Nanotechnology presents great opportunity, but the impact on insurance is still unknown
Insurance professionals gathered in the oak-paneled Old Library of Lloyd’s of London this past December to learn more about a risk that the institution’s 17th century founders could never have dreamed of — nanotechnology.
Some risk analysts predict nanotechnology could be the next asbestos, while others say all the publicity represents much ado about nothing. The impact likely sits somewhere in between, and ultimately the legal and insurance industries, along with the nanotechnology industry itself, will define where it stands.
At the seminar, the emerging risk team of Lloyd’s released a report titled “Nanotechnology Recent Developments, Risks and Opportunities.” This new publication joins four earlier comprehensive reports published by major insurance industry brain trusts wrestling with the potential insurance implications of the emerging nanotechnology field. But while major firms such as Lloyd’s, Allianz, Munich Re, Swiss Re and Guy Carpenter help spread the word regarding nanotechnology and define potential risks associated with its applications in both business and personal life, the fact remains that nobody really knows what the impact on insurance will be.
Nanotechnology is defined as the design and implementation of devices and systems at the nanometer (one billionth of a meter) scale, intended to improve product and system performance. For a sense of perspective, viruses are examples of natural objects on the nano (nm) scale, as well as a red blood cell (7,000 nm in width), DNA molecule (2 nm), and a silicon atom (0.2 nm). But unlike asbestos, nanotechnology represents an entire scientific and engineering field, not just a single product.
Nanotechnology’s global product revenue in 2004 was approximately $158 billion, projected to grow to $2.6 trillion by 2014, when it is estimated that 15 percent of all products will contain some form of nanotechnology. The biggest product category currently containing nanotechnology is health and fitness, which includes clothing, cosmetics, sunscreens and drug delivery, as well as sports equipment, such as improved tennis balls and stronger rackets. Other large categories are food and beverage products, metallurgy and electronics.
While in the absence of any incidents the impact remains educated guesswork, but it is generally agreed that nanotechnology’s two main risks are its effects on human health and on the environment. There are several ways that nanoparticles can enter the body, including inhalation, ingestion, absorption through the skin and direct injection for medicinal purposes. However, it remains unclear whether nanoparticles can cause chronic health effects, and if so, to what degree. Since nano-sized objects can be more toxic than their large-scale form, it is unwise to allow unnecessary build-up of nanoparticles in the body until the toxicological effects of that particular nanoparticle are known.
The environmental impact is also guesswork. If absorbed, harmful particles may travel up the food chain to larger animals, as DDT did. Some nanoparticles, such as copper and silver, have already been shown to harm aquatic life. In the absence of regulation or historical data, questions remain.
A 2005 study by the United Kingdom’s Royal Society addressing the question of nanotechnology’s environmental impact can also be applied to human health. “There remains virtually no data on the potential impact of nanomaterials on the environment,” the study authors wrote. “Research into the ecotoxiclogy is urgently required.”
In the absence of hard data, not everyone is convinced of the extent of risk posed by nanotechnology. Charles Brumlik, J.D., Ph.D., of NanoBiz LLC, believes that, while nanoparticles could have short-term risks due to their reactivity, the long-term effects may often not be as severe as those of their larger counterparts.
“Nanoparticles such as reactive metals can be very explosive if properly dispersed with air, and some are used by the military and NASA for high-energy materials,” said Brumlik. “Nanoparticles quickly dissipate, while larger metals build up over time.”
When discussing silver nanoparticles’ effects and harm on aquatic life, Brumlik noted that nanotechnology uses very small amounts of material. “The likely amount of nanosilver compared to traditional uses of silver would be thousands to trillions of times less,” he said. “These smaller amounts combined with higher reactivity often reduce the long-term environmental risk due to particle degradation.”
With regard to the use of nanoparticles for medical purposes, Brumlik explains that the “concentration in tissue is only an issue for non-degrading nanoparticles. Drugs or reactive materials in nanoparticle form often last long enough to target treatment of specific body areas, but do not last long enough to accumulate.”
From a legal standpoint, with practices of disclosure of nanoparticle content and potential risks still evolving, there is a lack of evidence to date of personal injuries caused by nano-based products. The lack of industry and regulatory standards creates the potential for hindsight judgments in the future, as well as greater opportunity for design defect claims, and complex causation scenarios could lead to highly individualized case-by-case litigation.
Jeffrey Bromme, partner at the Washington, D.C., office of Arnold & Porter LLP, explains that most nano-industry legal work to date has focused on non-litigation issues, such as intellectual property and transactional issues, rather than defending personal injury or other similar claims.
“There has been no wave of liability claims to date,” Bromme said. He observes, however, that commercialization of nanotechnology seems, at least to some extent, to have outpaced the development of scientific consensus regarding risks.
“Scientists are still trying to understand the risks,” Bromme said, “and even the development of a consensus framework for identifying and assessing risks remains a work in progress. In addition, some have questioned whether existing statutory and regulatory regimes provide regulators with all the tools they may need to address risks, if any, arising from the technology.”
He also notes that regulators in the European Union and elsewhere may approach the issue somewhat differently from regulators in the United States, and so the industry will eventually be confronted with conflicting regulatory regimes. In the meantime, Bromme’s firm is helping clients assess and establish “best practices” for the implementation of nanotechnology, recognizing the existing challenges.
