Liability risks, it’s fair to say, punch above their weight class. Canadian property and casualty insurance companies collected $4.5 billion in net written premiums for this business line in 2012 (latest year for available data). They paid net incurred claims of $2.6 billion in the same year. Both figures represent about one-tenth of the overall general insurance market, a business that tends to be dominated in premium volume by auto insurance.
However, casualty insurance, with its long-tail nature and notoriously difficult emerging exposures, can present numerous challenges for independent adjusters and their clients. The complexity of the policies, the nature of the investigation, the determination of time periods (claims made versus occurrence) and the involvement of several different parties (including potential subrogation) are factors that shape how liability claims are handled. All contribute to the challenges of adjusting casualty claims.
“With liability, you are really dealing with two claims in one,” notes Craig Walker, managing director at casualty specialist adjusting firm Maltman Group International. “The first step is investigating whether the insured has any liability and, if so, determining whether the policy will respond to the specifics of the claim. If there is liability, the second part is going back and ‘re-adjusting’ the claim that has been made. You have to look at all the documentation and see if it should have been legitimately paid, especially if there is subrogation involved.”
Complexity of Casualty Exposures
The complexity of casualty exposures extends to underwriting, pricing and projection of claims exposures, according to Swiss Re’s sigma 2014 paper – Liability Claims Trends: Emerging Risks and Rebounding Economic Drivers.
“Liability risks are challenging to underwrite and price due to the long-tail nature of risks that often result in claims being settled many years after business is written,” the reinsurer notes in the report. “Additionally, risks can accumulate, causing a ‘clash’ (when there are multiple liability claims originating from the same cause) or a casualty catastrophe, and can overlap with property risks.”
“Liability insurance is arguably the most complex property-casualty line,” states a recent report from research firm Conning & Company – Liability and Tort Trends: Trouble Around the Corner? “Liability insurance results are driven by an unusually wide array of factors above and beyond the inherent covered exposure of insureds’ liability for bodily injury or property damage to third parties.”
The Canadian liability insurance market, the sixth largest in the world, has been growing at a rapid average annual rate of 9 per cent since 2000, according to Swiss Re’s sigma report. It predicts “future annual nominal claims growth” in liability insurance in Canada of 6-7 per cent from 2014 to 2020.
After a period of relative stability in liability claims, there are signs of increased loss activity. One key reason for flat or diminished claims activity in recent years is the aftermath of the global financial crisis. Swiss Re observes that weak economic growth, low inflation and wage freezes or declines affect the level of casualty losses. However, with a strengthening global economy, things are expected to change in the liability market.
“Claims growth is expected to pick up to a pace that is again faster than gross domestic product (GDP) growth,” Swiss Re observes. “Economic activity will also influence claims growth. For example, wage gains had been declining but are now beginning to accelerate. Many of these factors will increase liability claims and boost demand for insurance.”
Worm Starting to Turn
Others agree that the worm may be starting to turn for liability insurance claims trends. “There are signs… that the benign period for liability insurance results may be coming to an end,” Conning & Company notes in its report. “Current trends in loss frequency, tort filings, and reserve releases suggest that an inflection point may have been reached.”
While recent reports on liability insurance tend to focus on severity issues and so-called “shock losses,” Walker says frequency should not be underestimated as a driving factor in liability claims within the Canadian market. “There are a lot of classes of business or business activities that generate high frequency,” Walker notes. “Although there may not be high dollars attached to individual claims, they certainly add up for insurers. In the end, it can create just as big of a problem.”
The business types tend to involve snow removal contractors, maintenance/janitorial firms and, to a lesser degree, property management companies, according to Walker. The source of legal action is typically slips and falls or any injuries suffered due to alleged lack of maintenance or upkeep.
“It seems like claimants and plaintiffs counsel are trying to hold contractors to a standard of perfection, which is next to impossible to achieve,” Walker says. “But they are still being targeted and are getting pounded left, right and centre in terms of frequency.”
In terms of severity, one of the most prominent issues in liability insurance claims is catastrophic injury. Walker notes that these types of serious impairments, which typically include future care costs, involve car collisions, falls off structures/buildings and freak accidents. Often, municipalities are drawn into legal actions because they are responsible for maintaining local roads, facilities and operations. Once the limits of an auto insurance liability policy (typically $1 million) are reached, claimants and plaintiff counsel seek other potential “payers” and these often involve municipalities and other large establishments.
Catastrophic Injury Claims
“These (injuries) involve car accidents and road maintenance standards, but also extend to things municipal governments operate, such as pools, playgrounds, athletic facilities, arenas,” Walker says. “These facilities are prone to injuries because of kids running around and horseplay.”
Walker cites an example of a child who fell out of the bleachers at a hockey arena, owned and managed by a municipality. The older structure, which met building codes at the time of construction, was not compliant to current building codes. The child slipped through the railings, fell to the ground and was catastrophically injured.
“That (claim) is squarely on the municipality, which operated the arena,” Walker notes. “It hit several different layers of coverage because of the size of the claim.”
