Building the case with customers for excess casualty coverage

What should brokers or agents say when they meet resistance from customers who already feel they are spending too much on liability coverage? Explain that in today’s world, it doesn’t take long to run through $1 million in primary insurance.

The following examples might compel a small business to purchase coverage.

A small boutique clothing store is sued when a customer trips over a bulge in the carpeting, injures her back and is forced to find a new occupation when surgery cannot restore her mobility. The claim is settled out of court for $2 million.

A local hardware story gets sued after a display is knocked over by a small child who suffers permanent scarring when heavy items land on top of him. Despite the child’s contribution to the accident, the jury awards $7 million.

A craftsman makes small, low tables for children and sells them at flea markets. Even though they have a label with a clear warning that they will not support a person’s weight, a man changing a light bulb uses one to give him a step up; the table collapses and he is seriously injured in the fall when his head hits a stone hearth. Misuse of product is not a strong enough defense, and the table maker is ruled liable for the man’s medical costs, loss of future earnings, and pain and suffering. Total cost: $4.5 million.

If anecdotes aren’t enough, turn to statistics for a fast education on the climbing costs associated with liability.

The Tillinghast-Towers Perrin report on U.S. tort expenses in 2004 found the direct costs alone for the American civil liability system totaled about $260 billion. Pacific Research Institute looked at all costs linked to the effect of tort litigation and concluded the total amount is actually $865.37 billion — a “tort tax” equivalent to almost $10,000 for each family of four in America. No business is immune. The Fulbright & Jaworski annual survey of corporate litigation trends found that U.S. companies of all sizes face an average of 305 pending lawsuits.

Answering the why question

Why is liability so costly? A number of trends contribute to the rising cost and although tort reform is a much-discussed topic across the nation, little has been enacted that would slow the growth.

One trend that should be familiar to any business owner is the rising price of medical care. Just as these costs have pushed health care insurance premiums to record rates, they have also had a dramatic impact on the expense of treatment in liability cases.

Another trend is juries awarding ever larger amounts to plaintiffs, even when the person injured is partially at fault. According to Jury Verdict Research data, in 2005 the median award in personal injury cases was $45,000 but the highest award that year was $253.4 million in a wrongful death case. Multi-million-dollar jury awards have been climbing rapidly. The number of million-dollar-plus awards for business negligence alone rose 44 percent from 1995 to 2001. Some experts attribute the climb to jury desensitization to the amounts of money involved, as well as juror sympathy that results in looking for a “deep pocket” to right any wrongs.

Aggressive trial lawyers who work on contingency and who are looking for a big payday, an activist judicial system that creates class action suits almost automatically, the credibility the court allows for junk science, and sensationalized media coverage are all factors in rising liability costs.

Helping customers understand what to look for

Despite the negative trends, excess casualty insurance rates have been dropping recently. Always cyclical, excess casualty rates tend to move in counterpoint to property rates, which have risen in the past few years as natural catastrophes have struck many states (hurricanes Katrina and Rita in 2005, floods and fires in 2006). Excess casualty rates have also dropped as insurers have rushed into the business and provided more capacity than is currently needed — the inexorable law of supply and demand.

Lower premiums may be a siren that lures customers to reconsider their excess casualty coverage. But the smart broker or agent will help a customer understand the key elements —financial strength, stability and claims handling — beyond price to assess when comparing policies.

Financial strength. Excess casualty insurance is designed to cover events that happened when the policy was in force but that may not be discovered until years later. That means a customer’s coverage is only as good as the ability of the insurer to stay in business and be around when a claim is finally made. Customers should be encouraged to check out insurers’ financial ratings.

Stability. Customers should look for a company that remains in the excess casualty business continually — not one that rushes in when rates are high and then disappears when rates soften.

Claims handling. An insurer that has claims staff devoted solely to excess casualty insurance has a much better opportunity to develop the kind of expertise that can save a customer money. When a settlement is negotiated, such expertise can save the customer money.

There was a time when lawsuits were infrequent and $1 million was an adequate cushion. Today, despite the talk of tort reform, that’s simply no longer the case. Brokers and agents owe it to their customers to make a strong case for excess casualty coverage.

Topics Lawsuits Agencies Excess Surplus Casualty