Category Archives: Legal Environment

Fraud, Litigation Push
Florida Insurance Market to Brink of Collapse

With its abundance of unneeded new roofs on homes – and flashy lawyer billboards at every turn claiming massive settlements on claims – Florida’s insurance market is on the verge of failure. This man-made catastrophe is causing financial strain on consumers, as the annual cost of an average Florida homeowners insurance policy will skyrocket to $4,231 in 2022, nearly three times the U.S. annual average of $1,544.

“Floridians pay the highest homeowners insurance premiums in the nation for reasons having little to do with their exposure to hurricanes,” said Triple-I CEO Sean Kevelighan.  “Floridians are seeing homeowners insurance become costlier and scarcer because for years the state has been the home of too much litigation and too many fraudulent roof-replacement schemes. These two factors contributed enormously to the net underwriting losses Florida’s homeowners’ insurers cumulatively incurred between 2016 and 2021.” 

Two major hurricanes made landfall in the state since 2016: 2017’s Irma and 2018’s Michael.

No direct hits occurred in Florida over the past three hurricane seasons. 

Florida, however, is the site of 79 percent of all homeowners insurance lawsuits over claims filed nationwide, even though Florida’s insurers receive only 9 percent of all U.S. homeowners insurance claims, according to the Florida governor’s office. To illustrate how lawsuits have weighed on insurer operating costs, JD Supra, citing the Florida Office of Insurance Regulation (OIR), reported $51 billion was paid out by Florida insurers over a 10-year period, and 71 percent of the $51 billion went to attorneys’ fees and public adjusters. The 2020 and 2021 cumulative net underwriting losses for Florida homeowners’ insurers totaled more than $1 billion each year.

“The state’s homeowners’ insurers have been forced to respond to these unfortunate market trends this year by restricting new business, non-renewing existing policies, and even canceling policies mid-term,” Kevelighan said. “What’s more, four homeowners insurance companies have been declared insolvent since February — all while more Americans are moving to Florida than any other state.”

Citizens Property Insurance Corp., the state-backed property insurer of last resort in Florida, has seen its policy count rise to nearly 900,000 this month statewide.  Its policy count figure stood at about 420,000 in October 2019.  Citizens provides insurance coverage to homeowners unable to find a private-sector insurer willing to sell them a homeowners insurance policy.

Placing further pressure on the affordability and availability of homeowners’ insurance in the state, third-party rating bureaus have downgraded the financial ratings of some insurers operating in Florida.

The typical Florida homeowners’ insurance policyholder paid $2,505 for coverage in 2020, Triple-I found, and that figure rose to $3,181 in 2021.  Triple-I’s analysis was based on data and analyses from Florida’s OIR, the National Association of Insurance Commissioners (NAIC), and Triple-I’s estimates of what insurers are paying today for home replacement costs.

During a special legislative session in May 2022, Florida lawmakers passed Senate Bill 2B, which Gov. Ron DeSantis signed into law. The measure is aimed at easing homeowners’ premium increases and reducing excessive litigation.

To help Floridians and others residing in natural disaster-prone states better manage risk and become more resilient, Triple-I launched a few years ago its Resilience Accelerator initiative, Kevelighan said.

The Resilience Accelerator’s goal is to demonstrate the power of insurance as a force for resilience by telling the story of how insurance coverage helps governments, businesses and individuals recover faster and more completely after natural disasters. “The insurance industry’s focus on resilience is starting to pay dividends as more Americans recognize the very real risks their residences face from floods, hurricanes, and other natural disasters,” Kevelighan added.

Litigation-Funding Law Found Lacking in Transparency Department

Piecemeal efforts to bring transparency to third-party litigation funding continued apace (albeit a snail’s pace) with legislation the governor of Illinois signed into law on May 27th.

The funding of lawsuits by investors with no stake beyond the potential to profit from any settlement has been a growing contributor to the phenomenon known as “social inflation”: Increased insurance payouts and higher loss ratios than can be explained by economic inflation alone. These increased costs necessarily end up being shared by all policyholders through increased premiums.

