Electric Avenue

As the number of electric vehicles on U.S. roads accelerates, a complicated assortment of new risks confront the insurance industry.

Since the industry bears a large portion of these exposures in a wide range of liability policies—bodily injury, general, property, product, environmental impairment, and management and board—EVs demand close attention and rigorous risk assessments, particularly as their numbers grow.

While only a negligible number of EVs were sold at the turn of the 21st century, by 2022 5% of all cars sold in the United States were fully electric. In 2023, new EV sales rose by about 7%. By 2030, according to a forecast from S&P Global Mobility, electric vehicle sales in the United States could reach 40% of total passenger car sales.

At least 20 manufacturers have introduced electric vehicles, including Tesla, Toyota, General Motors, Volvo and Ford, as well as relative upstarts Rivian, Aptiv, Arrival, Canoo and Lucid Motors, among others.

In the commercial transportation sector, a similar progression is underway. A recent report by consulting firm Oliver Wyman projects that two million commercial electric vehicles—a mix of buses, overnight delivery trucks and Class 8 tractor trailers—will be on the road by 2030, representing an annual growth rate of 70% over the 10,000 commercial EVs now on the road.

As manufacturers quicken the transition from gas- and diesel-powered vehicles to battery-operated cars and trucks, emerging safety, health, environmental, geopolitical and liability risks are in store for the property and casualty insurance industry. To address these new and nuanced exposures, insurers must develop accurate underwriting and pricing models.

Fast and Heavy

For starters, EVs present atypical accident safety and health risks. Due to the substantial weight of the battery, electric vehicles can weigh as much as one third more than comparable gasoline-powered vehicles. In some cases, the battery alone weighs as much as an entire gas-powered car. Heavier batteries are needed to drive longer distances before recharging: the longer the distance, the heavier the weight. Given consumer demands for a 300-mile range per charge, heavier batteries are to be expected. In a collision, however, greater weight equals greater momentum, increasing the risk of injury and death to the drivers and passengers in the lighter-weight vehicle.

Raul Arbelaez has followed and written about the evolution of electric vehicles for more than a decade. The vice president of the Vehicle Research Center at the Insurance Institute for Highway Safety (IIHS), Arbelaez is concerned about their heavy weight and rapid acceleration. “We’re interested here in what that extra weight and speed mean to people’s safety,” he says.

To learn the answer, IIHS loaded up a junked gas-powered car with slabs of steel and concrete to represent the weight of a 9,500-pound GMC Hummer EV with a 2,900-pound battery and crashed it into a vehicle less than half the weight. “The results were similar to the pretty devastating forces that occur when larger combustion-engine vehicles collide with smaller combustion-engine ones,” Arbelaez says.

Arbelaez cites a 2018 head-on collision between a large car and a minicar. “The minicar performed poorly,” he says. “Assuming heavier EVs are made in the future, the disparities in weight between them and much lighter cars will be concerning.”

The rapid acceleration of electric vehicles—some models reach 60 mph in three seconds—has also magnified safety concerns. In an interview with NPR in January, Jennifer Homendy, the chair of the National Transportation Safety Board, said EVs with heavier batteries and higher horsepower increase the risk of severe injury and death. In the same NPR report, Michael Brooks, the acting executive director of The Center for Auto Safety, said, “It’s a simple matter of mass and speed.”

Passenger electric vehicles with autonomous driver assistance options are another concern. A recent study suggests Tesla’s autopilot driver-assistance system has been involved in 736 accidents causing 17 fatalities. In mid-December, in response to a two-year investigation by auto safety regulators into the autopilot system, Tesla decided to recall more than two million vehicles.

In calculating the collision risks of different passenger EV models, underwriters have difficulty ascertaining battery weight, speed, autonomous driving and other emerging safety risks. “Actuaries are trying to determine where to get this information to figure out the risks,” says Lydia Zaharia, national automotive practice leader at Marsh McLennan Agency. “It’s too early to project how the market will react, but we’re already seeing higher-dollar, more frequent losses impacting the industry.”

