Claims frequency and severity are up across the industry, thanks in large part to social inflation, which has led to an increase in litigation and more costly settlements.
Fueled primarily by aggressive tactics by plaintiffs’ attorneys, social inflation has caused a significant uptick in bodily injury (BI) claims that are being paid out by commercial auto and general liability policies.
But other insurance segments haven’t been immune from this trend — claims payouts are going up across the board. A 2020 report by the Insurance Research Council (IRC) noted a 300% increase in jury verdicts of $20 million or more in 2019 as compared with the annual average between 2001 and 2010. IRC research also found that claim severity is greatly outpacing economic inflation, and there is “significant growth in the proportion of bodily injury liability claims being paid at policy limits.”
This fact is of particular concern to professional liability underwriters who are seeing a disturbing trend of underlying bodily injury claims spilling over to professional liability (PL) policies. General liability (GL) policies are designed to cover bodily injury and property damage that occurs on an insured’s premises. However, if those limits are exhausted or the claim includes an allegation of negligence or misrepresentation, then the incident can turn into a PL claim as well. Depending on the claim allegations, PL insurance providers are increasingly finding themselves pulled into BI claims.
Across the 150 to 200 miscellaneous professional classes of business, insurance agents and brokers, and real estate professionals such as property managers or home inspectors, have become targets of underlying bodily injury claims. The claims allege that these bodily injuries occurred, or were not properly covered, because of negligence, misrepresentation or an error/omission on the part of the insurance or real estate professional.
In other words, any professional whose client has a bodily injury exposure could also be at risk for these types of professional liability claims.
Some recent real-life examples of these claims include:
- A property management company was sued after someone was injured at an apartment complex they managed. The claimant successfully argued the property manager was negligent in maintaining the property, thus triggering the professional liability policy and a multi-million-dollar payout.
- A lawsuit over a shooting death at a residential complex led to a professional liability claim against the property manager for failing to provide proper security.
- A policyholder requested that a newly purchased truck be added to a commercial auto policy, but the insurance agent failed to do so. In the belief that coverage was in place, the truck was put into service and was involved in a fatal motor vehicle accident. Coverage was denied by the commercial carrier due to the error of the agent.
In general, the miscellaneous professional liability segment hasn’t experienced as much hardening as other lines of business, but professional liability carriers are closely watching how social inflation continues to play out.
Many insurers are already responding by reducing their capacity — cutting limits by half or more. And premiums are going up. Overall, professional liability rates are up 5% to 20%, depending on the line of business, according to a WTW E&O insurance market update published in April 2023.
Carriers are increasingly concerned that social inflation claims trends could continue. As a result, rates will likely continue to go up over the next. year while capacity decreases, particularly for classes of business that are more exposed.
What Agents and Brokers Need to Know
The combination of challenges in the professional liability market puts more pressure on agents and brokers, who have the responsibility of helping their insureds protect their exposure while rates are higher and fewer coverage options are available.
It’s not an easy situation, especially if clients don’t understand their exposure and think cutting coverage is a way to save money.
Agents can help clients get the coverage they need to protect their exposure in several ways, including:
- Know the changes insurance providers are making and properly prepare clients so they aren’t surprised at renewal time.
- Educate clients on market changes and exposures and help them address risks so they can get the coverage they need.
- Look into other opportunities to help the client cover their exposure, such as purchasing excess coverage that can drop down and fill in any primary policy gaps, taking a higher deductible, or obtaining tail coverage for prior claims.
- Maintain a strong relationship with underwriters and discuss different options and creative solutions for your clients, or negotiate on their behalf.
- Learn about the different risk management options carriers offer to mitigate your clients’ risks and ensure clients take advantage of these resources.
- Provide underwriters with all of the necessary information about your client when submitting applications, including any coverage concerns or specific needs, so accounts can be quoted accurately and quickly.
Unfortunately, social inflation trends don’t appear to be going away anytime soon, so the industry must work together to responsibly navigate these ongoing challenges. This includes finding ways to educate our clients on what social inflation means and the impact it has on all insurance consumers.
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