“Good things come in small packages,” is a comment weoften hear around Christmas time. For those in the burgeoning fieldof nanotechnology, though, the maxim has year-round relevance. Wedefine nanotechnology as the building of substances and structuresso tiny as to be essentially invisible. A nanometer is onebillionth of a meter. By comparison, a human hair is 80,000nanometers wide. Nanotechnology involves fabricating nanomaterialsand forging them into useful products. At this level, however,material properties change and can spawn unintended sideeffects.

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A scarcity of empirical data — especially regarding losses —hampers nanotechnology-related risk dialogue. Nanotechnology is agrowing niche, so there is little litigation or loss history toanalyze. Thus, much of the discussion of nanotechnology and itsmanagement flows from hypothetical examples.

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Less murky is the fact that nanotechnology is not a passing fad.It has innovative applications for a range of technologies andsectors, including drug delivery, medical imaging, integratedsensors, and semiconductors. Many believe that nanotechnology canenhance treatment and detection of diseases like AIDS and cancer.Some estimate that, by 2014, nanotechnology will command a globalmarket value of $2.6 trillion and provide jobs for one millionemployees in the U.S. alone.

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Occupational Hazards

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One of the biggest areas of nanotechnology risk managementconcerns lies in workers' compensation. Worries abound thatemployees working in manufacturing and industrial areas containingnanoparticles may inhale or absorb these particles and sufferadverse health effects. If this occurs, then serious workers'compensation claims could follow. All it would take would be ashowing by an employee that there was an accidental injury ordisease arising out of and during the course of employment.Experiments have shown that nanoparticles impact human tissue andcross the blood-brain barrier.

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Workers' compensation policies are statutory; that is, theycannot exclude benefits for claims arising out of exposure tonanotechnology or tiny particles. Certainly companies thatmanufacture nanotechnology or companies working with nano-techmaterials may face heightened workers' compensation risks, ratings,and costs.

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

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Product Perils

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In addition to workers' compensation exposures, productliability exposures loom. Thus far, companies have usednanoparticles in products such as solar panels, sunscreen,long-lasting cosmetics, and self-cleaning food containers. The useof nanoparticles in these and other products will likely increaseover the next decade. One can readily imagine an influx of claimsand lawsuits from plaintiffs alleging injury due to a supposedmalfunction or defect in a nanotechnology product. Plaintiffs canassert defective design, defective manufacture, failure to provideadequate instructions or warnings, breach of implied or expresswarranty, and negligent marketing, among others. These are the samekinds of allegations that companies face in “macro” productliability claims. In other words, they are not unique tonanotechnology except insofar as the potential from loss because ofinhalation or absorption of tiny particles that are later allegedto be harmful to public health. Currently, manufacturers ofnanotech products need not warn or notify consumers of thisfact.

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Product Liability Attorney Daniel Ring from Mayer Brown LLPobserves, “There [have] been claims related to some screens, butnot any real tremendous litigation.” He further notes, “it's fairto say they are already is increasing regulatory scrutiny overnanoparticles.”

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By now, it should be clear that nanotechnology does notnecessarily translate into nano risk. In fact, nanotechnology couldpossibly translate into mega risks.

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Industry Responses

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Insurance industry responses to nanotechnology perils are stillembryonic. One reason is that many insurance companies have yet toassess the exposure. Loss data is either scarce or nonexistent.Thus, most of the insurance industry is in a study and analysisphase. Primary insurance carriers may insert exclusions in theirgeneral liability policies, precluding coverage for claims arisingout of nanotechnology. Other potential insurance approaches wouldinclude deductibles for claims arising from nanotechnology orsub-limits applying to such claims.

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Where are some see dangers, though, enterprising carriers maysee opportunities. Therefore, we might even eventually seestand-alone policies crafted to address liability exposures fromnanotechnology.

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While primary insurance carriers formulate their own strategies,reinsurance companies are aware of nanotechnology risk. Somereinsurers may insert treaty exclusions precluding reinsurancecoverage for nanotechnology claims. From a risk managementstandpoint, risk managers must closely read their general liabilitypolicies to see if the latter contain exclusions that might rendera nanotechnology claim uncovered. Further, ceding carriermanagement must make sure that there is a clear meeting of theminds with reinsurers over coverage for nanotechnology claims.

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Risk Management Strategies

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

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Avoidance – As the name implies, this wouldinvolve a company consciously deciding not to manufacture or usenanotechnology products. However, one need not be a manufacturer toface nanotechnology risks. Employees exposed to nanoparticleson-the-job may suffer health ills even if the employer is not amanufacturer. “Unknowns” or perceived risks from potentialliabilities may deter firms from entering the nanotechnology niche.Some policy analysts have even suggested a moratorium onnanotechnology development because of safety concerns.

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Retention – This occurs when companies enternanotechnology and decide to self-fund for financial loss becauseof liabilities. Since quantifying such liabilities is challenging,because of the nascent nature of the risk, however, companiescannot credibly establish appropriate funding levels. The dangerhere is that ultimate liabilities might exceed retained funds andthreaten an organization's financial solvency.
Contractual transfer – This arises when firms use insurance andnoninsurance ways to cushion the financial risks and liabilitiesfrom nanotechnology. Insurance is a classic contractual transfertechnique. Insurance does not transfer legal liability. Rather, itshifts the financial repercussions of nanotechnology liabilities toa professional risk-bearer. Non-insurance contractual transfermight include indemnification and hold-harmless agreements withbusiness partners or component suppliers who are involved innanotechnology.

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Loss control – It is essential to institutesafety measures to minimize the frequency and severity of claimsarising from nanotechnology. In a workers' compensation andoccupational health context, this could prompt firms to provideadequate breathing apparatus to employees to filter out theinhalation of nanotechnology particles. From a manufacturingperspective, it might involve a company fine-tuning its qualitycontrol and manufacturing process to ensure that any nanotechnologyproducts pass all relevant governmental, regulatory, and safetystandards.

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

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Risk managers in a range of industries must stay attuned to thegrowth of nanotechnology and its attendant risks. The proverbialjury is out as to whether good things really do come in small(nano-sized) packages. Whether nanotech represents a scourge or apromising new business opportunity, risk managers must neverthelessanticipate both outcomes and prepare to use a variety of tools tokeep nano-tech from becoming a mega-hazard to theirorganizations.

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