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March 1, 2016 By Julian

Directors and Officers Insurance

PROTECTING YOUR BUSINESS FROM LIABILITY ISSUES

While business insurance policies by definition provide coverage for the business itself, individual company officers may still be personally exposed to financial losses resulting from a lawsuit. To protect your company’s leadership, you may want to consider purchasing directors and officers (D&O) liability insurance.

What D&O Covers

Directors and officers is a type of liability insurance that covers individuals for claims made against them while serving on a board of directors and/or as an officer. This type of policy can be written to cover directors and officers of for-profit businesses, privately held firms, not-for-profit organizations and educational institutions. There are several elements—called “Sides”—to a D&O policy, including:

  • Side A—Protects a corporation’s directors and officers when the company cannot indemnify the individuals.
  • Side B—Reimburses the organization when it indemnifies the individuals, thus protecting the company’s balance sheet
  • Side C—Also known as “entity coverage,” this eliminates disputes of coverage allocation when both the directors and officers and the insured organization are named as co-defendants in a securities lawsuit.

A wide range of claims against a business have the potential to target company leadership for responsibility—and liability. Business leaders can be held responsible for a company’s failure to comply with regulations and to provide a safe and secure workplace. In addition, if a company is found liable for losses because of operational failures and mismanagement, directors and officers may be exposed to liability as well. The types of claims that may target company leadership individually as well as the company itself typically include:

  • Shareholder suits over company or stock performance.
  • Creditor or investor suits over mismanagement or dereliction of fiduciary duties.
  • Misrepresentation in a prospectus.
  • Decisions exceeding the authority granted to a company officer.
  • Failure to comply with regulations or laws.
  • Employment practices and HR issues.
  • Pollution and other regulatory claims.
  • Cyber liability.

What’s Excluded?

Standard exclusions in a D&O policy typically include:

  • Fraud.
  • Personal profiting.
  • Accounting of profits, and other illegal compensation exclusions.
  • Pending and prior litigation.
  • Prior (late) claim notice.
  • Bodily injury/property damage.
  • Insured versus insured claims.
  • ERISA.

The Added Value of Protecting Company Leaders

Aside from paying for claims against company leadership, there are several other benefits to carrying directors and officers liability insurance, including a company’s ability to:

  • Retain Strong Leaders—Many potential directors and officers will be reluctant to join your business if they are exposed to personal liability. D&O liability insurance helps address this issue.
  • Attract Investment—Venture capital and private equity firms often require companies to have D&O coverage before they make an investment.
  • Cover Legal Fees—Even if directors and officers are exonerated of wrongdoing, your business may incur substantial legal fees in responding to a lawsuit against your leadership. If you have a D&O policy, your company’s legal fees will likely be covered.

There are several types of D&O policies, defined by what liabilities, legal costs and other exposures are covered. You should select coverage based on risks and how your business is organized. Your company’s bylaws or articles of incorporation may provide certain protections—or indemnification—for directors and officers. You should seek guidance from your insurance professional about this somewhat complex, technical type of insurance.

Source: U.S. Department of Transportation, “Director’s and Officers Insurance” http://www.iii.org/ website. Accessed March 1, 2016. http://www.iii.org/article/directors-and-officers-insurance

© Copyright 2016. All rights reserved. This content is strictly for informational purposes and although experts have prepared it, the reader should not substitute this information for professional insurance advice. If you have any questions, please consult your insurance professional before acting on any information presented. Read more.

Filed Under: Commercial, D&O/E&O, Specialty, Theme 145

March 1, 2016 By Julian

Product Liability Insurance

People_HappyKidsPRODUCT LIABILITY INSURANCE

Product liability insurance protects the manufacturer, distributor or seller of a product from legal liability resulting from a defective condition that caused personal injury or damage associated with the use of the product. Product recall insurance, a specialty product designed to cover the costs associated with recalls, is also available from some insurers.

According to a February 2015 report from the advocacy group Kids in Danger, recalls of children’s products declined 34 percent in 2014 to 75, the lowest number in the 14 years of data collected by the organization. In 2014 there were 338 incidents reported prior to recall of the 75 children’s products, for an average of 5 incidents per recalled product.  The 2014 average represents an improvement from 2013, when the average was 14 incidents per recalled product. Injuries related to the recalls were down 85 percent, and deaths fell from 11 in 2013 to three in 2014. Children’s product recalls in 2014 totaled almost 17 million units.

PRODUCT LIABILITY INSURANCE, 2005-2014

($000)

Year Net premiums written (1) Annual percent change Combined ratio (2) Annual point change (3)
2005 $3,546,009 4.2% 131.1 -21.3 pts.
2006 3,621,671 2.1 77.8 -53.3
2007 3,265,035 -9.8 99.8 22.0
2008 2,777,587 -14.9 124.0 24.2
2009 2,365,681 -14.8 124.0 (4)
2010 2,050,619 -13.3 157.1 33.1
2011 2,320,540 13.2 160.0 2.9
2012 2,575,225 11.0 102.7 -57.3
2013 2,718,879 5.6 155.3 52.6
2014 2,674,183 -1.6 138.5 -16.8

(1) After reinsurance transactions, excludes state funds.
(2) After dividends to policyholders. A drop in the combined ratio represents an improvement; an increase represents a deterioration.
(3) Calculated from unrounded data.
(4) Less than 0.1 point.

