The Gavel Keeps Falling and General Liability Is in the Crosshairs. The Latest on Litigation Funding and Social Inflation

Risk managers and their brokers are restructuring their liability programs as markets shift and underwriters take a closer look at exposures.

By: Alex Wright | August 3, 2022

The general liability market has changed beyond recognition since the start of the COVID-19 pandemic.

Ever-increasing economic and social inflation, medical expenses and litigation financing have all resulted in spiraling claim losses and legal costs, which continue to outstrip rates. Added to that, sexual harassment cases are on the rise, and decades-old general liability policies have been exposed as many states have removed limitations on financial recovery and victims have been given more time to file or proceed with claims.

The emergence of new potential risks such as cannabis, herbicide and pesticide use over multiple decades, nutraceuticals, PFAS or “forever chemicals,” contaminated drinking water and the impact of 5G technology on flight safety have also raised the specter of large-scale class action lawsuits, fueled by growing anti-corporate sentiment, mistrust and social polarization.

Insurers have been further hampered by post-pandemic uncertainties over workplace liability exposures and litigation and prolonged low interest rates constraining their investment returns.

“A.M. Best’s expectation for a modest decline in underwriting performance in 2022 assumes a return to pre-pandemic economic and litigation activity, as well as further increases in jury verdicts,” A.M. Best concluded in its latest general liability market segment report.

“Employer liability exposures will merit close monitoring, as expectations are that employees will return to traditional workplaces at an accelerating pace in the third year of the pandemic.

“Furthermore, because so many cases were put on hold in 2020 and early 2021, the pace of attorney advertising and reactivation of the court proceedings has increased substantially.”

Despite rates moderating to mid-single digit increases, the surge in nuclear verdicts and unsustainable loss accumulations have brought about a sea of change in the market over the last two years. The biggest issue has been finding sufficient capacity to build insurance towers to cover these new exposures. That has meant brokers and insurers have had to work closer together to craft coverage that meets clients’ needs.

Insureds have also been increasingly turning to alternative forms of insurance such as captives to secure cover.

Nuclear Jury Verdicts

Social inflation and nuclear jury verdicts with settlements totaling tens of millions of dollars have been the biggest challenges for insurers, and they show no signs of abating, said Carol Laufer, North America head of liability at Allianz Global Corporate and Specialty.

On top of that is medical cost inflation, which has increased exponentially in recent years, she said.

Carol Laufer, North America head of liability, Allianz Global Corporate and Specialty

“Plaintiff attorneys are also becoming increasingly sophisticated in their tactics,” said Laufer. “It has become a vicious cycle where claims are brought, they go to trial and a large award is made, and then it starts all over again with another claimant.”

Among the most common cases brought are around mass shootings in retail stores and hotels, sexual abuse and molestations at universities and colleges, traumatic brain injuries, multivehicle accidents, building collapses, wildfires and biometric data collection. With 50 firms that specialize in litigation funding, the likelihood is that these types of claims are only going to increase.

Insurers have responded by raising premiums to at least cover average claims inflation of 8 to 10%, with the largest increases in excess casualty and umbrella coverage, and by tightening terms and conditions.

A host of policy exclusions have subsequently been introduced, including for sexual abuse, COVID-19 and territories, particularly for companies with exposures in Russia and Belarus, in the wake of the war in Ukraine.

Capacity Halved

Laufer said capacity has halved for some insurance towers, from $1 billion before 2019 to $500,000 today, leaving significant gaps and forcing insureds to take larger retentions, particularly in the primary layer. Despite some new capacity coming in, as jury awards continue to increase, it will shrink or exit the market altogether as providers’ risk appetite diminishes.

“Previously, insureds could go out and get $25 million in coverage, or even $50 million or more, in some cases,” said Donnacha Smyth, president of excess casualty, Americas for AXA XL. “Now, they are having to build insurance towers with smaller chunks such as $5m, $10m from multiple different carriers and even, in many instances, quota sharing, to reach the total amount they need.”

Despite the reduced capacity, insureds still need to secure higher limits to protect themselves against these exposures, prompting many to turn to the excess market, said Erich Bublitz, senior vice president and head of excess and surplus at AmTrust Financial Services.

They also must ensure they have the right coverage in place, after many were forced to change their business models due to the pandemic, he said.

“The brokers are having to have many difficult conversations with their insureds about the need for additional limits to build larger towers,” said Bublitz. “It’s a real balancing act between securing the required amount of limits at the best possible price.”

Insureds’ CFOs and treasurers are also working more closely with their brokers and underwriters to understand the insurance process better and get comfortable with the risk, said Smyth.

Donnacha Smyth, president of excess casualty, North America, AXA XL

Despite being able to communicate electronically during the pandemic in order to do so, however, he said nothing can replace in-person interaction.

“As we move out of the pandemic, brokers and insurers need to rebuild that personal interaction through face-to-face meetings once again,” said Smyth. “That will ensure everyone gets better outcomes, with the insureds telling their story fully and as a result, the underwriters wanting to do business with them.”

Stephen Hackenburg, Aon’s U.S. national casualty practice leader, added: “Insureds need to be fully transparent and provide as much relevant information as possible for the insurer to be able to address their coverage needs. Getting out early ahead of the renewal cycle is also hugely beneficial when it comes to securing appropriate cover.”

Data Access

Brokers and insurers are also getting greater access to data and predictive analytics, enabling them to make more informed decisions. Underwriters, too, can benefit by focusing on specific subsets of the market, said Ashley Moffatt, vice president, brokerage — primary casualty at Nationwide.

“The players that will be most successful are those that take an industry vertical approach, focused on a specific area where they are true experts, such as excess auto, construction and product manufacturing,” she said. “Data and technology will enable them to gain a deeper insight to assist with this.”

