The NanoBCA would like to share with you an interview that was conducted on August 27, 2014 with Allen Gelwick, Executive VP of Lockton Companies. Mr. Gelwick is one of America’s leading insurance experts and has been an active participant in the nano community for over a decade.
NanoBCA:
Historically, how has the insurance sector dealt with nanotechnology?
Mr. Gelwick:
The insurance industry thus far has essentially dealt with nanotechnology by taking a “wait and see” approach. This is not unusual as the nature of insurance is to look retrospectively at events to determine how to set policies and rates. The challenge here is that nanotechnology is an emerging technology with little or no history. Thus, insurers cannot use the past to accurately predict future events. A basic tenant of the insurance sector is to rely on accurate predictive capabilities, which simply do yet not exist for nanotechnology.
NanoBCA:
Are there any steps that the insurance sector can take while waiting for data?
Mr. Gelwick:
Without the benefit of adequate historical data, the insurance sector has done its best to try to develop an understanding of risks associated with nanotechnology. To that end, risk control experts and actuaries from the major insurance carriers have engaged in nanotech specific conferences and meetings for over a decade with the intention to better understand risks associated with this emerging technology. They have also looked to government agencies for guidance.
NanoBCA:
Why can’t an insurer just make an educated guess and then revise rates as the data become available?
Mr. Gelwick:
Actuarial science is the discipline used by insurance companies to establish pricing. It’s a data driven discipline that does not lend itself to the flexibility you suggest. However, there are some actuaries who believe that emerging risk can and should be quantified. This creates somewhat of double-edge sword for insurers which could result in increases in reserves by the insurer, adversely impacting the insurers ability to remain competitive, in order to cover the risk.
NanoBCA:
If my nanotech company today has a standard policy, am I not already covered to some extent regarding risks arising from nanotechnology?
Mr. Gelwick:
There has been growing discussion in the insurance sector regarding the potential coverage implications due to specific existing coverages such as Products Liability, Workers Compensation, Health, Professional liability and Environmental liability. While there is not a specific “nanotechnology” exclusion written into the policy, Products, Liabilities, and Professional Liability (D&O, Medical Malpractice, EPO, etc) should raise a serious concern to the insurers as well as the company and their investors. Health coverages are likely to assume a majority of the emerging health risks. The good news is our health plans and workers compensation policies should continue to respond.
Some of the insurance industry articles have discussed products recall as an exposure, but this exposure is not generally covered by insurance and instead remains a specialty coverage. Perhaps most surprising is that neither health insurers nor state-funded Workers Compensation carriers have become vocal yet on the implications of this emerging technology. Those two will likely have the greatest share of liability.
NanoBCA:
Risks that are akin to those contemplated with a nanomaterial have been around for a long time, say for instance in the chemicals sector. Are there not established mechanisms in the insurance sector to deal with such risks?
Mr. Gelwick:
This is a good segue into why coverage should be reviewed. Unlike most professional liability and environmental policies that generally incorporate a “claims-made” coverage trigger, most U.S. products liability policies currently use an “occurrence” coverage trigger. We are now getting into some nuances that I am happy to discuss with anyone who is interested to dig deeper on this topic. Suffice it to say that there are significant pricing and potential liability dollar amounts that result from the type of coverage trigger. I will be covering this topic in more detail in some upcoming publications.
NanoBCA:
One last question on this topic: you mentioned “U.S.” policies; are European policies different?
Mr. Gelwick:
To some extent, yes. “Claims-made” coverage for products and completed operations is common in Europe, but not in the U.S.
NanoBCA:
What, if anything, is being reported in the insurance sector literature on the topic of nanotechnology?
Mr. Gelwick:
Articles on the topic of nanotechnology risk generally convey that a steep learning curve is underway and that the regulatory framework, which will govern nanotechnology, is still a work in progress. There are excellent high level and introductory articles offering views on this promising technology that, to date, come mostly from global insurers such as Allianz, ACE, Chubb, Gen Re, Lloyds, Swiss Re, and Zurich etc. However, very few of these publications have yet to discuss potential coverage issues.
NanoBCA:
Does a nano-specific policy exist yet in the marketplace?