Litigation funding not only drives up costs – it introduces motives beyond achieving just results to the judicial process. This is why the practice was once widely prohibited in the United States. As these bans have been eroded in recent decades, litigation funding has grown, spread, and morphed into forms that can cost plaintiffs more in interest than they might otherwise gain in a settlement. In fact, it can encourage lengthier litigation to the detriment of all involved – except for the funders and the plaintiff attorneys.

Funding of lawsuits by international hedge funds and other third parties has become a $17 billion global industry, according to Swiss Re. Law firm Brown Rudnick sees the industry as even larger, at $39 billion globally, according to Bloomberg.

But it’s hard to actually know how big the industry is and how much harm it may be causing because, in most cases, plaintiffs’ attorneys are not required to disclose whether, to what extent, and under what terms third-party funders are involved in the cases they bring to court.

Inching toward transparency

In April, we reported on the partial, creeping progress toward bringing greater transparency to this practice in courtrooms and state legislatures. Last year, the U.S. District Court for the District of New Jersey amended its rules to require disclosures about third-party litigation funding in cases before the court. The Northern District of California imposed a similar rule in 2017 for class, mass, and collective actions throughout the district. Wisconsin passed a law requiring disclosure of third-party funding agreements in 2018. West Virginia followed suit in 2019.

At the federal level, the Litigation Funding Transparency Act was introduced and referred to the House Judiciary Committee in March 2021. The measure was referred to the Subcommittee on Courts, Intellectual Property, and the Internet in October of last year.

The Illinois legislation, originally introduced in 2021, has some similarities to Wisconsin’s law – but the version signed last week contained “insufficient regulatory safeguards,” the American Property Casualty Insurance Association (APCIA) said. In its letter urging Gov. J.B. Pritzker to veto the measure, APCIA said a major concern is that it authorizes an interest rate to be paid by the plaintiff/borrowers in such cases “that shall be calculated as not more than 18 percent of the funded amount, assessed every six months for up to 42 months.”

The legislation does not clarify whether the 18 percent rate calculation is simple, compound, or cumulative interest over the 42-month period.

“This lack of clarity is problematic, as a cumulatively calculated interest rate could run as high as 126 percent!” APCIA said. “It is essential for the protection of consumers that this interest rate calculation be clarified.”

Further, APCIA explains, “The parties to these funding agreements are not required to disclose their existence, so that the courts and defendants are typically not aware of the presence or identity of the funders as real parties in interest to the litigation. The economic interests of the funders in these transactions are substantially enhanced by prolonged litigation and discouraging the amicable settlement of disputes, all to no ones’ best interests except those of the money lenders.”

Even the legal profession is concerned about the ethical implications of litigation funding. In 2020, the policymaking arm of the American Bar Association (ABA) approved a set of best practices for these arrangements. The resolution lists the issues lawyers should consider before entering into agreements with outside funders – but it doesn’t take a position on the use of such funding.

A standardized approach to disclosure would go a long way toward helping policymakers and decision makers determine an appropriate path forward.

A Piecemeal Approach Toward Transparency
In Litigation Finance

A U.S. District Court judge in Delaware made his courtroom the latest jurisdiction to require lawsuit participants to disclose whether third-party investors have any stake in litigation being brought before him.

While this is a step toward greater transparency with regard to third-party litigation funding, the standing order by Chief Judge Colm F. Connolly only affects cases in his court. The other three district court judges in Delaware have not issued similar decrees. But the order was made in an extremely influential district. More than half of publicly traded U.S. corporations are incorporated in Delaware, and the state’s laws often govern contracts between businesses.

A booming global industry

Funding of lawsuits by international hedge funds and other financial third parties – with no stake in the outcome other than a share of the settlement – has become a $17 billion global industry, according to Swiss Re. Law firm Brown Rudnick sees the industry as even larger, at $39 billion globally, according to Bloomberg.

Third-party litigation funding was once widely prohibited. As bans have been eroded in recent decades, it has grown, spread, and become a contributor to “social inflation”: increased insurance payouts and loss ratios beyond what can be explained by economic inflation alone.