The underwriting considerations are potentially less challenging for insurers of electric semi-trucks. In the United States, a semi and its cargo can legally weigh a maximum 80,000 pounds. A battery that adds 5,000 pounds to an electric truck requires a commensurate reduction in cargo weight to address the legal limit.

The good news is the electric vehicle industry’s goal is to reduce the weight of batteries sourced from suppliers. Efforts are underway by several EV manufacturers, among them Honda, Toyota and Stellantis, to reduce the weight of the battery package. All three have publicized their intent to achieve 50% reductions in battery weight in the next year or so, without surrendering driving range.

Several battery manufacturers are shifting away from heavier metal battery components to lighter plastic alternatives, while EV manufacturers are focused on decreasing the weight of the rest of the vehicle. At Rivian, for example, the new RS1 sports utility EV is made of lightweight aluminum and carbon-fiber composite in addition to customary high-strength steel components. Meanwhile, engineers at Poland’s National Science Centre are working on reducing the weight of EV transmissions. “There’s definitely a lot of work underway to reduce the weight of EVs,” says Rodney Taylor, managing director in the risk services environmental division of Aon. “Things are getting better all the time.”

Fire and Water

Although they are uncommon, the fire, health and electric shock risks of lithium-ion batteries in electric vehicles are another concerning matter. Thomas Barth, chief of the special investigations branch for highway safety at the NTSB, offers a brief primer: “Rechargeable lithium-ion batteries contain flammable electrolytes,” Barth says. “If the battery package is ruptured, a short circuit between the battery’s cathode and anode heats up the flammable electrolytes, causing the battery to ignite.”

Poisonous gases like lithium dioxide, hydrogen fluoride and lithium hydroxide are produced in such fires, in addition to other toxic gases generated when the synthetic materials in a vehicle’s interior burn. Unlike the foam used to extinguish an internal combustion engine fire, battery fires can be extinguished only with water—lots and lots of water.

Zaharia, who says it takes about 10,000 to 20,000 gallons of water to extinguish an electric vehicle fire, explains the challenge. “When a battery ignites, the entire battery compartment doesn’t catch on fire at the same time,” she says. “A firefighter puts out the fire and then minutes or several hours later, the battery is on fire again.”

Known as “stranded energy,” it’s the energy that remains in a lithium-ion battery damaged in an accident. Basically, the cells in one part of the battery ignite first, followed by other cells as the lithium burns and causes thermal runaway—uncontrolled increases in temperature and pressure that result in reignition.

Stranded energy results in secondary ignition in 10% of collisions, in some cases weeks after a crash. Defective batteries also can catch fire, resulting in potential product liability for battery makers and property liability claims filed against EV companies. Home EV chargers are another source of property- and product-related risks.

Personal injury claims emanating from battery fires are especially troubling. According to a report from Allianz, firefighters and other first responders have “limited experience” dealing with fires that can last 24 hours, are difficult to extinguish, release toxic gases, and can occur unexpectedly. “As an underwriter, I’m concerned that fires can occur without an accident, a thermal leak in a battery that results in fire,” says Steve Tagert, the North America environmental practice leader at Allianz Commercial.

Much like underwriters, firefighters are flummoxed by the fire potential of differently designed and constructed batteries. Steve Kerber, the executive director of the UL Fire Safety Research Institute, recently told NBC News that firefighters lack needed training to “know all the possible consequences.”

Zaharia cites a 2021 study by the NTSB calling for electric vehicle makers to provide battery-specific information to first responders to reduce the risks of electric shock, burns and toxic chemical exposure. This information is slow in coming. “New York City firefighters are trained and equipped to handle the fires,” Zaharia says, “but in many rural areas where a highway crash occurs, firefighters lack proper training and equipment and the volume of water to put out a fire.”

