The Next Liability Explosion

Lawsuits filed today are a good indicator of tomorrow’s liability claims.

Though there is a time lag, property/casualty liability trends are heavily influenced by local and national tort trends, according to Jerry Theodorou, a Conning analyst.

“It’s not like a hurricane or a fire where the damage is done and you have an estimate of the loss immediately. It takes longer and it’s also more obscure,” Theodorou said.

Findings in Conning’s 2012 liability trends study, “Liability and Tort Trends: Trouble Around the Corner?” leads to his conclusion that a casualty catastrophe is imminent.

“The potential for an emerging risk which is exposure-based rather than a factor of tort trends is also there,” he said. In his view, the casualty cat claim will relate to something latent in the air, water or food supply.

“Just like asbestos was latent, it was developing in people’s bodies and people’s lungs, and it took years before the manifestation came out,” Theodorou said.

The Conning report outlines the 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.

“Whereas the current effort to identify the next asbestos centers heavily around nanotechnology and hydrofracking, 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,” the Conning report concludes.

Liability insurers face increasing frequency of severity, lower investment yields, a shifting tort climate and the possibility of emerging risk.

Across the globe, commercial liability is moving to front stage. “The growth of the services sector, which is more exposed to liability risks than the manufacturing sector, is one reason for the increasing importance of liability protection,” said Thomas Holzheu, co-author of Swiss Re’s recent sigma report on global commercial lines.

“The pendulum is starting to shift from a very business friendly environment to a little bit more muscle from the plaintiff’s side,” says Theodorou. “You’ve got some things working against the industry,”

Food-related or environmental – those are Conning’s best estimate of where the next liability explosion may occur. Other studies and surveys conducted in the past year that look at tort trends warn about other lines where claims could explode. Here is where the industry might find the next liability claims crisis:

1. Food Safety

One of the most heavily litigated insurance issues relates to outbreaks of widespread foodborne illnesses and the determination of occurrence where multiple people in multiple states are affected by a contaminant that seems to stem from a single source.

The Centers for Disease Control (CDC) estimates that around one in six (or 48 million people) gets sick, 128,000 are hospitalized and 3,000 die of foodborne diseases annually in the United States.

Litigating foodborne illness cases can be challenging because the product in question often “is disseminated over a number of states to multiple claimants who are not going to be amenable to one court’s jurisdiction,” said Jean Golden, a partner in the law firm of Cassiday Schade LLP in Chicago, who specializes in these cases.

“The problem that you’re confronted with as an insurer in that situation is that you get a ruling or potentially have access to a ruling in one jurisdiction that won’t necessarily preclude a claimant in another jurisdiction from seeking relief against you in another state or federal court.”

2. Intellectual Property

A 2011 American Intellectual Property Law Association survey found that for cases valued at less than $1 million, litigation costs through trial could total almost $916,000.

“When you get to a case where the amount in controversy is between $1 million and $25 million, the price tag goes up,” said Robert Fletcher, president of Intellectual Property Insurance Services Corp. “It’s going to cost about $2.8 million to litigate those cases because people fight harder.”

The rise in costs and cases is reflective of the fact that every business has some form of intellectual property.

“[I]f you define intellectual property as ideas, innovations or reputation, a message or know-how, you’ll find that almost all companies have those assets,” said Fletcher.

One interesting aspect of intellectual property is that no intent is necessary for a claim to be alleged against a business.

“If you make it, sell it, import it, you’re on the hook,” said Garrett Koehn, president Northwest U.S., Crump Insurance Services, Inc.

3. Professional Liability – Healthcare

According to a 2012 report from the Physician Insurers Association of America that analyzed claims between 1985 and 2011, the specialty linked with the highest amount of indemnity paid to date is OB/GYN surgery, accounting for more than $3.6 billion. Paid claims for physicians in this specialty were linked with an average indemnity of $293,087. By comparison, neurosurgery and neurology had the highest average indemnities at $327,557 and $331,886 respectively, while dentists had the lowest, $44,701. Dentists continue to have the highest payment ratio of 47 percent.

Paul A. Greve, Jr., senior vice president and senior consultant with Willis Healthcare Practice, confirmed in his physician liability trends report the most troubled specialties are radiology, obstetrics/gynecology, neurosurgery and emergency medicine.

One factor influencing professional liability costs is state legislation, according to the annual industry study, “Aon/ASHRM Hospital and Physician Professional Liability Benchmark.”

Massachusetts and New Hampshire enacted medical malpractice laws in 2012 designed to speed up and fairly compensate injured patients.

“These states are at the forefront in changing the environment for healthcare providers,” said Erik Johnson, Aon’s Actuarial and Analytics Health Care Practice leader and author of the analysis.

According to the Nurses Service Organization’s “Nurse Practitioner 2012 Liability Update,” the average malpractice indemnity payment has increased 19 percent over a five-year period, rising from $186,282 to $221,852. The average cost to defend a lawsuit rose to $63,792.

“When you compare our past claim reports, it becomes evident that the cost of nurse practitioner professional liability claims has been steadily rising,” said NSO President Michael Loughran.

Not everyone sees medical malpractice claims rising in the future; some see mitigating trends.

“Decreases in frequency of claims among healthcare practitioners, the stabilization of claim severity trends, shifts in the medical profession, the impact of risk management training and advancements in patient safety are all contributors to a positive outlook for the medical liability insurance sector, according to panelists at the Casualty Actuarial Society (CAS) 2012 Seminar on Reinsurance last summer.

