Savvy underwriting is key for complex product liability market
There is plenty of opportunity for insurers in the product liability market as emerging technologies and products bring previously unimagined risks. More than ever, underwriters must be intimately acquainted with evolving technologies and with their customers’ and prospective customers’ changing risks and coverage needs. The upshot: “Carriers are becoming more specialized in order to meet the unique needs of their customers,” says Lane Schaffer, head of General Liability Product for Middle Market, The Hartford.
Computerized products are presenting challenges that were unknown a few years ago. “As products become more digitalized and cyber-infused, loss scenarios can be imagined that draw a fine line between products liability and cyber,” says Sean McPhillips, senior vice president and U.S. head of Primary Casualty at Aspen Insurance. “Contractual needs are driving product manufacturers and suppliers to provide product recall, cyber, and pollution insurance as well as products liability.” He points out that a hybrid package policy that offers all of these coverages would present one solution for a myriad of needs. “These ancillary coverages often call for specialized underwriting expertise, and the policy would need to capture appropriate rate to provide all of these coverages in one place,” McPhillips says.
Common claims, memorable cases
Still, many practitioners say it’s “business as usual” when it comes to the types of product liability claims they’re seeing. “We have not seen a lot we would consider new or surprising from a claims perspective,” says Ken Nieberding, divisional senior vice president, Casualty, for Great American Risk Solutions. He sees the typical bodily-injury claims from such segments as sporting goods, toys, and machinery, and the types of property-damage claims one would expect from segments like plumbing products.
He does recall a bodily-injury case that was surprising, however. “We insured a candle manufacturer, which immediately invoked thoughts of bodily injury and property damage claims due to fire losses. In reality, we experienced a considerable number of bodily injury claims from glass lids breaking. The glass cut the claimants’ hands and led to some severe hand injuries.” It turned out that the glass lids on the jars containing the candles were made of allegedly inferior materials. “A scenario like this is certainly memorable from an underwriting perspective,” Nieberding says. “The glass lids on candles would not be the first or even second thought we’d have when thinking about a claims scenario involving such a product.”
Bill Craane, vice president and New York-based broker for Worldwide Facilities, is seeing claims that include sports injuries from equipment such as pads and helmets, injuries for private-sector consumer products, and food poisoning and allergic reactions for ingestibles and implantables. Ingestibles are also presenting injury claims, such as the case of one insured, a confectionery company.
“While eating chocolate-covered peanuts with a candy shell, the claimant says they ate a piece without a peanut inside; there was just a hollow space. The claimant alleges they applied the biting force necessary to crush the peanut but, as it was an empty chamber, they applied too much pressure and chipped their teeth badly enough to require dental implants,” Craane recalls.
Another recent memorable claim was cited by Kate Daley, executive vice president at Commercial Insurance General Liability, Chubb. The claim concerned damaged and destroyed tissue used in medical research. “The claim included reputational damages for loss of biological tissue samples due to products failure because our insured’s manufactured environmental system allegedly failed,” she explains. “This system should have set off an alarm when the claimant’s freezer shut off.”
Losses from component parts of larger products are one of the most common product liability claims, Schaffer observes — and the claims may not be filed until years after a defective part was manufactured. “Consider construction,” he suggests. “There could be a small part of a window that causes a problem or damage but that may not become apparent until much later, when the window is installed as part of a construction project.”
New product areas bring risks
Of course emerging technologies continue to introduce a wide array of new liabilities, says Schaffer, who cites the example of a malfunction in an autonomous vehicle: “Who is responsible? Is it the car manufacturer, the company that provided the code to operate the vehicle, or a cyber loss?”
Craane agrees that it will be difficult to assess blame in future accidents involving autonomous vehicles. “Is the human operator responsible? Software programmer? Mechanic? Sensor manufacturer?” he asks.
Internet connectivity is driving other complex risks when it comes to product liability. “The Internet of Things (IoT) is accelerating Internet connectivity beyond standard devices,” McPhillips points out. “There are ‘smart’ components in products we would never have imagined a few years ago, such as cars, refrigerators, ovens, doorbells, thermostats, and so on. It is hard to imagine what products will next evolve into the cyber world. One thing is for sure: For every genius idea that improves a product through cyber connectivity, there is room for cyber mayhem and piracy as well.”
From a products underwriting perspective, Daley is “seeing exposures take on added layers, driven by the convergence of digital and physical exposures.”
Nieberding warns, “While connected home technology can make life easier, it also gives criminals another avenue into the home and potential access to a consumer’s personal information. Underwriters are often working in uncharted waters, where the tides are changing more rapidly than ever before.”
A new reality
One of the most complex areas in today’s product liability landscape is in the realm of virtual or augmented reality programs. Specifically, agents and brokers need to be aware of the intersection of product liability and professional liability exposures, cautions Bill Craane, vice president, a New York-based broker for Worldwide Facilities. “Many insureds seem to have one or the other covered, but as new technologies become pervasive, claim denials may occur,” he says.
The cyber world can cause injuries or property damage in the physical world. “Throughout much of history, content in games, books, and on TV stayed there in the imaginary world. But today, things in cyberspace are having cause-and-effect in the real world,” Craane explains. “In a claim, it’s hard to determine the proximate cause and which policy should respond. If an app directs a pedestrian player into a dangerous location, who is responsible? Is there a signed legal disclaimer? Probably not. People with a VR headset or looking down at their phones on the move are not looking where they are going. Someone can fall into an open manhole while playing a mobile app.”
Craane points out that any business with an interactive website or product considered “smart” likely has General Liability (GL) and some professional exposure. A software company with an office GL but Professional Liability without contingent bodily injury/property damage has gaps in coverage in the physical world, he notes.
He cites cases that have arisen from physical damages caused by activities in the cyber world. For example, dating websites have been sued for contributing to a rape, and smartwatch companies have been sued for distracting drivers.
“A few years ago, I quoted a GL policy for a website (now quite famous), that not only sold health and beauty aids, they offered advice on the health benefits of the products. I remember insisting that the retail broker allow me to quote Professional Liability. I was laughed off the phone,” Craane recalls. “Three years later, I read that the website settled a multistate lawsuit for unsubstantiated product health benefits.”
The worst culprits, Craane points out, are established manufacturing companies that start an interactive website making outlandish claims about their products and begin selling interactive electronic products, but they have the same standard package policy with forms from decades ago. “They have to be convinced to buy something new and see it as an extra expense that only their insurance broker seems to think they need. Their banks, customers, and distributors don’t ask for it, so why spend the extra money? However, if you can get in touch with their lawyer, they understand the need.”
Meeting the challenge
The bottom line when it comes to underwriting risks and exposures from many products that use new technologies, Nieberding says, is “we don’t know what we don’t know, so it will be a learning process for the entire industry. This makes for challenging underwriting conditions.”
The product liability market provides an opportunity for underwriters who want to understand and assume complex product liability exposures, notes Daley. “A company’s ability to assume this risk requires in-depth underwriting capabilities, risk-engineering expertise, plus a broad portfolio of products to respond to an array of exposures.” Daley and other practitioners believe there is great opportunity for agents and brokers that are willing to specialize and differentiate. “Specialization allows for a level of expertise and acumen, which carries value in the marketplace, creating meaningful growth and client retention,” she says.
“The competitive landscape is less a function of new entrants into the marketplace as it is this being an attractive class for the carriers that already occupy this space,” concludes Nieberding. “The rates are lower than we would like and getting additional rate for accounts that are not distressed is extremely difficult. Solid fundamental underwriting is more important than ever.”