Nanotechnology, used in more than 300 products currently, is a booming field that is expected to be a $2 trillion

business by 2014, but the still largely unknown risks posed by nanoparticles makes for a scary prospect in terms on insurance

recovery, says Matthew J. Schlesinger, partner, and Jacqueline Bennett, counsel, in law firm Reed Smith L.L.P.'s Washington

office. They recommend a series of steps that businesses should take and offer questions that corporate executives should

try to answer to begin to mitigate their potential risks.

Nanotechnology: Little objects that may pose big risks

More

than 300 consumer products, including food and cosmetics, already contain nanoscale ingredients, with little or no research

to document their safety. In this booming field--expected to be worth about $2 trillion by 2014--the concept of unknown risks

is a scary prospect, especially in the world of insurance recovery. Mitigating your exposure now makes good business

sense.

Nanotechnology and its risks

"Nano" means "one billionth" and "nanotechnology" is

the term used to refer to anything that involves measuring, manipulating or manufacturing materials on a nanoscale. It has

applications in nearly every industry.

The National Institute for Occupational Safety and Health has made clear its belief

that nanomaterials may present very real health concerns. So have numerous consumer groups. The U.S Food and Drug

Administration and the Environmental Protection Agency also acknowledged concerns about the risks associated with silver

nanoparticles, but the EPA to date has only published guidance as to one product containing nanosilver, a Samsung brand

clothes washer.

Coverage issues

While is impossible to know how nanotechnology will affect policyholders and insurers,

businesses should understand whether, and to what extent, their insurance policies may cover losses from

nanotechnology-related losses.

First-party property insurance: Property policies typically insure "direct physical

loss of or damage to the property insured." Such policies often also cover losses resulting from business interruption

caused by "physical loss of or damage to property." Business interruption coverage is designed to put the

policyholder in the same position as if the loss had never occurred, and includes coverage for lost profits, mitigation

expenses and other costs. Insurers are sure to raise numerous questions when faced with a nanoparticle-related claim under a

first-party property policy.

Insurers may argue that the infiltration of nanoparticles into a building, regardless of how

harmful they may or may not be, does not cause an insurable "physical loss." Several courts, however, have held

that the physical loss requirement can be satisfied by airborne chemicals or biologics. For example, one court found that

contamination of a building by carbon monoxide constituted a direct physical loss. The court was "persuaded by the

reasoning of those cases that have construed the phrase 'direct physical loss or damage' broadly, to include more than

tangible damage to the structure of the insured property."

Commercial general liability insurance: While first-party

property and business interruption policies provide coverage for harm to a own business, CGL policies provide coverage for

defense costs and liabilities resulting from injury a company allegedly inflicted on third parties. Of the four categories of

liabilities typically covered by CGL policies--property damage, bodily injury, personal injury and advertising injury--the

coverage grants for bodily injury and property damage are most likely to be implicated by nanotechnology. Companies may be

sued, for example, by persons who ingested or were exposed to nanotechnology.

Pollution and contamination exclusions: Both

property and liability policies typically contain a so-called pollution exclusion and, sometimes, a contamination exclusion.

Though courts have found the pollution exclusion precludes coverage for traditional environmental liabilities, some cases

suggest that the exclusion does not preclude coverage for every release of chemical or biological materials. The Louisiana

Supreme Court, after thoroughly exploring the origins of the pollution exclusion, stated it "was designed to exclude

coverage for environmental pollution only and not for all interactions with irritants or contaminants of any

kind."

Other courts have held that certain types of contaminants--such as bacteria and carbon monoxide--are not

pollutants as defined in the typical pollution exclusion. In one case, a company built a warehouse where food products were

stored and negligently left behind a chemical that contaminated the food. The court held that the contamination exclusion did

not preclude coverage because the damage to the food "resulted from a nonexcluded 'peril,' namely, a third party's

actions."

Nanotube and nanotechnology exclusion: The Insurance Services Office Inc. recently released a new exclusion

that purports to exclude coverage for bodily injury, property damage, and personal and advertising injury "related to

the actual, alleged or threatened presence of or exposure to 'nanotubes' or 'nanotechnology' in any form, or to harmful

substances emanating from 'nanotubes' or 'nanotechnology."' At least one insurer announced it intended to add the

exclusion to its policies beginning Nov. 15. Interestingly, the exclusion suggests that ISO itself is unsure whether

liability arising from nanotechnology is precluded by the pollution exclusion. Also, it remains to be seen whether other

insurers adopt the exclusion and how it may be construed by the courts.

What can be done?

Despite the uncertainties,

steps can be taken to mitigate your risk.

Monitor: Businesses should monitor and track science databases, regulatory

developments and what nongovernmental organizations are saying. Businesses also should consider monitoring and tracking their

workforce, their customers and the environment by having effective reporting systems in place.

Avoid: Businesses should

avoid communication disconnects, such as inconsistencies between internal documents and what is stated publicly; between what

is scientifically proven and what is state publicly; and lastly, between what is said or done domestically and what is said

or done in another country.

Respond: A business should respond to the potential risk of loss caused by nanotechnology by

ensuring compliance with the existing analogous or reasonably anticipated regulations. Communication strategies should be

developed and all complaints and inquiries should be taken seriously. Lastly, every business should know its international

and domestic reporting obligations.

Matthew Schlesinger is a partner in Reed Smith L.L.P.'s Washington office. He has

represented policyholders nationwide in coverage disputes with their insurers and counsels clients on insurance-related

issues. Jacqueline Bennett is counsel in the Washington office. Her practice includes complex civil litigation in state and

federal courts.