Articles and market insight from the insurance industry. Updates provided include past industry performance, current insurance trends, projected market fluctuations, and general insurance publications. Information useful to establish general rate and premium expectations.

SUPREME COURT SIDELINES CLASS ACTION ALLEGING INJURY FROM INACCURATE INTERNET INFORMATION

May 16, 2016

By Lawrence Hurley

The U.S. Supreme Court on Monday handed a narrow victory to Spokeo Inc. over the online people-search company’s bid to avoid a class action lawsuit for including incorrect information in its database.

The court, in a 6-2 decision, threw out an appeals court ruling in favor of lead plaintiff Thomas Robins, who sued the company in California claiming his Spokeo entry had damaged his job-seeking efforts because it contained inaccurate information. The court sent the case back to lower courts for further proceedings.

The legal issue before the justices was whether a plaintiff had the legal standing to sue for a technical violation of a federal consumer law even when there is a question about whether the person has been directly harmed.

The court did not decide that key question. It instead threw out the ruling in favor of the plaintiffs by the 9th U.S. Circuit Court of Appeals, saying it had not analyzed the standing question correctly.

Justice Samuel Alito wrote on behalf of the majority that the high court was taking no position on whether the appeals court was correct to find there was standing. Liberal justices Ruth Bader Ginsburg and Sonia Sotomayor dissented.

Business interests urged the conservative-leaning Supreme Court to impose new limits on class action litigation as it has done in a series of decisions including a 2011 victory for Wal Mart Stores Inc.

In 2010, Robins filed suit on behalf of himself and others potentially harmed by incorrect information about them that Spokeo might disseminate.

The suit was filed under the federal Fair Credit Reporting Act, which requires consumer reporting agencies to provide correct information. Spokeo, which maintains it is not a consumer reporting agency, sought to have the lawsuit thrown out.

Robins’ lawsuit was filed two years before Spokeo agreed to pay $800,000 to settle U.S. Federal Trade Commission claims that it had violated the Fair Credit Reporting Act when attempting to sell data to other companies.

Robins asserted that inaccurate information in his Spokeo entry – for example, stating that he had earned a graduate degree when he had not – hurt his job prospects.

Facebook, Google and Yahoo have faced similar lawsuits over violations of different federal laws. As many online companies have millions of users, a case can quickly snowball into a class action potentially worth millions of dollars. Click here to view the original article.

USAGE-BASED AUTO INSURANCE, SLOW AT FIRST, PICKING UP SPEED

May 12, 2016

By Insurance Journal

Usage-based auto insurance will explode globally in the next seven years, a new industry analysis asserts.

IHS Inc.’s IHS Automotive predicts that 142 million customers will sign up globally for the telematics-infused policies by 2023, up from nearly 12 million in 2015.

Usage-based auto insurance relies on a telematics system inside the vehicle that captures real-time information about how a driver fares and the road and the risks encountered along the way. Underscoring its popularity among younger drivers, 88 percent of millennials said in a Towers Watson survey last fall that they were interested in taking out a usage-based auto insurance policy, versus 74 percent among all other age groups.

Insurers including Allstate and Progressive have been offering usage-based auto insurance coverage since the technology initially debuted about a decade ago.

IHS Automotive said that use of the technology has grown slowly, due in part to “market stagnation and the reluctance of insurers to embrace the solution.” But that’s changing, according to the report, because of wide expansion as new insurers join the competition.

IHS Automotive, an auto industry consultancy, compiled its IHS Usage Based Insurance Report based on more than 40 interviews with insurance carriers, data aggregators, telecommunications companies and automotive original equipment manufacturers.

The study said that as insurers explore the best and strongest telematics business models, the U.S. – as the largest auto insurance market in the world – will lead the pack in terms of marketing and innovation. There are currently 5 million usage-based insurance policies in force in the U.S.

But IHS Automotive said it expects big growth in other markets too, including China, Italy (where usage based auto insurance already has a double-digit share), and the United Kingdom.

The number of live telematics-based motor insurance policies, including black box policies, in the UK increased by 40 percent by January 2016 over a year earlier, according to research by the British Insurance Brokers’ Association (BIBA).

A recent report by Fitch noted that usage-based technology, along with driverless car technology, promises to transform the auto insurance industry. In the short-term, telematics may have the bigger impact, especially for insurers that are early adopters.

“Early movers in telematics could be at an advantage among insurers as it enables them to much more accurately price the risk of a driver than traditional pricing factors such as age, postcode and type of car,” the Fitch report said. “Evidence suggests that the lower premiums on these policies are more than offset by cost savings due to better risk selection and better driving behavior by policyholders with telematics.”

Progressive Insurance, a pioneer in the use of telematics, believes its work with telematics will help it adapt to the newer world of driverless cars. According to Progressive CEO Glenn Renwick, as cars become more automated, the technology could be used by underwriters to design policies. Auto insurance will have “more to do with information that comes from the car than the classical segmentation with regard to characteristics of the driver,” Renwick has said.

One of the reasons usage-based policies are gaining popularity is that telematics devices appear to change the behavior of drivers. More than half (56 percent) of the 1,135 drivers participating in an Insurance Research Council (IRC) public opinion survey said they have made changes in how they drive since installing a telematics device provided by their insurance company in their primary vehicle.

Improved driving is important because monitoring a car with a device is not cheap and is only worthwhile if it lowers claim costs. The device, known as a dongle, can cost $100. Plus there are costs for wireless communications, as well as consumer, employee and agent education. For an insurer to “break even,” the savings from better driving must offset the costs of technology and any telematics-based discounts. By one ISO actuary’s account, the loss ratios have to drop from 13 to 22 percent to justify a permanently installed device.

Some consumers have been reluctant to sign on out of privacy concerns; however consumers’ comfort level withsharing personal UBI driving data is increasing, according to LexisNexis. Click here to view the original article.

TAKING STOCK OF D&O INSURANCE MARKET: CAPACITY, COVERAGE AND CULPABILITY

May 10, 2016

By Young Ha

The directors and officers (D&O) liability marketplace continues to find softening rates and intense competition especially in excess layers, according to industry executives. The industry is also seeing a continuing trend of broader coverages and more governmental activities from regulatory agencies, executives said.

There have been a lot more carriers in the D&O space in the past five to 10 years, said Louis Lucullo, chief underwriting officer for the Americas Region at American International Group’s Financial Lines, who spoke at the Professional Liability Underwriting Society (PLUS) D&O symposium in February. The majority of newcomers tend to write excess D&O, Lucullo said.

There have also been important developments on the primary side, including some consolidations particularly ACE Ltd.’s acquisition of Chubb, with the combined company adopting the Chubb brand globally.

“But overall, there are still a lot of carriers and a lot of capacity out there for the directors and officers market,” Lucullo said.

The biggest risk area is in the area of government investigations from the SEC and the Department of Justice.

Coverage Expansions

Lucullo said there’s been a trend of expansion of coverages, mostly on the investigative side. He said there’s much more activity in terms of the litigious environment. Federal class action security suits tend to be fairly stable year from year, but the overall majority of actions being brought today are being led by a growth in regulatory action.

There also have been more governmental activities from regulatory bodies like the Securities and Exchange Commission pursuing actions through investigations against directors and officers.

Lucullo said that a few years ago, AIG introduced the concept of a preclaim inquiry to be covered. “That’s at the moment that an investigator initially contacts an insured to mainly appear before them to answer questions or perhaps to produce some documents. That initiates the coverage much earlier on than historically. So there has been a trend to expanding the coverage through more investigative exposure.”

Lucullo also said how much the coverage should be broadened to address corporate entity exposure has been a hot topic in D&O insurance.

There are investigative cost coverage policies meant just for the entity as a standalone basis. But in the past couple of years, there now are endorsements where investigative costs for the entity could be added to the D&O policy but usually under the requirement that there also be a securities claim that coexists with that regulatory investigation.

Rate Decreases

Simon Hodge, national practice leader for Professional Risk Practice at Wells Fargo Insurance, noted that most of its clients have seen improved terms and conditions with significant price cuts, with public D&O policies getting renewed with 5 percent to 10 percent rate decreases.

In terms of the market capacity, “several new carriers have entered the D&O space and there is clearly more than sufficient supply to meet client demand,” Hodge said.

He also spoke of broader coverages, with more sublimit capacity availability for investigative costs in cases when directors are asked to investigate a possible wrongdoing. In terms of broader coverage, D&O insurers are becoming increasingly more responsive to providing coverage for entity regulatory investigations.

Also commenting on rates, Kevin LaCroix, executive vice president at RT ProExec, a division of R-T Specialty LLC, noted that while the primary layers are mostly flat, he sees intense competition in excess layers, especially for higher excess and Side A layers.

The result is rate decreases in the mid-single-digit percentage points and up to 10 percent for overall D&O programs. LaCroix also said he sees a market trend of coverage expansions, such as providing corporate entity coverage.

“There’s always been a certain amount of merger and acquisition activity in the insurance industry. In 2015, it really accelerated. It was true both for reinsurers and then for direct insurers,” LaCroix said.

The two most significant deals from the perspective of insurance buyers was XL Group plc’s acquisition of Catlin Group Ltd. and Ace’s purchase of Chubb, which was the biggest industry transaction in 2015.

“These are significant players in the D&O insurance industry and the P&C industry as a whole,” LaCroix said. “The combination of these companies means fewer of the larger players and more consolidation or concentration in some larger players.”

He advised that it would be important for the clients who are insured with those companies to be in contact with their brokers, because there could be process issues this year that haven’t been true in the past.

“It may affect their renewals. It may affect their ability to renew their coverage on the same terms and conditions or the same price,” LaCroix said. “There could be changes in their insurance program just as a result of the changes among the carriers.”

Yates Memo

The industry is also taking notice of a new regulatory development stemming from the “Yates Memo,” which was issued last September from U.S. Department of Justice’s Deputy Attorney General Sally Quillian Yates.

In her memorandum, Yates aims to put a greater emphasis on holding individuals more accountable. Companies would be asked to turn in information about culpable individuals to receive cooperation credit for assisting in investigations.

R. Damian Brew, managing director at Marsh USA Inc., said the biggest risk area that the marketplace is seeing today is in the area of government investigations – from the SEC and the Department of Justice.

“One area that’s getting an awful lot of attention is the Yates Memo, issued by the Department of Justice, which really indicated for the first time that the department was going to focus on individual wrongdoing at the expense of corporate wrongdoing,” Brew said.

In fact, Brew noted, the Yates Memo went as far as to say that corporations weren’t going to get cooperation credit unless they provided all relevant facts about potential officers that would be involved.

“There are enormous insurance implications for that, as you can imagine, because now individuals may be seeking separate counsel,” Brew said. “They may be in a position where they’re adverse to their companies. There may be questions about advancement and indemnification. So this is a very important step and it’s one that the industry and corporations and their officers are going to be watching very closely.”

Cyber Liability

Another risk that many directors and officers now face is the cyber liability.

Tony Galban, senior product manager of D&O at Chubb, said cyber has made its way into the boardroom as a management liability issue, which is not that unusual compared to other exposures in the past, like asbestos, pollution or environmental concerns.

“Cyber is just a new exposure that has to be addressed at the board level. It’s no longer reasonable for the board to ignore the risk of cyber,” Galban said.

“Everything we’re hearing suggests that it’s being attended to on a regular basis in boardrooms across the country as a line item agenda that the board has to deal with, whether by loss control, whether by insurance purchasing, but certainly not by ignoring it,” he said. “You can’t get away with that anymore.”

Galban said that there have been D&O claims associated with cyber. Typically, the allegations are that the management didn’t manage the issue sufficiently.