There is an upside: unlike gas-powered cars, Barth says, the risk of explosion in an electric vehicle is extremely rare. Moreover, most battery packages “are designed to avoid rupturing in a minor or even relatively severe collision, given certain limitations,” he says. “They’re not designed to withstand a collision at 100 mph.”

Pitfalls of Mining

In addition to the weight and fire hazards involved with electric vehicle batteries, mining for the metals required to make them also poses risks.

To extract lithium, holes are drilled in salt flats to pump up the briny water containing lithium and other minerals. Once the brine dries, the minerals are extracted. Lithium is mined in hot, dry and mountainous regions like the Andean states of Argentina, Chile, Bolivia and Peru, countries with poor environmental records and lax regulatory enforcement.

“Manufacturers by and large have ignored the liabilities because they buy the materials globally, often without mentioning where they’re mined,” Taylor says. His colleague, Catherine O’Leary Smith, chief broking officer in Aon’s risk services environmental division, says environmental liability is borne not by electric vehicle makers themselves but by the third-party mining companies, processors and transport carriers they contract with. “Manufacturers nonetheless need to contend with possible reputational damage because so many of these operations are conducted in parts of the world where there is less regulation and less regard for human health and the environment,” she says.

Smith is not alone in this position. “If we’re lucky, companies extracting materials for lithium-ion batteries in Indonesia, Russia, China, the Congo and the Andean states will follow the laws on the books,” says Aimee Boulanger, the executive director of Initiative for Responsible Mining Assurance (IRMA). “The problem is their laws aren’t sufficient to protect against significant harm at industrial scale. We need to have consistent expectations, when mining occurs, that drinking water, agriculture and the health of children are protected.”

IRMA has developed a global standard assuring more responsible mining practices. Meanwhile, the global demand for lithium is rapidly escalating. Benchmark Source, which tracks mineral supply and demand, forecasts that lithium demand in 2023 will reach 900,000 tons, a 27% increase from a year ago, and reach 1.5 million tons in 2026.

The recent discovery of what may be the world’s largest lithium deposit along the border of Oregon and Nevada may alter the supply-and-demand imbalance. In September 2023, volcanologists reported in Science Advances that an extinct volcanic crater in the McDermitt Caldera holds up to 40 million tons of lithium, potentially increasing the current domestic lithium reserves of just one million metric tons. Yet the prospect of mining in the caldera, a depression formed when a volcano collapses, has its detractors, most notably nearby indigenous groups, which consider the area sacred.

Another domestic source of lithium is the Salton Sea north of the California-Mexico border, where the aquifers contain enough lithium to meet 40% of the world’s demand. Several companies have committed to sourcing lithium using clean extraction processes. “It’s essential that America doesn’t sacrifice indigenous rights, clean water and biodiversity to provide materials for cleaner energy,” Boulanger says. “We must follow higher standards for mining, supported by stronger laws that reduce harm, so that our solutions don’t deepen our problems.”

To further U.S.-based lithium extraction, the Inflation Reduction Act, passed last year, provides tax credits to electric vehicle makers using mineral components from the United States and the country’s allies. Tax credits are earmarked for automotive companies that retool existing manufacturing facilities into new battery manufacturing and mineral processing facilities.

By 2030, the United States and allied partners hope to establish a secure battery materials supply chain supporting long-term U.S. economic competitiveness and decarbonization goals, while advancing social justice objectives. Altogether, the United States has targeted more than $135 billion toward the sourcing and processing of critical minerals to manufacture lithium-ion batteries.

Battery Disposal

While electric vehicle makers may not be held liable for environmental damage caused by suppliers, they nonetheless confront potential liability for batteries that have outlived their usefulness and require disposal. Although manufacturers are not required by law to recycle battery packages and their mineral content, most have such plans in place. In the meantime, thousands of depleted lithium-ion batteries are stored in junkyards specializing in disassembling batteries and recycling the materials.