4. Professional Liability – Law Firms

The legal professions also continue to see a rising number of professional liability claims.

The insurer survey, “Lawyers’ Professional Liability Claims Trends: 2011” by McLean, Va.-based broker Ames & Gough, found three practice areas had the largest number of claims: real estate, corporate and securities and trusts and estates. Conflict of interest was the largest cause of malpractice claims.

A recent study by CNA’s Lawyers Professional Liability Program, “Investigating the Hidden Risks of Business Transactions Practice,” found that business transactions presented the greatest professional liability risk for attorneys.

More than one-third of business transactions claims involved the improper preparation, filing and/or transmittal of documents. Failure to provide appropriate legal advice was found to be the second leading cause of claims. The study also found the cost to defend a business transaction claim is more than twice as much as claims arising from other practice areas.

5. Cyber Attacks

According to the 2012 “Cost of Cyber Crime” study by the Ponemon Institute in conjunction with Munich Re, cyber attacks get costly fast. A typical case can take almost two months to resolve and cost an estimated $591,780 to the affected organization, according to the study. The cost is 42 percent higher than it was a year earlier.

Information theft represents the highest cost, followed by business interruption.

The problem, Munich Re explains, stems from the fact that “most traditional property and liability policies provide no cover for cyber risks” although there still may be a duty to defend until such time as coverage is determined.

Myriad cyber risk possibilities exist, according to Munich Re, including: virus infections, Internet fraud, industrial espionage, misuse of personal data (identity theft), copyright infringements or denial-of-service attacks that block targeted sites by overloading them with communication requests.

6. Environmental

Michele Schroeder, Zurich Environmental assistant vice president and author of the white paper, “Environmental Claims Experience: What’s Old, What’s New, What’s Coming,” says first party cleanup and third party liability claims are on the decline as office of attorney general lawsuits become the new trend in claims.

Allegations, such as contamination to natural resources and water supplies, don’t allege a particular injury to any one person but to the public at large, according to the report. The report identifies toxic tort suits like those involving nanotechnology and genetically modified organisms as additional areas where future claims are expected.

7. Environmental – Hydraulic Fracturing

Much is still unknown about the environmental impact of hydraulic fracturing, also known as fracking. Last year, Ohio-based Nationwide Mutual Insurance Co. became the first major insurance company to announce that it would no longer offer coverage for damage related to fracking.

The Environmental Protection Agency (EPA) is currently collecting information on fracking chemicals from nine companies and 24,925 wells to determine the potential impact on drinking water. The agency doesn’t expect to issue a final report until sometime next year.

According to Brian S. Martin, a partner in the Insurance Litigation and Coverage Practice of the law firm of Thompson Coe Cousins & Irons, though there is little evidence suggesting groundwater contamination due to fracking, there have been a number of lawsuits filed alleging pollution.

In a recent article published in Insurance Journal, Martin points out some unique issues that will arise with fracking lawsuits.

First, while there may be no coverage for the damage alleged, there still may be a duty to defend. This is of obvious concern for insurers that pay the cost of defending such claims.

Second, there will likely be complex coverage issues that will arise from such claims.

Third, though most property policies don’t cover contamination of land and water, according to Martin, claims alleging damage due to groundwater contamination may still arise.

8. Directors & Officers

A recent Chubb Public Co. Risk Survey found that more than 80 percent of executives don’t believe they and their directors will be sued within the next 12 months, despite statistics that say otherwise.

“This general lack of concern is disconcerting especially in light of the fact that the directors and officers of nearly one-in-four (23 percent) of the public companies we surveyed already have been sued,” said Evan Rosenberg, senior vice president and global specialty lines manager for Chubb.

Rosenberg said activities such as mergers and acquisitions and enforcement of anti-bribery laws are further increasing directors’ and officers’ exposure to future suits by shareholders, regulators, customers, vendors and competitors.

Merger and acquisition related claims activity was reported to have increased more than 14 percent last year alone, noted Rosenberg.

“While M&A-related lawsuits may be covered by the company’s directors and officers liability policy, documented protocols may help improve the company’s defense in court or result in a lower settlement amount,” said Rosenberg.

9. Employment Practices Liability

Employment practices liability insurance claims continue their upward trend. According to a market survey by Betterley Risk Consultants, there are two problem areas: mass claims and wage and hour claims. The report indicated that insureds are experiencing more unexpected covered claims with increasing defense costs.

In addition, more cases are being pursued by the Equal Employment Opportunity Commission. A 2012 PLUS panel noted that the EEOC is currently pursuing the following case types: disability discrimination and leave policies; hiring practices; arrest and conviction records; pay and promotions; gender discrimination; migrant workers; and lesbian, gay and transgender rights under Title VII.

10. Social Media

As the popularity of social media sites grows, so does the liability risk.

In a survey of PLUS conference attendees conducted by global specialty insurer Torus last year, 58 percent expected requests for media liability policies to increase in 2013.

“An increasing number of respondents to this survey recognize the need for broader coverage – specifically media liability coverage – due to the potential risks small businesses face when introducing this medium into their business model,” said Christopher Cooper, assistant vice president for media products.

Nearly one-third indicate data leakage is their primary concern.

An additional 27 percent of respondents believe the biggest risk is lack of control over potentially damaging content disseminated by employees, while 19 percent believe it to be increased personal injury exposure (e.g., defamation, libel, slander).