“More directly, you’ll see cyber policies responding to direct cyber loss. But to say it’s strictly a cyber product issue would be a misnomer,” Galban said. “It affects other policies like the D&O, where we’ve had some claims, typically shareholder actions.” Click here to view the original article.

how p/c insurers fared in 2015

May, 9 2016

By A.M. Best

The U.S. property/casualty (P/C) industry marked a third consecutive year of underwriting profitability, with $6.2 billion in underwriting income in 2015. However, the lower level of underwriting income and an 11.2 percent decline in net investment income drove pre-tax operating and net income down from their 2014 levels, according to an A.M. Best special report.

The combination of lower net income and a negative change in the industry’s accumulated unrealized gain position resulted in a $1.5 billion reduction in policyholders’ surplus, to $688.6 billion at year-end 2015, a decline of 0.2 percent, says the Best special report, titled, “U.S. P/C Industry Marks Third Consecutive Underwriting Gain, But Surplus Declines on Investment Results.” After-tax return on equity (ROE) also declined, to 8.1 percent from 9.2 percent in 2014, driven by the lower level of net income.

Net premiums written (NPW) continued growing in 2015, up 3.4 percent to $519.0 billion from the prior year. However, this represented a second year of declining premium growth since the peak of 4.7 percent NPW growth in 2013. Modest economic growth, along with rate and exposure increases continue to drive up premium, even as market pressure builds, particularly in commercial lines.

Catastrophe activity in the United States remained relatively benign in 2015, with catastrophe losses adding just 3.5 points to the industry combined ratio, down from 4.0 points in 2014. Despite this reduction in catastrophe losses, the P/C industry’s accident year combined ratio increased by 0.5 points, and the benefit from favorable development of prior accident year loss reserves declined. The combination of these factors deteriorated the reported 2015 combined ratio to 98.3 from 97.4 in
the prior year.

The personal lines segment saw a substantial adverse impact on surplus growth from a negative change in its unrealized gain position, in line with the overall industry results. Underwriting income in 2015 declined to a loss of $0.3 billion from an underwriting profit of $2.2 billion in the previous year. Reinsurance transactions that took place in 2014 caused an unusually high level of favorable development of loss reserves in that year; a return to a more normal, lower level of favorable reserve actions in 2015 reduced the benefit and contributed to the loss.

The commercial lines segment produced a slightly higher level of pre-tax operating income in 2015, driven by increases in net investment income and other income. While underwriting income declined compared with 2014, the segment’s underwriting performance remained favorable. Unlike the personal lines segment, the underwriting results for the commercial lines segment were adversely impacted by expenses, with both loss adjustment and underwriting expenses increasing relative to premium. Incurred losses declined on both a relative and absolute basis, driving the loss ratio down to 53.0 from 54.2. Click here to view the original article.

D&O MARKETPLACE CONTINUES TO SEE SOFTENING RATES

March 21, 2016

By Young Ha

“But overall, there are still a lot of carriers and a lot of capacity out there for the directors and officers market,” Lucullo said.

The biggest risk area is in the area of government investigations from the SEC and the Department of Justice.

Coverage Expansions

There also have been more governmental activities from regulatory bodies like the Securities and Exchange Commission pursuing actions through investigations against directors and officers.

Lucullo also said how much the coverage should be broadened to address corporate entity exposure has been a hot topic in D&O insurance.

Rate Decreases

In terms of the market capacity, “several new carriers have entered the D&O space and there is clearly more than sufficient supply to meet client demand,” Hodge said.

Yates Memo

Cyber Liability

Another risk that many directors and officers now face is the cyber liability.

“Cyber is just a new exposure that has to be addressed at the board level. It’s no longer reasonable for the board to ignore the risk of cyber,” Galban said.

Galban said that there have been D&O claims associated with cyber. Typically, the allegations are that the management didn’t manage the issue sufficiently.

UNTESTED CYBER COVERAGE REMAINS 'VOLATILE,' EXPERTS SAY

March 4, 2016

By Stephanie K. Jones

With cyber insurance premiums expected to grow from around $2 billion in 2015 to an estimated $20 billion or more by 2025, insurers and reinsurers are continuing to work out underwriting requirements, and the market can be characterized as “volatile,” according to industry observers with expertise in the area.

“Take up rates are growing astronomically for this line of business and really for good reason,” said Jim Rice, senior business development executive at Xuber, a software vendor focused on the MGA, insurance and reinsurance sector. The potential is high for a widespread cyber event, and underwriters are taking notice, he said.

“Underwriting requirements are rising and both insurers and reinsurers are increasing their retentions, as well,” added Rice. “In some cases, we’re seeing some capacity reduction in some players who saw an opportunity, and are leaving the market altogether and really focusing their attention on other lines of business.”

In addition to well publicized “hacktivist” incidents, the simple fact that nearly all businesses are vulnerable to attacks may be one reason for the increased interest in cyber coverage.

There’s “no question of whether a business will be a victim of a cyber attack, it’s really a question of when a business is going to be a victim,” said Ted Shaer, an attorney with Zarwing Baum DeVito Kaplan Shaer Toddy PC in Pennsylvania.

It’s a potential threat for which all businesses need to prepare, he added.

“Any business that stores data that has value, personal information or financial data is going to be a target,” Shaer said during an A.M. Best law webcast on cyber risks.

So far, the cyber line has been untested in terms of claims-paying ability, according to Rice, who’s based in Detroit. While there have been large losses, such as those at Sony, Target and Anthem, to date there has been no widespread, catastrophic occurrence to test insurers’ ability to pay claims on these losses. And there has been no indication that insurers are not paying the claims that have come in so far.

The insurance market as a whole is in a far better financial position that it was following the hurricane season of 2005, which included Hurricane Katrina and multiple other large-scale cat events, Rice noted. But, “cyber is a different animal, and … the nature of potential catastrophic cyber loss is likely far more reaching than the industry probably understands. Therefore, as cyber matures and loss and underwriting data become more available, I think we’re going to see a lot more specialization in the cyber market, as we’re seeing now,” Rice said.

There also haven’t been any high profile coverage disputes to help define what will and what will not be covered in cyber policies going forward, according to Lynda Bennett, a partner the law firm of Lowenstein Sandler in the New York/New Jersey area.

She said cyber insurance policies have “given new meaning to a complex and difficult to navigate insurance product.”

Over the last several years, traditional commercial general liability policies have begun to include cyber exclusions, “because the insurance industry is moving in a direction of developing products dedicated specifically to covering cyber risk. It just is becoming a more prominent issue and concern. They’re trying to isolate all of the different coverage grants that touch and concern data, privacy‑related issues, all in one product,” Bennett said.

The market today continues to be “volatile, because we still have a number or insurers that are entering and leaving the market of even providing this type of coverage. There are upwards of 40 different types of insurance policy forms out there,” she said.

Bennett compared the development of cyber coverage with the early days in the evolution of coverages such as environmental and employment practices liability (EPLI), where it took several years before claims and coverage disputes were litigated and policies began to be stabilized.

There are carriers that are emerging as leaders in the cyber area and they too are continuing to adjust the coverages, Bennett said.

“What I find interesting and a trend that’s developing with those leaders … is that they’ve developed policy forms, but they’re still tinkering one year over the next. On renewal, the terms and conditions are still very different. Some things are being taken back through exclusions. There are some enhancements that are being added to make the policies more attractive,” she said.

Some carriers are beginning to specialize in certain as to types of cyber risks, as well, according to Rice.

“For instance, there are cyber markets seeking just healthcare risks or markets seeking combinations of retail and other related industries. Naturally, each will come with their own policy forms and sets of exclusions including their own available capacities reflective of certain market segment experience,” he said.

Broker Specialization

Specialists brokers are an important part of the coverage equation when it comes to protection for cyber risks, according to Bennett.

“There are brokers that specialize in placing cyber insurance policies. That’s literally all that they do every day, all day long. They are on top of all of the different policy forms that are out there. They are negotiating with the underwriters at all of these insurance companies,” she said.

Bennett said she’s seen clients make big mistakes by using a typical broker to place this type of specialized policy.

“Even though I’m sure the broker approaches it using their best skill set possible, when you’re not living and breathing these policies day to day, as the terms are changing on a mere weekly basis, you’re not in a position to provide the best service and the best advice and the best placements for your clients,” Bennett said.

She advised agents and brokers without someone on their team dedicated to staying on top of developments in the cyber insurance market to affiliate with brokers that do specialize in placing cyber coverage.

Agents and brokers also need to understand no matter how large or small their clients may be, there’s a good chance that they need some sort of cyber liability coverage, Rice said.

“Any business that comes with data, whether transactional or any other, is susceptible to cyber risk, whether they know it or not,” he said.

Even so, he added that a stand-alone cyber-liability policy is not always required.

“Typically, businesses with say less than $10 million in annual revenues, which don’t store or process large amounts of sensitive data, may not need standalone cyber policy. Instead, they may be able to endorse the coverage onto their existing commercial business policy,” Rice said.

Because cyber insurance comes in all varieties, shapes and sizes, “when it comes to advising clients, agents and brokers shouldn’t just take into account afforded coverage limits, but the additional services and expertise that comes with the product,” Rice said.

“Having sufficient limits in place in tandem with coverage that’s really best suited for the insured’s needs in the event of a breach not only puts the insured in the best … position, but it places a high value on the agent or broker especially in their client’s hour of need,” he said. Click here to view the original article.

CYBER INSURANCE RATES UP, UNLIKE OTHER COMMERCIAL RATES

December 3, 2015

By Insurance Journal

Cyber insurance stood out in the third quarter as the only line for which insurers saw consistent and large rate increases, which averaged more than 15 percent in the United States, according to the latest analysis from Marsh.

Even with that pocket of price gains, the quarter still marked the tenth straight quarter of declining commercial lines insurance rates overall, for all lines taken together, Marsh reported in the November 2015 “Global Insurance Market Quarterly Briefing.”

Key contributors to a 4.8 percent overall global decline in renewal rates were falling property insurance rates in every region tracked by Marsh, with the most pronounced property declines coming in the Asia-Pacific (more than 7.5 percent drops), followed by Continental Europe and the United States (where average property rates dropped 5-7.5 percent).

Casualty rates declined less than property in all regions. In the United States and Continental Europe, for example, casualty rates fell by 2.5 percent or less, on average and ,

The only other increases noted in the report came in financial and professional lines in the United States and Latin America, with the U.S. hikes boosted by the cyber line. Both regions saw small rate hikes—2.5 percent or less—in financial and professional lines overall.

In contrast, rates for financial and professional lines in the U.K. dropped more than 7.5 percent, Marsh reported. Click here to view the original article.

CYBER INSURANCE UNDERWRITING MOVES FROM 'TODDLER' TO 'TEEN' AS INSURERS LEARN FROM CLAIMS

December 8, 2015

By Stephanie K. Jones

Given the fact that the insurance industry paid out more than $400 million in highly publicized cyber liability insurance claims in 2014 alone, one might think that insurers would be shying away from the line.

But one would be wrong, according to insurance professionals who specialize in cyber-related risks.

“The interest in cyber is phenomenal right now. It’s never been hotter. This is a product line that’s been around for only 15 years. It feels like now it’s reached that stage of maturity where we’re seeing more and more buyers, we’re seeing more and more market participants, and everybody’s talking about cyber right now,” said Graeme Newman, a director at CFC Underwriting in London.

In an interview at the PLUS Cyber Liability Symposium in Chicago in September, Newman said the cyber liability line has moved from the “toddler stage” to its “teenage years.” The difference between now and, say, five years ago, claims are starting to come in and they are being paid, he said.

The year 2014 with its headline generating claims was extraordinary, Newman said, because the market “at that stage was probably less than a billion dollars in net premium.”

