Developing Exposures CAS Seminar on Reinsurance Washington, D.C. July 12, 2001 Michael A. Frantz, J.D. American Re-Insurance Company.

Developing ExposuresCAS Seminar on Reinsurance

Washington, D.C.

July 12, 2001

Michael A. Frantz, J.D.

American Re-Insurance Company

Format of the Presentation

“Identified” Exposures

“Developing” Exposures

Questions and Discussion

Identified Exposures

Asbestos Pollution Breast Implants Sexual Misconduct

Repetitive Stress HIV/AIDS Fen-Phen

Developing Exposures

Developing Exposures

Advertising Injury / Intellectual Property

Firearms Latex Sensitivity Lead

Managed Care Mold MTBE Tobacco

Advertising Injury/Intellectual Property

Types of claims include:

Offenses committed in the course of advertising activities

Libel, slander, defamation, violation of privacy, piracy, copyright, trademark, tradedress, style of doing business or patent infringement

Interference with potential business advantage

Advertising Injury/Intellectual Property

New insurance products address some of these risks, but

coverage issues under the CGL form exist, including,

Advertising Injury Coverage Whether Insured is in the business of advertising Whether in the course of advertising Whether it fits one of the “offenses” Whether during the policy period Whether 1st publication exclusion applies

Advertising Injury/Intellectual Property

Personal Injury Coverage Whether it fits one of the “offenses” Whether claims are invasion of recognized

privacy right Whether during the policy period Whether 1st publication exclusion applies

Firearms

Product liability actions are a recent phenomenon

Lawsuits include: Private recovery actions Public recovery actions modeled after the

government’s efforts against the tobacco industry

Firearms

8/4/99 Journal of the AMA report puts the annual cost for medical treatment of gunshot wounds at $2.3BB (1994 data)

A Cal State/Tulane Univ. study in October 1998 indicates 29% of high school boys possess a firearm

The Bureau of ATF estimates handguns are used in 71% of all armed crimes

Firearms

Typical defendants include: Gun manufacturers Pawn shops Firearms trade associations

Recent Developments USDC in Brooklyn found 15 of 25 gun

manufacturers guilty of negligent distribution Cities across U.S. filed product liability/cost

recovery actions against firearm industry

Firearms

Since claim activity is recent, it is difficult to predict insurance implications Several manufacturers have placed their

carriers on notice There are generally no specific applicable

exclusions Market share distribution of liability remains

speculative

Latex Sensitivity

Latex is a natural rubber compound used to make protective gloves and other products

About 2.5% of the population is sensitive to the proteins contained in latex

Increased demand due to AIDS led to higher levels of protein in gloves

Powder in gloves carries irritants into the air

Latex Sensitivity

Hyper-sensitivity can cause skin and respiratory reactions leading to disability or death

Types of Claimants: Healthcare workers Patients

Latex glove use in the US rose from 800 million in 1987 to 10 billion in 1995

Latex Sensitivity

The potential impact to the insurance industry appears manageable Courts have generally frustrated the plaintiff

bar’s attempts to certify class actions. Most courts now address product

identification before allowing additional discovery.

Lead

The primary cause of human contamination is lead paint

Nearly 1.7 million children in the U.S. have elevated blood lead levels (BLL>.10)

At high levels, lead can cause a variety of health problems, including death

Lead

Primary defendants include: Building owners Paint and pigment manufacturers or distributors Plumbing manufacturers and distributors

Frequency and severity of lead claims have been less than the industry’s initial expectations

Managed Care

As the population ages, there will be continued growth in the Managed Care industry

Congress is currently considering Patients’ Bill of Rights legislation

An increase of claims/litigation may likely follow Coverage Issues limited

• Occurrence

• Expected/Intended

Mold

Mold is a fungus, not a bacteria, that

occurs naturally in the environment.Examples - aspergillus, penicillium and

stachybotrys

Mold can cause health problems depending

on individual sensitivities and amounts

involved.

Mold

Three things mold needs: Water Food Source (paper, wood, etc.) Temperature

There are no state or federal guidelines on acceptable levels

There is a lack of information on health effects

Mold

Mold can be very costly to investigate and remediate.

Ballard v. Farmers Insurance - $32M verdict

($6.2M in actual damages, $5M in mental anguish, $12M in punitive damages and $9M in fees)

Mold

Among the claim handling issues are - timely response - mold

can grow in 24-48 hours appropriate consultants and experts identification of coverage issues appropriate response (e.g. health issues) adequate remediation & prevention

Mold

Coverage Issues Presented1st Party Property (e.g. water damage)

Exclusions for fungus, mold, wear & tear

deterioration, seepage, etc.

Liability (PD, BI or PI)

Does the Pollution Exclusion apply?

MTBE

Methyl

Tertiary

Butyl

Ether

MTBE

MTBE has been used since 1979 as an anti-knock compound in gasoline

In 1992 petroleum companies and the USEPA began using MTBE to improve combustion and reduce carbon monoxide emissions

“Reformulated Gasoline” use in areas plagued by poor air quality became mandatory in 1995

85% of reformulated gasoline uses MTBE and makes up 30% of nationwide gasoline sales

MTBE

MTBE has been identified as a possible carcinogen

There has been alleged widespread groundwater contamination from petroleum that contains MTBE

MTBE can cause symptoms when inhaled, ingested or absorbed through the skin

MTBE

Insurance Implications Use of MTBE was stopped by the EPA last

year. Ethanol has been the substitute Non-specific symptomology may lead to claims If a product claim, some courts have held that

the pollution exclusion may not apply The government’s virtual mandate to use

MTBE will likely be used as a defense

Tobacco

U.S. tobacco litigation remains active Types of exposures include:

Private lawsuits Reimbursement actions

• Government recovery of medical costs

• Private reimbursement actions Ancillary exposures

• Professional liability

Tobacco

State medical cost recovery actions Settlement of 46 states Medicaid actions Payment of at least $206 billion Includes changes in business practices

Insurance industry exposure remains uncertain

Tobacco

The Engel Verdict• $145 Billion in Punitive Damages• $12.7 Million in compensatory damages

awarded to three smokers representing the class

• Class is comprised of 300,000 to 700,000 sick smokers in the State of Florida only

• Recent commitment to pay $710 Million

Tobacco

Foreign Exposure• Canada has several reimbursement

actions pending

• EU, Columbia, Guatemala, Israel and others have also filed actions

• There may be no operable exclusions

So...

What else can we expect to see?

The End

Thank you!