The Cadmium Crisis and Its Impact on Liability Insurers

On January 10, 2010, the Associated Press (AP) reported the results of laboratory tests of 103 pieces of low-priced children's jewelry sold by American retailers, almost all of which was manufactured in China. The AP determined that 12 of these pieces contained high levels of the metal cadmium. Following the enactment of recent legislation limiting the use of lead in children's products to trace amounts, Chinese manufacturers have increasingly turned to cadmium for jewelry, because of its low cost and ease of use.

However, the potential risk to consumers may far outweigh the advantages of cadmium to manufacturers. Cadmium is a known carcinogen, suspected to hinder brain development in young children, as well as cause kidney damage and bone deterioration. These concerns have led the U.S. Centers for Disease Control and Prevention (CDC) to rate cadmium as the seventh most hazardous substance in the environment. Nevertheless, there are no federal regulations restricting the amount of cadmium in jewelry, and the U.S. Consumer Product Safety Commission has thus far declined to issue any recalls for items containing the metal.

While all of the jewelry items in the AP study contain cadmium levels of at least 10 percent, it was determined that some of the items contain levels in excess of 80 percent.

The testing also indicated that a number of the items easily shed cadmium -- a finding of particular concern, given the fact that children are most often exposed to cadmium by swallowing or biting affected substances.

Some retailers and regulators have reacted swiftly in response to the report. Wal-Mart, and major jewelry retailer Claire's, have pulled the 12 items identified in the AP study from their stores. The U.S. Consumer Product Safety Commission has warned Chinese manufacturers to shy away from using cadmium (or the similarly hazardous elements of antimony or barium) in children's products. It has issued a statement on its website advising parents not to give their children cheap metal jewelry or to allow their children to play with such jewelry. While there are currently no restrictions regarding the level of cadmium in jewelry, the AP report has prompted U.S. Senator Charles Schumer (D-NY) to announce plans to introduce federal legislation banning the use of cadmium, antimony, and barium in children's jewelry and toys.

Recent Discoveries

If prior instances of contamination related to products manufactured in China prove to be any indication, then these recent discoveries of cadmium in children's jewelry are likely to result in extensive litigation against jewelry distributors and retailers. In 2007 came revelations that hundreds of brands of pet food were contaminated with the chemical melamine. This resulted in the filing of at least 100 class action lawsuits against pet food manufacturers and retailers, alleging that the tainted food resulted in the illness and death of numerous household pets. These lawsuits were ultimately resolved in a $24 million global settlement. The value of this settlement may have been larger, absent long-standing rules in most jurisdictions limiting recovery for a loss to a pet to the value of the pet as property, rather than recognizing theories of recovery such as emotional distress in such situations.

The health effects of cadmium exposure are believed to develop over an extended period of time. Because of this latency period, there may be relatively few reports of cadmium-related illnesses in the months and years to come. Distributors and retailers may, however, face claims for "medical monitoring." At least 13 states have recognized this cause of action, which allows plaintiffs exposed to a hazardous substance because of the negligence of the defendant to seek a court order directing the defendant to pay the costs of monitoring the plaintiff for early detection of illness.

While standards for this cause of action vary among jurisdictions, plaintiffs are typically required to demonstrate that exposure to the hazardous substance has resulted in an increased risk of developing a serious illness; that monitoring procedures exist that would make the early detection of the illness feasible; and that early detection would be beneficial to the plaintiff. At the present time, it is far from certain whether plaintiffs exposed to cadmium in children's jewelry will be able to satisfy such standards. However, many plaintiffs and their attorneys will likely make the attempt.

If relatively few personal injury claims pertaining to cadmium exposure are filed against jewelry distributors or retailers over the next several years, then this is not a reason for complacency. If injuries caused by cadmium arise years or even decades after the exposure, then litigants will be able to pursue claims under the "discovery rule" adopted by most states, which provides that the statutory limitations period for personal injury claims will not begin to run until the injury first manifests itself. In addition, the statutes of limitation in several states do not begin to run for claims brought by a minor until the minor reaches the age of 18.

Once parties begin to pursue litigation pertaining to cadmium exposure, defendants may not only be faced with multiple causes of action by an injured party but also with multiple lawsuits. For illnesses of prolonged latency, a number of courts have recognized the ability to pursue "second-disease" lawsuits for additional illnesses that have arisen years after the illness giving rise to an initial litigation. When taking into account the number of illnesses and conditions that could arise from cadmium exposure, defendants may find themselves facing the same plaintiff on numerous occasions.