Mr. Gelwick:
AIG’s licensed non-admitted carrier, Lexington Insurance, is the first carrier to offer a nano-specific coverage, known as “LexNano Shield.” Another surplus lines carrier (a licensed non-admitted carrier in the U.S. – meaning they operate outside of any state guarantee funds and are essentially unregulated as it relates to coverage), James River, is also willing to underwrite and cover some nanotechnology related risks. Aspen currently incorporates nanotechnology questions that if addressed can affirm coverage. And finally, Zurich developed its “ZNEPtm” protocol to underwrite nanotechnology exposures.
NanoBCA:
Sounds like progress is being made to address some of the concerns you mentioned above?
Mr. Gelwick:
Yes, but as an aside, Lexington continues to advise companies in the nano space save the $5,000 or more per year by rolling the dice that there are no nano specific coverage exclusions (and perceive that retaining “Occurrence” coverage will protect them.) This is a bet, that if wrong, could impair an exit strategy or otherwise adversely impact your investors. No doubt that entrepreneurs will take risks. And, when it works out, we tend to romanticize this behavior. When it does not work out, however, investors and the public are at risk. A difference between Europe and the U.S. is that regulations are already being implemented in Europe and the public demands that risks are assessed before products are introduced to the marketplace. Regulations in the U.S. are inevitably coming, but as stated previously, the sector is largely unregulated currently and insurers are in a reactive mode rather than a proactive mode.
NanoBCA:
Do insurers use “nanotechnology” as a classification for coverage analysis, or do they look at more distinct categorization?
Mr. Gelwick:
The insurance industry, like regulators and scientists, continue to argue over the definition of nanotechnology.
While this discussion focuses on nanotechnology, we should note that chemicals also remain largely uncharacterized. Insurers therefore usually require a “Claims-made” coverage trigger to address their inability to assess the risks of long-term exposures to certain chemicals. From an underwriting standpoint, and with a lack of an adequate regulatory framework, insurers are applying protocols often adapted from the chemical, medical and environmental exposures to underwrite emerging technologies.
An example of how underwriters can underwrite in the absence of specific classifications is Zurich’s “ZNEPtm”.
NanoBCA:
What specific questions about nanomaterials are insurers most concerned about?
Mr. Gelwick:
Every article that I have seen suggests that toxicological assessments of nanomaterials are broadly needed. And although a tremendous amount of funding has been expended to develop nanomaterials, the smallest portion of that funding has been assigned to understanding risk.
For instance, we find that very few nanomaterials have been characterized for EHS purposes. Further, a smaller percentage of those have been independently evaluated by toxicologists for impacts on workers, consumers and the environment. Without such evaluation, I believe there exists a false sense of security for us all.
NanoBCA:
Can you sum this up for us more in layman’s terms?
Mr. Gelwick:
Keep in mind that insurance is simply a method to finance business risk. Insurance carriers and risk practices use risk identification as a necessary first step, then they measure the risks identified, as best they can, to determine the cost of risk transfer through insurance. Any business should use a similar process to decide whether to transfer the risk to a qualified insurer, or alternatively to retain the risk.
NanoBCA:
So, it sounds like you are saying that many companies do not do this?
Mr. Gelwick:
Well, we can start by acknowledging that less than 100 nanomaterials have been characterized, yet there are in active development.
Universities, where a majority of the research is conducted, have proven to be very reluctant to allow independent safety assessments of their nanomaterial laboratory activities. Small companies tend to not have the funds necessary to properly assess nanosafety, or at least they perceive the cost as too expensive. And, larger companies, like Johnson & Johnson, tend to be self-insured and may or may not have an understanding of the risks including risks to supply chains upon which they rely.
NanoBCA:
As you mentioned previously though, insurance policies do, to some extent, currently cover risks associated with nanotechnologies?
Mr. Gelwick:
Generally, the structure of the policies relevant here are classified as “occurrence” policies which means that if you have a policy for year 2014, then any claim in future years (say, in 2018) that points to an event in 2014, will be covered by the terms of the policy as it existed in 2014. (Note: every state has different laws in this regard which creates a level of complexity). So, for illustration sake, if an “occurrence” policy does not exclude nano, then in many states, plaintiffs’ attorneys would be able to sue for every single year, under a separate policy for each year, that a suspect material was produced. This creates a scenario where multiple claims are possible. That is why the “occurrence” coverage trigger vs. the “claims made” coverage trigger presents such significantly different financial consequences.
