the political question doctrine; however, challenges to this ruling are anticipated. Climate change cases such as this one will produce disputes over the existence of an "occurrence," notice, and the expected or intended clause. These cases—involving decades of conduct allegedly contributing to global warming—also may produce disputes regarding the scope of coverage, such as issues pertaining to trigger, allocation, aggregate limits, and the number of occurrences.

Although early cases have been fraught with difficulty for plaintiffs' counsel, the increasing regulation of carbon emissions that may affect climate change – and the threat of future strict liability standards – seems poised to create fodder for future liability claims over injury or loss associated with global warming. Certainly, this area is one to watch for emerging claims in the coming years.

Food and Product Safety Failure Issues: The largest beef recall in U.S. history was announced recently, following a year of problems with toys, pet food, tires, toothpaste and more. The increase in food and product safety failures in recent months suggests that insurers will be faced with numerous claims, and the resulting coverage issues, arising from defective products and recalls. General liability insurers will likely face issues regarding: (1) the scope of the products-operations hazard; (2) whether "no-injury" claims for economic harm resulting from the purchase of a defective product are covered; (3) whether class action claims seeking medical monitoring for potential bodily injury must be covered; and (4) whether new theories advanced by plaintiffs' attorneys somehow implicate non-products coverage. In the context of the lead paint toy recalls, the meaning of lead paint exclusions may be at issue. Additionally, exclusions common to products liability litigation, such as the effect of sistership, insured's own product, and impaired property exclusions will likely be implicated.3

While the product liability component of general liability coverage does not cover the costs to the policyholder of a product recall, such as recall transportation expenses, consultant fees, lost profits and rehabilitation costs, food and product safety failures can prompt important coverage claims under general liability coverage. For instance, there may be consumer claims by or on behalf of the purchasing public or commercial claims among companies in the supply chain. General liability claims can arise where one company's product physically injures another's and over additional insured issues with respect to entities with whom the insured has ongoing business relationships.

Plaintiffs class action lawyers increasingly are alleging so-called "no injury" claims which seek to recover for the economic damage of purchasing a product that is defective. This presents interesting coverage issues: can insurers properly deny coverage for them as mere complaints of economic harm, not involving actual property damage or bodily injury? Even if there is no coverage for pure "no-injury" claims, what about mixed claims, particularly unjust enrichment claims combined with medical monitoring claims, for instance? In defective food and product cases, plaintiffs' attorneys often seek to recover the cost of periodic medical examinations to monitor for and detect conditions that can be caused by exposure to lead paint or other toxic substances. Some medical monitoring claims allow plaintiffs to recover monitoring costs without showing any present physical injury. There is surprisingly little case law on whether such claims trigger a duty to defend or indemnify under "bodily injury" coverages. If they do, there may be large exposures in store for general liability insurers.

This new wave of cases may also test a number of traditional exclusions. These include the sistership provision, which bars coverage for the costs of a product recall, e.g., the costs of withdrawing unsold goods when a potential product defect is discovered.

In addition, the insured's own product exclusion eliminates coverage for failure to produce a product as specified (breach of contract or economic loss to the manufacturer) but preserves coverage for damage to the property of a third party or for third-party bodily injury. Further, there is an exclusion for damage to "impaired property," which is defined as "tangible property other than 'your product' ... that cannot be used or is less useful because ... it incorporates 'your product' ... that is known or thought to be defective, deficient, inadequate or dangerous." Most general liability policies exclude "impaired property" from coverage if it has not been physical injured and the damage arises out of a defect in the policyholder's product. If the "impaired property" is physically injured, however, coverage may exist. This caveat—restoring coverage where an impaired product is physically injured—has resulted in substantial controversy and coverage in commercial claims among companies in the product manufacturing stream.

These issues and more will be tested in the newest surge of food and product claims. For example, are toys physically injured when coated with lead paint? The new suits over product and food safety are almost certain to revisit the meaning and scope of the business risk exclusions. Again, especially if regulation of products and food increases, this may mean emerging exposures for general liability insurers.

