Product Liability Insurance
Product liability insurance
Product liability insurance protects the manufacturer, distributor or seller of a product from legal liability resulting from a defective condition that caused personal injury or damage associated with the use of the product. Product recall insurance, a specialty product designed to cover the costs associated with recalls, is also available from some insurers.
According to a March 2020 report from the advocacy group Kids in Danger, recalls of children’s products rose slightly to 58 compared with 52 in 2018, but well below the 93 recalls in 2017. In 2019 there were 776 incidents reported prior to recall of the 58 children’s products, for an average of 13.4 incidents per recalled product. Both incidents reported prior to recall and average incidents per recalled product were both down from 2018 when 1,275 incidents were reported and the average number of incidents reported was 24.5.
Insurers’ legal defense costs
Most lawsuits are settled out of court. Of those that are tried and proceed to verdict, Jury Verdict Research data from Thomson Reuters show that in 2018 (latest data available) the median award in personal injury cases was $100,000, down from $125,000 in 2017. The average award, $1,669,340, also fell in 2018 compared with $1,825,808 in 2017. Thomson Reuters notes that average awards can be skewed by a few very high awards and that medians are more representative. In cases of product liability, the highest median award from 2012 to 2018 was in medical products cases ($4,002,185).
Businesses address their liability concerns through many types of risk management, of which insurance is an important component. A Swiss Re study indicated that in 2014 the United States had the largest commercial liability insurance market in the world both in premium volume ($87 billion) and as a percentage of Gross Domestic Product (0.52 percent). More than half of all global liability premiums were written in the United States.
Insurers are required to defend their policyholders against lawsuits. The costs of settling a claim are reported on insurers’ financial statements as defense and cost containment expenses incurred. These expenses include defense, litigation and medical cost containment. Expenditures for surveillance, litigation management and fees for appraisers, private investigators, hearing representatives and fraud investigators are included. In addition, attorney legal fees may be incurred owing to a duty to defend, even when coverage does not exist, because attorneys must be hired to issue opinions about coverage. Insurers’ defense costs as a percentage of incurred losses are relatively high in lines such as product liability and medical malpractice, reflecting the high cost of defending certain types of lawsuits, such as medical injury cases and class actions against pharmaceutical companies. For example, in 2020, in addition to $1.1 billion in product liability incurred losses, insurers spent $667 million on settlement expenses, which was equivalent to 60.9 percent of the losses
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