Social Inflation, Nuclear Verdicts Mark Liability Insurance Landscape

To understand what’s driving the market for General Liability Insurance, start by considering three elements of the phenomenon known as social inflation:

• Rampant litigation


• Broadened definitions of liability


• A spiking trend in plaintiff-friendly legal decisions.

These alone are enough to harden the market – through restricted coverage limits, through constrained carrier capacity for assuming risk, through increased underwriter scrutiny and selectivity. And, yes, through escalating rates.

Now add to these elements another aspect of social inflation contributing to the ongoing hard market for Property and Casualty Insurance overall and for Commercial General Liability coverage in particular: nuclear verdicts.

The insurance carrier Liberty Mutual defines a nuclear legal verdict – also known as a nuclear judgement – as “one that surpasses $10 million.” Liberty also cites “3 factors fueling today’s supersized verdicts:”

1. Corporate mistrust


2. Growth in third-party litigation financing


3. Social pessimism and jury sentiment favoring plaintiffs.

The impact of such verdicts extends far beyond the parties immediately involved in the decision. As the International Risk Management Institute (IRMI) observes:

“Higher claim costs lead to higher insurance premiums. It is that simple. Greater insurance premiums lead to greater reinsurance premiums. This is what insurers are seeing in lines of business such as commercial automobile, directors and officers, medical malpractice and commercial general liability. Moreover, unanticipated higher claim costs and significant jury verdicts may cause some insurance companies to shut down lines of business or, in the extreme situation, go out of business.”

Net Effects 

Social inflation and nuclear verdicts aren’t the only factors driving the hard market for Commercial General Liability Insurance. As Alera Group noted in our Property & Casualty 2021 Market Outlook, contributing factors also include defective products and poor workmanship, catastrophic weather-related events such as hurricanes, tornadoes and wildfires, as well as COVID-19 – which has created its own wave of litigation while at the same time slowing the wheels of justice to a virtual halt.

Combined, all of this has resulted in a market characterized by tighter underwriting standards, lower limits and reduced capacity, with high-hazard classes such as contractors, municipalities, public utilities, manufacturers, chemical producers, and habitational real estate developers and property managers particularly hard hit.

The past year has also heightened attention on the trucking industry, thanks in part to a study by the American Transportation Research Institute, which reported 26 trucking litigation cases that resulted in judgements of at least $1 million from 2015-2019. And that did not include a $411 million judgment awarded by a virtual jury in favor of a motorcyclist injured in a 2018 crash.

Expensive verdicts aren’t confined to the trucking industry, of course. In June of 2020, PropertyCasualty360 published a graphic detailing 10 expensive verdicts in lawsuits involving premises liability, with judgements ranging from $6.5 million in a case involving a child injured on a Florida carnival ride to $81 million awarded a Navy vet robbed and shot outside a Georgia supermarket.

Outlook Heading into 2021 

Here’s a glance at the landscape for General Liability Insurance as outlined in Alera Group’s Property & Casualty 2021 Market Outlook whitepaper, released in December 2020:

► This line of business continues to underperform and will be under sustained pressure to generate an underwriting profit.

► Rates will rise again in 2021 for virtually all businesses, reflecting:

• Increases in claims frequency and severity


• Social inflation and litigation funding


• COVID-19


• Defective products and poor workmanship


• Increases in the number of class action product liability lawsuits.

To obtain the entire Property & Casualty 2021 Market Outlook whitepaper, click the button below.

GET THE WHITEPAPER 

What You Can Do

In a market such as this, premium costs are largely out of the insured’s control – but don’t let that deter you from playing an active role in obtaining the best available coverage. Here are some basic steps:

• Pay your bills on time. While this may seem obvious, you might be surprised by how many businesses wait until they’ve received notice of impending cancellation before they pay their insurance bills. Know that insurance companies get nervous when they see a client isn’t paying bills on time – and at a time of heightened underwriter scrutiny and selectivity, you don’t want to give anyone cause to reject your application.


• Use the resources available to you, including your agent/broker. An experienced, knowledgeable broker can:


• Provide you with the tools necessary to implement a strong risk management program;


• Help you leverage your strengths and communicate them during the underwriting process. If, for example, you can show that you had 10 claims one year and just two the following year and two again the year after that, you’ve demonstrated that you’ve implemented a good risk management program.


• Start the underwriting process early. Your agent/broker will appreciate it. Carriers will appreciate it. You’ll allow yourself time to assist in marketing your business in the best possible light, and you’ll have a head start on all those other organizations trying to place coverage under unfavorable circumstances.


• Read this Denver Post commentary about businesses’ liability due to cyber exposures, and register for Alera Group’s April 28 webinar, Cyber Security: What to Do Before and After a Breach. With the shift to remote work and the dramatic rise in cyber threats, businesses need new solutions and expertise to combat hackers and cyber attacks. We’ll show you how to build a cyber security strategy to protect your business.

REGISTER FOR THE WEBINAR



About the Author

John Beauregard, CIC, LIA

Senior Partner

Sylvia Group

During more than three decades as a business insurance professional, John has built relationships with clients by recognizing and addressing their unique risks and needs, providing them with the best available coverage and delivering dedicated, dependable customer service, particularly in the property development and management, medical manufacturing, municipal, education, and transportation insurance markets. A Certified Insurance Counselor (CIC) and Licensed Insurance Adviser (LIA), John works with clients to help them secure what they've invested in and built, evaluating the risks they face, developing customized policies to protect against those risks and creating comprehensive risk-management programs designed to save them money by reducing premiums.

Contact information:

• john.beauregard@aleragroup.com


• (508) 742-9228