Source: SNL Financial LC.

View Archived Tables

MEDIAN AND AVERAGE PERSONAL INJURY JURY AWARDS BY TYPE OF LIABILITY, 2013

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(1) Represents the midpoint jury award. Half of the awards are above the median and half are below.

Source: Reprinted with permission of Thomson Reuters, Current Award Trends in Personal Injury, 54th edition.

View Archived Graphs

INSURERS’ LEGAL DEFENSE COSTS

Most lawsuits are settled out of court. Of those that are tried and proceed to verdict, Jury Verdict Research data show that in 2013 the median, or midpoint, plaintiff award in personal injury cases was $68,218, down 9 percent from $75,000 in 2012.

Travelers Insurance 2015 Business Risk Index showed that legal liability was the fourth-highest rated worry for business leaders in the United States, down from No. 3 a year earlier. Of 1,210 business leaders surveyed, 56 percent indicated they worry about it somewhat or a great deal.

Businesses address their liability concerns through many types of risk management, of which insurance is an important component. A Swiss Re study indicated that in 2013 the United States had the largest commercial liability insurance market in the world both in premium volume ($84 billion) and as a percentage of Gross Domestic Product (0.50 percent). More than half of all global liability premiums were written in the United States.

TOP 10 LARGEST COMMERCIAL LIABILITY MARKETS, 2013

($ billions)

Direct premiums written, 2013 Liability as a percentage of
Rank Country Liability Total nonlife GDP (1) Total nonlife GDP (1)
1 U.S. $84.0 $531.2 $16,802 15.8% 0.50%
2 U.K. 9.9 99.2 2,521 10.0 0.39
3 Germany 7.8 90.4 3,713 8.6 0.21
4 France 6.8 83.1 2,750 8.2 0.25
5 Japan 6.0 81.0 4,964 7.4 0.12
6 Canada 5.2 50.5 1,823 10.3 0.29
7 Italy 5.0 47.6 2,073 10.5 0.24
8 Australia 4.8 32.7 1,506 14.7 0.32
9 China 3.5 105.5 9,345 3.3 0.04
10 Spain 2.2 31.0 1,361 7.1 0.16
World $160.0 $1,550.0 $61,709 10.3% 0.26%

(1) Gross Domestic Product.

Source: Swiss Re, sigma, No. 4/2014.

Insurers are required to defend their policyholders against lawsuits. The costs of settling a claim are reported on insurers’ financial statements as defense and cost containment expenses incurred. These expenses include defense, litigation and medical cost containment. Expenditures for surveillance, litigation management and fees for appraisers, private investigators, hearing representatives and fraud investigators are included. In addition, attorney legal fees may be incurred owing to a duty to defend, even when coverage does not exist, because attorneys must be hired to issue opinions about coverage. Insurers’ defense costs as a percentage of incurred losses are relatively high in some lines such as product liability and medical malpractice, reflecting the high cost of defending certain types of lawsuits, such as medical injury cases and class actions against pharmaceutical companies. For example, in addition to $1.2 billion in product liability incurred losses in 2014, insurers spent $953 million on settlement expenses, equivalent to 77.4 percent of the losses.

DEFENSE COSTS AND COST CONTAINMENT EXPENSES AS A PERCENT OF INCURRED LOSSES, 2012-2014 (1)

($000)

2012 2013 2014
Amount As a percent of
incurred losses
Amount As a percent of
incurred losses
Amount As a percent of
incurred losses
Product liability $873,860 114.7% $1,166,236 75.1% $952,997 77.4%
Medical malpractice 1,686,009 45.7 1,656,257 53.3 1,873,874 43.2
Commercial multiple peril (2) 2,022,739 46.0 2,096,543 37.7 2,083,103 39.1
Other liability 4,959,838 24.8 4,914,374 25.4 4,365,569 21.1
Workers compensation 3,071,093 12.3 3,018,372 12.3 3,357,813 12.9
Commercial auto liability 1,091,434 10.4 1,207,681 10.7 1,266,046 10.6
Private passenger auto liability 4,353,427 6.7 4,600,395 6.8 4,714,584 6.5
All liability lines $18,058,400 13.9% $18,659,858 14.0% $18,613,986 13.1%

(1) Net of reinsurance, excludes state funds.
(2) Liability portion only.

Source: SNL Financial LC.

 

Source: U.S. Department of Transportation, “Product Liability” http://www.iii.org/ website. Accessed March 1, 2016. http://www.iii.org/fact-statistic/product-liability

© Copyright 2016. All rights reserved. This content is strictly for informational purposes and although experts have prepared it, the reader should not substitute this information for professional insurance advice. If you have any questions, please consult your insurance professional before acting on any information presented. Read more.