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Laura A. Foggan: If it's toxic, it concerns insurers

PLI: What about the top coverage issues facing general liability insurers today. Can you highlight what insurers are concerned about?

LAURA A. FOGGAN: Certainly, toxic substance claims are a "must have" on the list of emerging general liability exposures. The difficulty is in predicting which substances will emerge as those responsible for the largest losses. Some possibilities – such as lead paint and welding rod claims – have thus far remained somewhat modest dollar exposures, at least on an industry-wide basis. Others – such as nanotechnology risks – are untested to date. Below is a short overview of why these and other toxic substance risks will continue to be closely watched by insurers.

Lead Paint: Recent case developments and the employment of novel theories by plaintiffs' attorneys suggest that insurers may be faced with more serious liability claims involving lead paint in the near future. Many governmental claims, often pursued by private counsel retained on a contingency fee basis, now rely on the public nuisance theory—a theory which allows a government entity to take action to abate the impact of unreasonable behavior that injures a public right—in asserting claims against former lead paint manufacturers. These claims have gained force from the February 2006 Rhode Island jury verdict finding that the cumulative presence of lead pigment in paints and coatings on buildings throughout Rhode Island constituted a public nuisance.4 The jury found three lead paint companies caused or substantially contributed to the public nuisance and required them to rid more than 300,000 homes of lead contamination. The appeal is still pending before the Rhode Island Supreme Court.

The law on liability for lead paint hazards is divided, however. In 2007, a Wisconsin jury determined that the presence of lead paint in Milwaukee housing created a public nuisance, but makers of lead paint could not be held liable without a showing a negligence.5 Also in 2007, a New Jersey court rejected a public nuisance cause of action against paint companies, noting that labeling lead paint as a public nuisance would improperly stretch the theory since the product was legal when sold.6 Depending on how the law evolves, lead paint and pigment manufacturers may face dramatic new exposures or a relatively contained risk. In this respect, several major lead paint and pigment manufacturers already have presented claims to their insurers. If these companies are required to pay billions of dollars to abate lead paint conditions, there will almost certainly be hard-fought battles over whether insurance responds at all and/or to what extent to cover defense and indemnity costs of lead-related litigation.

MtBe Liability: In 1990, Congress amended the Clean Air Act, resulting in the addition of Methyl tertiary-butyl ether (MtBE) to gasoline to make it burn cleaner and more efficiently. Water providers and government entities began filing product liability claims against the oil industry in the late 1990s, alleging threatened or actual groundwater contamination and arguing, inter alia, that gasoline that contains MtBE is a defective product. Their suits arise from the fact that MtBE has seeped into groundwater used to provide drinking water, giving the water an unpleasant taste and smell. In 2000, several class action suits were consolidated in the Southern District of New York, but the presiding judge denied plaintiffs' motion to certify classes in the case and the claims of the individual plaintiffs were resolved.7 In 2003, the multidistrict litigation was reactivated as plaintiffs alleged public nuisance, design defect, failure to warn, negligence, private nuisance, trespass, civil conspiracy, and violations of state law.8 The multidistrict litigation remains pending now in the Southern District of New York. As the parties navigate this complex litigation, manufacturers and refiners of gasoline containing MtBE, as well as transporters and retailers, are increasingly looking to their insurers to shoulder the costs of these claims.

Benzene Risks: Products containing benzene also may bring widespread exposure. Workers may be exposed to benzene in a variety of operations, such as refining operations, shipment and retail operations, and the manufacturing of chemicals, plastics, and rubber. Benzene is also used in the making of lubricants, dyes, detergents, drugs, and pesticides. Additionally, many products contain trace amounts of benzene including paint, paint thinners, and kerosene. Most recently, claims have arisen regarding the presence of benzene in soft drinks, leading to multiple class action suits. Apart from direct exposure to benzene products, benzene can also be released into water and soil through the disposal of products containing benzene and through gasoline leaks from underground storage tanks.

