Protecting Your Business As Liability Insurance Becomes More Challenging

Any business can be hit with a liability lawsuit, no matter your industry or the size of your company. A commercial umbrella or excess liability policy is critical for shielding your business from the devastating financial consequences of a massive jury award or settlement. But it is becoming more difficult to obtain a policy that provides the coverage your business needs, at sufficient limits, at a reasonable price.

The specialists at B.F. Saul Insurance review the trends impacting commercial liability insurance and the steps you can take to ensure your business remains adequately covered.

A Look at What is Driving Liability Coverage Challenges

As the headlines underscore, lawsuits aimed at companies are growing more frequent and more severe, with more nuclear verdicts than ever. A nuclear verdict is generally defined as a jury award that exceeds $10 million, but it also can refer to an outcome that is much larger than expected.  

From 2009 to 2019, the liability claim frequency trend rose from 5.7% to 7.3%, while the claim severity trend skyrocketed from 3.4% to 9.3% (per the Risk Placement Services 2024 Q2 Umbrella and Excess Market Update). According to the National Law Journal, worker/workplace negligence topped the list of categories with the largest verdicts in 2022, totaling $3.08 billion in claims that year, followed by intellectual property at $1.87 billion and product liability at $1.3 billion.

The reasons for this surge in commercial lawsuit frequency and award size are many—from social factors like rising income inequality and anti-corporate sentiment to the influence of social media, aggressive law firm advertising, and trial tactics that play on emotion. The industry has also seen an increase in third-party funding, where private equity groups and other sources fund litigation and take a percentage of the recovered amount in exchange.

If your business experiences a loss that triggers a liability claim, the first policy to respond is the relevant primary policy, such as your general liability (GL) or commercial auto liability. If the primary policy’s limits are exhausted, the commercial umbrella or excess liability policy will come into play.

The problem is that umbrella and excess liability insurance is not meant to experience frequent losses; it was designed to protect against rare, catastrophic incidents. But as our society becomes more litigious and excessive jury awards and settlements become more frequent, the umbrella or excess liability coverage is more likely to be “pierced.” Now, insurance companies are paying out much more in umbrella and excess liability claims than they ever expected.

Less Capacity, More Exclusions, Higher Premiums

The volatility of the liability landscape makes it difficult for insurance companies to forecast losses and set rates that enable them to cover claims and still maintain the desired level of profitability. As a result, many are reducing their umbrella and excess liability capacity, adding policy exclusions, and increasing rates. Each of these measures makes it more challenging to protect your business assets.

• Less capacity means the insurance carrier is less willing to take on a large portion of your liability risk or is no longer willing to write your account at all. In the former situation, they are likely to offer lower policy limits than they have historically. If a single insurer is no longer willing to provide the limits you require, you will need multiple insurance carriers to participate and provide umbrella or excess coverage to meet the coverage limits your business needs, desires, or is required to maintain per contractual requirements. Some insurance companies are also starting to require increased underlying attachment points to offer competitive umbrella or excess liability terms, which reduces their exposure by making the underlying/primary insurance company take on more risk. For example, standard underlying general liability limits are $1,000,000 each occurrence and $2,000,000 aggregate. In today’s market, some insurers are requiring companies to maintain $2,000,000 each occurrence and $4,000,000 aggregate limits on their underlying general liability. In a hard market, these limits can be challenging to obtain and costly.
• More policy exclusions mean some of your exposures may no longer be covered or contemplated all the way through your umbrella or excess liability policy limits. Some insurers are no longer willing to cover or sit excess over liquor liability, abuse and molestation, certain construction-related and development-related exposures, and many more. As a result, your business might need to buy a more expensive, stand-alone policy to fill these coverage gaps and meet contractual insurance requirements that might require such coverages.
• Higher premiums are the unfortunate result of a hard market. When there is less competition for your liability insurance business, insurers might renew the policy at a much higher premium or quote the same premium for much less coverage.

Though any business can experience liability losses, companies that have heavy foot traffic, serve alcohol, manufacture or distribute physical products, or operate large auto fleets are just some examples of businesses that are especially susceptible. If you run a business in the hospitality, habitational, human services, retail, restaurant, manufacturing, or auto/trucking industry, you might find it difficult to secure adequate umbrella or excess liability policy limits at a reasonable premium.

Strategies to Overcome Liability Insurance Challenges

Despite a difficult market, it’s still possible to protect your business from the costly consequences of a liability claim with the proper umbrella or excess liability insurance coverage. An experienced independent insurance advisor can help you take measures like the following.

• Make your business a more attractive risk. Proper policies and procedures can go a long way toward reducing your liability risk and helping you obtain sufficient coverage. Many insurers offer loss prevention assistance through their in-house resources or by recommending reputable third parties.  
• Consider changing your deducible. If your loss history is clean, the insurer might offer a lower deductible, reducing your out-of-pocket expense in the event of a covered claim. On the other hand, a higher deductible can reduce your premium, helping to offset rising liability rates. Some third-party contracts include deductible requirements, so make sure you check your contracts before adjusting your deductible to ensure you are meeting all insurance-related obligations.
• Plan early for renewals. Getting an early start on your insurance portfolio renewal gives your insurance advisor more time to shop the market and avoid last-minute coverage issues. If your organization maintains a large umbrella or excess liability tower, it is important to communicate with your current insurance carriers about their renewal expectations well in advance of the insurance renewal. If your insurance advisor anticipates changes that could negatively impact your business, they will strategize and work to obtain the most competitive solution from a price and coverage standpoint.

The B. F. Saul Insurance team brings decades of experience advising organizations on how to reduce liability risk and helping businesses obtain the liability coverage they need, even in a difficult market.

Schedule a call with an independent insurance advisor to learn how we can help protect your business with the right commercial umbrella or excess liability insurance.