Products Liability

Products Liability

PRODUCT LIABILITY INSURANCE

According to a March,2012 report from the advocacy group Kids in Danger, recalls of children’s products declined 24 percent in 2011, but injuries and other incidents related to these recalls increased 7 percent. Children’s product recalls in 2011 totaled over 11.6 million.

Products 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.

 

PRODUCTS LIABILITY INSURANCE, 2003-2012

($000)

Year Net premiums written (1) Annual percent change Combined ratio (2) Annual point change (3)
2003 $2,726,599 51.7% 165.8 -187.5 pts.
2004 3,401,867 24.8 152.4 -13.5
2005 3,546,009 4.2 131.1 -21.3
2006 3,621,671 2.1 77.8 -53.3
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 2,546,403 9.7 100.4 -59.6

(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: SNL Financial LC.

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MEDIAN (1) AND AVERAGE PERSONAL INJURY JURY AWARDS BY TYPE OF LIABILITY, 2011

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

Source: Thomson Reuters, Jury Verdict Research Series.

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INSURERS' LEGAL DEFENSE COSTS

Lawsuits against businesses affect the cost of insurance and the products and services of the industries sued. According to Towers Watson, an actuarial consulting firm, the American civil liability (tort) system cost about $264.6 billion in 2010 in direct costs, up 5.1 percent from the previous year. Most lawsuits are settled out of court. Of those that are tried and proceed to verdict, Jury Verdict Research data show that in 2011 the median, or midpoint, plaintiff award in personal injury cases was $55,000, up 46.7 percent from $37,500 in 2006.

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 products 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 $762 million in products liability incurred losses in 2012, insurers spent another $874 million in settlement expenses, equivalent to 114.7 percent of the losses.

DEFENSE COSTS AND COST CONTAINMENT EXPENSES AS A PERCENT OF INCURRED LOSSES, 2010-2012 (1)

($000)

  2010 2011 2012
  Amount As a percent of
incurred losses
Amount As a percent of
incurred losses
Amount As a percent of
incurred losses
Products liability $899,174 54.7% $1,140,230 72.0% $873,860 114.7%
Commercial multiple peril (2) 1,881,223 44.7 1,896,935 37.6 2,022,739 46.0
Medical malpractice 1,809,106 61.4 1,793,296 57.5 1,685,867 45.7
Other liability 5,270,556 25.5 4,464,140 25.0 4,959,838 24.8
Workers compensation 2,502,138 11.2 3,087,836 12.6 3,053,222 12.4
Commercial auto liability 927,259 10.5 960,961 10.3 1,090,969 10.4
Private passenger auto liability 3,946,241 6.2 3,960,967 6.2 4,343,521 6.7
All liability lines $17,235,697 13.8% $17,304,365 13.8% $18,030,016 14.0%

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

Source: SNL Financial LC.

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