Efforts at transparency

Some progress in toward greater transparency has been made in recent years. Last year, the U.S. District Court for the District of New Jersey amended its rules to require disclosures about third-party litigation funding in cases before the court. The Northern District of California imposed a similar rule in 2017 for class, mass, and collective actions throughout the district. Wisconsin passed a law requiring disclosure of third-party funding agreements in 2018. West Virginia followed suit in 2019.

At the federal level, the Litigation Funding Transparency Act was introduced and referred to the Senate Judiciary Committee in October 2021.

Panelists at Triple-I’s Joint Industry Forum in December 2021 agreed on the importance of requiring disclosure of litigation funding. Insurance groups and the U.S. Chamber of Commerce say litigation funding needs more rules to prevent abuses of the legal system and to protect consumers, who often pay exorbitant interest rates on money they borrow to pay legal expenses.

“By its very nature, third-party litigation financing promotes speculative litigation and increases costs for everyone,” said Stef Zielezienski, executive vice president and chief legal officer for the American Property Casualty Insurance Association in a press release about the Delaware order. “At its worst, outside investment in litigation financing dependent on a successful verdict creates incentives to prolong litigation.”

The Delaware judge’s order requires, in addition to disclosing the name and address of any third-party funder, that parties to any case before his bench must also disclose whether approval by the funder is necessary for settlement decisions and, if so, the terms and conditions relating to that approval.

While strides like this may be small, they add up in the fight to make disclosure of third-party litigation financing a priority in states and in courthouses nationwide.

Learn More:

Social Inflation: What It Is and Why It Matters

Triple-I, CAS Quantify Social Inflation’s Impact on Commercial Auto

What Is Social Inflation and What Can Insurers Do About It?

IRC Study: Social Inflation Is Real, and It Hurts Consumers, Businesses

Bringing Clarity
to Concerns About
Race in Insurance Pricing

There is no place for discrimination in today’s insurance marketplace. In addition to being fundamentally unfair, to discriminate on the basis of race, religion, ethnicity, sexual orientation – or any factor that doesn’t directly affect the risk being insured – would simply be bad business in today’s diverse society.

Concerns have been raised about the use of credit-based insurance scores, geography, home ownership, and motor vehicle records in setting home and car insurance premium rates. Critics say using such data can lead to “proxy discrimination,” with people of color sometimes being charged more than their neighbors for the same coverage. Insurers reply that these tools reliably predict claims and help them match premiums with risks – preventing lower-risk policyholders from subsidizing higher-risk ones.

Public confusion around insurance rating is understandable. The models used to determine insurance rates are complex, and actuaries have to distinguish causal relationships from superficial correlations to appropriately align insurers’ prices with the risks they’re covering. If they get it wrong, the insurers’ ability to keep their promises to pay policyholder claims could be compromised.

And they have to do this while complying with regulations and statutes in 50-plus U.S. jurisdictions. As one of the most heavily regulated industries in the world, insurers have strong incentives to comply with anti-discrimination rules.

To help clarify this complexity, Triple-I has published an Issues Brief on the subject, and the Casualty Actuarial Society has published a series of four research papers, drilling down deep into the topic:

Defining Discrimination in Insurance

Methods for Quantifying Discriminatory Effects on Protected Classes in Insurance

Understanding Potential Influences of Racial Bias on P&C Insurance: Four Rating Factors Explored

Approaches to Address Racial Bias in Financial Services: Lessons for the Insurance Industry

“Insurance pricing is a high-wire act,” CAS says.  “As regulation and society’s understanding of discrimination evolve, however, it is necessary for us to keep abreast of changes in the manner in which discrimination is defined and adjudicated.”

Insurers are well aware of the history of unfair discrimination in financial services. While it would be disingenuous to suggest that all traces of bias have been wrung out of the system, the insurance industry has been responsive over the decades to concerns about fairness and equity. Insurers and actuaries are uniquely positioned to continue helping policymakers, corporate decisionmakers, and the public understand these inequities and to play a constructive role in the policy discussion.

Evolving Conceptions
of Gun Liability

By Max Dorfman, Research Writer, Triple-I

Two recent developments – one the result of litigation, the other imposed by statute – warrant insurers’ attention, as they reflect shifts in legal thinking on potential firearms-related liability.

