"Good things come in small packages," is a comment we often hear around Christmas time. For those in the burgeoning field of nanotechnology, though, the maxim has year-round relevance. We define nanotechnology as the building of substances and structures so tiny as to be essentially invisible. A nanometer is one billionth of a meter. By comparison, a human hair is 80,000 nanometers wide. Nanotechnology involves fabricating nanomaterials and forging them into useful products. At this level, however, material properties change and can spawn unintended side effects.

A scarcity of empirical data - especially regarding losses - hampers nanotechnology-related risk dialogue. Nanotechnology is a growing niche, so there is little litigation or loss history to analyze. Thus, much of the discussion of nanotechnology and its management flows from hypothetical examples.

Less murky is the fact that nanotechnology is not a passing fad. It has innovative applications for a range of technologies and sectors, including drug delivery, medical imaging, integrated sensors, and semiconductors. Many believe that nanotechnology can enhance treatment and detection of diseases like AIDS and cancer. Some estimate that, by 2014, nanotechnology will command a global market value of $2.6 trillion and provide jobs for one million employees in the U.S. alone.

Occupational Hazards

One of the biggest areas of nanotechnology risk management concerns lies in workers' compensation. Worries abound that employees working in manufacturing and industrial areas containing nanoparticles may inhale or absorb these particles and suffer adverse health effects. If this occurs, then serious workers' compensation claims could follow. All it would take would be a showing by an employee that there was an accidental injury or disease arising out of and during the course of employment. Experiments have shown that nanoparticles impact human tissue and cross the blood-brain barrier.

Workers' compensation policies are statutory; that is, they cannot exclude benefits for claims arising out of exposure to nanotechnology or tiny particles. Certainly companies that manufacture nanotechnology or companies working with nano-tech materials may face heightened workers' compensation risks, ratings, and costs.

In addition, the tiny nature of nanoparticles renders them highly reactive. This increases the potential for explosion, fire, and ignition. This can also create new workers' compensation and environmental hygiene challenges.

Product Perils

In addition to workers' compensation exposures, product liability exposures loom. Thus far, companies have used nanoparticles in products such as solar panels, sunscreen, long-lasting cosmetics, and self-cleaning food containers. The use of nanoparticles in these and other products will likely increase over the next decade. One can readily imagine an influx of claims and lawsuits from plaintiffs alleging injury due to a supposed malfunction or defect in a nanotechnology product. Plaintiffs can assert defective design, defective manufacture, failure to provide adequate instructions or warnings, breach of implied or express warranty, and negligent marketing, among others. These are the same kinds of allegations that companies face in "macro" product liability claims. In other words, they are not unique to nanotechnology except insofar as the potential from loss because of inhalation or absorption of tiny particles that are later alleged to be harmful to public health. Currently, manufacturers of nanotech products need not warn or notify consumers of this fact.

Product Liability Attorney Daniel Ring from Mayer Brown LLP observes, "There [have] been claims related to some screens, but not any real tremendous litigation." He further notes, "it's fair to say they are already is increasing regulatory scrutiny over nanoparticles."

By now, it should be clear that nanotechnology does not necessarily translate into nano risk. In fact, nanotechnology could possibly translate into mega risks.

Industry Responses

Insurance industry responses to nanotechnology perils are still embryonic. One reason is that many insurance companies have yet to assess the exposure. Loss data is either scarce or nonexistent. Thus, most of the insurance industry is in a study and analysis phase. Primary insurance carriers may insert exclusions in their general liability policies, precluding coverage for claims arising out of nanotechnology. Other potential insurance approaches would include deductibles for claims arising from nanotechnology or sub-limits applying to such claims.

Where are some see dangers, though, enterprising carriers may see opportunities. Therefore, we might even eventually see stand-alone policies crafted to address liability exposures from nanotechnology.

While primary insurance carriers formulate their own strategies, reinsurance companies are aware of nanotechnology risk. Some reinsurers may insert treaty exclusions precluding reinsurance coverage for nanotechnology claims. From a risk management standpoint, risk managers must closely read their general liability policies to see if the latter contain exclusions that might render a nanotechnology claim uncovered. Further, ceding carrier management must make sure that there is a clear meeting of the minds with reinsurers over coverage for nanotechnology claims.

Risk Management Strategies

Companies may apply a classic risk-management template to the perils arising from nanotechnology. This would include avoidance, retention, contractual transfer, and loss control.

Avoidance - As the name implies, this would involve a company consciously deciding not to manufacture or use nanotechnology products. However, one need not be a manufacturer to face nanotechnology risks. Employees exposed to nanoparticles on-the-job may suffer health ills even if the employer is not a manufacturer. "Unknowns" or perceived risks from potential liabilities may deter firms from entering the nanotechnology niche. Some policy analysts have even suggested a moratorium on nanotechnology development because of safety concerns.

Retention - This occurs when companies enter nanotechnology and decide to self-fund for financial loss because of liabilities. Since quantifying such liabilities is challenging, because of the nascent nature of the risk, however, companies cannot credibly establish appropriate funding levels. The danger here is that ultimate liabilities might exceed retained funds and threaten an organization's financial solvency.

Contractual transfer - This arises when firms use insurance and noninsurance ways to cushion the financial risks and liabilities from nanotechnology. Insurance is a classic contractual transfer technique. Insurance does not transfer legal liability. Rather, it shifts the financial repercussions of nanotechnology liabilities to a professional risk-bearer. Non-insurance contractual transfer might include indemnification and hold-harmless agreements with business partners or component suppliers who are involved in nanotechnology.

Loss control - It is essential to institute safety measures to minimize the frequency and severity of claims arising from nanotechnology. In a workers' compensation and occupational health context, this could prompt firms to provide adequate breathing apparatus to employees to filter out the inhalation of nanotechnology particles. From a manufacturing perspective, it might involve a company fine-tuning its quality control and manufacturing process to ensure that any nanotechnology products pass all relevant governmental, regulatory, and safety standards.

In addition, companies should analyze their indemnification obligations arising from labeling and operations. For example, there is much discussion today about whether consumer products should bear labels disclosing that suntan lotion or beauty cream purchased includes some type of nanotechnology.

Risk managers in a range of industries must stay attuned to the growth of nanotechnology and its attendant risks. The proverbial jury is out as to whether good things really do come in small (nano-sized) packages. Whether nanotech represents a scourge or a promising new business opportunity, risk managers must nevertheless anticipate both outcomes and prepare to use a variety of tools to keep nano-tech from becoming a mega-hazard to their organizations.

National Underwriter Company