PRODUCT LIABILITY INSURANCE
According to a February 2013 report from the advocacy group Kids in Danger, recalls of children’s products declined 20 percent in 2012 to 97, the lowest number since 2004, but the number of incidents related to these recalls increased 49 percent. Injuries related to the recalls were up 42 percent, and deaths were up 200 percent from 2011. Children’s product recalls in 2012 totaled over 13 million units.
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, 2004-2013
MEDIAN AND AVERAGE PERSONAL INJURY JURY AWARDS BY TYPE OF LIABILITY, 2012
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 $265 billion in 2010 in direct costs, up from $180 billion in 2000. Tort costs rose 5.1 percent in 2010 after dropping 1.2 percent in 2009. Absent payouts from the April 2010 Deepwater Horizon drilling rig explosion, tort costs would have shown an overall decrease of 2.4 percent in 2010, according to Towers Watson. The U.S. tort system cost $857 per person in 2010, up from $820 per person in 2009.
Most lawsuits are settled out of court. Of those that are tried and proceed to verdict, Jury Verdict Research data show that in 2012 the median, or midpoint, plaintiff award in personal injury cases was $75,000, up 87.5 percent from $40,000 in 2008.
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 $1.6 billion in products liability incurred losses in 2013, insurers spent another $1.2 billion in settlement expenses, equivalent to 75.1 percent of the losses.
DEFENSE COSTS AND COST CONTAINMENT EXPENSES AS A PERCENT OF INCURRED LOSSES, 2011-2013 (1)