Car accidents are, however, the most frequent cause of catastrophic injury. There have been several examples of legal awards that exceed $10 million, and go as high as $24 million. For example, an Ontario Superior Court Justice Peter Howden awarded Katherine-Paige MacNeil $18.4 million on Sept. 2, 2009 after the car in which she was a back-seat passenger ran a stop sign, crossed a highway and landed in a ditch.
And in a single judgment totaling $24 million in damages, the Ontario Superior Court handed down in 2007 both the largest award for a spinal cord injury in Canadian history and one of the largest for a brain injury, to two young men catastrophically injured in a motor vehicle accident in September 2003.
“The costs are phenomenally high,” Walker says. “With the auto liability policy for the at-fault party, it is rare to see a limit more than $1 million. For a catastrophic injury over $10 million, if even a small percentage of liability attaches to the municipality, joint and several liability kicks in and the limits are blown.”
Joint and several liability is a common law principle holding that those who have combined to cause
a single indivisible loss are each liable to the injured person for the full amount of the damage suffered. A defendant, who may be only 1% at fault, can be obligated to pay the plaintiff’s entire judgment, particularly in cases where the other defendant is unable to meet a court-ordered award. This applies to municipalities but also to other so-called “deep pockets” – other levels of government, large commercial establishments, restaurants and taverns, amongst others.
Joint and Several Liability
In all, 11 common law jurisdictions in Canada have “joint and several” language contained in their contributory negligence legislation. In addition to Ontario, other jurisdictions with the joint and several rule on their books include Alberta, B.C., Manitoba, New Brunswick, P.E.I., Nova Scotia, Newfoundland and Labrador, Northwest Territories, Yukon and Nunavut. According to the Association of Municipalities of Ontario (AMO), for several years the cost of municipal insurance has been rising at a disproportionate rate compared to inflation and all other municipal expenditures. The AMO noted in a 2011 study that municipality liability premiums increased 22% from 2007 to 2011. The report predicts that, unless change is made, insurance-related costs will increase further to $180 million by 2015, an additional 16%.
Beyond catastrophic injury, industry observers constantly forecast emerging liability risks. It’s not just auto losses that can fuel liability awards, but also large property claims. Swiss Re notes that: “Over the past 10 years, with the exception of pharmaceutical mass tort product liability and financial institution losses, many of the largest claims originated from major property events. Key drivers for the increase in casualty claims from property lines include the increased frequency and severity of catastrophic events, a diminishing societal acceptance of ‘acts of God,’ more transparency through media, and increased scrutiny by shareholders, analysts and auditors,” according to its sigma report. Everything from e-cigarettes to air drones to the latest medical device/pharmaceutical product lawsuit can be projected as the next big liability exposure. The most frequently asked question is: “What is the next asbestos or tobacco?” The answer is both elusive and speculative.
“A number of technological, social and regulatory changes will shape the near-term future of liability insurance. Cyber risk and the liability from emerging technologies, such as hydrofracking and autonomous cars, may become more prominent in liability claims.” according to the Swiss Re sigma report.
The Conning & Company report list four characteristics a future casualty “cat” source is likely to have: (1) broad use of the product or process, (2) a signature injury or damage, (3) applicability of tort law to ensuing damages, and (4) a definable universe of potentially liable defendants.
Potential risks and exposures are difficult to predict and are rarely “siloed” into neat categories. However, reinsurers, insurers and research firms agree there are some key trends that insurers and adjusters should monitor. Beyond the traditional risks of professional liability in directors and officers (D&O) and errors and omissions (E&O) insurance, casualty exposures tend to collect around some major areas.
Technology – Cyber Risk and the Cloud
Cyber liability is clearly a prominent area of casualty risk. Several major retailers, including Target and Home Depot, have been victimized by serious data breaches in recent months. According to Swiss Re: “The global annual cost of cybercrime is estimated to be in the range of $100 billion to $500 billion. A recent study showed rapid growth in not only the number of incidents, which reached 2,164 worldwide in 2013, but also in the number of exposed records, which reached 823 million.”
Walker notes that “cyber liability is a big issue. This can be true for smaller to mid-size operations,” he says “They may not have the money to put in proper safeguards, they are vulnerable. With the size of corporations that have been hacked, you would think they have robust safeguards. If they can get hacked, anyone could be hacked.”
Cyber risk is particularly an issue for information technology contractors, who work with organizations to implement and develop hardware and software systems, according to Walker. “We have seen claims against IT consultants so far that have been along the lines of ‘you sold us a system that you said was capable of doing this and this, and it has not met those targets and we sustained a financial loss as a result,'” he says “But if you take it to the next logical step, the IT contractors could be liable for a cyber attack.”
The risk of cyber liability may be magnified as systems move to the cloud for data storage and retrieval. In a 2014 report from Swiss Re titled SONAR, Emerging risk Insights, the reinsured noted that: “Shared access also fuels risks such as data leakage, data loss and hijacking of computer resources,” adding the “potential impact” includes “internal data loss and partial business interruption,” as well as “reputational and financial damage if confidential client data is lost.”
“There are only a limited number of cloud locations, which could mean large accumulation issues to insurers if multiple clients are on the same cloud,” observes Carol Kreiling, a vice president at Swiss Re Property & Casualty Business Management Canada on the insblogs site hosted by Canadian Underwriter Magazine. “The question becomes: How many of your clients are on the same cloud?”
