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NEW ORLEANS-The third jury verdict against Dow Chemical Co. in a silicone gel breast implant case illustrates that parent companies need to keep close tabs on the liabilities of their subsidiaries, legal experts say.

After five months of trial, a Louisiana state court jury found there is sufficient cause for Dow Chemical Co. to remain a defendant in the nation's first class-action implant case to go to trial.

This is the third time that plaintiffs have effectively pierced the corporate veil that otherwise shields Dow Chemical from thousands of injury claims that have been filed against its subsidiary, Dow Corning Corp.

Based on internal confidential company documents, test results, correspondence and actual testimony of former employees to prove Dow Chemical's negligence, the jury found last week that Dow Chemical suppressed or concealed information about the dangers of using silicone in the body.

"This shows an American jury can't be fooled," lead plaintiffs' counsel John O'Quinn, a partner with O'Quinn & Laminack in Houston, said in a statement released after the verdict.

Mr. O'Quinn added, "Dow Chemical can't just throw their baby company into bankruptcy and walk away."

Plaintiffs lawyers also predict the verdict will open the door for compensation for potentially hundreds of thousands more women, as almost all breast implants, though made by several manufacturers, contain silicone gel tested by Dow Chemical and sold by Dow Corning.

If that should happen, Dow Chemical has virtually unlimited coverage under its general liability insurance program to defend those claims, according to Greg Smith, one of Dow Chemical's in-house lawyers.

The verdict may have a detrimental effect on Dow Chemical's attempt to obtain insurance coverage for defense and indemnification of these claims, some lawyers say.

"If they knew this stuff was bad and they failed to disclose that information to Dow Corning, then that raises the possibility that insurers may use the 'expected or intended' defense" to deny coverage, said Jim Otto, a partner at Los Angeles-based Cummins & White who regularly represents insurers in coverage suits.

Mark F. Rosenberg, a partner at Sullivan & Cromwell in New York, agreed.

"The insurers are going to have significant expected or intended exclusion arguments based on the language of this jury's findings," he said.

But attorneys for Dow Chemical characterized the latest verdict in Spitzfaden vs. Dow Chemical as merely the first step in a long, multi-phase legal process and not an indictment of Dow Chemical or the large body of medical research supporting the safety of silicone breast implants.

"All this decision really means is that the jurors believe Dow Chemical's conduct warranted moving to Phase II of the litigation," said John Scriven, Dow Chemical's general counsel.

The next phase of the trial, before the same jury, will determine whether the tested implants caused the plaintiffs' injuries.

"Nothing in this finding speaks to whether Dow Chemical or silicone breast implants caused the illnesses claimed by the women," Mr. Scriven said. He also asserted that the decision is not supported by the facts or the evidence in the case and will be reversed on appeal.

Midland, Mich.-based Dow Chemical has repeatedly asserted in court that it should not be held liable for the actions of Dow Corning because it only has a 50% stake in the now-bankrupt manufacturer of silicone breast implants. Corning, N.Y.-based Corning Inc. holds the other 50% share.

Dow Chemical has been dismissed from some 4,000 other silicone breast implant cases. Corning Inc., also named in thousands of implant claims, has been dismissed from most cases, though some state cases in which it is a co-defendant are pending.

However, Dow Chemical has increasingly become a litigation target since Dow Corning filed for bankruptcy protection in 1994.

In two other trials, a Houston judge threw out a jury finding against Dow Chemical, and a $14 million verdict against the company in Reno, Nev., is on appeal to the Nevada Supreme Court.

Plaintiffs in those cases were successful in proving Dow Chemical shared liability because it tested the silicone used and sold by Dow Corning between 1962 and 1967.

Besides the personal injury suits, Dow Corning and its parents also face cross-claims filed by other implant manufacturers facing similar litigation.

Dow Corning and Dow Chemical both have sued their general and product liability insurers seeking coverage to defend against these claims (BI, July 12, 1993).

While many of these coverage lawsuits have been settled, a significant portion of litigation is continuing, and both companies are in settlement negotiations with their insurers.

While Dow Corning has settled most of its coverage lawsuits, Dow Chemical is still in litigation with its insurers in U.S. District Court in Michigan, according to Mr. Smith, who is heading Dow Chemical's insurance coverage case.

Meanwhile, Dow Chemical in Janurary 1996 agreed to drop its objections to Dow Corning's insurance settlement negotiations under the condition that those recoveries be held in an escrow account until the underlying product liability litigation is resolved, he added.

Dow Corning and Dow Chemical also reached a settlement with Hoechst Marion Roussel, the successor company to former Dow Corning unit Marion Merrill Dow, which also objected to the company's insurance settlements. As part of that settlement, HMR will receive 2% of all insurance settlements Dow Corning had reached by January 1996 and 2.5% of all settlments reached afterwards.

In all of the settlements with its subsidiaries, Dow Chemical has reserved its right to pursue insurance coverage from the policies on which it is also named as a policyholder, according to Mr. Smith.

Some legal experts say last week's victory for breast implant plaintiffs may provide encouragement to plaintiffs' lawyers who have lost more cases than they've won against Dow Corning and Dow Chemical.

"I think it will in fact give greater incentives to the plaintiffs bar to pursue Dow Chemical," said Matthew L. Jacobs, a partner with Kirkpatrick & Lockhart in Washington. He is not involved in the implant litigation.

However, Mr. Jacobs said the defendants should feel stronger as they enter the next phase of the litigation because, so far, science is on their side.

Major studies at Harvard University, the Mayo Clinic and several other institutions have found that women with silicone breast implants were no more likely to suffer from immune system, connective tissue or other diseases than women without such implants.

Mr. Jacobs also pointed out that the case shows that parent companies must be diligent in following developments in litigation involving their subsidiaries, no matter how far removed they believe themselves to be.

"Even if you're a parent, you should put your carriers on notice right away, or you'll be denied coverage based on late notice," he warned.

The verdict should send a message to other parent companies to keep at arm's length from their subsidiaries, other lawyers say.

"If they're going to provide research, testing or other assistance, they are taking a risk that they can be held liable," said Mr. Otto.

The second phase of the Spitzfaden trial will begin Sept. 29 before the same jury to determine whether the tested silicone implants caused the injuries suffered by the eight women representing the class of 1,800.

The two remaining phases-one to notify other members of the class and another to adjudicate those claims-have been eliminated since the silicone breast implant litigation was consolidated in U.S. District Court in the Eastern District of Michigan. Dow Corning's bankruptcy proceedings also are pending in Michigan.

Spitzfaden vs. Dow Chemical Co., Louisiana District Court; No. 92-2589, Aug. 18, 1997.