“We’re seeing how the insurance market is reacting … how coverage is changing. We’re seeing new entrants come in. We’re seeing some people leave. The interesting thing is going to be how it develops over the next 12 to 24 months,” Newman said.

Going forward, insurers will necessarily have to make underwriting and pricing adjustments for the cyber market to remain viable, according to Sarah Stephens, partner and head of Cyber, Technology, and Media E&O at JLT Specialty Limited.

“It doesn’t seem sustainable to me to do it that way. Insurers have swung the pendulum a little bit back, to actually asking for detailed information, and really trying to differentiate a good risk from a bad risk. They’ll continue to do that.”

Carriers expect this area to grow, said Manny Cho, regional underwriting manager at Axis Pro in San Francisco, but they need to be profitable in order for that to happen.

Carriers are “picking and choosing the different areas that we feel most comfortable with,” Cho said.

Growth Areas, New Markets

Historically, the cyber market has focused on healthcare companies, financial industries and more recently, retailers, Newman said. Now, “the market has started to develop and mature in those industry verticals,” he added.

But Cho, Newman and Stephens all agree there is a lot of room for market growth both among tradition types of buyers and in new market sectors.

“I would say right now, there’s a massive amount of growth in the U.S., even in industries that are traditional buyers. If you think about retailers and healthcare and financial institutions, still not 100 percent of them buy [cyber] insurance,” Stephens said.

“And then there are the non-traditional industries, such as heavy industry, mining, manufacturing, transportation, energy,” she said.

Newman said he also expects to see new buyers seeking the coverage — “everything from manufacturing, professional services companies, logistic companies, aviation, marine. I think we’re going to see a huge number of new buyers entering the market, because the product is changing, and it’s adapting.”

Five years ago, the products being sold “were all about privacy breach response, and that’s where the market started and it grew,” he said. “Now we’re seeing products develop around the business interruption components, the system damage elements, and that makes the product so much more appealing to a much, much wider spread of customers.”

Another potential growth area — the global market — is virtually untapped, according to Stephens, who is based in London and works with many companies in the U.K. and in Europe.

“Probably only about 10 percent of the world’s cyber premium is outside the U.S. There’s a massive opportunity for growth there,” she said. “Especially in Europe right now, because we’ve got a new EU data protection regulation that’s going to be coming into effect at some point later this year. Then it will have about a two-year horizon before it really starts to affect companies.”

A lot of companies are also starting to think about protection beyond data breach, as well. “You’re now starting to see companies, in non-traditional classes and also in traditional classes think, ‘Actually, I’m really dependent on technology. What if I didn’t have email? What if my logistics system went down and I couldn’t ship product?'” she said.

“They’re thinking about that business interruption component, from either a cyber-attack, or the more broad system failure coverage. … That’s going to drive even more growth,” she said.

Cho said many carriers are also looking at small and midsize business as a robust area for growth. We are trying to “figure out if we can underwrite it effectively, if we can price it effectively and build our books on that segment,” he said.

With the small to midsize company market there are some real inhibitors, Cho said. The main one is cost.

“If you’re a small to midsize business owner with a limited budget, every dollar counts,” he said. “When I was on the broker side … we would always try to talk about it in practical terms: ‘If you have a PCI violation, what does that mean to you?'”

It may cost the client $10,000 to $25,000 for a forensic investigation. There could be an assessment charge, perhaps another $5,000 or $10,000. It may be a modest breach but it may cost the business $25,000 to resolve.

Can the potential insured afford to pay 25,000? Do they “have that kind of margin where that money is laying around? Most will say no. You just equate that to a $2,500 cyber insurance policy or $1,500 cyber insurance policy. Let them manage the risk or make the decision from there,” Cho said.

He conceded it’s very difficult.

“There’s always the argument, ‘That’s not going to happen to me.’ Then it happens and then [they] go, ‘Oh my gosh! I should’ve done something,'” he said.

Cho said it’s likely more insurers will start to offer “add-ons to just give someone a taste for what the cyber coverages is or give some critical first-party coverages, reimbursement coverages. Maybe if they want to buy more, they’ll build on top of that. That may be another way small and midsize businesses can grow that segment and for carriers to grow the segment.” Click here to view the original article.

Product liability: the quest to protect us from ourselves

October 27, 2015

By Christopher J. Boggs

Unintentional injury is the leading cause of death among teenagers and adults 15 to 44. According to the Centers for Disease Control (CDC), more than 43,000 people between 15 and 44 died in 2013 as a result of unintentional injury. When all age groups are considered, unintentional injuries are the fourth leading cause of death in the US.

Within the purview of “unintentional” are deaths resulting from consumer products. Nearly half of the unintentional injury deaths resulted from the use or misuse of a consumer product. Accidental poisoning leads the way with nearly 50 percent of reported consumer products related unintentional injury deaths (33 percent of all unintentional injury deaths).

When someone is injured by a consumer product, lawsuits occur. Rarely are injured users of consumer products credited with any sense, common or otherwise, or charged with by juries any responsibility for their contribution to the injury. If the product contributed to the injury, plaintiff counsel contends, the product is obviously defective or the consumer wasn’t adequately warned by the manufacturer (regardless of the fact that thousands of others use the same product without incident).

Legends, true, not completely true and so far out that they sound true, surround the development and history of warning labels. Snopes.com even gets in on some of these urban tales. The best known of these legends chronicles the lore behind the picture on lawn mower decks showing fingers being unceremoniously cut off by the spinning blades. History repeats the story as follows.

Rather than take the time and trouble to find the hedge trimmer, a lazy, “do-it-yourself” yardman reportedly decided to use his readily available, already running push mower to trim his hedges. When he reached down to pick it up, he was shocked when his fingers were removed from his hands. His lawsuit against the manufacturer claimed that nothing indicated that he could not use the mower in that manner. A jury agreed and he palmed the money (sorry). Voila, the picture of fingers being cut off if stuck under the mower deck. Incidentally, the validity of this account cannot be proven or disproven, it is likely true.

Reported and actual products-related lawsuits have lead to the attachment of some unusual product warning labels – intended to protect us from ourselves. As you prepare for Halloween, Thanksgiving and Christmas, reflect on some of these labels and think how much “crazy” there must be when we are so limited in the manner in which we are allowed to use products (some of these really spoil all the fun).

Directions for the use of a collapsible baby stroller my wife and I purchased: Step 1 – Remove baby. (Did they really have to write this? My wife and I figured it out right off, when it wouldn’t close properly.)

Hair dryer warnings:

Do not use while bathing.(But it’s such a timesaver)
If dryer falls into water, do not reach into water. (What do they expect me to do, unplug it?)
Do not use near or place in water. (You are in the bathroom for goodness sake).
Do not use while sleeping. (I don’t know how many times I’ve awakened styling my hair.)

Warning on a bag of cotton balls: Warning-Flammable! (Glad they told me, I won’t use them to put out that fire my hair dryer caused.)

Inflatable mattress warnings:

Do not step or jump on bed or use as a trampoline. (Boy, are my kids gonna be disappointed.)
Amazingly, it did not say that it was not a floatation or life saving device, so I guess it…whoops, it does say: Do not use around water.

Curling Irons are dangerous, too:

Warning: This product can burn eyes. (Well, how do you curl your hair?)
For External Use Only! (Ummmm…)

Electric rotary drill: “This product not intended for dental use.” (What, does it void the warranty?)

As printed on a cardboard automobile sunshield: “Do not drive with sunshield in place.”(How do they expect me to keep the sun out of my eyes?)

Found on bottle of mildew remover: Use only in well ventilated area. (If it were well ventilated, there wouldn’t be mildew.)

Superhero costume warns: Cape does not enable wearer to fly. (“It says whaaaaa” (thump!!))

Plastic bags used to protect clothes until you get them home from the dry cleaners: This bag is not a toy. Please discard. Keep away from small children. (And my favorite warning) Do not place in baby crib. (Kids just aren’t allowed to learn the hard way anymore.)

On a clothes iron: Do not iron clothes while on body. (Unless you like the smell of burning flesh.)

On a package of firecrackers: Waning: Explosive! (If they weren’t, we’d sue the manufacturer for that.)

Seen on a bottle rocket package: Do not put in mouth! (Words preceding this stunt,”Hey, watch this.”)

Have A Happy And Safe Season! Link to original article.

us cyber insurance market demonstrates growth, innovation in wake of high profile data breaches

October 21, 2015

By Insurance Information Institute

U.S. businesses spent more than $2 billion for cyber insurance last year as interest in this coverage grew dramatically following numerous high profile data breaches, according to the Insurance Information Institute (I.I.I.).

“More than 60 carriers offer stand-alone cyber insurance policies, and Marsh, a major insurance broker, estimates the U.S. cyber insurance market was worth over $2 billion in gross written premiums in 2014, with some estimates suggesting that figure has the potential to triple by 2020, growing to $7.5 billion,” stated Dr. Robert Hartwig, president of the I.I.I. and an economist. Hartwig co-authored the I.I.I.’s newly released white paper, Cyber Risk: Threat and Opportunity, along with Claire Wilkinson, who writes the I.I.I.’s award-winning Terms + Conditions blog.

The white paper examines where the cyber threats are coming from—from foreign governments and criminal enterprises to disgruntled employees—and how U.S. businesses can protect themselves from the substantial economic fallout of a data breach. The paper also surveys the rapidly evolving market for cyber insurance, including pricing and limits purchased.

“A proliferation of high profile cyberattacks and data breaches ensures that businesses, governments, law enforcement, cyber security experts and consumers around the world are paying close attention to the risk of cyberspace and developing a corresponding response,” Dr. Hartwig said.

Indeed, “Cyber Crime, Information Technology (IT) failure, espionage” climbed to number five on Allianz’s Top 10 Global Business Risks for 2015. It had ranked at number eight in 2014, the same year 783 data breaches were reported by U.S. businesses, most of them medical/healthcare organizations, according to the Identity Theft Resource Center.

The I.I.I. found that today’s stand-alone cyber insurance policies typically feature the following coverages:

Liability—Covers the costs (e.g., legal fees, court judgements) incurred after a cyberattack, such as data theft, or the unintentional transmission of a computer virus to another party, causing them financial harm.

Crisis Management—Covers the cost of notifying consumers about a data breach that resulted in the release of private information, and providing them with credit monitoring services, as well as the cost of retaining a public relations firm, or launching an advertising campaign to rebuild a company’s reputation.

Directors & Officers (D&O)/Management Liability—Covers the cyber liability risks faced individually by a company’s key decision makers while acting on behalf of the company.

Business Interruption--Covers loss of income due to an attack on a company’s network that limits its ability to conduct business.

Cyber Extortion—Covers the “settlement” of an extortion threat against a company’s network, as well as the cost of hiring a security firm to track down the blackmailers.

Loss/Corruption of Data—Covers damage to, or destruction of, valuable information assets as a result of “viruses, malicious code and Trojan horses,” the white paper states. Link to original article.

JUST HOW COSTLY, FAST-GROWING IS CYBER RISK

September 15, 2015

By Allianz Global Corporate & Specialty

Cyber risk is costing the global economy $445 billion annually, $108 billion of which comes from the U.S., according to a new report.

The report from insurer Allianz Global Corporate & Specialty also predicts cyber insurance premiums will grow globally from $2 billion per year today to more than $20 billion over the next decade.

“Cyber risk is now a major threat to businesses,” Allianz said in the report. “Companies increasingly face new exposures, including first-and third party damage, business interruption and regulatory consequences.”

AGCS said the problem has become severe only in the last 15 years, though it has a particularly severe impact on the world’s top economies. Out of the $445 billion annual global cost, $200 billion-plus of that number comes from the world’s largest economies—the U.S., China, Japan and Germany. The top 10 global economies account for more than 50 percent of cyber crime costs, according to the report.