Transportation – Planes, Trains and Automobiles
2014 was an eventful year for the aviation hull and liability market. First, Malaysian Airlines Flight 370 disappeared while travelling from Kuala Lumpur to Beijing on March 8. Then, the shooting down of Malaysian Airlines Flight 17 in July over Ukraine caused another massive rupture in the aviation insurance market.
Jason Hutchings, vice president and team leader for Aon Risk Solutions, noted in the September 2014 issue of Canadian Underwriter Magazine that these and other aviation losses created a major challenge for aviation insurers. “The final quantum is yet to be determined, but loss estimates for hull and liability insurance market for the year so far range between US$1.5 billion and US$1.8 billion,” he stated.
The transportation of dangerous materials by train has become a key issue in North America after several high-profile derailments and explosions. The most obvious example was Lac-Mégantic, Quebec in July 2013, yet several less fatal train derailments, including the October 7 2014 incident near Clair, Saskatchewan involving hazardous materials, has focused public attention.
A prime area of concern is third-party liability and minimum insurance cover for railroad operators. Montreal, Maine & Atlantic, the railway involved in the Lac-Mégantic disaster, had liability insurance of only $25 million, typical for a small railroad. The costs of the clean-up alone have been put at $200 million. Compensation for deaths, injuries and damage to property will add hundreds of millions more.
“Shortly after the (Lac-Mégantic) tragedy, the Canadian Transportation Agency (the federal regulator) announced a public consultation process and review of the adequacy of third-party liability coverage.” Insurance Bureau of Canada noted in a 2014 document. “The review could lead to future regulatory changes that will undoubtedly affect commercial insurance writers.”
Auto manufacturing recalls are a consistently troublesome product line for insurers. The product recall numbers at Genera
l Motors for faulty ignition switches are alarming: 54 separate recalls in the first half of this year involving nearly 29 million vehicles worldwide. The company estimates the recalls will cost it $2.5 billion for the first half of 2014 alone.
However, the liability issues related to cars involve far more than just product recalls. As automobiles become more “connected,” the potential for more accidents related to distracted driving raises significant safety concerns. Virtually all vehicle manufacturers have installed some form of dashboard or wi-fi connected communications systems.
Many of these systems are so error-prone or complex that they require more concentration from drivers rather than less, according to studies released in early October by the AAA Foundation for Traffic Safety and the University of Utah and quoted in The Associated Press. “Infotainment systems are unregulated,” Deborah Hersman, president of the National Safety Council and former chairman of the U.S. National Transportation Safety Board told The Associated Press. “It is like the Wild West, where the most critical safety feature in the vehicle – the driver – is being treated like a guinea pig in human trials with new technologies.”
Environment – Hydrofracking and Air Pollution
Hydraulic fracturing (hydrofracking) is quickly emerging as a risk on the radar screen of insurers and clients. Hydrofracking is an oil and natural gas extraction and production technique in which a mixture of water, sand and chemicals are injected into deep wells under high pressure to fracture shale rock formations in order to increase the efficiency of releasing oil and gas, according to Swiss Re’s sigma report.
“Energy firms engaged in hydrofracking face an array of risks, ranging from environmental liability litigation to regulatory uncertainties,” Swiss Re notes. “Potential environmental risks include contamination of groundwater with fracking fluid or methane gas, air pollution from methane emissions at well sites and fumes from drilling equipment, and accidental wastewater spills.” To date in Canada, Quebec, New Brunswick and Nova Scotia have either passed or proposed moratoriums to ban hydro-fracking in their respective provinces.
Another emerging risk with “high impact” is air pollution, which, Swiss Re notes in its SONAR report, “has been identified as a major health risk in the form of chronic obstructive pulmonary disease. It has now been found to cause cancer also.” This, Swiss Re contends, has the “potential for an increase in litigation against polluters, car manufacturers and energy companies.”
Health – Food Products and Pandemics
The health effects of food consumption in society have been a key source of risk speculation in recent years. Foods ranging from genetically modified organisms to high sodium or sugar products to fast food outlets have been the target of speculation and, in some cases, litigation.
“Our analysis of the conceivable universe of risks finds that more likely suspects may be found somewhere in the food production and processing chain, or elsewhere in the broad swath of activities that may adversely affect the environment,” notes the Conning & Company liability study.
“The grim reality is that today’s children in North America are more obese than children from previous generations,” notes Swiss Re in a recent report entitled Are Potato Chips the New Cigarette? ” Whether through government intervention – via tax or ban – corporate initiatives or consumer activism, there are no easy solutions for this obesity epidemic. If the solution cannot be legislated, then we can be sure that it will be litigated.”
A global pandemic is the most important extreme risk for the insurance industry to worry about in the long term, according to a recent survey of global insurance industry executives conducted by Towers Watson. Given the outbreak of Ebola in Africa and the spread of the disease to other parts of the world, the identification of a pandemic as a major source of risk seems particularly relevant. Where the next threat, or liability, will come from is anyone’s guess.