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Battery Risks

Exploding Exposures

From fire risk to defective counterfeits, lithium-ion batteries present insurers and risk managers with a variety of property and liability challenges. 
By: | August 3, 2016 • 5 min read

From personal items such as e-cigarettes, cellphones and laptops to power tools, hoverboards, electric vehicles and alternative energy storage, rechargeable lithium-ion batteries (LIBs) come in all shapes and sizes, and are integral to modern living.

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But despite their increasing application, the fire risks associated with LIBs have gained publicity of late, piquing the interest of insurers across a range of disciplines, from property and casualty to supply chain to product and environmental liability.

If overheated, LIBs can enter “thermal runaway,” emitting flammable material — sometimes in the form of small explosions; the bigger or more powerful the battery, the more impactful the event.

LIBs include a number of safety features to minimize the risk of thermal runaway. However, overcharging, damage to the battery, using an improper charging device or even excessive discharge can all trigger the problem.

After a UPS plane carrying a bulk LIB cargo caught fire and crashed in 2010, at least 18 airlines, including Cathay Pacific, Emirates and Qatar Airways, banned the bulk haulage of such cargo, causing supply chain headaches for companies transporting LIB products.

There have also been incidents when personal items have ignited in the carry hold on passenger flights.

A study by the Federal Aviation Administration (FAA) showed that gas venting from the batteries had the potential to “rocket” the battery away from the heat source. In a bulk storage facility, this could send batteries off into other parts of the warehouse, spreading the fire.

“If you are selling lithium batteries, it is even more important to have detailed instructions and warnings because there are so many things that can go wrong.”  — Paul Owens, products liability manager, Sadler Products Liability Insurance

Indeed, bulk storage situations pose the biggest threat due to the risk of contagious overheating when multiple batteries are in close proximity.

“When you have a lot of these batteries together, fires can grow very quickly and be very damaging,” says Lou Gritzo, vice president of research at FM Global.

However, Gritzo’s firm said it made a major research breakthrough in April that could help mitigate LIB fire risk.

Lou Gritzo, vice president of research, FM Global

Lou Gritzo, vice president of research, FM Global

In partnership with the National Fire Protection Agency and the Fire Protection Research Foundation’s Property Insurance Research Group, FM Global conducted a first-of-its-kind warehouse fire test on the type of LIBs used in electric cars and energy storage. The test, he said, identified a sprinkler configuration that provides an “adequate fire protection point.”

Gritzo hopes the test results, which he expects to be published in a few months following data quality assurance checks, can be taken on board as an industry standard.

The results do not resolve the issue of air cargo safety, though some findings may be extrapolated out to develop in-flight fire extinguishing systems and improve safety for LIB cargo transportation.

Beyond the warehouse environment, LIB-powered devices present a product liability risk for manufacturers, importers, distributors and retailers. The biggest hazard lies in importing products that have been installed with defective or even counterfeited batteries that have been repackaged and rebranded to look superior.

In February, for example, U.S. Customs and Border Protection seized 3,500 hoverboards worth $1.8 million that reportedly contained substandard counterfeit batteries that posed a safety risk.

“If you are an electronics manufacturer, it is essential you know who and where you are buying your batteries from, that you are getting high quality batteries, and that they have high thermal runaway thresholds,” said Morgan Kyte, senior vice president and technology team leader at Marsh. R8-16p50-51_9Lithium.indd

Detailed Warnings Required

The importer of defective goods is considered the manufacturer in the eyes of the law, and in the eyes of insurers in the event of a claim, said Paul Owens, products liability manager at Sadler Products Liability Insurance.

“Importers are top of the pyramid in the U.S. as no one is going overseas to recover,” he said. Most importers are buying from companies whose product liability policies won’t respond in the United States.

“Warning and instruction defect is a common entry into a product liability lawsuit,” Owens added.

“If you are selling lithium batteries, it is even more important to have detailed instructions and warnings because there are so many things that can go wrong.”

“When you have a lot of these batteries together, fires can grow very quickly and be very damaging.” — Lou Gritzo, vice president of research, FM Global

Retailers and wholesalers who purchase from U.S. manufacturers at least know they have a route of recourse in the event of a claim, though it is likely they would be dragged into litigation.

When e-cigarette user Jennifer Reis was set on fire in 2015 when the battery in her device exploded, the e-cigarette’s distributor, wholesaler and even the Tobacco Expo store where she bought it were all named in the lawsuit. Reis was awarded $1.9 million in damages.