In addition, corporations, which tend to incur larger jury verdicts and settlements, are increasingly taking on more of their own risk and turning to captives, self-insurance and quota sharing. They are also adopting assigned risk pools, particularly for large transportation firms, to bridge the gap between primary and excess casualty premiums.

But it’s a collaborative approach between insureds, their brokers and insurers that will yield the best results. That means leveraging some of the tools which have proved so successful during the pandemic.

“The partnership between brokers and risk managers remains central to a successful and efficient general liability program,” said Liz Larsen, vice president at CAC Specialty. “With risks evolving in the physical and digital world, communication with not only these two partners, but those in claims can help detect potential lapses in coverage before losses occur.

“Clients have become more visible to underwriters during the pandemic, joining negotiations and giving presentations on operations, risk management and safety advances as Zoom/Teams becomes a part of our daily lives.” &

Alex Wright is a UK-based business journalist, who previously was deputy business editor at The Royal Gazette in Bermuda. You can reach him at [email protected].

Why Insureds Might See an Uptick in M&PL Claims

George Schalick, Jr., Senior Vice President of the Management and Professional Liability Division, Philadelphia Insurance Companies

The current soft market might come as a bit of a surprise as it does not track with previous underwriting cycles and economic conditions. Afterall, many privately held and non-profit organizations struggled during the early days of the pandemic with shutdowns and rapidly declining revenues. But the Government assistance programs, like the Paycheck Protection Program loans, helped keep many afloat during the tough times.

“During COVID many organizations stopped doing business until they were able to sort out all of the health and safety challenges,” Schalick said. “They were forced to lock down, but then all the government assistance programs allowed them to keep people employed. The increased volume of claims we anticipated we would see coming from the lockdowns and restrictions that were imposed upon businesses in the U.S. didn’t manifest at first.”

“Just because there wasn’t an onslaught of reported claims at the beginning of the pandemic, doesn’t mean the circumstances that would give rise to a claim being reported didn’t occur. Courts and the judicial system were closed or slowed and now that they are back open, we’re starting to see the circumstances that occurred during the COVID lockdowns becoming claims today,” Schalick said. “Litigation is progressing.”

Added to the delayed pandemic litigation is a concern over newer claims that might be filed as the country inches toward an economic downturn. Though a recession was avoided in 2023, experts think a soft dip could occur in 2024, with 76% of economists saying there’s a 50% or less chance of an economic downturn this year — that almost always results in more management liability claims.

“During the Great Recession in 2008, we saw an almost immediate spike in claims because of the economic conditions and the pressure it placed on organizations. They were making personnel changes with significant belt tightening almost immediately.” Schalick said.

What’s in Store for M&PL Policy Rates in 2024?

Despite an uptick in claims and increased economic uncertainty, management liability rates haven’t increased, resulting in market-wide pricing levels that may not meet the increased pressure of rising settlements and jury verdicts.

“Rates are going the other direction and settlement values are not falling,” Schalick said.

The mismatch between rates, claim frequency and severity is, in part, because carriers experiencing the dramatic soft market in the public D&O market are seeking premium gain in the private and non-profit market.

“In the public company market, the rates have been decreasing significantly. The rates were increasing in the private, not-for-profit market, and rightfully so, but there’s a desire to supplement overall mid-size D&O for carriers who also write private not-for-profit, and they see that as an opportunity to aggregate premium,” Schalick said. “So the always competitive landscape in the private, not-for-profit market has dramatically increased in the last 18 to 24 months.”

Still, companies of all sizes and types should be concerned about management liability rates in the future. Legal system abuse is resulting in increases in both the amount of litigation and the size of verdicts plaintiffs are receiving.

Certain areas of the country are particularly vulnerable to this type of legal system abuse. As a result, insureds in these localities are likely to be vulnerable to rate increases.

“The environment is so positive for the plaintiff that forces premium increases so carriers are able to stay in that market long term,” Schalick said.

Why a Tenured Carrier Partner Can Help Insureds Navigate An Uncertain Market

It’s clear that insureds are facing an uncertain M&PL market over the next few years. Fortunately, carriers with a long history in the M&PL space will be there to offer stability.

Philadelphia Insurance Companies has been supporting this market for 35 years. PHLY is committed to offering long-term rate stability, even as economic and claims trends start to push premiums upwards. They have an appetite for all sorts of companies, large and small, for-profit and nonprofit alike.

“We’ve been at this game for a long time and are one of the most tenured underwriters in this space,” Schalick said. “We like to stay very consistent.”

PHLY has worked with both for-profit and non-profit on management liability policies. With dedicated M&PL teams throughout the company’s 13 regions, PHLY provides the support agents and brokers are looking for on behalf of their clients. The teams know their regions well and can respond to local trends. They’re also dedicated to making the renewal process as easy as possible for their partners and policyholders.

“We have real confidence in our results, so we focus a lot on making the renewal experience as painless as possible for all agents and insureds,” Schalick said.

The company is also investing in tools to help insureds avoid losses. Earlier this year, they launched a new online risk management platform, PHLYGateway, which offers resources for insureds on how to create an employee handbook and trainings on issues such as recognizing workplace sexual harassment and discrimination.

If insureds have questions, they can consult a Best Practices Help Line, provided via the platform. That way, they can get on the spot risk management guidance to help them prevent claims.

To learn more, visit: https://www.phly.com/mplDivision/managementLiability/default.aspx.

This article was produced by the R&I Brand Studio, a unit of the advertising department of Risk & Insurance, in collaboration with Philadelphia Insurance Companies. The editorial staff of Risk & Insurance had no role in its preparation.