AGCS said that cyber risk remains the most underestimated by businesses. But as companies increase their awareness and government attempt to respond to the problem, there remains rapid growth potential in the area for property/casualty insurance carriers.

But as premiums grow, carriers must adapt to counter the cyber risks as they evolve and change. AGCS said that cyber risks of the future will become more complex than they are now. Corporate data breaches and privacy concerns drew much of the initial attention, but future cyber issues will stem from intellectual property theft, cyber extortion, and the impact of business interruption after a cyber attack, AGCS noted.

“Within the next five to 10 years, [business interruption] will be seen as a key risk and major element of the cyber insurance landscape, Paul Schiavone, AGCS regional head of financial lines in North America, said in prepared remarks.

Some recommendations from the report:

Businesses need to spot key vulnerable assets and also address areas such as employee vulnerabilities or over-reliance on third parties.
Businesses should create a cyber security culture and tackle cyber risk using a “think tank” approach—knowledge sharing from different stakeholders.
Hidden risks can emerge. M&A activity and changes in corporate structures can impact cyber security and the holding of third party data.
Companies should decide which risks to avoid, accept, control or transfer.
Cyber coverage must evolve to become both broader and deeper. Such policies should address business interruption and close gaps between traditional coverage and cyber policies.
Cyber exclusions in property/casualty policies should become more common. But standalone cyber insurance will keep evolving as the main source of comprehensive cover, addressing demand from industries including telecommunications, retail, energy and transport sectors. Click here to view the original article.

WHERE CYBER INSURANCE UNDERWRITING STANDS TODAY

June 12, 2015

By Insurance Journal

“You would think the first question to ask would be: Do insured parties understand the elements and limitations of coverage?” said Kevin Kalinich, speaking on cyber risk. “The real first question is: Do the insurance companies understand?”

Kalinich, global practice leader for cyber/network risk, at consulting firm Aon Risk Services, was a panelist at the Standard & Poor’s Ratings Services 2015 Insurance Conference this week in New York where experts stressed the importance of underwriters working together to gain a better understanding of the market so they can properly assess and price cyber risk.

Demand for insurance covering cyber attacks is mounting and the risk is evolving rapidly, panelists noted. A number of U.S. insurers are testing the waters but panelists said that even the insurers with larger market shares have thus far been cautious due to the lack of actuarial data available in this nascent market. They have been writing policies with low limits and a slew of exclusions such as excluding damages resulting from data handled by an external contractor.

Current Marketplace

Right now, a handful of players — American International Group Inc., ACE Ltd., Chubb Corp., Zurich Insurance Co. Ltd., and Beazley Group Ltd. — dominate the market for cyber insurance, but panelists said clients are looking to buy more coverage than insurers are willing to offer.

As the market develops, providers will need some time to model risk sufficiently and to set premiums accordingly. This will remain difficult, Kalinich said, because the threat is evolving fast. He said two decades of reliable data are needed to feed models.

“We’re much farther along than we were two years ago; we have much better information now,” he said. “But it’s not a static model. It changes over time, and in two years it will be much better.”

Regulators have taken steps to guide insurers toward a consistent approach to the market. The National Association of Insurance Commissioners (NAIC) recently adopted guiding principles for insurers underwriting cyber risk.

Regulators Involved

The NAIC is also developing a set of best practices for insurance company examiners to test protocols and processes, as well as a consumer bill of rights so that consumers know when data has been hacked.

“The primary issue— the cornerstone of the whole effort-— is making sure we are seamless in information sharing,” said Adam Hamm, the North Dakota insurance commissioner and chair of its NAIC Cyber Taskforce. “The good news here is that that is happening. There’s a substantial amount of work being done to ensure that we’re working together and collaborating.”

So far, risk assessment has been inadequate because initiatives don’t specify the need for aggregated estimates of maximum possible loss, said Aon’s Kalinich. For example, if an insurer covers 1,000 companies, half of which share a particular risk, it’s difficult to gauge the aggregated risk, he said.

Relation to Other Lines

At the same time, it’s important for insurers and clients to understand where stand-alone cyber insurance fits with other lines–coverage could fall under a property/casualty policy, for example.

“If there’s a cyber attack that causes tangible damage to property, it could be covered under your property policy,” Kalinich said. “If there’s an attack that causes tangible damage to a third party, your general liability policy could cover it.”

Currently cyber insurance is written on a claims-made basis and primarily covers third-party liability in the U.S. First-party coverage (covering the cost of investigating and securing the site of the technology breach, as well as losses) is available only sparingly in the U.S.

With large retailers such as Home Depot and Target, banks such as JPMorganChase and Citibank, and health insurers Anthem and Premera Blue Cross all suffering cyber breaches, experience shows no company is safe.

National Security

Jason Healey, director of the Cyber Statecraft Initiative for the international affairs think tank the Atlantic Council, looks at the issue from a national security perspective.

“From that perspective, none of the attacks have been big,” Healey said. “One of the reasons I don’t think cyber-attacks have been that bad yet is that it’s relatively easy to bounce back from them.”

He said it does not appear anyone has died from acyber-attack. “Essentially, what’s lost are ones and zeroes, and it’s really easy to replace ones and zeros,” he said.

Yet with the increased linking of concrete-and-steel structures–such as power grids–to the cyber world, there’s an increased danger that people could be hurt or killed, and that an economy could suffer irreparable damage, according to Healey.

“It’s going to get worse before it gets better–without a doubt,” Healey said.

Lax Controls

Kalinich said he sees little coordination within companies themselves. He related a tale in which Aon visited a client and found that 19 percent of employees were still using their system’s default password–which was “PASSWORD.” When advised of this, the company implemented a policy to force workers to change their passwords to access the system. During a visit six months later, Aon discovered that 23 percnt of employees had their new passwords on notes stuck to their computers.

Hamm agreed that better intracompany coordination is essential. “If this is an issue that stays in your IT department, you’re probably not going to be around much longer,” he said.

Healey warned that risks change quickly and hackers have become sophisticated. “It used to be that those with intent didn’t have capabilities and those with capabilities didn’t have the intent; that has changed,” he said. “I think we’re coming up on the Internet’s most dangerous moment.” Click here to view the original article.

large product liability awards made comeback in 2014

February 19, 2015

By Margaret Cronin Fisk

Huge jury verdicts against companies over fatal flaws in their products made a comeback last year, which may foretell more bad news for carmakers with defective parts.

Absent for a decade, billion-dollar verdicts returned in product defect suits in 2014. The largest was for $23.6 billion in favor of the family of a smoker who died at 36. Coming in second was one for $9 billion to a New Yorker who linked his bladder cancer to a diabetes medication.

The re-emergance of huge verdicts comes at a bad time for the auto industry. It experienced a year of almost constant recalls, congressional hearings and scores of lawsuits against companies such as General Motors Co. and the air-bag maker Takata Corp.

“People now come into the jury room really suspicious, instead of wondering is this ambulance-chasing lawyer trying to squeeze money out of a company,” said Erik Gordon, a law and business professor at the University of Michigan in Ann Arbor. “Jurors now come in expecting to hear a story of corporate wrong-doing and are being very receptive to these stories.”

The biggest awards were for punitive damages, meant to punish companies for bad conduct and not to cover actual losses. One silver lining for the companies: based on past court rulings,it’s unlikely anything close to the initial verdict amounts will ever be paid.

Of the 10 largest punitive verdicts against corporations in U.S. history, none survived post-trial trimming by judges, according to Bloomberg data. The largest, $145 billion in a Florida tobacco class-action in 2000, was tossed out entirely on appeal.

Haunting Effect

Even so, that case continues to haunt the tobacco industry, as multiple findings on the companies’ blameworthiness are being used in individual cases, including the one that produced last year’s $23.6 billion award.

After being slashed, large punitive verdicts often have lingering effects, said attorney Victor Schwartz, who represents defendants in complex lawsuits.

“It can affect their business,” Schwartz said in a phone interview. “It can affect the reputation of the company. The stock can go down.”

Some effects become permanent, he said. “No one would name any product a Pinto again,” a reference to a Ford Motor Co.’s model linked to deaths from exploding fuel tanks.

Big verdicts attract more plaintiffs and raise the ceiling for settlement talks, said Gordon, the Michigan academic.

“When it’s knocked down, the story is on page 6” he said. “It’s the initial headline that attracts the attention.”

Mark Behrens, an appellate defense attorney, said the threat of punitive damages increases the risk to the companies he represents.

Settlement Impact

“Punitive damages are used as leverage by the plaintiffs’ lawyers, both as a tool to force a settlement before trial and after a verdict to inflate the value of the settlement,” he said.

The family of Michael Johnson Sr., a Florida laborer who had smoked since his early teens, was awarded $16.9 in actual damages and $23.6 billion in punitive damages by a jury in Pensacola, Florida

The verdict was cut to $16.9 million, the same amount as the jury’s compensatory verdict. The trial judge offered Reynolds the choice of paying or getting a new trial on punitive damages. Reynolds chose the new trial.

The company doesn’t consider any of the verdict justified, said Jeff Raborn, assistant general counsel for R.J. Reynolds.

We believe the entire verdict should be set aside,” Raborn said in an e-mailed statement.

In the drug company case, Terrence Allen and his wife sued Takeda Pharmaceutical Co. and Eli Lilly & Co., contending he developed cancer because of their diabetes drug Actos. The jury awarded them $1.5 million in compensatory damages and $9 billion in punitive damages.

Reduced Awards

The trial judge sliced Takeda’s punitive damages to $27.7 million and Lilly’s to $9.2 million.

The remaining judgment is still too high, a Takeda spokesman said in an e-mailed statement.

“We believe a damage award of any amount is not justified based on the evidence presented in this trial and have multiple grounds for appeal,” said Kenneth D. Greisman, general counsel of Takeda Pharmaceuticals U.S.A.

Lilly is also appealing.

“The evidence did not support claims that Actos caused the plaintiff’s bladder cancer,” Candace Johnson, a Lilly spokeswoman, said in an e-mail.

Switch Recalls

Amid this anti-company sentiment, GM has settled multiple death and injury claimsconnected to its 2014 ignition switch recalls, primarily through a program overseen by attorney Kenneth Feinberg that is an alternative to litigation.

The company still faces lawsuits throughout the U.S. by accident victims claiming product defects that aren’t part of the Feinberg process.

“The public is well aware of the poor choices GM made in the name of economy,” said Mark Lanier, who who won the $9 billion Actos verdict and represents GM accident victims. He said he’d take a GM case to a jury “right now in a heartbeat.”

The ninth-biggest verdict last year was against a car company, Hyundai Motor Co., over the deaths of two Montana teenagers, cousins Tanner and Trevor Olson, for which the families blamed a steering defect. It was the largest ever against that company.

Of a total award of $248 million, $240 million was for punitive damages.

Confidential Accord

The suit was settled on confidential terms, Jim Trainor, a Hyundai spokesman, said in an interview. The company didn’t admit any wrongdoing or concede any flaws in the vehicle, he said. John Bohyer, the Olsons’ lawyer, confirmed the settlement and declined to comment further.

The tobacco and Actos verdicts were the only ones for more than $1 billion in 2014.

The rest of the top five were against Trinity Industries for $525 million over allegedwithholding of information from the U.S. over changes to its highway guardrail system; Royal Philips NV for $466.7 million in a medical-device patent- infringement suit by Masimo Corp.; and Medtronic Inc., $393.6 million in an Edwards Lifesciences Corp. heart-valve device patent case. Link to original article.

media advisory: get insurance facts, figures and expert analysis as the third anniversary of superstorm sandy nears

October 21, 2015

By Insurance Information Institute

Reporters looking for statistics, analysis and interviews on the insurance implications of Sandy in preparation for the approaching third anniversary of the storm can contact the Insurance Information Institute.