“Retailers and distributors should ask their suppliers to name them as additional insureds on their policies,” said Owens.

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“If you are named as an additional insured, the importer’s policy is primary and yours is secondary, which is an important step for retailers and wholesalers.”

However, Owen noted, not all insurance carriers are comfortable writing coverage for LIB-powered products.

“You have to be very careful with the policies you buy as some can be very narrowly written — some have full health-hazard exclusions, and for items like e-cigarettes this leaves very little coverage.”

It is not always easy to determine whether a thermal runaway event has been caused by a defective LIB, a defective electronic device or human error, Kyte said.

“Often there is not much material left after one of these, though there are certain tests that can be done and sometimes it is possible to extrapolate a sequence of events to determine the cause.”

Quality Verification

The best way to avoid expensive product liability claims is to only buy and sell LIBs and chargers of the highest quality.

“This will cost you and your customer a little more, but it’s nothing compared to the increase in premiums after a product liability claim,” said Owens.

Lithium manganese (lMR) and hybrid (NiMH) batteries are considered chemically safer than most LIBs and do not require protection circuits, he said.

“Importers need to be good engineers. They should make sure they buy from reputable sources and it is advisable to batch test products that contain LIBs,” he added. &

Antony Ireland is a London-based financial journalist. He can be reached at [email protected]

More from Risk & Insurance

More from Risk & Insurance

Cyber Resilience

No, Seriously. You Need a Comprehensive Cyber Incident Response Plan Before It’s Too Late.

Awareness of cyber risk is increasing, but some companies may be neglecting to prepare adequate response plans that could save them millions. 
By: | June 1, 2018 • 7 min read

To minimize the financial and reputational damage from a cyber attack, it is absolutely critical that businesses have a cyber incident response plan.

“Sadly, not all yet do,” said David Legassick, head of life sciences, tech and cyber, CNA Hardy.

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In the event of a breach, a company must be able to quickly identify and contain the problem, assess the level of impact, communicate internally and externally, recover where possible any lost data or functionality needed to resume business operations and act quickly to manage potential reputational risk.

This can only be achieved with help from the right external experts and the design and practice of a well-honed internal response.

The first step a company must take, said Legassick, is to understand its cyber exposures through asset identification, classification, risk assessment and protection measures, both technological and human.

According to Raf Sanchez, international breach response manager, Beazley, cyber-response plans should be flexible and applicable to a wide range of incidents, “not just a list of consecutive steps.”

They also should bring together key stakeholders and specify end goals.

Jason J. Hogg, CEO, Aon Cyber Solutions

With bad actors becoming increasingly sophisticated and often acting in groups, attack vectors can hit companies from multiple angles simultaneously, meaning a holistic approach is essential, agreed Jason J. Hogg, CEO, Aon Cyber Solutions.

“Collaboration is key — you have to take silos down and work in a cross-functional manner.”

This means assembling a response team including individuals from IT, legal, operations, risk management, HR, finance and the board — each of whom must be well drilled in their responsibilities in the event of a breach.

“You can’t pick your players on the day of the game,” said Hogg. “Response times are critical, so speed and timing are of the essence. You should also have a very clear communication plan to keep the CEO and board of directors informed of recommended courses of action and timing expectations.”

People on the incident response team must have sufficient technical skills and access to critical third parties to be able to make decisions and move to contain incidents fast. Knowledge of the company’s data and network topology is also key, said Legassick.

“Perhaps most important of all,” he added, “is to capture in detail how, when, where and why an incident occurred so there is a feedback loop that ensures each threat makes the cyber defense stronger.”

Cyber insurance can play a key role by providing a range of experts such as forensic analysts to help manage a cyber breach quickly and effectively (as well as PR and legal help). However, the learning process should begin before a breach occurs.

Practice Makes Perfect

“Any incident response plan is only as strong as the practice that goes into it,” explained Mike Peters, vice president, IT, RIMS — who also conducts stress testing through his firm Sentinel Cyber Defense Advisors.

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Unless companies have an ethical hacker or certified information security officer on board who can conduct sophisticated simulated attacks, Peters recommended they hire third-party experts to test their networks for weaknesses, remediate these issues and retest again for vulnerabilities that haven’t been patched or have newly appeared.

“You need to plan for every type of threat that’s out there,” he added.

Hogg agreed that bringing third parties in to conduct tests brings “fresh thinking, best practice and cross-pollination of learnings from testing plans across a multitude of industries and enterprises.”

