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A Publication of WTVP

The following information was pulled directly from a special white paper report performed in connection with the U.S. Chamber of Commerce.

The American tort system remains the most expensive civil justice system in the world, costing $260 billion in 2004. This translates to a “litigation tax” of $886 per person, up $41 per person from 2003. Since 1950, growth of U.S. tort costs has exceeded that of gross domestic product (GDP) by an average of two to three percentage points. As a ratio to economic output, U.S. tort costs exceed those of other industrialized countries by a sizable margin. Recent experience in the products liability arena is indicative of the severity and unpredictability that permeates the U.S. civil justice system.

Products liability exposures pose serious and unanticipated problems for product and component makers in the U.S. They’re impeding the competitiveness of American manufacturers and forcing manufacturing jobs overseas. The problems stem from a variety of sources: new theories of liability; unexpected sources of liability; or substances in widespread use that are suddenly alleged to be harmful even in trace amounts, which has resulted in an avalanche of lawsuits. Recent litigation involves five emergent areas of products liability exposure: lead paint, benzene, pharmaceuticals, welding rods, and diacetyl (butter flavor for popcorn).

Excess liability insurance remains the most effective way for companies to protect against the potentially catastrophic financial impact of product liability lawsuits. While necessary limits vary widely depending on a company’s particular circumstances, it’s safe to say even the most benign operations are wise to carry primary liability plus excess limits. Manufacturers should buy at the higher end of the spectrum, especially if the products they produce have the potential to impact a large number of people and give rise to a class action or mass action lawsuit. Other factors to consider include the size of a company’s operations, its geographic spread, and inherent industry hazards.

Buyers also should be cognizant that coverage isn’t only needed to pay potentially catastrophic judgments or large settlements, but also will serve as the collateral required to post an appeal bond, which is typically the full value of the verdict or more. Many large awards are reduced or reversed on appeal. Without the ability to post bond, a company is powerless to mitigate a loss on appeal.

Instilling a high degree of financial strength at every level of a liability insurance program is essential. Product liability lawsuits can stretch over a decade. Mass tort actions can take two decades or more to reach resolution. Hence, each participating insurer in a corporation’s insurance program needs to be strong today and for many years to come.

Given the potential severity and frequency of liability claims and the unpredictability of the exposures, it’s critical for companies to have adequate coverage for these risks, purchased from financially strong insurers, with the experience and expertise to address exposures that may arise tomorrow or decades in the future. Make sure to contact your local insurance professional to assist with assessing your risk exposure. IBI

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