Sandy made landfall near Atlantic City, New Jersey, on October 29, 2012, as a post-tropical cyclone. The storm caused an estimated $18.75 billion in insured property losses at the time ($19.3 billion in 2014 dollars), making it the third costliest natural disaster in U.S. history, exceeded only by hurricanes Katrina (2005) and Andrew (1992), according to ISO’s Property Claim Services (PCS).

Nearly 1.6 million Sandy insurance claims were filed across a total of 15 states and in the District of Columbia. The most significant damage occurred in New Jersey and New York. While there were more personal claims from Sandy—1,129,000 versus 193,000 for commercial claims—insured losses were greater among commercial policyholders (e.g., business interruption) at $8.9 billion versus $7.1 billion for personal claims (e.g., property damage, additional living expenses). Auto claims (258,000) accounted for $2.7 billion in losses.

The $18.75 billion insured property loss figure excludes the insured flood losses covered by the federal government’s National Flood Insurance Program (NFIP). The NFIP has to date paid out $7.94 billion in Sandy claims, a number that has been revised upward since the I.I.I. compiled its Sandy Fact File in October 2014.

To arrange a media interview with an insurance expert, contact the I.I.I.’s media department at 212-346-5550.

The I.I.I. also offers the following online resources on Sandy, hurricanes, disaster preparedness and insurance:

Articles

Facts and Statistics

Issues Updates

ADDITIONAL RESOURCES

Federal Alliance for Safe Homes (FLASH) Strengthening homes
FloodSmart.gov Official site of the NFIP
Insurance Council of New Jersey (ICNJ) NJ insurance information
Insurance Institute for Business & Home Safety (IBHS) Building science research
National Insurance Crime Bureau (NICB) Fighting fraud
New York Insurance Association (NYIA) NY insurance information

the scoop on recall insurance and listeria-linked ice cream

May 22, 2015

By Denise Johnson

While peanut butter and cantaloupe made big news in recent years, ice cream is now the latest item to be pulled off grocery store shelves due to foodborne-illness.

Brenham, Texas-based Blue Bell Creameries’ listeria-tainted ice cream has been linked to at least 10 illnesses and three deaths. Federal officials said the firm knew about a listeria problem back in 2013 in its Oklahoma plant but did not report it.

The company has voluntarily pulled all of its ice cream, frozen yogurt, sherbert and frozen snacks off store shelves in the 23 states in which is sells. Blue Bell has also announced plans to lay off 750 full-time and 700 part-time workers and also furlough another 1,400 employees due to the outbreak while it cleans up its plants and tries to get its manufacturing and sales back on track. They are the firm’s first layoffs in more than 100 years in business.

The company has agreed to implement stricter product testing and reporting procedures going forward.

Blue Bell hasn’t released estimates on what the recall will cost the company but the impact of voluntary recalls like the one undertaken by Blue Bell have implications for the company and its insurer, according to experts.

The effects can vary by company, situation and how a company responds to the crisis, said Bernie Steves, managing director of AON Risk Solutions Crisis Management Practice, and Michael McGaughey, a Los Angeles-based partner in the Insurance Coverage Group at Lowenstein Sandler.

According to these experts, manufacturers can mitigate the damage by being proactive.

“It’s getting out in front of the issue. Being honest with your customers, the other stakeholders, for that matter, your employees, your suppliers and everybody else that might be involved,” said Steves. “Depending on how well you do that, really dictates the impact of the recall.”

Proactive management, according to Steves, means being able to identify the specific product, the product location and the source of the contamination.

“Getting out in front of those things so that you’re able to assure your customers that you’re making products going forward in a safe manner,” said Steves. “It’s really what’s going to give your customers the confidence to continue to utilize your products.”

According to both experts, the majority of recalls are voluntary.

“The FDA [Food and Drug Administration], which regulates the matters on Blue Bell and for 80 percent of food products, actually just received the ability to order recalls through the Food Safety Modernization Act that was passed in 2011,” said Steves. “There have only been a couple of instances where the FDA came in and ordered the recall.”

While costly, voluntary recalls can actually help a company.

“I think it enhances the public image, in the sense that they’re being proactive…and responsible in light of an unfortunate incident as opposed to what perception may be out there if the FDA, for example, should react and the company be seen as not cooperative or not on board with issues of public safety and things of that nature,” said McGaughey.

The California attorney said that the FDA typically works with the company affected to issue a recall statement.

According to Steves, there have been some significant changes over the past several years in how investigative agencies enforce quality standards, testing and traceability. New regulations under the Food Safety Modernization Act require companies to have certain procedures in place. Typically, these include conduct hazard analysis capability and a critical control points plan along with testing and auditing procedures.

“Health inspectors, and even the FDA, will come in and do occasional audits from a food safety standpoint, a regulatory standpoint, to make sure that you’re actually doing the things that are required,” said Steves.

Advances in testing allow officials to identify specific strains of a contaminant, the Aon executive said.

“We’ve seen a real technological advancement in whole genome sequencing so that not only are you able to identify the strain of listeria or whatever the contaminant might happen to be, but you’re also able to look at that exact DNA of that listeria,” said Steves.

He explained that someone in New York might go to the doctor with a foodborne illness and the test results are sent to the Centers for Disease Control and Prevention. The CDC maintains an international database that tracks foodborne illnesses.

“They literally can link someone who is not feeling well after eating a meal in New York to the same DNA fingerprints of something that came from a drain in California,” Steves said.

Recall Policies

According to experts, most companies like Blue Bell have a commercial general liability and a recall policy. Recall policies generally provide coverage for the cost of a recall, loss of profits and reputational damage.

McGaughey said recall policies typically include a crisis management component within them.

“You are entitled, as the insured, to call upon crisis management firms. Usually, the policies will identify some select number of firms and/or individuals at those firms who can be contacted to handle crisis management in the event of a recall and those fees are covered by the insurance, assuming that the claim is covered in the end. There’s not even a need to get pre-approval from the insurance company,” said McGaughey.

Sometimes, companies can negotiate in advance with the insurer on which crisis management company they prefer to use.

Crisis consultants are also available on a pre-incident basis.

“They will make a portion of the premium available for the insured to utilize one of the consultants to do things like review your crisis management plans, review your auditing procedures for your vendors and for your own products for that matter. It really is a full risk management circle here where you’ve got your pre-incident assistance from the insurer, you’ve got your crisis management response available from the insurer, and you’ve got the financial safety net of the insurance in place,” said Steves.

Insurer Involvement

Insurance coverage for product recall or product contamination is risk management oriented, Steves said.

“By that I mean having the processes in place upfront to minimize the potential for contamination or recall. Doing everything you can to make safe products, even things like testing or checking your labels,” said Steves.

Insurers are involved in the onset of a new policy to make sure companies have vendor management, quality control, auditing and traceability procedures in place, he said. Traceability plans, Steves explained, allow companies to identify products and minimize the extent of a recall.

Insurers also look at whether companies have plans in place to pull back the recalled products as quickly and efficiently as possible as well as whether they can get good product back on the shelf, so business interruption is minimized, the Aon Risk Solutions managing director said.

Providing notice to an insurer is of utmost importance, said McGaughey.
“Some of these recall policies that I’ve seen and worked with in the past have a very short notice window. It can be a matter of days,” McGaughey said.

In addition to policy deadlines, insureds may face additional notification requirements under state guidelines.

Investigating and compiling documentation to support damages is the next step. This is generally handled internally, McGaughey said.

“The company will work internally to gather the records —certain things like the costs of recalling the product and actually destroying the product…are oftentimes finite. Definite costs that the company can say, ‘Here’s what we paid to have that stuff shipped back to us’ or ‘Here’s what we paid to destroy it.’ Lost profits as far as the value of the product itself,” said McGaughey.

Other aspects that may be recoverable under a recall policy include damage to reputation.

“Usually, a company would be served well by involving somebody from the outside. Not necessarily in compiling that information, but in identifying exactly what information is needed,” McGaughey said. “Then putting it in a format and a presentation that’s best suited for what the insurance company’s looking for.”

Additionally, he said insurers will often ask for samples of the product for testing to verify the contamination.

“You want to retain some of the product because you might need that for insurance purposes as well as for the third party claims,” said McGaughey.

Third Party Claims

Food manufacturers involved in recalls must also deal with third party liability claims.

“If there’s an allegation of bodily injury, it generally triggers a CGL [commercial general liability] policy. Then that carrier would be responsible for handling those claims and the defense and the indemnity for those claims,” McGaughey said.
The law partner said third party claims are important for food manufacturers to consider.

“Not only presenting the claim to the recall carrier but…you want to give notice to your CGL carrier as well, knowing that there may be claims coming,” he said.
Because third party claims can be expected for some time, McGaughey thinks it’s important for all parties involved to coordinate a strategy to handle the claims to resolution.

“I think it’s definitely worth sitting down…the company with the recalled product, the CGL carrier and defense counsel. Trying to work out a coordinated defense strategy. That is, whose defense counsel are going to be in these matters? Because it makes sense to have those matters handled by as few people as possible since they’ll get familiarity with the record,” said McGaughey.

There may be a reputational advantage and business reasons for wanting to address or settle some of these claims early on, he added.

“So that there’s not in fighting, for a lack of a better term, between them,” McGaughey said. “That would just risk potentially further damage to the reputation of the company.”

Who Pays for the Recall?

Typically the company on the hook financially for a recall is the company that manufactured the product, Steves said.

“Ultimately, they are going to be the ones that are first affected. Certainly, your ability to trace back where contamination may have occurred, if it’s a supplier who may have been at fault, there are ramifications depending on how well you’ve structured your supplier contract. You should have the ability to go back against a supplier or service provider who may have been the root cause of the contamination,” Steves said.

He emphasized the importance of supplier contracts.

“Frequently, a lot of these smaller companies that are maybe ingredient suppliers or co packers, they look at the immediate expense of the recall and the value of the products. But they don’t necessarily take into account the damages that they can cause their customers overall brand which obviously can be the biggest area of loss for these types of situations,” said Steves. “The recall expense, the value of the product that you’re going to destroy, that’s very much a finite type of loss. It’s the business interruption and how well that’s managed that’s going to dictate how well you come out of the situation.” Link to original article.

cyber liability risks

By Insurance Information Institute

In recent years, there have been an increasing number of costly computer hacking attacks against large companies, such as Target and Home Depot. But smaller companies face computer liability risks as well. Virtually all businesses use information technology (IT) in some way—to communicate via email, to provide information or services through a website, to store and use customer data and more. Your business can be held liable if certain data is compromised, not only by hacking attacks but even if a smartphone is lost or a laptop computer is stolen.

The risks of cyber liability are evolving rapidly, with new risks emerging as technology advances and new regulations are put in place. Insurance experts now consider the risk of cyber liability losses to exceed the risk of fraud or theft. In this tumultuous environment, your business can take several steps to limit risks, including purchasing cyber liability insurance.

What Are Your Cyber Liability Risks?

If your computer systems are hacked or customer, employee or partner data is otherwise lost, stolen or compromised, the costs of response and remediation can be significant. Your business may be exposed to the following costs:

Liability—You may be liable for costs incurred by customers and other third parties as a result of a cyber attack or other IT-related incident.
System Recovery—Repairing or replacing computer systems or lost data can result in significant costs. In addition, your company may not be able to remain operational while your system is down, resulting in further losses.
Notification Expenses—In several states, if your business stores customer data, you’re required to notify customers if a data breach has occurred or is even just suspected. This can be quite costly, especially if you have a large number of customers.
Regulatory Fines—Several federal and state regulations require businesses and organizations to protect consumer data. If a data breach results from your business’s failure to meet compliance requirements, you may incur substantial fines.
Class Action Lawsuits—Large-scale data breaches have led to class action lawsuits filed on behalf of customers whose data and privacy were compromised.