“Right now, there is no economic way to recycle lithium-ion batteries,” Taylor says. “The volume isn’t enough to make it economically advantageous.” Taylor says only a few million EVs are on the road, with batteries that last 10 years. “The batteries differ in their construction and materials, with different percentages of copper, nickel and cobalt, making disassembly and recycling difficult. Altogether, recycling costs five times what it costs to mine lithium from a brine operation. The government will eventually get involved.”

This appears to be the case. “We’re beginning to hear loud voices,” says George Buermann, partner at law firm Goldberg Segalla and leader of its environmental practice. “In the U.S., public water utilities now have to test for lithium in drinking water, which is listed along with 29 PFAS [per- and polyfluoroalkyl substances] compounds as drinking water contaminants. Right now, there are no hazardous waste recycling regulations for lithium-ion batteries, much less handling requirements.”

Buermann provided a May 2023 memorandum issued by the Environmental Protection Agency that suggests increased interest in the regulation, management and tracking of lithium-ion batteries. “EPA has determined that most lithium-ion batteries on the market today are likely to be hazardous waste when they are disposed,” the memo states. “Batteries may end up at a dealership or automobile mechanic shop, if the vehicle’s battery needed to be replaced, or at an automobile disassembler, if the entire vehicle reached the end of its life. In all cases, batteries must be identified and sorted for proper recycling [as they] may change hands several times in the process, getting shipped to other collection facilities before arriving at a facility that can process them.”

As more electric vehicles hit the road over the next few years, battery recycling is expected to become more economical. Recycling the minerals also reduces both emissions and geopolitical risks. Small wonder that a thriving battery recycling industry has emerged, led by Redwood Materials, set up in 2017 by former Tesla co-founder J.B. Straubel.

Redwood recently closed several acquisitions to expand into Europe, augmenting its staff of chemical engineers, metallurgists and material scientists. The company is building a state-of-the-art $3.5 billion battery materials recycling facility in Charleston, South Carolina, the state’s largest economic development project in history. In August 2023, Redwood raised $1 billion in Series D funding, and it is the recipient of a U.S. Department of Energy loan of $2 billion to make EV batteries from new and recycled sources.

Management and Board Liability

One other concern to heap on top of these worries is director and officer liability. “The issue I see,” says veteran liability attorney Dan Bailey, chair of the D&O liability practice group at Bailey Cavalieri, a law firm in Columbus, Ohio, “is if management over-touts the environmental benefits of what the company is doing, emphasizing the green zero-emission advantages of electric vehicles without disclosing the environmental impacts arising from the manufacture of the batteries.”

This outcome is “not just theoretical,” Bailey adds. “In 2022, the SEC proposed new environmental disclosure requirements [that] are very comprehensive, requiring all kinds of disclosures that would directly impact EV manufacturers and other companies. It’s easy to stub one’s toe overstating, misrepresenting or omitting important information, but the potential outcome legally for the directors and officers who file such disclosures to the SEC is concerning. I can see shareholders, customers and maybe regulators criticizing the undisclosed items, leading to the filing of disclosure-based claims against them.”

Another D&O litigation scenario is equally troubling. “If companies go all-in on making EVs and abandon the combustion engine, the question is whether consumers are prepared to buy them, particularly if they cost significantly more than traditional cars,” Bailey says. “If an awful lot of customers part ways with the company to buy a gas-powered car from a competitor, revenues could fall, resulting in a shareholder claim of mismanagement against the directors and officers for betting the company’s future on an arguably unproven product or industry.”

Insurers, Bailey says, need to be “very sensitive to where they have exposure—not just under an environmental impairment policy [or] a general liability policy but also under a D&O policy. The more policies you implicate, the greater the limits of insurance at risk.”

Like everything in life and business, there is no such thing as a surefire winner. “EVs are just not the magic bullet lots of people want them to be,” Buermann says. “People need to understand that battery-operated EVs are not a panacea. Prior to rolling off the assembly line, they have an initial carbon footprint from the impact of mining raw materials. Issues remain with regard to battery disposal and recycling. Time will tell.”