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
MEDIAN (1) 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 $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)