Facts + Statistics: 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 March 2020 report from the advocacy group Kids in Danger, recalls of children’s products rose slightly to 58 compared with 52 in 2018, but well below the 93 recalls in 2017. In 2019 there were 776 incidents reported prior to recall of the 58 children’s products, for an average of 13.4 incidents per recalled product. Both incidents reported prior to recall and average incidents per recalled product were both down from 2018 when 1,275 incidents were reported and the average number of incidents reported was 24.5.

Median And Average Personal Injury Jury Awards By Type Of Liability, 2018

 

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

Source: Reprinted with permission of Thomson Reuters, Current Award Trends in Personal Injury, 59^th 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 from Thomson Reuters show that in 2017 (latest data available) the median (or midpoint) award in personal injury cases was $125,000, up from $100,000 in 2016. The average award also rose in 2017 and was $1,847,438 compared with $1,356,325 in 2016. Thomson Reuters notes that average awards can be skewed by a few very high awards and that medians are more representative. In cases of product liability, the median award was $1.5 million, and the average award was $5.1 million. The highest median award in product liability cases in 2017 was for medical products cases ($4,002,185).

Lawsuits against businesses affect the cost of insurance and the products and services of the industries sued. Travelers Insurance's 2017 Business Risk Index showed that legal liability was the fourth-highest rated worry for business leaders in the United States, same as in 2016. Of 1,203 business managers surveyed, 55 percent indicated they worry about it somewhat or a great deal, about the same as the 56 percent who felt that way in 2016. 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 2014 the United States had the largest commercial liability insurance market in the world both in premium volume ($87 billion) and as a percentage of Gross Domestic Product (0.52 percent). More than half of all global liability premiums were written in the United States.

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 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 2019, in addition to $1.3 billion in product liability incurred losses, insurers spent $668 million on settlement expenses, equivalent to 50.4 percent of the losses.