Liability is an increasingly difficult and unpredictable class, according to broker Marsh.

It is a truth universally acknowledged that the liability environment is proving increasingly tough, both in the US and Europe. A recent survey from broker Marsh, entitled Limits of Liability 2002 - Valuing Wrongful Death and Serious Injury, has found that there are several key changes in the liability arena:

  • UK companies are buying less cover;

  • personal injury cases are increasing;

  • new types of claims are emerging;

  • exposures vary across European countries;

  • several key issues remain to be resolved in the US; and

  • corporate results are vulnerable to large liability losses.

    Marsh surveyed more then 3,500 companies across the world, breaking down their insurance-buying attitudes by company size, location and industry. In general, the survey found that post-September 11, there has been a recognition that catastrophes can cause liability as well as property losses. From the clients' point of view, there has been a realisation that large liability losses can have a serious impact on the balance sheet, potentially threatening their ability to trade into the future. This leads to the question of what limits clients should be buying in the current market.

    At the same time, underwriters are aware that their clients' exposures are now much greater than previously thought, and this, coupled with the large losses the re/insurance industry has sustained to date, has pushed up the price of cover. In addition, according to Marsh, insurers are now "far more conservative in allocating their capacity".

    Combining these two aspects - conservative capacity allocation and limits clients should be buying - leads to difficult questions in the current market conditions. According to Marsh, "the answer varies, of course, from client to client and depends on numerous factors. In general, insurance-buying decisions involve a combination of science and art."

    In Marsh's view, the science component comprises data and trends on values placed on loss of life and serious injuries, and "can be of immeasurable value as a context for evaluating the level of insurance limits purchased". The art element is calculating each company's exposure. "Since every enterprise is different, the data for making that determination is internal in nature," says Marsh. "Unlike the science part, a broad base of external experience is not necessarily available to assist in setting appropriate levels of variable," and there may be additional variables, to boot.

    These variables change from country to country. In the UK, for example, there has been a "marked increase" in the number of personal injury cases, though Marsh does not specify over what period of time this increase has taken place. Nevertheless, the introduction of the Access to Justice Act of 1999 brought the concept of contingency fee arrangements to the UK personal injury domain, as well as introducing after the event insurance, which is designed to provide cover if a case is lost.

    Other factors impacting the UK liability environment include:

  • the Heil v Rankin Court of Appeal decision in March 2000, which established guidelines for raising levels of general damages;

  • the increase in medical costs and greater life expectancy for disabled people;

  • the increased use and cost of expert witnesses;

  • the reduced discount rate for personal injury multipliers (from 4.5% to 2.5%);

  • the introduction of a system for hospitals to recover the cost of treating road accident victims; and

  • the change in social attitudes, mainly in the swing towards a `compensation culture.'

    New types of lawsuits in the UK, such as work-related stress claims, military post-traumatic stress disorder claims and inadequate educational standards claims, are also pushing up the losses in the class. Even so, the most prominent case currently in the UK is that surrounding a collision between a train and a vehicle in Selby, Yorkshire, which took place in February 2001. Ten people died in the accident, and projections for claims are currently topping £63m. "Since the train crash, UK companies have shown greater interest in third-party property damage cover for commercial vehicles," according to Marsh.

    Continental Europe is not exempt from the trend of increasing awards and costs, either. Marsh cites the case of a German pharmaceutical company that in August 2001 announced that one of its products may have been implicated in more than 50 deaths. According to Marsh, the product recall costs reached ¤1.4bn, and around 160 lawsuits have been filed against the company.

    These matters get more complicated across European borders. "Because of country to country variation, it is vitally important that firms with cross-border business understand the exposures facing them in each of the countries they either operate in or sell into," advises Marsh. "Even without a physical presence, the manufacturer of an exported product is open to potentially costly product liability lawsuits."

    In the US, average liability limits purchased fell in 2002, "the first such overall drop ... since 1996," according to Marsh. Prices rose sharply in the January 2002 renewals for all risks, irrespective of their claims history, and several issues remain a problem, says Marsh. These include higher self-insured retentions for exposures such as terrorism and mould, and the dramatic rise in healthcare costs, impacting on workers compensation, motor and general liability products.

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