“Collaboration is key — you have to take silos down and work in a cross-functional manner.” — Jason J. Hogg, CEO, Aon Cyber Solutions

Legassick added that companies should test their plans at least annually, updating procedures whenever there is a significant change in business activity, technology or location.

“As companies expand, cyber security is not always front of mind, but new operations and territories all expose a company to new risks.”

For smaller companies that might not have the resources or the expertise to develop an internal cyber response plan from whole cloth, some carriers offer their own cyber risk resources online.

Evan Fenaroli, an underwriting product manager with the Philadelphia Insurance Companies (PHLY), said his company hosts an eRiskHub, which gives PHLY clients a place to start looking for cyber event response answers.

That includes access to a pool of attorneys who can guide company executives in creating a plan.

“It’s something at the highest level that needs to be a priority,” Fenaroli said. For those just getting started, Fenaroli provided a checklist for consideration:

  • Purchase cyber insurance, read the policy and understand its notice requirements.
  • Work with an attorney to develop a cyber event response plan that you can customize to your business.
  • Identify stakeholders within the company who will own the plan and its execution.
  • Find outside forensics experts that the company can call in an emergency.
  • Identify a public relations expert who can be called in the case of an event that could be leaked to the press or otherwise become newsworthy.

“When all of these things fall into place, the outcome is far better in that there isn’t a panic,” said Fenaroli, who, like others, recommends the plan be tested at least annually.

Cyber’s Physical Threat

With the digital and physical worlds converging due to the rise of the Internet of Things, Hogg reminded companies: “You can’t just test in the virtual world — testing physical end-point security is critical too.”

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How that testing is communicated to underwriters should also be a key focus, said Rich DePiero, head of cyber, North America, Swiss Re Corporate Solutions.

Don’t just report on what went well; it’s far more believable for an underwriter to hear what didn’t go well, he said.

“If I hear a client say it is perfect and then I look at some of the results of the responses to breaches last year, there is a disconnect. Help us understand what you learned and what you worked out. You want things to fail during these incident response tests, because that is how we learn,” he explained.

“Bringing in these outside firms, detailing what they learned and defining roles and responsibilities in the event of an incident is really the best practice, and we are seeing more and more companies do that.”

Support from the Board

Good cyber protection is built around a combination of process, technology, learning and people. While not every cyber incident needs to be reported to the boardroom, senior management has a key role in creating a culture of planning and risk awareness.

David Legassick, head of life sciences, tech and cyber, CNA Hardy

“Cyber is a boardroom risk. If it is not taken seriously at boardroom level, you are more than likely to suffer a network breach,” Legassick said.

However, getting board buy-in or buy-in from the C-suite is not always easy.

“C-suite executives often put off testing crisis plans as they get in the way of the day job. The irony here is obvious given how disruptive an incident can be,” said Sanchez.

“The C-suite must demonstrate its support for incident response planning and that it expects staff at all levels of the organization to play their part in recovering from serious incidents.”

“What these people need from the board is support,” said Jill Salmon, New York-based vice president, head of cyber/tech/MPL, Berkshire Hathaway Specialty Insurance.

“I don’t know that the information security folks are looking for direction from the board as much as they are looking for support from a resources standpoint and a visibility standpoint.

“They’ve got to be aware of what they need and they need to have the money to be able to build it up to that level,” she said.

Without that support, according to Legassick, failure to empower and encourage the IT team to manage cyber threats holistically through integration with the rest of the organization, particularly risk managers, becomes a common mistake.

He also warned that “blame culture” can prevent staff from escalating problems to management in a timely manner.

Collaboration and Communication

Given that cyber incident response truly is a team effort, it is therefore essential that a culture of collaboration, preparation and practice is embedded from the top down.

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One of the biggest tripping points for companies — and an area that has done the most damage from a reputational perspective — is in how quickly and effectively the company communicates to the public in the aftermath of a cyber event.

Salmon said of all the cyber incident response plans she has seen, the companies that have impressed her most are those that have written mock press releases and rehearsed how they are going to respond to the media in the aftermath of an event.

“We have seen so many companies trip up in that regard,” she said. “There have been examples of companies taking too long and then not explaining why it took them so long. It’s like any other crisis — the way that you are communicating it to the public is really important.” &

Antony Ireland is a London-based financial journalist. He can be reached at [email protected] Dan Reynolds is editor-in-chief of Risk & Insurance. He can be reached at [email protected]