Risk Management

Organizations are vastly underestimating their liability risk

Insurer finds a growing gap between liability coverage and growth in “nuclear verdicts.”
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A massive jury verdict is a rather large monkey wrench for any company’s spreadsheet. Insurance carrier Chubb is calling out the widening gulf between organizations’ liability coverage and their risk of loss.

“Despite a clear trend of large losses, companies are underestimating the amount of liability coverage they need,” the insurer wrote in its 16th annual benchmark report on liability limits.

Chubb found that large verdicts against corporate defendants increased 273% (that’s not a typo) between 2020 and 2022, to $18.3 billion, in the 10 industry sectors the company analyzed. The industries included healthcare, manufacturing, construction, real estate, and consumer products, among others.

Amid the risk that “nuclear verdicts”—verdicts that result in at least $10 million in damages awarded to plaintiffs—pose, organizations in all but one of those 10 sectors actually purchased a lower median insurance limit than nearly a decade ago, according to the report.

For instance, the median limits that construction companies bought last year were 44% lower than in 2014. And in healthcare, the median limits were about 31% lower in 2023 than in 2014. Only utility companies acquired more coverage in 2023, increasing their median liability limit by 9% versus nine years ago.

Liability risk is becoming more expensive due to the increasing prevalence of third-party litigation financing, and a growing public perception that “the system, including big business, is rigged against everyday people,” Seth Gillston, head of North America industry practices at Chubb, said in the report.

“Companies that underestimate the severity of liability losses may face financial, brand, and long-term stock price impacts,” he said.

One particularly painful development in liability cases is the increasing amounts juries award in punitive damages, according to the report. Punitive damages, by the report’s definition, are a deterrent meant to stop defendants from engaging in “outrageous, wanton, or willful conduct…in the future.” Many states, such as California and New York, prevent companies from purchasing punitive damage insurance. Organizations can work around this by procuring punitive damage wrap policies that are issued outside the US, according to the report.

News built for finance pros

CFO Brew helps finance pros navigate their roles with insights into risk management, compliance, and strategy through our newsletter, virtual events, and digital guides.