NanoBCA:
So, is this scenario bad for the insured, or the insurer, or both?
Mr. Gelwick:
Any ambiguity usually works to the benefit of the insured. Thus, it is commonly believed that this is ultimately a problem for the insurer. However, the reality is that this scenario will likely hurt the insured more because the company may end up in a situation, post claim, that it can not find an insurer that will provide coverage at an acceptable cost moving forward from any claims which, as mentioned above, could also impact exit strategies for investors. As claims increase, insurers will predictably evolve to either limiting coverage or creating exclusions.
NanoBCA:
You make a good point. But, what “claims” are out there currently?
Mr. Gelwick:
Of current significance is the recent hip replacement claims against Johnson & Johnson and its subsidiaries. These claims account for over $4 billion in offered settlements by Johnson & Johnson. You can bet that plaintiff attorneys are considering this as a template for future litigation on other products.
NanoBCA:
Aren’t the insurers incentivized to figure out a way to create a market to sell nano specific policies, and to control risks associated therewith?
Mr. Gelwick:
Yes, and they are working on it. For starters, the reinsurance sector will likely begin inserting and requiring answers to nanomaterial specific questions to assist with the underwriting process. This will force the applicant to answer difficult risk questions associated with nanomaterials. Since nanomaterials are rarely disclosed, yet are commonly incorporated into products, it is currently almost impossible for insureds to answer these questions completely. Failure to do so, however, will likely create coverage gaps, particularly as it relates to supply chain risk. This process will, in some instances, evolve to create insurance exclusions. However, where enough understanding and data is available, buy-back policies or endorsements will likely become available.
NanoBCA:
Is there a precedent for this seemingly awkward point in time that we are in with regard to nanotech and insurance?
Mr. Gelwick:
Most would cite asbestos and the evolution of pollution exclusions, but this in my view this is too narrow a focus and assumes the worst when it is more likely that only a limited percentage of nanotechnology will equate to this level of risk. In fact, nanotechnology will likely help reduce risks in the future, as evidenced by nano enabled products that can clean-up pollution.
However, I agree with some observers who believe that we are in unchartered territory as the number of new and innovative chemicals, not to even mention nanomaterials,that have recently been introduced into commerce is growing at a steep exponential rate. Risks are not yet known as to most of these.
Michael Depledge, the former Chief Scientific Advisor of the UK Government’s Environment Agency, gave a presentation on point this June in London at the Royal Institute for EMTECH, an emerging fund being created to invest in emerging technologies. He offered two slides that from an insurance standpoint help us consider emerging risk from a historical standpoint. Those slides illustrated that the lag time from the introduction of any new technology to the adequate recognition and understanding of associated risks is generally about 10 years. The number of new chemicals and materials has experienced truly “off-the-charts” exponential growth in the 21st Century. What the future holds in terms of risk is literally growing faster than we can possibly fathom.
NanoBCA:
So, how do you manage this increase of unknown risks?
Mr. Gelwick:
Insurance companies will simply have to increase the size of their reserve funds to offset incurred and unknown risks on these new materials because they may likely have to pay claims on them down the line.
NanoBCA:
Any other observations to share regarding the future of nanotechnology risk insurance?
Mr. Gelwick:
People often ask me if insurers will simply exclude nanotechnology. Nanotechnologies have been in the stream of commerce now for over ten years and, to date, only one insurance company that we know of has put an exclusion on nanotechnology. But things are changing rapidly. Most insurance companies are starting to consider nanotechnology through their underwriting groups already supporting high hazard classes of business such as chemical companies or environmental exposures. The analysis of insuring consumable products will follow except to the extent the exposures are covered by regulatory agencies such as the FDA. Ultimately, nanotechnology will be incorporated into all realms of insurance risk assessment and coverage.
NanoBCA:
What do you see as the toughest questions emerging in the arena of nanotechnology risk and liability?
Mr. Gelwick:
How do you exclude something from a policy if even the applicant doesn’t know that the risk exists? There are many risks that we just simply do not know yet. How does that play out in court? Can those risks legally be excluded? Probably not, but these things will play out in court. And that will take some time.
