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Lithium-Ion Battery Failures: Suggestions for Product Manufacturers to Mitigate Liability Risk

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Lithium-Ion Battery Failures: Suggestions for Product Manufacturers to Mitigate Liability Risk Product Safety & Liability ReporterrTM VOL. 45, NO. 10 MARCH 6, 2017 BATTERIES RISK MITIGATION As lithium-ion batteries are widely used and have known potential risks, product makers need to take steps to manage hazards, reduce the possibility of consumer injury or property damage, and protect their reputations, attorneys Kenn Brotman and Scott G. Kobil say. The authors offer advice on steps to manage risks and reduce exposure. Lithium-Ion Battery Failures: Suggestions For Product Manufacturers to Mitigate Liability Risk expense of recalls or investigations (not to mention law- suits) but also the bad publicity and loss of consumer trust. As news reports expose various, albeit limited, in- cidents of property damage or personal injuries associ- ated with lithium-ion batteries, numerous attorneys across the internet advertise their experience with lithium-ion related lawsuits. Frequently, the target of these lawsuits is not the manufacturer of the battery it- self but rather the manufacturer of the larger product that uses the battery. With the proliferation of lithium- ion batteries, it may be just a matter of time before a fire on an airplane, a cruise ship, or a high-rise building leads to significant property damage or, far worse, ex- BY KENN BROTMAN AND SCOTT G. KOBIL poses a large number of people to possible death or in- ighly publicized incidents involving lithium-ion jury. Although sellers of lithium-ion powered products battery fires have necessitated large-scale and that experience failures cannot avoid lawsuits alto- H costly recalls, or highly publicized investigations, gether, there are steps that can be taken to manage the requiring product manufacturers to incur not only the risk or reduce exposure. Kenn Brotman is counsel in K&L Gates’ Chi- What Is A Lithium-Ion Battery cago office, where he focuses his practice on product liability, premises liability, general And Why Can It Fail? tort liability, and complex commercial litiga- tion, including breach of warranty, breach of A lithium-ion ‘‘cell’’ comprises (1) a positively contract and breach of fiduciary duty matters. charged electrode, typically lithium oxide; (2) a nega- tively charged electrode, typically porous carbon or Scott G. Kobil is counsel in K&L Gates’ New- graphite; and (3) an electrolyte conductor, typically a ark office, where his practice includes product lithium salt in an organic solvent. When the cell liability, employment, and commercial litiga- charges, the positively-charged electrode gives up some tion matters. His clients include manufac- of its lithium ions, which move through the electrolyte turers and corporate defendants. to the negatively-charged electrode. When the cell dis- charges, the ions move in the opposite direction, pro- COPYRIGHT ஽ 2017 BY THE BUREAU OF NATIONAL AFFAIRS, INC. ISSN 0092-7732 2 ducing energy that powers the cell. A lithium-ion ‘‘bat- claims or business losses caused by problems with the tery’’ (or ‘‘battery pack’’) is a collection of cells, along lithium-ion batteries. Product manufacturers and retail- with housing and electrical connections. ers should include indemnification provisions within Lithium-ion batteries have a high-energy density, ow- their vendor agreements or as part of their purchase or- ing in part to lithium being the lightest metal and least ders. The scope of an indemnification provision should dense solid element. This high-energy density enables be negotiated with the vendor. Obviously, business fac- lithium-ion batteries to store greater energy over longer tors will dictate the extent to which a vendor will agree periods of time compared to traditional batteries. On to a broad indemnification provision. For example, the other hand, lithium’s chief disadvantage is that it is whether a battery manufacturer will agree to indemnify a highly combustible material. For example, in a the product manufacturer for all losses (including per- lithium-ion battery, an individual cell can get so hot that sonal injuries, investigations, recalls, business losses, it actually catches fire. The fire increases the heat, and reputational injuries related to battery fires) will which causes the fire to spread to the next cell and get likely be related to the size and length of the underlying even hotter — a chain reaction referred to as ‘‘thermal business transaction. Regardless, a product manufac- runaway.’’ Ultimately, the entire battery can quickly turer should confirm that the battery producer is willing catch fire or explode. In response to consumers’ in- to stand behind its product through the provision of an creasing demand for batteries that last longer, manu- indemnification agreement. facturers have packed battery cells closer together, Once the terms and scope of the indemnification pro- which increases the battery charge but also increases vision are agreed upon, the product manufacturer the chance of thermal runaway. should require that the battery manufacturer provide In order to limit the risk of thermal runaway, lithium- proof of adequate insurance to cover potential losses, ion batteries are designed so that they cannot be and that the product manufacturer and/or retailer is a charged too fast (doing so increases the risk of starting properly named additional insured. While a Certificate the thermal runaway process) and placing dividers be- of Insurance is frequently viewed as sufficient for this tween cells to limit the spread of heat from a malfunc- purpose, reviewing the policy language itself, particu- tioning cell. Other safety features include temperature larly with regard to coverage of additional insureds, is sensors, chips, circuits, and vents that monitor heat and strongly encouraged because Certificates of Insurance regulate electrical power to help ensure the batteries do can contain errors and may or may not modify or vary not overheat. the terms of the actual policy. Consideration should In addition to safety features within lithium-ion bat- also be given to the identity and reputation of the in- teries, research is currently being performed on the vi- surer providing coverage. In the event that an insurer ability of new battery sources that may be cheaper, refuses coverage if a loss occurs, initiating a coverage more effective, and safer than lithium-ion batteries. For action against a foreign insurer may be challenging. For example, there is promise that lithium-sulfur may be this reason, a manufacturer should consider using a the next ‘‘big thing’’ in battery development. Such tech- vendor agreement that mandates that (1) the vendor nologies are still years away, however. For this reason, maintain sufficient insurance coverage from an insurer until other effective power sources are available (i.e., carrying at least a certain A.M. Best rating (e.g., ‘‘A’’) sources having a high-energy density that can still be and (2) the insurer must agree to name the product used safely), certain practices should be considered manufacturer as an additional insured. when incorporating lithium-ion batteries into products. After requiring and reviewing applicable insurance coverage, the product manufacturer should remain dili- gent throughout the relationship with the battery ven- Proactively Mitigate Against dor. Insurance policies typically cover either ‘‘occur- Battery Failure in Your Products rences’’ that arise at least in part during the policy pe- riod, or ‘‘claims made’’ within the policy period or a The first line of defense against lithium-ion failures is contractually bargained-for extended reporting period. to know your battery supplier. Since the mass produc- The manufacturer should require that proof of coverage tion of lithium-ion batteries started in the 1990s, it has for each successive policy period be provided by the become a high-volume, low-margin industry. Economic vendor, and records of such proof should be maintained factors have caused some battery manufacturers to cut by the product manufacturer. Each time proof of cover- corners with some of the available safety measures. age is provided, it should be reviewed to ensure that it Therefore, it is important for product manufacturers to names the manufacturer as an additional insured and investigate their battery suppliers thoroughly. Manufac- covers the agreed-upon scope of the indemnification turers should become familiar with the battery manu- provision. facturing process and work with the supplier to ensure However, simply relying upon a vendor or its insurer that the lithium-ion batteries are properly manufac- can leave a product manufacturer exposed if the vendor tured to minimize the risk of thermal runaway. and/or its insurer refuses to defend and indemnify the When selecting a battery supplier, a manufacturer manufacturer, or if the alleged loss exceeds the ven- should ensure that the battery manufacturer will accept dor’s coverage. For this reason, it is important for the financial responsibility for costs and potential liability manufacturer to maintain its own insurance and to con- To request permission to reuse or share this document, please contact [email protected]. In your request, be sure to include the following in- formation: (1) your name, company, mailing address, email and telephone number; (2) name of the document and/or a link to the document PDF; (3) reason for request (what you want to do with the document); and (4) the approximate number of copies to be made or URL address (if posting to a website). 3-6-17 COPYRIGHT ஽ 2017 BY THE BUREAU OF NATIONAL AFFAIRS, INC. PSLR ISSN 0092-7732 3
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