While potential claim scenarios involving nanotechnology are limitless, there are several categories where it is agreed that claims would most likely result — products liability, environmental impairment, automobile liability, workers’ compensation and medical malpractice.
Products liability claims, for example, could arise from bodily injury, as well as property damage from development and design errors, faulty manufacture, and product defects.
Companies that engage in nanotechnology applications could incur environmental impairment liability if activities at manufacturing plants, warehouses, waste management and disposal plants have an adverse effect on the environment. Similarly, the risk exists that the transportation of nanotechnology products could impact the environment.
And by hiring employees to work in a nano environment, employers have the responsibility to create safe, cleanroom-type working conditions. Active nano products released during manufacture could ultimately endanger the lives of workers, resulting in workers’ comp claims.
Nano applications such as gene therapy could impact the medical malpractice coverage of physicians and hospitals. Other areas of potential concern are pharmaceutical dosage regulators for patients, as well as implants and other future technologies.
When new risks emerge, the applicable insurance coverages go through an evolutionary process. We’ve seen it happen with asbestos, employment-related practices, Y2K and other perceived emerging risks, and we will likely see it with nanotechnology.
Guy Carpenter’s 2006 report “Nanotechnology: The Plastics of the 21st Century?” splits this evolutionary process into three stages.
During the first stage, the early study period, coverage continues under existing insurance policies while insurers and reinsurers try to become more familiar with nanotechnology’s special risks.
Next comes the fear phase. This is where insurers fear that the risks may be greater than originally estimated. Coverage in this phase is reduced via higher specific retentions, use of sub-limits, and the introduction of claims-made coverage or exclusions. In the worst-case scenario, pool solutions or government support may be introduced, similar to the approach taken to the terrorism threat in the United States and elsewhere.
Guy Carpenter describes the last stage as the mature phase, whereby the insurance market introduces reasonably-priced customized solutions and policies. By this point, insurers can predict with more precision the likelihood of loss, claim frequency and other risk factors. Coverage solutions might be stand-alone policies or integrated into standard policies.
For the nanotechnology risk, we are currently in the first stage. There are no known exclusions under current general liability, workers’ compensation, environmental, professional liability or other policies. Due to the severe lack of regulation and data, it is challenging to anticipate potential future claims activity, and research continues on the behavior of nano materials, methods to measure exposure and assessment safety across all areas of usage.
In the past, due to world events, questionable exposures such as silica, mold (both issues in the construction and real estate sectors), and electromagnetic radiation were ultimately excluded under the wordings of standard commercial general liability policies. More recent examples are exclusions for Y2K and mad cow exposures, as well as terrorism. No such nanotechnology exclusions currently exist under any other coverage wordings, as it’s too early in the process to measure possible bodily injury, property damage or environmental impairment.
Joe Picone, managing director in charge of claims at Hilb Rogal & Hobbs, said: “There haven’t been any claims to date that I know of regarding nanotechnology.” He added, however, that there could be a latency issue from a workers’ compensation standpoint.
While policy contract wordings remain unchanged, insurers have been careful to address nanotechnology in other ways. For example, in a 2005 report, Allianz Global Risks CEO Axel Theis stated: “Allianz believes that it would not be appropriate to create a general exclusion of nanotech from insurance coverage. However, a general ‘wait and see’ attitude is also not an option. As a responsible insurer, Allianz has worked in this report to stimulate an early, active and positive response to nanotech-related risks from all parties involved.”
To safeguard against a repeat of the asbestos experience, reinsurer Swiss Re advocates a strict application of the precautionary principle in the regulation of nanotechnology. The insurer emphasizes that conservative regulation, putting health and safety first, must be adopted regardless of the scientific uncertainties.
Connie Germano, senior vice president at ACE USA, said that while insurers have not revised policy language to address nano exposures, it is best to be informed and prepared. “At Ace, we have been monitoring the situation,” Germano said. “We view it as an important risk management topic that should be explored by all parties.”
The Chubb Group of Cos. has adopted a client-focused strategy of developing effective loss control measures in addressing nanotechnology exposures. Louise Vallee, loss control services research and development specialist at Chubb, said the company’s position is that “nanotechnology is here to stay, so let’s assist clients in making sure it is used and applied in the safest manner possible.”
Vallee says Chubb tries to keep abreast of all emerging technologies in order to develop best practices, noting that most businesses involved in nanotechnology are small- to midsized firms still in the research and development stage, rushing to market.
“We want to help clients build safety and health procedures on the ground level, as it’s cheaper to build safety at the beginning, rather than retro fit it,” he said. To do this, Chubb relies on guidelines developed by the National Institute for Occupational Safety and Health, including stratified risk. Chubb considers workplace conditions, such as whether the nano environment is wet or dry, and if the particles are airborne or enclosed.
Vallee also points out that the organic applications of nanotechnology have risks. “Carbon nano tubes may have a possible link to fibrosis caused by inhalation,” he said.
While the insurance industry scrambles to stay ahead of the curve, the general consensus is that it will be several years before insurers have a clearer understanding of nanotechnology’s potential risks. As this technology emerges and matures, insurance carriers will play an important role in facilitating this new industry, and if necessary, putting the brakes on if the risks prove too great.
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