What Does a Billion-Dollar Verdict Mean for Casualty Insurance Buyers?

Frequency of severity is back. Insurance buyers need to approach excess casualty renewals carefully to mitigate for loss trends and take advantage of a changing insurance market.

This article is the first part in a two-part series, the second of which discusses loss trends and lead umbrella placement strategies.

During the height of the COVID-19 pandemic in 2020, the shutdowns gave insurers and corporate risk managers a brief reprieve from the boom in huge jury verdicts for personal accident claims. However, when courts reopened in 2021, the juries went back to awarding liability claimants huge damages, shaking up the Excess Casualty insurance market.

So far in 2021, there have been 11 auto liability settlements of $15 million or more, according to Advisen. While the number of claims above that threshold has been on the rise for more than a decade, a handful of massive verdicts issued in 2021 have been very disruptive. So far this year, three auto accident verdicts have exceeded $100 million. The most headline-grabbing verdict involved the tragic death of a college student in a trucking accident in north Florida in 2017. In that case, a jury awarded the surviving family $100 million in damages for pain and suffering, as well as $900 million in punitive damages assessed against the trucking companies deemed to have caused the accident.

Mega-Verdicts May Be an Acceleration of Auto Losses

The recent spate of mega-verdicts is a continuation—and perhaps an acceleration—of the increasing frequency of auto liability losses that has played out for more than a decade. A Woodruff Sawyer analysis of Advisen large auto liability claims data illustrates this trend. Looking at four-year windows (in order to eliminate the impact of year-to-year variability), the number of auto liability claims with settlement and judgment value of $15 million or greater increased 168% from 35 claims in 2008–2011 to 94 in 2016–2019. Per an American Transportation Research Institute (ATRI) study on auto liability litigation, there were over 300 verdicts exceeding $1 million in the last five years as compared to just 26 in 2005–2010.

Many insurers covering corporations for these large claims expect the trend to continue to grow unabated due to social inflation—the phenomenon of increasing claims costs due to changing societal factors such as legal advertising, litigation financing, the appeal of class action lawsuits, and growing public distrust of corporations. Litigation financing, in which private investors fund claimants’ litigation against corporations, grew 18% to over $11 billion in 2020, estimates Westfleet Advisors.

With claims $100 million and larger, underwriters have to reckon with the increased potential that relatively thinly priced high-excess layers can lead to limit losses and huge destruction of capital for insurers.

How can risk managers protect their corporations from mega-verdicts while controlling the cost of excess liability insurance?

Let’s look at best practices in building high excess layers amid a legal environment that is terrifying for casualty insurers.

The first step in approaching the excess casualty market is to conduct a thorough gap analysis of risk controls intended to minimize the potential of big casualty losses (most commonly, severe auto accidents involving heavy trucks or class action products liability claims for manufacturers and wholesalers). Note that most of the $15M+ awards handed down by juries so far this year involved trucking or transportation companies operating heavy tractor-trailers. However, many corporations outside of the for-hire transportation industry (think manufacturers, retailers, and distributors) own heavy auto fleets and face many of the same exposure to huge auto claims.

To improve risk profile and ensure compliance with Department of Transportation (DOT) regulations, companies should consider conducting a mock DOT audit and gap analysis by location by working with a third party vendor, their auto liability carrier, or even a state trucking association. But even those companies without a DOT level fleet can provide evidence to their auto liability carrier that they are limiting their auto liability exposure. Some examples include:

• Establishing a robust fleet management program and safety policy
• Having a dedicated person responsible for management of drivers
• Instituting a distracted driving policy
• Using MVR monitoring or contracting with a monitoring service
• Collecting personal auto insurance from employees who drive personal vehicles on company business
• Establishing minimum limits to be carried by drivers on their personal policies
• Requiring minimum safety options, such as cruise control, lane departure warnings, ABS, traction control, back-up cameras, and motion sensors, on company vehicles
• Utilizing telematics to monitor driving activity
• Conducting defensive driver training

Once risk controls are vetted and optimized, risk managers and their brokers should approach the excess insurance market with creativity, flexibility, and care. The market remains dynamic, with insurers constantly reexamining their pricing and capacity management strategy to counteract the trend of huge jury verdicts.

Because of the increased potential for significant losses, many insurers continue to cut their available capacity for excess layers, even those above, say, a $50 million attachment point. Many insurers previously providing blocks of $25 million will now only provide layers of $5 million to $15 million, forcing insurance buyers to line up a greater number of insurers to fill out towers.

Potential Counter-Trend in the Excess Insurance Market

However, the good news is that there is a helpful counter trend in the excess insurance market. Because layers have been reduced and rates for excess casualty have increased over the past three years, there is new competition for excess business among reenergized incumbent insurers and startups alike. At least $200 million of new capacity from insurers in the US has been admitted, and excess and surplus markets—as well as the London market—are now chasing tough casualty business.

Here are some of our recommendations for engaging the current excess casualty market:

• Conduct a thorough inquiry of insurers in the US market (both admitted and E&S) and London, as well as Bermuda, for tougher exposures.
• Leverage relationships on Primary Casualty as well as other coverages to push insurers to provide excess capacity on problematic layers.
• Break up expensive larger layers of $25 million into smaller layers to maximize competition among legacy insurers and new market participants. London syndicates in particular have recently become much more competitive versus US insurers but are generally only able to deploy $5 million or $10 million for large risks with tough auto or products exposures.
• Utilize quota-sharing among multiple insurers to spread risk across larger layers and attract competition.

In the second installment of this two-part series, we will discuss the long-term trend for large casualty losses and offer recommendations for managing the challenging lead umbrella layers of liability insurance towers. In the meantime, please contact your Woodruff Sawyer representative if you have any questions on your Excess Casualty renewals.