Canadian Underwriter

Up In Smoke

February 1, 2000   by Sean van Zyl, Editor

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The fact that one of Hollywood’s recent creations “The Insider”, which is based on behind-the-scenes dirty tricks employed by opposing parties in the U.S. anti-tobacco wars, achieved such box office success clearly indicates rising public interest in tarring cigarette manufacturers — and making them cough up payment. With the U.S. courts having recently passed settlement on 50 state-brought litigation actions against the tobacco manufacturers for recovery of health-related expenditure totaling US$260 billion, the blood of a wounded prey is quickly spreading through the carnivorous waters of litigation attorneys and cash-hungry governments. These actions have not been limited to the U.S., with both the provincial government of British Columbia and the Canadian federal government having launched legal actions against tobacco manufacturers, the latter suing for Cdn$1 billion in damages through the U.S. court system. What does this mean for property and casualty insurers? Possibly the biggest payout on claims since the crippling liabilities of the asbestosis and environmental damage (A&E) covers of the 1980s, some analysts warn.

The groundswell of actions being brought against tobacco manufacturers in the U.S. was sparked by the recent settlement of lawsuits of 50-odd states for the recovery of approximately US$260 billion in health expenditure believed to have been incurred through the treatment of tobacco-related illnesses.

Subsequently, the U.S. federal government has filed against the major cigarette companies on the same grounds. The Canadian federal government also recently filed its own lawsuit of Cdn$1 billion in New York state against R.J. Reynolds Tobacco Holdings Inc., RJR-Macdonald Canada and several affiliated companies, on grounds of alleged smuggling of products from the U.S. into Canada. They are not alone. Several countries, including local government bodies, trade unions and anti-tobacco lobby groups, entered the tobacco litigation fray last year, filing in the U.S. where tort awards are seen to be much higher than that achievable in their own legal jurisdictions.

Several of the actions brought against the tobacco companies have been class action suits. However, toward the end of December last year, New York state’s highest court dismissed five class action suits brought against the major cigarette companies, supporting the tobacco industry’s view that class actions are not suitable for settlement of tobacco-related health cases. Furthermore, within days of the aforementioned decision, the U.S. District Court of Columbia dismissed a year and half-old case presented by the Republic of Guatemala against the tobacco companies, on the grounds that any action would have to be taken within that country’s own jurisdiction. It is believed that this decision may have delayed similar pending foreign actions being brought forward in the U.S., including that of the Ontario government.

However, regardless of the nature and settlement of tobacco litigation, the major cigarette manufacturers are facing enormous payout costs and legal fees. A recent state court decision in Florida upholding a class action suit brought forward on behalf of 500,000 of the state’s “sick smokers” against the tobacco companies could cost the industry up to US$300 billion in a lump sum award (Florida, Maryland and Louisiana stand alone in upholding tobacco class actions).

The result of this has seen several actions being brought by the tobacco companies against their insurers under commercial general liability covers (CGL), some dating back to the 1950s. So far insurers have not agreed to settlement of these claims, although the number being brought forward is steadily rising. Already in Canada several insurers are engaged in legal tangles with tobacco clients. As a result, no one was overly keen to be openly quoted in this article.

As Ted Belton, author of the Belton Report, observes in the third-quarter 1999 edition of his report: “Lawyers representing the tobacco and insurance industries have been pouring over policy wordings to determine whether there is coverage for health risk liability. As might be expected, they disagree, and ultimately, that is an issue that will have to be decided by the courts. Remember the very liberal court interpretations of policy wordings that extended coverage for environmental damage when insurers were certain that no such coverage existed. If it is found that coverage does exist, tobacco liability has the potential to dwarf the cost to insurers of such previous mass tort actions as those arising from asbestosis and environmental damage.”

Belton goes further to suggest that, in the event insurers are found liable under policies for health related tobacco claims, the cost could prove crippling for some insurers, “…and cause the biggest ever hardening of the property and casualty market [globally]”.

Belton is not the only person who believes that tobacco liabilities are a real threat to the industry. A senior claims manager for one of Canada’s leading insurers believes there are many similarities between the building legal complexities of tobacco and that of A&E. “There are many parallels between the environmental/asbestosis cases of the 1980s, one of which is the fact that there are many people involved and the dollar numbers could be very high.”

Bruce Thomas, a senior partner at Cassels Brock & Blackwell, points to another parallel, that being many of the CGL coverages being called on date back to the 1950s when health liability exclusions were not as common or uniform in wording. In addition, the covers were issued by numerous companies, many of whom have since merged or been acquired. Sorting through these issues will be a complicated, time consuming task, he predicts.


The area where insurers stand most exposed lies in older CGL policies, says Thomas. He notes that later policies included specific uniform exclusions relating to health liability arising from the use of tobacco. Thomas expects claims will be filed against tobacco companies in Canada, the result being increased demands on insurers to meet the cost of defence.

