Insurers Hear A Smoke Alarm

Can they be dragged into the tobacco fray?

Drowned out by the cannonades of America's tobacco wars, the lawsuit initially attracted little attention. In January, Imperial Tobacco Ltd. sued American Home Assurance Co. and Commercial Union Assurance Co. of Canada in a Quebec court. Canada's largest cigarette maker--facing a lawsuit filed by allegedly injured smokers--claims that the two insurers are on the hook to pay for its defense costs and any judgments or settlements. The two insurance companies did not comment.

As the American tobacco and insurance industries grasp the implications of the Canadian suit, however, the filing has become hot reading material. While the case won't create a legal precedent in the U.S., it could presage the next major tobacco battlefield. Facing billions of dollars in claims by smokers and eight states seeking reimbursement of medical expenses, tobacco companies own a variety of policies that could be tapped if the industry's litigation winning streak ever ends. The insurance industry, meanwhile, is already facing estimated liability of $90 billion for asbestos and environmental claims and $2 billion more for alleged injuries from breast implants.

RISKS. Will tobacco litigation be its next nightmare? "Anybody who says they don't have to worry about this is making a big mistake," says Roger M. Moak, general counsel for Home Insurance Co. in New York. His company has received notification of potential liability from "a few" policyholders whom he declined to identify, although the insurer believes that it has little significant exposure.

Even if Big Tobacco does go after its insurers, the effort could backfire. In the insurance industry, tobacco would have an opponent that is every bit as rich, politically muscular, and legally savvy as it is. What's more, insurers may have more access to private industry documents and studies than current tobacco foes because of the unique policyholder-insurer relationship. "The insurance companies would hire 50 law firms [and] conduct years of discovery. They would make the plaintiffs' lawyers look like novices," says experienced industry foe Matthew L. Jacobs, a partner at the Washington office of Kirkpatrick & Lockhart.

No U.S. tobacco companies have filed insurance coverage suits yet. The one company that has agreed to a settlement, Liggett Group Inc., has said that it doesn't expect to fund it with insurance. But there are signs that other tobacco companies, facing much more potential liability than tiny Liggett, are preparing for a fight. One law firm partner who specializes in suing the insurance industry says that a U.S. tobacco company has asked him to review policies to determine if it could win a coverage suit.

Even companies that did business with the tobacco industry could jump into the coverage brawl. For example, public relations firm Hill & Knowlton Inc., named in some of the state suits for allegedly helping tobacco companies conceal the health effects of smoking, has given notice of possible liability to "a long list" of insurers, according to a company spokesperson.

Still, it's the tobacco companies that present the greatest risk to the insurance industry. Although they refuse to discuss the matter, some tobacco companies appear to have purchased product liability coverage until the late 1950s and possibly even later, according to Robert L. Carter, an attorney in the Washington office of Anderson Kill Olick & Oshinsky, who brings suits against insurers. Many of these policies may still expose insurers to claims: Asbestos companies recovered money as late as the 1980s from insurance contracts written in the 1940s.

Even after they stopped buying product liability coverage (apparently because the price got too high), tobacco companies continued to purchase general liability and other insurance. While most of these policies probably contain clauses intended to prevent product liability claims, enterprising attorneys have managed to overcome these exclusions in environmental and asbestos cases.

In addition to Home, insurers that have sold policies to the tobacco industry in the past two decades include American International Group, Liberty Mutual Insurance, and North River Insurance, according to two insurance defense attorneys who have reviewed actual contracts. These insurers declined to comment on any possible exposure. Lloyd's of London sold conventional liability coverage to tobacco companies until 1953, after which new policies included product liability exclusions and time limits on coverage. A Lloyd's spokesperson estimates total exposure to tobacco liability claims of approximately $350 million, assuming American courts uphold the exclusions. And Employers Insurance of Wausau sold policies to two U.S. tobacco companies in the 1980s, but a spokesperson says it expects no liability.

Notwithstanding the huge potential losses for insurers, any damages are still a ways off. Tobacco companies have a nearly unbroken defense record and could continue to fend off plaintiffs--thus leaving their insurers unscathed.

KNOWN DANGERS. But even if Big Tobacco were to lose a case and subsequently sue for coverage, insurers would be tough opponents. In their defense, insurers would inevitably attempt to deny coverage by claiming that cigarette injuries were not an "accident" because manufacturers knew of the potential risk. This argument would entitle the insurers to view any internal tobacco industry documents relating to the dangers of smoking. Unlike the bevy of plaintiffs' attorneys currently seeking the same evidence, insurers would have a huge advantage: Some courts have held that they are entitled to review documents that might otherwise be protected by attorney-client privilege. That would enable insurance attorneys to recover scientific research that tobacco companies have allegedly withheld from plaintiffs by funneling it through their lawyers.

Given this threat, perhaps it's not surprising that no American tobacco company has yet followed Imperial's lead by suing for coverage. But litigants seeking billions from tobacco manufacturers are mounting their most serious attack ever. If they succeed in winning even a small fraction of that sum, then the tobacco industry will have plenty of incentive to reconsider whether going after their insurers is worth the risk.

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