Nearly 10 years after the Sandy Hook Elementary School massacre in Connecticut, during which 20 first graders and six staff members were killed, a federal bankruptcy court in Alabama agreed to insurance payments totaling $73 million from gun manufacturer Remington Arms. The payment will be dispersed to the victims’ families who participated in the lawsuit.

This is the first time a gunmaker has been held accountable for a mass shooting in the United States. The ruling could force insurers to become more prudent in how they cover these companies. The risks of such settlements must be considered, particularly as the political and legal landscape continues to evolve.

The case revolved around the notion that Remington negligently sold civilian consumers assault-style rifles, which the plaintiffs argued are only suitable for use by military and law enforcement personnel. This, they argued, breached the Connecticut Unfair Trade Practices Act by the sale or wrongful marketing of the rifle.

Remington, which filed for bankruptcy protection in July 2020, contested that the plaintiffs’ legal arguments don’t apply under Connecticut law and invoked a federal statute, called the Protection of Lawful Commerce in Arms Act, which generally immunizes firearms manufacturers, distributors, and dealers from civil liability for crimes committed by third parties using their weapons.

The plaintiffs were able to demonstrate that the Remington used an “aggressive, multi-media campaign that pushed sales of AR-15s through product placement in first-person shooter video games and by touting the AR-15’s effectiveness as a killing machine,” according Josh Koskoff, lead counsel and partner at the Connecticut law firm Koskoff, Koskoff & Bieder, which represented the Sandy Hook families. 

San Jose takes notice

San Jose, Calif., recently approved the nation’s first mandatory gun liability insurance requirement. The news comes four months after a mass shooting on a light rail in the city, which resulted in nine deaths.

San Jose Mayor Sam Liccardo said gun liability insurance will be similar to car insurance, promoting responsible gun ownership, storage, and use, with the fees for possession of firearms potentially hovering between $25 and $30 a year.

Though this insurance cannot legally cover deliberate harm caused by a gun owner, it nonetheless marks a novel way to confront potential mass shootings. Second Amendment activists in San Jose contest the mandatory insurance, stating that this will primarily affect lawful gun owners and not criminals.

While the San Jose measure might remain an anomaly, it reflects a shift in thinking on firearms-related liability. Most insurers do not offer stand-alone gun liability coverage, and no other municipalities appear to be in the process of requiring it. But shifting public sentiment could lead to other ways to address gun violence through the courts and by statute.

Triple-I, CAS Quantify Social Inflation’s Impact on Commercial Auto

The phenomenon known as “social inflation” accounted for $20 billion in commercial auto liability claims between 2010 and 2019, a new study by Triple-I and the Casualty Actuarial Society (CAS) finds.

Social inflation isn’t a new term. Warren Buffett used it in the 1970s to describe “a broadening definition by society and juries of what is covered by insurance policies.” It has since become common parlance among insurers and risk managers for a range of factors causing losses in certain lines to rise faster than general inflation would predict. These include:

  • Class-action lawsuits;
  • Growing awards from sympathetic juries;
  • Third-party litigation funding, in which investors finance lawsuits against large companies in return for a share in the settlement; and
  • Rollbacks of tort reforms that were intended to control costs in the wake of the 1980s “liability crisis”.

Hard to measure, important to understand

Reliably quantifying social inflation for rating and reserving purposes is hard because it’s just one of many factors pressuring pricing. The paper, authored by actuaries James Lynch and David Moore, uses “standard actuarial metrics and visualizations to demonstrate how actuarial insights can be presented to an interested lay audience, such as lawmakers, regulators, the news media, and the public.”

This is an important contribution to the public policy discussion because actuaries are well positioned to spot shifts in loss severity.

Separately, Triple-I has published an “Issues Brief” that succinctly describes the drivers of social inflation, as well as its potential impact on insurers, policyholders, and the economy and society.

“More frequent suits and bigger awards can lead to increased insurance costs as rates are adjusted to reflect the changing risk profile – or even to insurers ceasing to write particular forms of coverage,” the brief says. “Higher premiums tend to be passed along to consumers in the form of higher prices and, in extreme cases, can ripple through the entire economy, creating conditions analogous to the 1980s liability crisis.”

