Emerging Issues E-Alert: Reports of Cadmium in Jewelry Could Result in Significant Exposure for Liability Insurers

by Mark H. Rosenberg, Joseph F. Bermudez and Robert T. Horst

A recent study by the Associated Press promises to write a new chapter in the ongoing story of contaminated consumer goods manufactured in China. On January 10, 2010, the Associated Press reported results of laboratory tests of 103 pieces of low-priced jewelry manufactured in China and sold by American retailers. The AP determined that 12 of these pieces contained high levels of cadmium, a known carcinogen that is suspected to hinder brain development in young children. All of the items in question were found to contain cadmium levels of at least 10 percent, with some of the items containing cadmium levels in excess of 80 percent.

The response of retailers and regulators to this report has been swift. Wal-Mart has pulled the 12 items from their stores, and the U.S. Consumer Product Safety Commission has warned Chinese manufacturers not to utilize cadmium (or the similarly hazardous elements of antimony or barium) in children's products. Furthermore, while there are currently no restrictions on the level of cadmium in jewelry, the AP report has already prompted legislators in states such as New York to call for implementing such restrictions.

If the presence of high amounts of cadmium in jewelry is found (or alleged) to have resulted in illness by buyers of the jewelry or their family members, extensive litigation is likely to follow. In 2007, revelations that hundreds of brands of pet food were contaminated with the chemical melamine in wheat gluten imported from China resulted in the filing of at least 100 class action lawsuits against pet food manufacturers and retailers, alleging that the contamination 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 would have undoubtedly been much 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.

Several months after the pet food contamination was discovered, numerous toy companies were forced to recall millions of toys manufactured in China following the determination of excessive lead levels in the paint used on the toys. Again, this led to numerous lawsuits against manufacturers and retailers, including 22 class action lawsuits against leading toy manufacturer Mattel, which were recently settled for a sum that has been estimated at over $50 million.

As the health effects of exposure to cadmium are generally believed to develop over an extended period of time, there may be relatively few reports of cadmium-related illnesses in the months and years to come. However, this is unlikely to limit the exposure of distributors and retailers, given the ability of plaintiffs in many states to pursue theories such as "medical monitoring" that justify litigation before the manifestation of injury from exposure to a hazardous substance. Plaintiffs may also be able to pursue claims for the reimbursement of the purchase price of the jewelry, under theories such as breach of express and implied warranty.

The discovery of cadmium in jewelry is therefore likely to lead to significant exposure for jewelry distributors and retailers, as well as their liability insurers. It is also likely to raise numerous coverage issues. For example, a number of commercial general liability policies contain exclusionary provisions pertaining to toxic metals and/or carcinogens. Coverage issues are also likely to arise with regard to whether the sale of jewelry containing cadmium can be deemed to be a "sudden and accidental" event, so as to invoke coverage under the standard language of most commercial general liability policies. Furthermore, the determination of the number of occurrences for each liability claim submitted to an insurer is likely to result in coverage disputes.

In addition to claims arising from litigation, insurers may also be faced with numerous claims arising from the cost and expense of product recalls, whether arising under commercial general liability policies with product recall endorsements, or specialty policies providing coverage for such claims.

The Associated Press report regarding the presence of cadmium in jewelry is likely to have significant ramifications for the consumer products industry and liability insurers. Liability insurers should continue to closely monitor this issue and develop strategies for addressing potential claims and exposure. NLdH will also continue to monitor this issue and report any significant developments.

From coverage, to reinsurance, to third-party defense and subrogation, NLdH's Emerging Issues team is positioned to handle every need of insurance carriers in connection with this matter. For more information, please contact Michael Hamilton or Bob Horst at 215.358.5100.