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, 2004-2013

($000)

Year Net premiums
written (1)
Annual percent
change
Combined ratio (2) Annual point
change (3)
2004 $3,401,867 24.8% 152.4 -13.5 pts.
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 2,575,225 11.0 102.7 -57.3
2013 2,718,879 5.6 155.3 52.6

(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 AND AVERAGE PERSONAL INJURY JURY AWARDS BY TYPE OF LIABILITY, 2012

(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, 53rd edition.

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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 $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)

($000)

  2011 2012 2013
  Amount As a percent
of incurred losses
Amount As a percent
of incurred losses
Amount As a percent
of incurred losses
Products liability $1,140,230 72.0% $873,860 114.7% $1,166,236 75.1%
Medical malpractice 1,793,296 57.5 1,686,009 45.7 1,656,049 53.3
Commercial multiple peril (2) 1,896,935 37.6 2,022,739 46.0 2,096,543 37.7
Other liability 4,464,140 25.0 4,959,838 24.8 4,914,106 25.4
Workers compensation 3,087,836 12.6 3,071,093 12.3 3,012,719 12.3
Commercial auto liability 960,961 10.3 1,091,434 10.4 1,207,596 10.7
Private passenger auto liability 3,960,967 6.2 4,353,427 6.7 4,600,395 6.8
All liability lines $17,304,365 13.8% $18,058,400 13.9% $18,653,644 14.0%

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

Source: SNL Financial LC.

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