In the 1980s, liability claims were pushing the U.S. insurance industry to the brink of collapse. Tort reforms – ranging from capping non-economic damages and limiting contingency fees to specifying statutes of limitations and eliminating “joint and several” liability – were enacted, and losses declined. It has been argued that legislative efforts to roll back these reforms in many states have contributed to social inflation, but the research is not conclusive.

California Takes Top Spot on ATRA’s “Hellholes” List; Pennsylvania Falls to No. 4

California has reclaimed its top spot on the “Judicial Hellholes” list maintained by the American Tort Reform Association (ATRA).

“California’s appellate courts are the first to hold e-commerce companies strictly liable for products sold on their sites,” ATRA writes in its 2021-2022 report. “Baseless Prop-65 lawsuits thrive in courts, and the volume of litigation continues to skyrocket.”

The report also points to what it calls “frivolous” Private Attorney General Act (PAGA) and Americans with Disability Act (ADA) lawsuits and says the state’s Lemon Law “provides windfalls for plaintiffs’ lawyers.”

New York State is a close number two, ATRA says, “as the two jurisdictions battle it out for the most ‘no-injury’ class action lawsuits and the most claims under the ADA.” It adds that New York “is a preferred jurisdiction for asbestos litigation and, like California, the legislature ignores the need for reform and continues to push a liability-expanding agenda.”

Georgia has risen to number three on the basis of what ATRA calls the “significant deterioration” of its civil justice system.

“The Georgia Supreme Court eliminated apportionment of fault in certain cases and expanded bad faith liability for insurers,” ATRA says. “It also adopted an expansive view of jurisdiction of its courts over out-of-state businesses. Nuclear verdicts are bogging down business, and third-party litigation financing is playing an increasing role in litigation.”

Pennsylvania fell from number one to number four, but ATRA says this “was in no way a reflection of progress or improvements made in the state, but rather indicative of the number of issues plaguing other jurisdictions.”

ATRA is a Washington, D.C.-based group formed in 1986 and dedicated to tort and liability reform. It has published the Judicial Hellholes report since 2002. 

Runaway Litigation
Drives Up Costs, Premiums,
JIF Panelists Say

Credit for all photos in this post: Don Pollard

By Loretta Worters, Vice President, Media Relations, Triple-I

Costs associated with increasing lawsuits and “nuclear verdicts” continue to challenge insurers’ capacity to provide coverage, according to panelists at Triple-I’s Joint Industry Forum (JIF).

“Excessive growth in insurance settlements is top of mind for many,” said Frank Tomasello, J.D., executive director of The Institutes Griffith Insurance Education Foundation, who moderated the JIF Runaway Litigation panel. The panelists explored definitional issues and controversies surrounding this phenomenon and assessed its impact with a look ahead to what is needed to inform next steps.

“Certain observers dismiss runaway litigation, suggesting it’s a ‘phantom threat’ used to justify premium increases,” Tomasello said.  “Industry leaders, however, point to data evidencing its existence in various lines of business, including commercial auto liability.”

Michael Menapace, an attorney with Wiggin and Dana LLP and a Triple-I Non-resident Scholar, noted that insurers’ claims expenses are increasing faster than inflation “due to a combination of increased litigation defense costs, higher percentage of plaintiff verdicts, and increased jury awards.” 

Sherman (Tiger) Joyce, president of the American Tort Reform Association (ATRA), said the analysis should examine where litigation is having the greatest impact on expenses, whether it’s a line of business, type of litigation, or a geographic region.  “Where is it real, where is it not?  If it is real, why are defense costs up?  Why are plaintiffs winning more?” 

To offer guidance in this regard, the ATR Foundation publishes each year its list of Judicial Hellholes.

Rick Merrill, founder and CEO of Gavelytics, a litigation analytics software firm, said his company is well positioned to help answer these questions.

“We can’t do as well as insurers, who can speak to the cost side,” Merrill said. “They are better positioned to determine price; but where we can add value is in trying to understand why this has occurred.”

Merrill cautioned against reliance on anecdotes.

“The much more modern approach to litigation analysis is measuring things in an empirical fashion,” he said. “Understanding whether or not the rates of trial wins are up or down, understanding whether the grant rates of certain key motions are up or down, those are things we do, and that adds a lot to the conversation.”