In a court environment, he expects insurers will argue that, regardless of policy exclusions, the tobacco companies had not been forthcoming in revealing all they knew about the ill effects of smoking thereby nullifying any right to claim for liability losses arising in that regard. In such circumstances, insurers would have to prove to the courts that the policyholder had been deliberately misleading — which normally would not be an easy achievement. However, this task could prove relatively simple in the tobacco scenario as ample internal documentation released by the tobacco industry under order of the U.S. courts would seem to support prior knowledge of the negative health effects of smoking.

The flip side to this situation, observes Ani Abdalyan, an insurance group specialist at Miller Thompson, is that insurers could be opening themselves to Directors’ and Officers’ (D&O) liability claims. By arguing that tobacco companies had willfully sold a product which they knew to be health threatening and thereby concealing that information could open the door to D&O claims. Thomas concedes this possibility, although points out that D&O coverages are a relatively new phenomenon in the context of tobacco exposure, and the liability costs would be minor when compared with the potential exposures.

William Blakeney, a partner at Lafleur Brown (Toronto), notes that reports filed with the U.S. Security and Exchange Commission suggest that liability insurance coverage for the tobacco companies may exist as far back as the 1930s. Given the wide range of allegations in the lawsuits presented, “it is to expected that claims will be forthcoming under CGL, errors and omissions and D&O liability policies”.

Furthermore, Blakeney observes that insurers not only face potential claims from tobacco companies, but numerous affiliated enterprises, namely advertising companies and medical professionals who had been brought in by the cigarette companie
s to counter-attack anti-smoking studies. “Advertising agencies that designed campaigns aimed at younger audiences, or glamorized smoking, are an obvious target. Professionals who participated in industry attempts to deflect attention away from medical studies showing harm also face errors and omission claims. If it is proven that specific actions were undertaken with the knowledge or collusion of officers or directors of the company, there may be exposure under D&O policies as well.”

So far, the senior claims manager quoted above says the actions taken in Canada have been limited to the tobacco companies, and no attempt has been made by plaintiffs to sue insurers or other non-tobacco organizations directly. Although there is the risk of a tobacco company’s insurer being sued in the event of the company going into insolvency (highly unlikely in the multi-billion dollar tobacco industry), he does not believe that in the Canadian court system insurers will face significant tobacco-related health claims from outside parties.


Canadian federal Health Minister Allan Rock recently unveiled a new proposal regarding health warnings printed on cigarette packs. One of the more graphical items is the picture of a “limp cigarette” accompanied by the line: “Smoking can cause impotency”. Given the recent Canadian federal government lawsuit filed against the tobacco companies, plus the tough stance being taken by Rock on packaging, combined with the B.C. litigation action, and the pending lawsuits of at least two other Canadian provinces, and it would be fair to say that the political odds are moving out of favor for the all-powerful tobacco lobbying machine.

As a result, legal and insurance industry experts expect tobacco litigation will steadily rise in Canada in coming years. In turn, the instances of tobacco company actions taken against insurers will also grow.

However, Blakeney observes, Canadian courts are likely to be more conservative in their interpretation of policies. Particularly, he adds, if the substance of the claim is an allegation of deliberate wrongdoing with foreseeable results. Besides which, he believes plaintiff lawyers will encounter some problems in attempting to adapt the American model of class actions and pleading to the Canadian tort law system.

In addition, Blakeney points out that “treble recovery” and contingency fees in the U.S. make tobacco lawsuits more lucrative an area of business for American plaintiff attorneys. With Canadian legal system restrictions on contingency earnings for lawyers, there is less incentive to take on an intensive litigation case without guarantee of reward. This, no doubt, was a factor behind the Canadian federal government’s decision to hire Chicago attorney Fred Bartlit, nicknamed the “the Grey Lion”, who has extensive experience with environmental litigation. Both Bartlit and the Canadian government have, however, gone to great lengths to dispel the fact that he stands to make significant financial gains through contingency fees based on the success of the case.

An issue which does not bode well for tobacco companies, and perhaps indirectly their insurers, is that many of the tobacco actions are being driven by hardened environmental litigation lawyers. Similar to the A&E situation, precedents set south of the border may well spill over into Canada.

Whether insurers will ultimately be faced with a significant portion of the costs associated with the settlement of tobacco litigation is highly debatable. Industry spokespeople are confident that policy exclusions will stand up in court, although as Belton cautions, if the tobacco companies begin to feel the financial pinch, and a more concerted effort is made to gain a more liberal court interpretation of policy exclusions, anything can happen.

But, as Glenn McGillivray, head of corporate communications at Swiss Reinsurance Company of Canada, observes in the July 1999 edition of “Review”: “It is important to recognize that unlike asbestos, DES, silicone breast implants or other banned products, the tobacco industry wishes to continue the manufacture and sale of tobacco products on a worldwide basis. Since there is an annual market of over US$45 billion at stake in the U.S. alone, the incentive for the tobacco industry to remain in business is overwhelming. Moreover, the tobacco industry can afford to fund the multi-billion dollar settlements on its own simply by shifting the costs to consumers and raising the price of a pack of cigarettes by less than 50c. As a result, the tobacco industry is clearly in a unique position to continue funding its own defense and any settlements without waging a coverage war with the insurance industry.”cu

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