The Insurance Information Institute's chief economist has referred to benzene as "a looming potential liability."9 Benzene exposure has been linked to numerous conditions and illnesses, including blood disorders, central nervous system damage, immune system damage, various types of cancer, and fertility issues. Benzene plaintiffs have won jury verdicts in California, Mississippi, New Jersey, Pennsylvania, Texas, and Florida. Settlements and damage awards in benzene cases can be high. In 2005, a Missouri jury ordered BP Amoco to pay $13.3 million in damages after a woman living near a refinery died as a result of contact with benzene, and a part-time aircraft painter was awarded $2.2 million by a California court for leukemia that was found to be caused by benzene exposure. These benzene liability claims are likely to prompt disputes insurance coverage in the coming years.

Welding Rod Exposures: Welding rod litigation typically involves claims that occupational exposure to manganese in welding fumes has caused neurological conditions that are similar to those exhibited with Parkinson's Disease. Claims have been filed against manufacturers and distributors of welding products, alleging conspiracy, negligence, strict product liability, and failure to warn. Although there have been a few large verdicts in welding rod claims,10 the overall scope of exposure remains unclear. Some coverage over welding rod risks already has been litigated and many such claims have been presented to insurers.

Nanotechnology Risks: Nanotechnology is an emerging science that involves making incredibly small materials and devices, often resulting in novel applications of common substances. While there is exciting potential for nanotechnology in medical procedures, manufacturing technologies, and environmental issues, various risks also surround the new field that could lead to insurance claims in the future. For instance, a 2006 congressionally-mandated report by the independent National Research Council recognized that "[t]here is some evidence that engineered nanoparticles can have adverse effects on the health of laboratory animals."11 Nanoparticles could trigger stress reactions that weaken the body's defense. Because current workplace standards for dust exposure cannot be applied to nanoparticle dusts, one of the greatest concerns is in the workplace of companies that produce or use nanomaterials and in the laboratories engaged in nanoscience and research.12 Additionally, there is concern regarding what will happen if non- or slowly degradable nanoparticles accumulate in bodily organs and interact with the body's biological processes.13

Nanoparticles could have adverse impacts on the environment as well. Nanoparticles can be released into the air or water during production, as a result of production accidents, or as a waste byproduct of production, resulting in accumulations in soil and water. Additionally, when nanoparticles are part of a manufactured product, the particles will eventually have to be recycled or disposed. Traditional filters apparently are not suitable for removing such pollutants from air or water, and it is possible that certain nanoparticles could be designated as a new class of non-biodegradable pollutant.14 Claims linked with this new science, clearly fraught with potential and risks, may face the insurance industry in the coming years.

Asbestos Claims: The recent Second Circuit decision in Johns-Manville Corp. v. Chubb Indemnity Insurance Co., _ F.3d_, 2008 WL 399010 (2d Cir. Feb. 15, 2008), reinforces that asbestos risks will continue to challenge insurers into the future. In the Johns-Manville case, the court ruled that a bankruptcy court channeling injunction cannot reach direct claims against an insurer based on breach of its own duties. As a result, area insurers who have settled their asbestos liabilities and obtained the protection of a 524(g) channeling injunction will continue to face asbestos risk. Other continuing asbestos risks include policyholder efforts to reopen old settlements based on uncapped premises limits in policies whose products aggregates are exhausted. In Continental Cas. Co. v. Employers Ins. Co. of Wausau, No. 601037/03 (N.Y. Sup. Ct. May 8, 2007), the trial court gave asbestos claimant and policyholder advocates hope that they could continue to tap insurers for more funds for "non-product" asbestos claims. Finally, claimants' attorneys continue to search out allegedly responsible parties in the installation, distribution and use of asbestos – and their insurance funds. Thus, a review of claim trends and predictions for future comprehensive general liability cases would be incomplete without including asbestos in the list of toxic substance risks.

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