Workers comp and commercial auto

Menapace noted that there are increased costs, particularly in workers compensation and commercial auto — specifically, trucking. 

“After COVID started, we had more than a dozen states who implemented as a matter of policy a presumption that if a worker got sick with COVID, that it happened on the job,” Menapace explained. “The burden then shifted to the defendant/insurer to disprove that this happened. There was a public policy decision made in those states.”

In commercial auto, Menapace said, “We’re seeing in trucking and elsewhere the increased use of cameras – body cameras, cameras out in the public, dashboard cameras facing out or many trucking institutions now have cameras facing into the cab. Think about how powerful that might be in a court when, moments before the trucking accident, we now have on video the trucker who was checking Facebook, eating, or dozing off.

Reptile theory and litigation funding

Menapace also mentioned “reptile theory,” a popular plaintiff tactic in personal injury suits. Introduced in Reptile: the 2009 Manual of the Plaintiff’s Revolution by David Ball and Don Keenan, it started a movement that has evolved into seminars, retreats and law review articles aimed at understanding and exploiting the primitive, emotion-driven “reptile” portion of jurors’ brains.

Litigation funding – in which third-party investors assume all or part of the cost of a lawsuit exchange for an agreed-upon percentage of the settlement – is a growing issue that increases defense costs and the length of dispute, the experts said.  According to a recent Bloomberg article, hedge funds and others “are piling billions into the outcome of high stakes court cases at a faster rate than ever before,” turning litigation funding into a $39 billion global industry in 2019. The panelists concurred that requiring disclosure of third-party funding of litigation would be a great benefit for the industry if it were to happen. 

Learn More About Runaway Litigation on the Triple-I Blog

What Can Be Done About Nuclear Verdicts?

Litigation Funding and Social Inflation: What’s the Connection?

Litigation Funding Rises as Common-Law Bans Are Eroded by Courts

What Can Be Done About Nuclear Verdicts?

“Nuclear verdicts” are putting a strain on corporations and their insurers, an insurance executive writes in this month’s Best’s Review. Paul Horgan, head of U.S. national accounts for Zurich, says the insurance industry is acting to address this trend but can’t do it alone.

The phrase refers to “exceptionally high” jury awards that, Horgan says, “exceed what most would consider reasonable.” He adds that such verdicts are becoming more common “and are being driven, in part, by aggressive and effective plaintiff’s attorneys.”

Commercial trucking is one of the most industries most heavily affected by nuclear verdicts. When considering verdicts of more than $1 million, the average size of awards related to trucking incidents increased nearly 1,000 percent from 2010 to 2018, according to a study by the American Transportation Research Institute (ATRI).  

One piece of the picture

Nuclear verdicts are just one part of a larger trend that includes increases in class action suits and “litigation funding,” in which third-party investors assume all or part of the cost of a lawsuit in exchange for an agreed-upon percentage of the settlement. According to Bloomberg, hedge funds, private-equity, and sovereign wealth funds “are piling billions into the outcome of high stakes court cases at a faster rate than ever before,” turning litigation funding into a $39 billion global industry in 2019.

These and other aspects of runaway litigation are considered major contributors to “social inflation” – a common term for claims and losses rising faster than general inflation and leading to more expensive insurance for businesses and consumers.

“Just a few years ago,” Horgan writes, “the top verdicts in the United States were measured in the millions of dollars…. Today, it’s in the billions.” He adds that the median settlement of the top 50 U.S. verdicts rose from $28 million in 2014 to $58 million in 2018.

“Without a strong defense,” Horgan writes, “nuclear verdicts will become the norm, and the fallout will be devastating.”

Defense counsel have begun employing some of the same techniques as plaintiffs’ attorneys, according to Horgan, but more is needed to address runaway litigation. He says it’s “critical for corporations to exert pressure on their state and federal legislators to put an end to this.”

Learn More at JIF

At Triple-I’s Joint Industry Forum in New York City this week, a panel is being dedicated to the topic of runaway litigation, its impact on claims and losses, and what can be done about it. Moderated by Frank Tomasello, executive director of The Institutes Griffith Insurance Education Foundation, the panel features the following participants:

There’s still time to register by December 1, 2021 (11:59 p.m.).