What Cyber Liability Insurance Covers

Some standard business insurance policies, such as a Business Owners Policy (BOP), may provide coverage for certain types of cyber incidents. For instance, if you lose electronic data as a result of a computer virus or hardware failure, your insurance may pay recovery or replacement costs. To extend coverage for a fuller range of cyber liability risks, you will need to purchase a stand-alone cyber liability policy, customized for your business. This type of policy can cover several types of risk, including:

Loss or corruption of data.
Business interruption.
Multiple types of liability.
Identity theft.
Cyber extortion.
Reputation recovery.

Steps to Reduce Cyber Liability Risks

Because computing technology changes rapidly, there is no absolutely sure-fire way to protect digital data and computer systems. In addition, technologies deemed to be highly secure can later develop vulnerabilities or be found to be vulnerable all along. For instance, websites worldwide used an encryption technology called OpenSSL for many years before the technology was discovered to be vulnerable to cyber attack. You may be able to limit your cyber liability risk by:

Installing, maintaining and updating security software and hardware.
Contracting with an IT security services vendor.
Using cloud computing services.
Developing, following and publicly posting a data privacy policy.
Regularly backing up data at a secure offsite location. Link to original article.

does my business need terrorism insurance?

By Insurance Information Institute

Terrorism insurance is offered separately or as a special addition—called an “endorsement” or “rider”—to your standard commercial property insurance policy. A standard business policy alone will not cover losses caused by terrorism.

Terrorism coverage is a public/private risk-sharing partnership that allows the federal government and the insurance industry to share losses in the event of a major terrorist attack. The Terrorism Risk Insurance Act (TRIA), which was enacted by Congress in November 2002, ensures that adequate resources are available for businesses to recover and rebuild if they are the victims of a terrorist attack. Under TRIA all property/casualty insurers in the U.S. are required to make terrorism coverage available.

Q. What is covered by terrorism insurance?

A. A commercial terrorism policy covers damaged or destroyed property—including buildings, equipment, furnishings and inventory. It may also cover losses associated with the interruption of your business. Terrorism insurance may also cover liability claims against your business associated with a terrorist attack.

Q. What’s excluded in a commercial terrorism insurance policy?

A. Depending on your state, a terrorism insurance policy may exclude coverage for fire following. Nuclear, biological, chemical and radiological (NBCR) attacks are also excluded, except in the life, health and workers compensation lines of insurance.

Cyber risks are also an emerging terrorist threat. It is possible that property damage or injuries to employees could be caused by a cyber-attack—for instance an attack that causes equipment to malfunction. On the other hand, most computer attacks are not violent and do not cause physical damage. In general, terrorism insurance is unlikely to cover a cyber-attack, and a small business concerned about this risk should consider purchasing separate cyber liability insurance.

Q. How does terrorism insurance work?

A. Losses are only covered by a terrorism insurance policy if the U.S. Department of the Treasury officially certifies an event as an act of terrorism. This requires that the act be violent and be driven by the desire of an individual or individuals to coerce U.S. civilians or government. No act shall be certified by the Secretary as an act of terrorism if property and casualty losses, in the aggregate, do not exceed $5 million. The act must also cause at least $100 million in damage to be considered a terrorist attack.

The definition of a certified act of terrorism has been expanded to cover both domestic and foreign acts of terrorism.

Factors to Consider When Deciding Whether to Buy Terrorism Insurance

About 60 percent of U.S. businesses have terrorism insurance. A few factors to consider when deciding whether or not to insure yourself against terrorism include:

Business Location—Rural and residential areas are less likely to be targeted by a terrorist attack. Commercial urban centers, as well as airports and train stations, have a higher risk for terrorist attack.
Cost—Premiums for terrorism coverage range from $19 to $49 per million of insured value, depending on the size of the company. The expense generally represents 3 to 5 percent of a company’s property insurance costs.
Type of Business—Certain industries—such as the energy sector—have a higher risk of being targeted for terrorist attacks. If your business is part of a high-risk industry, you may want to consider purchasing terrorism insurance. Link to original article.

liability system

September 2014

By Insurance Information Institute

Litigiousness has become a societal problem in the United States.

U.S. consumers pay directly for the frequency and high cost of going to court through higher liability insurance premiums because liability insurance rates reflect what insurance companies pay out for their policyholders' legal defense and any judgments against them. Consumers also pay indirectly in higher prices for goods and services since businesses pass on to consumers the expenses they incur in protecting themselves against lawsuits, including the cost of insurance.

Tort law is the basis for the U.S. liability system. It is the body of law governing negligence, intentional interference and other wrongful acts that result in injury or damage for which a civil action can be brought, with the exception of breach of contract, which is covered by contract law.

Liability insurance distributes the costs of the liability, or tort, system. The tort system reflects the values of society, which through the courts and the legislative process, decides which injuries should be compensated, in what circumstances and in what amounts.

Beginning in the 1980s, in an effort to reduce litigation costs, business groups and others mounted a campaign to reform tort law. Most reforms have taken place on the state level, and during the last decade all but a handful of states passed significant tort law reforms. However, some have been overturned by the courts.

RECENT DEVELOPMENTS

Bad Faith Lawsuits: An August 2014 Insurance Research Council (IRC) study suggests that third-party bad faith lawsuits may have resulted in more than $800 million in additional auto liability claim payments in 2013, or an extra $79 in claims costs for every insured vehicle in the state. The IRC report, “Third-Party Bad Faith in Florida’s Auto Insurance System,” says that bodily injury claim frequency in Florida increased dramatically from 1995 to 2013 and that the average claim payment per vehicle jumped by 68 percent during that period. Other large no-fault states that do not allow third-party bad-faith lawsuits against insurers, such as New Jersey, New York and Pennsylvania, saw significant declines in liability claim frequency and much smaller increases or even declines in claim payments per insured vehicle.
Over the past few years, a number of states have considered bad faith proposals. Bad-faith lawsuits allege bad faith in the settlement of a claim. Bills were introduced in Oregon and New Jersey in 2013. Several states have enacted laws that allow first-party bad-faith lawsuits against insurers, including Washington (2007), Maryland (2007) and Minnesota (2008), and many additional states and the District of Columbia considered such legislation. (A first-party claim is one filed by the policyholder under the policyholder’s insurance policy, see also Background section.)
According to a study by the Insurance Research Council (IRC), “The Impact of Third-Party Bad-Faith Reforms on Automobile Liability Costs in West Virginia,” published in October 2011, reforms adopted by the West Virginia State Legislature in 2005 reduced insurance costs by about $200 million over the five-year period following the reforms’ enactment. The legislation eliminated the right of third-party insurance claimants to file lawsuits against the other person’s insurance company when they believed the company had treated them unfairly. Instead of turning to the courts, dissatisfied claimants can now file their complaints with the insurance commissioner, who is responsible for investigating whether an insurer has violated the state’s Unfair Trade Practices Act and imposing the appropriate fines and penalties.
Another IRC study published in March 2011 entitled “The Impact of First-Party Bad-Faith Litigation on Key Insurance Trends in Washington State” found a significant surge in homeowners insurance claim payments from 2006 to 2009, which it attributes to Washington’s enactment of the Insurance Fair Conduct Act in December 2007. The Act, R-67, simplified the process for dissatisfied claimants to file bad-faith lawsuits against insurers so that Washington State now has the lowest standard in the country for the filing of first-party bad faith lawsuits. According to the study’s findings, the measure could have caused as much as $190 million in higher claim costs for the years 2008 and 2009. Although average claim payments increased in other states too, the average increase in Washington was 17 percentage points greater than in the control group states.
Under R-67, insurers can be sued for three times the amount of damages, plus attorneys’ fees. The threat of costly litigation and treble damages pushes insurers to settle more questionable claims without a full investigation and to settle for higher amounts to reduce the risk of punitive damages.
Higher Caps on Noneconomic Damages Awards. In Kansas the cap on noneconomic damages in personal injury actions has been increased from $250,000 to $350,000 in three increments over the next eight years, reaching the final figure on or after July 1, 2022. The law, SB 311, took effect in July 2014. Some of the impetus for the increase was due to comments made by members of the state’s Supreme Court in October 2012, when it upheld the law limiting noneconomic damages to $250,000 and the right of the legislature to impose limits but suggested that a future challenge might be successful since the amount had not been raised since the cap was enacted in 1988. SB 311 also amended statutes on expert witness testimony and the qualifications of experts to bring them in line with federal Daubert standards, see Background section on Scientific Evidence.
Medical Malpractice Ballot Initiative in California: An initiative that would raise the cap on medical malpractice noneconomic damage awards will be on the ballot in California in November. The current cap of $250,000 has been in effect since 1975. The measure’s formal title is “Drug and Alcohol Testing for Doctors,” referring to a provision that would require random testing of physicians, but the real focus of the initiative is on the pain and suffering (noneconomic damages) part of the question. The limit on noneconomic damages, which does not apply to nonmedical malpractice cases, has been credited with helping to stabilize the price of medical malpractice insurance premiums after a period in the mid-1970s when doctors threatened to leave the state because of soaring rates. The initiative would raise the current $250,000 cap to $1.1 million to account for inflation since the limit was imposed. Opponents say that the increase will push up the cost of medical malpractice coverage.
Caps Upheld: Mississippi’s $1 million cap on noneconomic damages was upheld at the end of February 2013 in an auto accident case where the jury did not specify how much of the award was for economic damages and how much for noneconomic damages, such as pain and suffering.
Caps Overturned: In a ruling in June 2013 the Oklahoma State Supreme Court found that the state’s 2009 Tort Reform Act was unconstitutional in that it violated the state’s single subject rule. The law included some 90 different reforms.
Shareholder Lawsuits: Total settlement dollars for securities class-actions rose 46 percent in 2013, and the number of settlements also increased, according to Cornerstone Research’s latest study. Six mega-settlements (defined as those above $100 million) accounted for 84 percent of all settlement dollars, the second highest proportion in the past decade, researchers said. The largest settlements were associated with either pharmaceutical companies or financial institutions involved in the subprime credit crisis allegations, Cornerstone said. The 2013 median estimated damages, a key measure of investor losses, declined 48 percent from 2012 and most likely contributed to the substantially lower median settlement amount of $6.5 million in 2013.
According to NERA Economic Consulting’s “Recent Trends in Securities Class Action Litigation: 2013 Full Year Review” report, released in January 2014, the number of securities class-action filings rose by 10 percent to 234 from 213, compared with the average over the past five years of 224. Average amounts for “usual” settlements (those under $1 billion and excluding two specific classes of settlements) broke earlier records, hitting $55 million, an increase of 53 percent over 2012 and a 31 percent increase over the previous high in 2009. The median settlement was $9.1 million, a 26 percent decrease from 2012. NERA says large settlements were larger, driving the average settlement amount to its record high, but there were numerous small settlements, which pushed down the median amount. Nine settlements exceeded $100 million.

