Product Liability

Product Liability

PRODUCT LIABILITY INSURANCE

Product liability insurance protects the manufacturer, distributor or seller of a product from legal liability resulting from a defective condition that caused personal injury or damage associated with the use of the product. Product recall insurance, a specialty product designed to cover the costs associated with recalls, is also available from some insurers.

According to a February 2015 report from the advocacy group Kids in Danger, recalls of children’s products declined 34 percent in 2014 to 75, the lowest number in the 14 years of data collected by the organization. In 2014 there were 338 incidents reported prior to recall of the 75 children’s products, for an average of 5 incidents per recalled product.  The 2014 average represents an improvement from 2013, when the average was 14 incidents per recalled product. Injuries related to the recalls were down 85 percent, and deaths fell from 11 in 2013 to three in 2014. Children’s product recalls in 2014 totaled almost 17 million units.

 

Product Liability Insurance, 2006-2015

($000)

Year Net premiums written (1) Annual percent change Combined ratio (2) Annual point change (3)
2006 $3,621,671 2.1% 77.8 -53.3 pts.
2007 3,265,035 -9.8 99.8 22.0
2008 2,777,587 -14.9 124.0 24.2
2009 2,365,681 -14.8 124.0 (4)
2010 2,050,619 -13.3 157.1 33.1
2011 2,320,540 13.2 160.0 2.9
2012 2,575,225 11.0 102.7 -57.3
2013 2,718,879 5.6 155.3 52.6
2014 2,674,183 -1.6 138.4 -16.8
2015 2,796,758 4.6 130.6 -7.8

(1) After reinsurance transactions, excludes state funds.
(2) After dividends to policyholders. A drop in the combined ratio represents an improvement; an increase represents a deterioration.
(3) Calculated from unrounded data.
(4) Less than 0.1 point.

Source: NAIC data, sourced from S&P Global Market Intelligence, Insurance Information Institute.

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MEDIAN AND AVERAGE PERSONAL INJURY JURY AWARDS BY TYPE OF LIABILITY, 2013

(1) Represents the midpoint jury award. Half of the awards are above the median and half are below.

Source: Reprinted with permission of Thomson Reuters, Current Award Trends in Personal Injury, 54th edition.

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INSURERS' LEGAL DEFENSE COSTS

Most lawsuits are settled out of court. Of those that are tried and proceed to verdict, Jury Verdict Research data show that in 2013 the median, or midpoint, plaintiff award in personal injury cases was $68,218, down 9 percent from $75,000 in 2012.

Travelers Insurance 2015 Business Risk Index showed that legal liability was the fourth-highest rated worry for business leaders in the United States, down from No. 3 a year earlier. Of 1,210 business leaders surveyed, 56 percent indicated they worry about it somewhat or a great deal.

Businesses address their liability concerns through many types of risk management, of which insurance is an important component. A Swiss Re study indicated that in 2013 the United States had the largest commercial liability insurance market in the world both in premium volume ($84 billion) and as a percentage of Gross Domestic Product (0.50 percent). More than half of all global liability premiums were written in the United States.

 

TOP 10 LARGEST COMMERCIAL LIABILITY MARKETS, 2013

($ billions)

    Direct premiums written, 2013   Liability as a percentage of
Rank Country Liability Total nonlife GDP (1) Total nonlife GDP (1)
1 U.S. $84.0 $531.2 $16,802 15.8% 0.50%
2 U.K. 9.9 99.2 2,521 10.0 0.39
3 Germany 7.8 90.4 3,713 8.6 0.21
4 France 6.8 83.1 2,750 8.2 0.25
5 Japan 6.0 81.0 4,964 7.4 0.12
6 Canada 5.2 50.5 1,823 10.3 0.29
7 Italy 5.0 47.6 2,073 10.5 0.24
8 Australia 4.8 32.7 1,506 14.7 0.32
9 China 3.5 105.5 9,345 3.3 0.04
10 Spain 2.2 31.0 1,361 7.1 0.16
  World $160.0 $1,550.0 $61,709 10.3% 0.26%

(1) Gross Domestic Product.

Source: Swiss Re, sigma, No. 4/2014.

 

Insurers are required to defend their policyholders against lawsuits. The costs of settling a claim are reported on insurers’ financial statements as defense and cost containment expenses incurred. These expenses include defense, litigation and medical cost containment. Expenditures for surveillance, litigation management and fees for appraisers, private investigators, hearing representatives and fraud investigators are included. In addition, attorney legal fees may be incurred owing to a duty to defend, even when coverage does not exist, because attorneys must be hired to issue opinions about coverage. Insurers’ defense costs as a percentage of incurred losses are relatively high in some lines such as product liability and medical malpractice, reflecting the high cost of defending certain types of lawsuits, such as medical injury cases and class actions against pharmaceutical companies. For example, in addition to $1.2 billion in product liability incurred losses in 2014, insurers spent $953 million on settlement expenses, equivalent to 77.4 percent of the losses.

 

Defense Costs And Cost Containment Expenses As A Percent Of Incurred Losses, 2013-2015 (1)

($000)

  2013 2014 2015
  Amount As a percent
of incurred losses
Amount As a percent
of incurred losses
Amount As a percent
of incurred losses
Products liability $1,166,236 75.1% $952,997 77.4% $1,037,576 70.5%
Medical malpractice 1,656,257 53.3 1,873,835 43.2 1,871,109 53.8
Commercial multiple peril (2) 2,096,543 37.7 2,083,103 39.1 1,977,804 34.7
Other liability 4,914,500 25.4 4,366,030 21.1 4,786,370 19.9
Workers compensation 3,035,186 12.3 3,357,813 12.9 3,305,927 13.7
Commercial auto liability 1,207,682 10.7 1,266,051 10.6 1,541,787 11.4
Private passenger auto liability 4,600,395 6.8 4,714,942 6.5 4,923,908 6.2
All liability lines $18,676,799 14.0% $18,614,771 13.1% $19,444,481 12.8%

(1) Net of reinsurance, excluding state funds.
(2) Liability portion only.

Source: NAIC data, sourced from S&P Global Market Intelligence, Insurance Information Institute.

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