NanoBCA:
So, what conclusions, if any, can we make about the future course of insurance for nano?
Mr. Gelwick:
I would conclude that there will continue to be a lot of confusion in the future, at least the near future – 5 to 10 years. It seems logical to me that insurers might shift Products, Liability from the “occurrence coverage” model to a “claims made coverage” model as discussed earlier. The advantage of the “claims made” model is to limit the cost of distracting and expensive litigation. This model really appears to be best suited for an emerging technology with unknown risks, such as nanotechnology. Insurers will need to broaden tail coverage to be able to offer reasonable pre-agreed pricing for tail coverage and to structure these policies to reflect the different statute of repose for different states providing confidence to the insured. This enables a more sustainable economic model for all stakeholders.
NanoBCA:
What role will the pending hip replacement class action products liability lawsuits have on the insurance sector?
Mr. Gelwick:
Frankly, I see the hip replacement litigation serving as a roadmap for more claims from the plaintiffs’ bar. They will not only look prospectively at new products and new claims, but will also look retrospectively at the possibility of adding nanotech specific claims to products produced over the past ten or so years. Each day that we as a nanotech business community fail to address issues we have discussed today, simply benefits those who make their livings from litigation.
NanoBCA:
Do you attach any historical significance to this hip replacement litigation?
Mr. Gelwick:
Yes, I think we are indeed at a watershed moment. Previously there have not been any claims against insurance policies, or allegations contained in lawsuits, that specifically cite “nano” anything. This hip replacement litigation, which is resulting in settlements in the billions of dollars, is the first to identify “nano” as a specific allegation of causation. Note that only the surface of the hip incorporated nanotechnology, yet it appears to be the proximate cause of loss. This is significant because it serves to educate the plaintiffs’ bar that nanomaterials exist and may be a component of causation, and thus liability, of other products in the future (and the past). Also, given what we know about the huge volume of products in the flow of commerce that include nanomaterials, it is reasonable to assume that this hip replacement litigation is the first of many to come that will implicate nanomaterials.
NanoBCA:
This is all very enlightening and confusing at the same time. As you say, confusion is likely to reign for a while longer. With that in mind, should nanomaterials companies seek insurance coverage today? And, how would they get it?
Mr. Gelwick:
Yes, nanomaterials companies should absolutely seek coverage. If anything, the hip replacement litigation shows us that liability is very real and that it can be extremely expensive to find yourself as a defendant in a products liability and recall action without coverage to the point that it could easily destroy companies that do not have a good risk strategy plan in place. I hope and suspect that the nanomaterial producer, or producers, for Johnson & Johnson had a contract(s) holding them harmless, or their business(es) could be in jeopardy. So, use of contracts to mitigate its risks become critical.
We also now know that taking the approach of “putting your head in the sand” to feign ignorance will be no match in a court of law against the reasonableness standard of independently assessing safety. From an insurance standpoint this will trigger a common coverage exclusion “expected or intended” creating grounds for an insurance carrier to deny coverage.
A more prudent approach, in my estimation, would be for companies to pursue “Claims-made” coverage, broadened from traditional offerings as we discussed, to affirm there is coverage for nanomaterials that are known and to include those materials the insured can be reasonably held to have known contained nanomaterials. And, companies should make efforts to fully understand, to the extent possible, the nano risks associated with their business and products. This would include toxicological analysis and data regarding risks to their workers, consumers, and the environment. Ultimately this understanding and data will be very useful because insurers (as well as current shareholders and future investors) are going to demand answers to these questions. Moreover, EPA requires this data for approval of manufacturing and sales of nanomaterials in the U.S.
Larger companies that utilize nanomaterials from third parties are also at risk. They are likely not aware of whether a supply chain risk exists that may seriously disrupt their production schedules. These large companies may want to consider purchasing aggregate stops on their large retention cash flow programs.
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I would like to thank Mr. Gelwick for his insight in regard to the insurance industry as it relates to nanotechnology. I hope you have enjoyed Mr. Gelwick’s interview as much as I have.
Regards,
Vincent Caprio “Serving the Nanotechnology Community for Over a Decade”
Executive Director
NanoBusiness Commercialization Association
203-733-1949
vincent@nanobca.org
www.nanobca.org
www.vincentcaprio.org