Reducing Medical Malpractice Lawsuits: A number of proposals are being tried in an effort to reduce the cost of the medical malpractice system. In March 2013 Oregon adopted legislation that would set up a system of out-of-court mediation to try to avoid lengthy and costly lawsuits. In Massachusetts healthcare professionals can now disclose unanticipated adverse outcome to patients, apologize and offer fair compensation. In New Hampshire a healthcare provider or its insurer can make an early settlement offer to an injured patient considering a medical malpractice lawsuit.
New York State received a $3 million grant in 2010 from the Department of Health and Human Services (HHS) to conduct a three-year pilot program aimed at promoting patient safety and achieving rapid settlement of medical malpractice cases wherever possible, thus reducing “transaction costs,” which are estimated to make up about 60 percent of total costs.
Five New York City hospitals participated in the study: four initiated safety initiatives in obstetrics and one in general surgery. The grant called for each hospital to establish an early disclosure program through which patients are notified of medical errors and offered compensation and for the state to set up a special health court with specially trained judges to handle negotiations in cases that are not settled and lead to the filing of lawsuits. Of the 20 programs funded by HHS under a federal program to encourage states to design demonstration projects that would lead to reduced costs, New York’s was the only one awarded to a court system. The program which went into effect in 2011, is based on a model created by a New York City judge that is used for all medical malpractice cases involving the Health and Hospital Corporation, which runs New York City’s municipal hospitals. The “judge-directed negotiations” program has produced savings of up to $50 million annually in defense costs and indemnity payments.

BACKGROUND

Liability insurance pays for amounts paid to the claimant as compensation for injury and for the costs of defending the policyholder in court. The American civil liability system cost $25.7 billion in 2008 in direct costs (the last year for which there are data) and many billions more in indirect costs. Tort costs accounted for about 1.8 percent of the nation’s gross domestic product, down from a high of about 2.2 percent in the years 2002-2004 but up from 0.6 percent in 1950, according to data from Towers Perrin, an actuarial consulting firm. Looking at the data another way, tort costs equaled $838 per U.S. citizen in 2008 compared with $12 in 1950.

An earlier Tillinghast study suggests that the tort system is highly inefficient, returning less than 50 cents on the dollar to claimants. Breaking down costs, Tillinghast found that an estimated 22 cents go to litigants for their actual (economic) losses and 24 cents to compensate for pain and suffering (noneconomic losses). Of the remaining 54 cents, 19 cents pays for claimants; lawyers, 14 cents for defense costs and 21 cents for administrative costs associated with the settlement of tort claims.

There are signs that we have reached the limit of what people believe we can afford to pay for compensation, not only in terms of the number and cost of awards but also in terms of the overall impact of excessive litigation. Many legal experts believe the American civil justice system is in need of reform. Such critics cite the number of lawsuits, the size of some awards and the rise over time in the number of class action lawsuits.

Lawsuits represent only a small portion of total liability claims, however. Only 2 percent of such claims are settled by verdict and only one-third of claims become lawsuits. Nevertheless, lawsuit verdicts are important because they influence the damage amount sought by plaintiffs and the size of out of court settlements.

The law is constantly changing in response to societal needs and perceptions of justice. New legal theories or modifications of existing tort law are continually being developed. Fifty years ago reformers worked to rectify what they believed was a bias in the tort system toward defendants and business interests, making it easier for plaintiffs to receive compensation for their injuries. Now reformers are working to reduce what appears to many to be abuse of the tort system by those representing plaintiffs. Supporters of tort reform were successful in the 1980s and early 1990s in getting major legislation enacted in many states. They also set in motion a more conservative attitude toward jury awards among the public.

Changes in Legal Doctrine and Other Trends: In most states prior to the 1960s, an injured person would be compensated only if the defendant was wholly responsible for the plaintiff’s injuries. As societal values changed, the doctrine of contributory negligence, under which plaintiff’s’ claims would be denied if they contributed to the injury through their own actions, gave way to the doctrine of comparative negligence, which requires damages to be apportioned based on the degree of fault. This change gradually occurred in all but a handful of states.

There are two major categories of comparative negligence: pure and modified. Under the pure form, damages are reduced by the amount of the plaintiff’s negligence. The modified form is divided into three types: the "less than" rule or 49 percent, i.e., plaintiffs may receive damages if their negligence is not as great as the defendant’s; the "not greater than" rule or 50 percent system, i.e., recovery is barred if the plaintiff’s negligence is greater than the defendant’s; and the "slight versus gross" system, where the plaintiff may receive damages if the plaintiff’s negligence was slight in comparison to the defendant’s negligence.

Changes in the area of municipal liability brought about a large increase in the number of suits. Prior to the 1960s, in all but a few states public entities were not liable for civil wrongs and were protected against personal injury actions by a common law doctrine known as sovereign or governmental immunity. However, as state and local governments began to provide a growing array of services that were also available in the private sector, from paving roads to managing recreational programs, the idea that governments were not subject to the same legal standards as private citizens and corporations carrying out the same activities offended the public’s sense of justice. Today government entities can be sued for false arrest, failure to arrest and failure to meet certain standards of care in almost every aspect of governmental activity.

Class Actions: Class actions settle in a single lawsuit the rights and liabilities of people who have similar claims. In order for claims to be consolidated in a single suit, the court must certify that the case meets Federal Rule of Civil Procedure 23, which sets out the requirements for claims to be eligible for class-action status.

Several factors distinguish class actions from other kinds of lawsuits such as automobile accident cases. In class actions, there are a large numbers of claimants who have suffered a common set of injuries incurred in the same or similar circumstances and most plaintiffs are represented by a small number of law firms, each of which may represent hundreds or thousands of claimants.

There are many different types of class actions, including shareholder and civil rights suits. In the 1980s and 1990s, lawyers began to use the class-action lawsuit to settle what became known as "mass torts"—personal injury cases involving medical devices, toxic substances such as asbestos, and new pharmaceutical products where many people sustained injuries from the same product. Although class actions have been certified in many personal injury cases, the lawyers and judges who wrote the federal class-action rule adopted in 1966 said that a "mass accident" is ordinarily not appropriate for a class action because of the conflicts among state laws and the differences in the claimants’ injuries. Nevertheless, they said, a class action may be brought if the legal and factual issues in common outweigh the differences. As a practical matter, some judges certify mass torts because the individual cases would overwhelm the courts.

Although this kind of litigation is not new, the number of class actions appears to have grown in recent years. It is difficult to ascertain the number of cases because state courts, where the majority are filed, publish little data on this subject. From the viewpoint of the claimant, class actions have some advantages. First, they prevent the defendant’s assets from being depleted by the first judgment so that little remains for any subsequent claimant. Second, they allow a group of injured citizens to obtain redress without incurring huge legal fees. However, some public policy observers believe that the publicity surrounding class actions is beginning to lead to abuse of the legal system. At their worst, critics say, class actions can amount to legalized blackmail for defendants; a sell-out for claimants, who may receive little compensation for their injuries; and a get-rich scheme for lawyers who receive a percentage of the total settlement.

Restoring the Balance between Plaintiffs and Defendants: Over time there have been swings in the balance between plaintiffs’ and defendant’s rights. It became increasingly apparent in the 1980s that in the attempt to make up for past imbalances the law had swung too far in favor of plaintiffs. For example, in most states, under the doctrine of joint and several liability, if two or more persons have a part in causing a plaintiff’s injury, they are joint wrongdoers and are jointly and severally liable. They are, therefore, responsible for the whole amount a plaintiff may recover for his or her injuries, regardless of each defendant’s share of fault. The change to comparative negligence in the 1960s and 1970s greatly affected the equity of the joint and several liability rule. It meant that a plaintiff who was 45 percent at fault may collect the whole award payment from a defendant much less to blame for the accident than the plaintiff himself. In such cases, defendants with "deep pockets"—corporations and municipalities seen as having an almost unlimited power to raise money through taxes—often ended up footing the bill. In the mid-1980s states began to modify this rule to make the tort system more equitable. Some abolished joint and several liability altogether, making each party responsible for its share of blame. Some abolished it for defendants 50 percent or less liable or restricted its application.

Members of Congress have also taken up tort reform fights in an attempt to create more uniform liability laws and extend successful measures to all jurisdictions. Over the years pro-reform lawmakers have pushed for products liability, class-action, medical malpractice liability and asbestos reform, among others.

There is also the issue of punitive damages. People who bring suits may ask for punitive damages in addition to compensation. Intended to "punish" a defendant’s outrageous conduct, punitive damages can amount to millions of dollars, although many initially large awards are significantly reduced on appeal. Many believe that the prospect of receiving a big "bonus" brings into court cases that otherwise could be settled without a judge or jury, especially where the dispute is relatively minor. Some argue that if serious wrongs have been committed as opposed to common negligence, wrongdoers should be punished by criminal, not civil, courts. Others believe that punitive damages belong within the domain of civil law but that the fully compensated winning party should not be the beneficiary (the punitive award should go to the state or to charity) and the size of punitive damages should bear some relationship to the award for compensatory damages. (Since the 1980s a small minority of states has passed legislation that sets aside a percentage of punitive damage awards for the state, but in a few states these laws have been repealed.) And in products liability suits, a single defendant should not be "punished" over and over again for the same defect each time a new case goes to trial.

One problem caused by multiple punitive damage awards is that the first few plaintiffs to bring suit may receive large awards, leaving the defendant with barely sufficient funds to pay subsequent plaintiffs’ out-of-pocket expenses. Fear of using up all available funds to pay punitive damage awards was one of the reasons Manville Corporation, the asbestos manufacturer; A.H. Robins, maker of the Dalkon Shield contraceptive device; and Dow Corning, maker of silicone breast implants, filed for bankruptcy.

The issue of punitive damages and their constitutionality has been brought before the U.S. Supreme Court. In the first case designed to guide lower courts on the imposition of punitive damage awards, Pacific Mutual Life Insurance Co. v. Haslip in 1991, the court ruled that the punitive damages awarded did not violate due process. The court stated that the judicial procedures, designed to ensure that punitive damages were not egregiously out of proportion to compensatory damages, were followed in the case. Punitive damages were four times greater than compensatory damages, which the court acknowledged were high, but they did not cross the line into the area of constitutional impropriety, it said.

More recently, the Court moved closer to determining when punitive damages may be excessive in a State Farm case involving a bad faith award. The ruling was handed down in April 2003. However, the high court has yet to rule in a case that involves physical harm. In the State Farm case, State Farm v. Campbell, the high court overturned a $145 million punitive damage award (145 times the compensatory damage verdict) imposed by a Utah jury. The court ruled that juries should generally not be allowed to consider a defendant’s wealth when setting a punitive damage award. This was the first time the court had addressed this common but controversial practice directly in a majority opinion. The court also characterized the ratio of the compensatory damages to the punitive damages as unreasonable. However, when the Utah court again reviewed the case, it lowered the punitive damage award to $9 million, an amount that still exceeds the guidelines issued by the nation’s highest court. The U.S Supreme Court declined to review its decision, letting the Utah Supreme Court ruling stand.

In State Farm v. Campbell, the high court elaborated on an earlier 1996 decision in an Alabama case, BMW of North America, Inc. v. Gore, which set out three guidelines to determine when punitive damage awards are constitutional. Justice John Paul Stevens, writing for the majority, described the three-part fairness test: the degree of reprehensibility of the defendant’s conduct; the ratio of punitive to compensatory damages or actual harm to the plaintiff; and the difference between the award and comparable penalties under the law. Applying these precepts to the BMW case, Justice Stevens said that BMW had not acted in bad faith and had caused only minor economic loss (as opposed to personal injury); that the ratio of punitive damages to actual harm was 500 to 1; and that under Alabama’s Deceptive Trade Practices Act, the defendant would have paid a $2,000 penalty, a tiny fraction of the award, and lesser amounts in some other states.

While punitive damages are awarded nationally to a small percentage of plaintiffs, about 4 percent according to a 2002 study by Cornell University professors, in some jurisdictions the percentage of punitive damage awards can be exceedingly high. A 1997 study conducted by Cornell University and the National Center for State Courts found that in one Georgia court punitive damages were awarded in 25.8 percent of cases in which plaintiffs prevailed. Because without clear limits there can be dramatic exceptions to the norm, fear of an irrational punitive damages award still influences settlements, tort reform advocates note.