Filed Under: Commercial, Specialty, Theme 145

March 1, 2016 By Julian

Product Liability, Recall and Contamination Insurance

Houses-Buildings_WarehouseProduct Liability

If your company designs, manufactures, distributes or sells a physical product—anything from toys to building supplies to macaroni and cheese—you’ll want to strongly consider purchasing product liability coverage. This coverage helps provide financial protection in the event that the use of your product results in property damage, personal injury or death. Product liability coverage can be added to your general liability insurance policy or purchased as a stand-alone policy and can be tailored to the types of risks to which your business may be exposed.

What Could Go Wrong?

As you weigh the option of purchasing product liability coverage, it’s worth considering the ways in which your company could be found at fault for damages resulting from the use of your product. You might think that your product—or your role in a product’s “stream of commerce”—is at little risk of causing damage, but you may be exposed to a range of less visible risks. Consider these factors:

  • Product Design, Manufacturing, Assembly and Packaging—Although your company’s role in the life of a product may be limited, you may still be liable in a product lawsuit. For instance, you might provide a single small part of a larger product; or your design might be safe, but a contract manufacturer produces a flawed product; or your company simply repackages and distributes products manufactured elsewhere. In all of these instances, your company could be liable—or at least will have to pay to legally defend itself—in the event of a product lawsuit.
  • Directions, Warnings and Flawed Marketing—How you communicate about your product can result in product liability risk. For instance, if instructions, warnings or promotions lead to misuse of your product resulting in property damage or injury, your company could be found liable.
  • Partner, Investor and Affiliate Relations—Partner or affiliate companies may also require that you have product liability insurance. For instance, a retailer may not sell your product unless you have product liability coverage. Financial backers might also require this coverage before making an investment. Ultimately, failure to carry product liability insurance can result in missed business opportunities.

Covering the Costs of a Product Recall

Product recalls can be costly and logistically complex, as well as damaging to your company’s reputation so you may want to include—or purchase separately—product recall coverage. Product recall insurance can help defray the operational costs of a recall as well as the costs of re-establishing your company’s brand.

While product recalls may be relatively rare, their frequency is on the rise, driven in part by stronger consumer protection regulations. Product safety problems can also be caused by the globalization of supply chains and manufacturing overseas in countries that do not have the same standards and enforcement policies as the European Union or the United States. Product recalls can be financially devastating and can even put a company out of business. No organization is immune to the risk of a product recall—even those with the best safety records, operational controls and manufacturing oversight.

Product recall insurance will help you cover a wide range of costs, including:

  • Advertising and promotional costs to launch the recall.
  • Shipping costs to collect recalled products.
  • Product destruction and disposal costs.
  • Product replacement, repair and distribution costs.
  • Fees to wholesalers, distributors and retailers.
  • Business interruption costs.
  • Reputation repair and management costs.

Contamination Insurance

If your product might be accidentally or maliciously contaminated—for instance food, cosmetics or pharmaceuticals—you may also want to consider adding contamination coverage along with product liability and recall insurance.

Contamination, whether the result of criminal activity or simple human error, is occurring with alarming frequency in the U.S. and around the world. Companies that fall victim to these incidents often incur staggering costs in damage control and in the restoration of profits and brand reputation. When a contamination incident occurs, it can attract media attention that has a disastrous impact on the public’s confidence in the affected product or brand.

Product contamination insurance will generally provide coverage for the following:

  • Recall costs, including laboratory analysis and product transportation.
  • Announcement costs, such as radio, television and Internet placements.
  • Third-party recall expenses.
  • Loss of gross profits, typically up to 18 months.
  • Rehabilitation expenses.
  • The value of contaminated products.
  • Crisis response and consulting expenses, including public relations and recall consultants.
  • Increased cost of operations.
  • Extortion costs.

Coverage for adverse publicity and government recall may be included or added to a contamination policy as an extension.

Your insurance professional can help you identify your product liability risks and weigh your coverage options.

 

Source: U.S. Department of Transportation, “Product Liability, Recall and Contamination Insurance” http://www.iii.org/ website. Accessed March 1, 2016. http://www.iii.org/article/product-liability-recall-and-contamination-insurance

© Copyright 2016. All rights reserved. This content is strictly for informational purposes and although experts have prepared it, the reader should not substitute this information for professional insurance advice. If you have any questions, please consult your insurance professional before acting on any information presented. Read more.

Filed Under: Commercial, Specialty, Theme 145

March 1, 2016 By Julian

IN: Product Liability, Recall and Contamination Insurance

Dear Valued Customer,

Product liability insurance helps provide financial protection in the event that the use of your product results in property damage, personal injury or death. This issue of “———————-“ focuses on protecting your business from liability issues.

If you’re asking yourself what could possibly go wrong? It could be product design, manufacturing, assembly and packaging, directions, warnings and flawed marketing. Product recalls can be costly and logistically complex, as well as damaging to your company’s reputation so you may want to include—or purchase separately—product recall coverage. Please connect with us for more information.

We appreciate your continued business and look forward to serving you.

Kind regards,

Filed Under: Commercial, Specialty, Theme 145

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