Going up in flames (lithium batteries and reasonable precautions clauses)

In February 2022, the cargo ship Felicity Ace was carrying nearly 4,000 vehicles and caught fire, burning for two weeks before sinking off Portugal’s Azores islands. No official cause of the accident was established. It was recently reported that lawsuits have been commenced against Porsche as it is alleged that a battery in their electric vehicle (“EV”) caught fire. In its defence, Porsche has, reportedly, disputed the location and cause of the fire. Some analysts have placed the total dollar value of the goods on board the Felicity Ace to be in the region of $438 million.

Indeed, when lithium batteries fail, the consequences can be catastrophic. One of the hazards associated with lithium-ion batteries would be the risk of thermal runway where the cells reach an uncontrollable self-heating state, setting off a chain reaction which can cause a fire or an explosion. Nevertheless, lithium batteries remain a popular choice for electric products as they have one of the highest energy densities and a low self-discharge property. Their uses ranges from small electronic products (such as laptops), to EVs and as a Battery Energy Storage System (“BESS”).

We anticipate an exponential increase in the use of lithium batteries as governments strive to reduce carbon emissions. For insurers, this varied and widespread use of lithium batteries translates into increased associated risks (e.g. damage to surrounding properties).

How not to go down in flames

Risks concerning lithium batteries can occur during manufacturing, transportation, use and storage. During manufacturing, structural defects and contamination may render the lithium batteries unsafe. Improper packaging, handling and storage conditions are some factors that contribute to the risks of lithium batteries short circuiting and catching fire. There are risk mitigation strategies that insurers can consider. These include requiring lithium batteries to only be sourced from reliable manufacturers, ensuring that the storage and transport conditions comply with any prevailing law, regulations and/or guidance notes.  

Increasingly, various bodies have proposed industry standards to address the risks inherent to the use of lithium batteries. For instance, the European Maritime Safety Agency published a guidance note for the safe carriage of alternative fuel vehicles (such as EVs) in roll-on roll-off spaces of cargo and passenger ships, precautions to take against ignition, charging the batteries onboard, fire detection and fire suppression and extinguishment.

Insurers might wish to consider the appropriateness of their ‘reasonable precautions’ clauses to ensure that they sufficiently address this risk and consider local rules or regulations on lithium batteries. For example, a clause that only makes reference to ‘statutory requirements by any public authority’ might be too narrow to encompass industry rules or guidelines by professional bodies, while a clause that is too broadly worded might be too vague to be effective. An option available to insurers might be to specify the precautions that have to be taken, however, this requires a comprehensive assessment and appreciation of the risks involved. That might not be achievable in every instance.

Another aspect of ‘reasonable precautions’ clauses in English law govern policies is, typically, the requirement for the insurer to prove that the insured’s conduct was reckless, that is to say, the insured recognised the danger but acted without caring whether or not that danger was averted. However, if a reasonable precautions clause was drafted with sufficient clarity, it could be breached by negligence.

Conclusion

Given the risks associated with lithium batteries and the potential for widescale damage that might extend to surrounding property, it is important for insurers (whose portfolio insures the use etc. of lithium batteries) to conduct a thorough risk assessment and to re-examine their ‘reasonable precautions’ clauses. For other insurers, it would be helpful to understand if the insured’s property is within close proximity to any lithium battery storage facilities or products (such as EVs) that incorporate lithium batteries. Please contact us if you would like to discuss further.