Scientific Evidence: The U.S. Supreme Court ruled in 1993 on the admissibility of scientific theories as evidence in federal courts. The decision in the case, Daubert v. Merrell Dow Pharmaceuticals Inc., focused on the use of "junk science" in personal injury trials. A federal district court upheld a ruling that the evidence the plaintiffs used was "sub-standard"—it had never been published, nor had it gone through a "normal peer-review process." The federal court ruled that such a process was necessary to prove the general acceptance rule of evidence.

In the past, federal courts had relied on two measures of acceptancy for scientific evidence. The first, used in this case, is known as the Frye rule, after a 1923 case in which the judge refused to allow the results of an early lie detector on the grounds that the results of lie detector tests were not generally accepted by scientists and others in the field as reliable. A less stringent rule was adopted in 1975 by Congress as one of the Federal Rules of Evidence. That rule (702) says that experts who are qualified in their field may present their ideas as evidence to a jury, even if their ideas do not represent a consensus of their colleagues, as long as the evidence is relevant to the case and may help a jury to reach a verdict.

In a unanimous decision, the Supreme Court said that the newer rule should be used to determine the admissibility of evidence. In addition, the high court said that federal judges must act as gatekeepers, excluding testimony that is not relevant or reliable. Writing for the majority, Justice Harry A. Blackmun said that federal judges possess the capacity to determine whether the reasoning or methodology underlying the testimony is scientifically valid and to decide what evidence the jury should hear.

In December 1997, further defining its 1993 decision in Daubert vs. Dow, the U.S. Supreme Court ruled that trial judges may not only act as gatekeepers to ensure scientific testimony is relevant and reliable, but also that their decisions should be upheld unless found to be manifestly erroneous. Then, in March 1999, broadening the scope of the 1993 ruling, the high court said in the case of Kumho Tire Co. v. Carmichael that a judge’s gate keeping powers were not limited to scientific matters. The Kumho case, which involved the failure of a minivan tire on a cross country trip, centered on the testimony of a mechanical engineer who had worked in the field of tire design for 10 years.

Gun liability: The shootings at the Sandy Hook primary school in Newtown, Connecticut, in 2012 raised the level of debate about gun control and how to reduce the number of gun-related deaths. A number of states considered mandatory liability insurance for gun owners following the shootings, but currently no primary insurance company offers gun liability insurance. Excess personal liability coverage for gun owners is available through some firearms associations.

Advocates of mandatory liability insurance believe that requiring the coverage would create an incentive for gun owners to consider safety measures such as safety locks or to purchase less powerful weapons. But accidental deaths represent just a small fraction of gun-related fatalities. Insurance generally covers accidents and unintentional harm. No insurer offers coverage for illegal acts, which make up the bulk of the recent incidents that are spurring gun control debates.

Growth in Delays: Compounding the problem of growth in the volume of lawsuits is growth in the time it takes to move a case through the trial process, resulting in backlog and delay. One avenue being explored to lessen delay is known as alternative dispute resolution (ADR), which includes arbitration, where disputants agree to be bound by the decision of an independent third party, and mediation, where a third party is used to try to arrange a settlement between the contending parties. ADR is being used successfully by many insurance companies to resolve disagreements among parties to auto accidents and by many businesses although it has yet to gain universal acceptance. Property insurers may also use ADR to resolve disagreements between claimants and their insurers about catastrophe damage claims. Meanwhile, both lawyers and organizations that use ADR are investigating ways of qualifying mediators and setting other guidelines to govern the legal process, including class action suits.

In 2013 the nation’s largest arbitration provider, the nonprofit Arbitration Forums, resolved more than 533,000 inter-insurance disputes, valued at $2.4 billion. The organization’s arbitration services save about $700 million annually in litigation costs. Disputes leading to arbitration typically arise when insurance or self-insured companies believe their policyholders or employees are not at fault or due to disagreement over the percentage of liability or the amount of damages. More than 85 percent of these disputes involve auto collisions.

State Reform Measures: The large number and size of awards, the belief that the pendulum has swung too far in favor of plaintiffs and the realization that the costs of the civil justice system are borne by individuals in the form of higher insurance premiums, directly or indirectly, has led to a groundswell of support for civil justice reforms. Tort reform advocates believe changes are necessary in four key areas to help restore fairness to the civil justice system: modification of the joint and several liability rule, revision of the collateral source rule, a cap on noneconomic damages, restrictions on punitive damage awards and reinstatement of the state-of-the-art defense. Since the tort reform effort began in earnest in the mid-1980s, hundreds of reform measures have been passed, although some have been challenged and some overturned. Reform measures may completely abolish a rule or modify it by limiting its application.

The collateral source rule refers to a rule of evidence that bars the introduction of any information indicating a person has been compensated or reimbursed by any source other than the defendant. Approaches taken by modifying legislation include permitting consideration of compensation or payments received from some or all collateral sources and requiring that any award be offset by the amount of collateral source payments.

The concept of capping noneconomic damages has been endorsed by many states. In some states, laws now limit the liability of defendants in liability suits in one of several ways: by limiting recovery of a particular type of damages (usually noneconomic damages, such as pain and suffering); by limiting the total amount of damages recoverable; or by placing an absolute cap on liability, as in wrongful death cases. Reform measures may apply to all tort suits or only to specific types, such as medical malpractice.

Originally designed to punish defendants who showed a wanton disregard for safety, punitive damage awards no longer are limited to such cases and may substantially exceed the amount of compensatory damages awarded. More than half the states have passed laws that limit the imposition of such damages. Reform measures may require punitive damage awards to be paid to the state; set limits on the amount that may be awarded in total or relative to compensatory damages; limit the type of case in which they may be awarded; or require hearings to establish a case for punitive damages before they may be sought in court. Some states have never had provisions for punitive damages.

Bad Faith: Over the past few years there has been an increase in so-called “bad faith” legislation introduced states legislatures. Bad faith is a legal term used to denote the kind of complaint that may be filed against an insurance company for alleged unfair claim settling practices.

All states have laws that give the insurance commissioner power to regulate unfair claims settlement practices, such unreasonable denials or delays in settling claims. Regulations are based on the Unfair Claims Settlement Practices Model Act created by the National Association of Insurance Commissioners in the 1990s. Insurers that violate state laws based on the act can be fined or have their licenses revoked. In cases of egregious bad faith, punitive damages may be awarded against the insurer, enabling the plaintiff to recover an amount larger than the face value of the insurance policy.

There are no provisions in the act for a tort lawsuit to be filed directly against an insurance company either by a first-party (a policyholder who has a property insurance claim) or by a third-party claimant (an individual who is filing a liability claim against the policyholder). However, over time, some states have modified their versions of the Model Act to allow first-party lawsuits and expanded the act’s provisions in other ways. The bad faith legislation introduced in various states would expand existing law. Depending on the state, such legislation would to allow third-party claimants to file lawsuits against an insurer, extend definitions of unreasonable settlement practices to very specific and narrow situations or enable lawsuits to be filed for a single infraction, rather than for a pattern of questionable business practices. Insurers support consumer protections but fear that the expansion of existing regulations being sought in some states will lead to higher insurance premiums. Companies may be pushed into settling claims, even those that may be frivolous or fraudulent, under the threat of lawsuits for failure to deal with claimants in good faith. Link to original article.

TARGET'S CYBER INSURANCE SOFTENS BLOW OF MASSIVE CREDIT BREACH

February 26, 2014

By Dhanya Skariachan and Jim Finkle

Target Corp. shares made strong gains after it reassured investors that customers were beginning to return to its U.S. stores, suggesting that the impact of a massive data breach may not be as severe as some had feared.

The third-largest U.S. retailer said on Wednesday that customer traffic had started to improve this year after falling significantly at the end of the holidays when news of the cyber attack and theft of payment card data spooked shoppers.

Chief Financial Officer John Mulligan said on a conference call he expected first-quarter sales at its established U.S. stores to be flat to down 2 percent and so far in February, they have been running within that range and nearly flat to last year.

Target shares, which had fallen 11 percent since news of the breach broke before Wednesday, were up 6.8 percent at $60.37, their highest level for almost six weeks.

It was the first time the Minneapolis-based chain had faced Wall Street since the breach, which led to the theft of about 40 million credit and debit card records and 70 million other records with information such as addresses and phone numbers of shoppers compromised.

Earlier on Wednesday, Target warned that costs tied to the cyber attack could hurt its results in the first quarter and beyond.

Still, its shares rose as its full-year outlook was better than some investors had expected. Mulligan said on the call that the outlook did not include potential additional costs related to the data breach.

The retailer now sees 2014 buyback capacity at $1 billion to $2 billion as it sets aside money to cope with the breach and tries to stay away from borrowing more to preserve its credit rating. It had originally planned to buy back up to $4 billion of shares this year.

Target reported a 46 percent drop in net profit in the crucial holiday quarter and reported $61 million in costs related to the breach, much of which was covered by insurance. It did not provide an estimate on future expenses related to the cyber attack, though it said they “may have a material adverse effect” on results of operations through the end of the current year and beyond.

“It is going to take some time for this to heal,” said Sean Naughton of Piper Jaffray, who estimates that transactions were down “in the high single digits” in the weeks after the breach was disclosed.

Target said it sees first-quarter profit of 60 cents to 75 cents, excluding expenses related to the data breach and other items. Analysts expect the company to report quarterly profit of 85 cents, according to Thomson Reuters I/B/E/S. For the full year, Target sees earnings of $3.85 to $4.15 a share on that basis, compared with the analyst forecast of $4.15 per share.

Naughton said that Target’s reputation for having a top-rate shopping experience had been tarnished by the fact that many customers have either had to have payment cards replaced or find themselves checking their monthly statements more closely, giving them a negative association with the retailer.

He noted that Target posted a 5.5 percent drop in transaction count during the quarter, the worst he had ever seen, even steeper than the 4.8 percent drop reported when the United States was in the midst of a financial crisis in the fourth quarter of 2008.

Sales fell 3.8 percent to $21.52 billion in the fourth quarter, missing the already lowered estimate of $22.37 billion, according to Thomson Reuters I/B/E/S. Sales at U.S. stores open at least a year, fell 2.5 percent.

The data breach “took the wind out of Target’s sails – and unfortunately sales,” said Sandy Skrovan, U.S. Research Director at Planet Retail.

Net earnings fell to $520 million, or 81 cents a share in the three months that ended on Feb 1, from $961 million, or $1.47 a share, a year earlier. Excluding its losses in Canada and a host of items, it earned $1.30 a share. That was at the high end of its lowered forecast from January.

The retailer had already lowered expectations for the fourth quarter. News of the breach has hurt its reputation and stock, and made many on Wall Street take down their profit and sales estimates on Target.

THE BREACH EFFECT

Target said of the $61 million in expenses related to the breach during the quarter, $44 million were offset by an insurance payment, bringing the impact to $17 million.

Mark Rasch, a former cyber crimes prosecutor who worked on some of the biggest U.S. payment card breach cases, said that it was too early to estimate how big the bill would be, but it would certainly be in the hundreds of millions of dollars and could top $1 billion. “We know it is going to be big. We just don’t know how big,” he said.

Target has declined to discuss exactly what sorts of costs its cyber insurance will cover or identify its insurers.

Insurers offer cyber policies that cover costs for items such as investigating breaches and repairing networks, compensating credit card issuers for fraudulent activity, fighting lawsuits and responding to regulatory probes.

Target said breach-related expenses may include costs for reissuing cards, lawsuits, government probes and enforcement proceedings, legal expenses, investigative and consulting fees, and capital investments. Click here to view the original article.

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