Whether limited to the cost of successfully defending merit less lawsuits or including the payment of multimillion-dollar settlements or verdicts, the discovery of cadmium in children's jewelry is likely to lead to significant exposure for jewelry distributors and retailers, as well as their liability insurers. As these lawsuits arise, numerous coverage disputes may follow pertaining to the liability insurer's duty to provide a defense and indemnification.

CGL Pollution Exclusions

For example, such lawsuits are likely to result in coverage disputes pertaining to standard CGL pollution exclusions. These may include disputes regarding whether cadmium may be considered an irritant, a contaminant, or a pollutant so as to invoke the exclusion. These may also include disputes as to whether the contamination of jewelry with cadmium concerned "the discharge, dispersal, release, or escape of pollutants," so as to fall within the exclusion under the language most typically used for such provisions. Courts may also be required to determine whether the alleged discharge of cadmium constituted a "sudden and accidental event," which would invoke coverage under an exception found in some CGL pollution exclusions.

In analyzing these issues, courts are likely to grapple with the ongoing debate as to whether a standard pollution exclusion in CGL policies should be interpreted in light of the plain meaning of the terms used in the exclusion, or whether such an exclusion should be interpreted in light of the original purpose of the exclusion to preclude coverage for "traditional" environmental pollution.

In addition to pollution exclusions, liability insurance claims arising from the use of cadmium in children's jewelry may also invoke a variety of exclusionary provisions that have been added to CGL policies in recent years in response to court decisions limiting the application of pollution exclusions. These include exclusionary provisions pertaining to toxic metals, as well as exclusionary clauses for carcinogens. Depending upon the precise policy language employed, courts may be asked to determine whether CGL coverage for cadmium liability claims is excluded by one or more of these provisions.

In an effort to obtain punitive damages, a plaintiff may allege that a distributor or retailer knew that the jewelry in question was laced with cadmium and was aware of the health risks arising from the jewelry. In such a case, coverage may be excluded under a standard CGL exclusion pertaining to "expected or intended injury." However, in many jurisdictions, this exclusion is limited to allegations of truly intentional (rather than simply reckless) conduct. Furthermore, in some jurisdictions, such an exclusion may only be invoked if the policyholder is alleged to have expected or intended to cause the precise type of injury that is alleged to have actually occurred. Therefore, it may be difficult for insurers to disclaim coverage for cadmium claims under this exclusion.

Coverage disputes may also arise with regard to the amount of coverage available for each claim. These disputes will likely focus on the number of occurrences assigned to each incident leading to claims of liability, for the purpose of determining the amount of coverage available under policies that set limits on a "per-occurrence" basis. In making this determination, courts will apply well-accepted principles that (depending upon the state) may base the number of occurrences upon the cause or causes of the loss or the manifestations of injury.

Courts may also face the problem of determining the date of an occurrence or occurrences. This may be significant, given the time lag between exposure to cadmium and the manifestation of its effects. In some jurisdictions, an "occurrence" takes place at the time of the wrongful act that causes the injury. In other jurisdictions, however, an "occurrence" takes place at the time the injury occurs. The vast majority of commercial general liability policies limit coverage to events that have occurred during the policy period. Accordingly, if a potential target of cadmium litigation was covered by a number of commercial general liability policies during the time period from the sale and manufacture of cadmium-laced jewelry to the date of injury, the timing of the underlying occurrences will (under most CGL forms) govern the allocation of coverage among these policies.

Allocation issues may also arise if exposure to cadmium in jewelry results in an ongoing injury that is latent for a period of time. In many jurisdictions, liability coverage is "triggered" from the date of the first latent injury, and continues to be triggered at least until the date the injury first manifests itself. Under such a rule, coverage would be allocated among every policy in effect during this period.

As set forth above, the recent revelations regarding the discovery of cadmium in jewelry are likely to have significant ramifications for the jewelry industry for the foreseeable future. Proving liability will be far from simple. It may ultimately rest upon whether expert witnesses can present reliable, persuasive scientific evidence linking cadmium to illnesses in particular plaintiffs. Even if the plaintiffs' bar faces challenges in proving liability, the costs to liability insurers of providing defense and indemnification will be substantial. Insurers should continue to closely monitor this issue and to develop strategies for addressing potential claims and exposure.

Robert T. Horst is a Founding Partner of Nelson Levine de Luca & Horst, a national law firm focused on the insurance industry. He may be reached at 215-358-5100, rhorst@nldhlaw.com, www.nldhlaw.com.

Mark H. Rosenberg is an Associate at Nelson Levine de Luca & Horst, a national law firm focused on the insurance industry. He may be reached at 215-358-5100, mrosenberg@nldhlaw.com, www.nldhlaw.com.