With Violent Crime Up, Negligent Security
Is a Looming Hazard

By Maria Sassian, Triple-I Consultant

While property crime (except for car theft) has been on the decline, the United States has been experiencing a worrying surge in violent crime since the start of the pandemic.

Murder and non-negligent manslaughter rose 29.4 percent in 2020 from 2019, the biggest rise since recordkeeping began in 1960, according to F.B.I. data.  The trend continued in the first half of 2021, when the number of homicides increased 16 percent from the same period in 2020 and 42 percent compared to the same period in 2019. Aggravated assault increased 9 percent, and gun assaults were up 5 percent, according to the Council on Criminal Justice.

Crime analysts have suggested several possible contributing factors, including the many strains brought on by the pandemic; a pullback in enforcement by the police; and a spike in firearm purchases.

Negligent security

When a violent crime occurs on a business or residential property, the victims often can hold the owners liable for damages stemming from “negligent security.”  Negligent security cases are based on the obligation (“duty of care”) of a property owner or tenant to provide a safe environment for their customers, residents, or visitors. According to PropertyCasualty 360, such cases are a “significant and growing subset of premises liability.”

Examples of negligent security include:

  • Poor lighting,
  • Lack of security guards or guards who fail to do their job properly, and
  • Insufficient locks or other security devices.

The duty of care borne by property owners can vary based on the types of businesses they operate. A shopping mall with limited hours may have a lower duty of care than an assisted living facility charged with caring for vulnerable residents 24/7.

Negligent security cases incur significant investigation and settlement costs, though few make it to trial.  Cases that do go to trial can get widespread media coverage, and juries, sympathetic to violent-crime victims, can hand down massive awards.  In Georgia, for example, lawsuits stemming from criminal attacks in CVS and Kroger parking lots ended in verdicts of $43 million in Fulton County and $69.6 million in DeKalb County, respectively, in 2019. CVS and Kroger were held liable on the basis that they should have had more security.

Risk management

Property and business owners can prepare to demonstrate that they have taken reasonable precautions by making sure crime prevention practices are in place. Steps that can be taken include:

  • Have on-site security staff and make sure they follow up-to-date policies and procedures,
  • Make sure security equipment is up-to-date and working,
  • Make sure all staff is trained in security and in how to handle potentially dangerous situations,
  • Perform regular inspections on lighting, stairs, windows, and doors,
  • Maintain landscaping properly, and
  • Investigate all threats of criminal activity.

The role of insurance

Negligent security is part of the broader coverage of premises liability. Whether you are covered or not depends on your individual policy. If negligent security is excluded, it should plainly say so in the policy. If the policy language  is ambiguous, courts may favor the policyholder in a coverage dispute.

When you’re covered, your insurance underwriting professional will work with you to make sure recognized crime prevention practices are being followed on the property. That way you will be prepared to prove that you followed reasonable precautions if a violent crime occurs.

If a violent crime does happen and a negligent security insurance claim is filed, the insurer will want to respond quickly to investigate the security measures that were in place, retain legal counsel, and engage a premises security expert. Delays in developing a defense plan can adversely affect the outcome and cost of the case. It’s important for the policyholder to have an emergency call list in the event of a crime and to have someone from the claims group on that list.

An insurance adjuster can help to resolve complex claims quickly, as well as help property owners prevent future incidents. The adjuster might dig into a property’s history to illuminate what’s considered “normal” and what activities owners should reasonably have anticipated. A history of break-ins or muggings, for example, could establish that the owner knew about the risk and, therefore, should have strengthened security measures in response, according to Engle Martin & Associates, a loss-adjustment and claims-management provider.

The adjuster may also look at the property owners’ social media and online reviews for previous complaints about security.  If the owners issued warnings about criminal activity and shared their attempts to improve security, for example, that can bolster their defense, said Natalie Prescott, casualty claims manager at Engle Martin.

Taking appropriate security measures and understanding your insurance coverage will go a long way toward helping you be prepared if a violent crime happens on your property.  Of course, you should seek guidance from your insurance or legal professionals about your specific circumstances.