Insurance

Umbrellas Shrink as Social Inflation Grows

As property insurance rates are somewhat stabilizing in 2022, Umbrella Liability rates continue rising for common interest communities. Five years ago, many community associations were able to purchase Umbrella Liability limits as high as $50 million for a very economical price. In the last two years, insurance companies that offer Umbrella coverage for community associations through special purchasing programs have reduced their limits down to $5 million, or have been forced to exit the market altogether. The very few remaining players in the market have tightened their underwriting guidelines drastically, which has made many associations ineligible for such programs, and has left insurance brokers fighting to replace coverage with the same expiring limits.

Higher demand for Umbrella coverage in today’s market

Following the tragedy in Surfside, Florida in June 2021, board members have been more cautious regarding their personal liability and the potential impacts of their decisions for their communities. This loss, along with the life-safety related decisions made during the pandemic, have driven the need for community leaders to be properly insured and more aware of what is not covered by insurance.

Logically, this is not the time to lower liability limits, but the current insurance market conditions have handicapped insurance brokers and carriers alike, preventing them from delivering the high Umbrella limits seen 5 years ago.

If high limits are secured, premium increases can vary between 5% to 45%, and new exclusions may apply. Given the current conditions, Umbrella coverage is becoming a must-have rather than an optional coverage.

What is driving the insurance market to these conditions?

  1. Economic Inflation

According to the Department of Labor, the U.S. inflation rate reached 7% in December 2021 and 7.5% in January 2022 – the highest levels seen in almost 40 years. This is directly impacting the cost of first party insurance claims because of the rapid increase in demand for goods, construction materials and labor. The price of steel increased 168% from 2020 to 2021, and prices are once again on the rise. Lumber prices have begun to climb after falling back sharply from a record high in May of last year – it is now three times higher than the average price prior to COVID-19.

  1. Social inflation

A new phenomenon has emerged that is the result of a dramatic rise in litigation along with astonishingly large payouts for bodily injury claims, also referred as “nuclear verdicts.” For a jury award to be termed a nuclear verdict, the penalty should exceed $10 million. This is primarily due to changes in societal perceptions and trends. One of the very few positive aspects of  COVID-19 is that it slowed down social inflation, but as courts reopen and cases go through the system, many cases are being heard in a more plaintiff-friendly environment.

The 2022 Large Loss Profile by Industry Sector report recently published by the Chubb Insurance Company, reflects that the real estate industry has had verdicts ranging from $41 million to $800 million. The manufacturing industry is even worse, with verdicts into the billions. The examples listed below show how all industries are contributing to the rise in social inflation.

 

Date of Loss Loss details Incurred Amount
2016 The construction of illegal partition walls blocked access to fire escape, resulting in fatalities $183 Million
2017 Community association liable for bicyclist’s crash into improperly placed pole $41 Million
2018 Wildfires allegedly caused by power and distribution lines, conductors, and failure of power poles $24 Billion
2018 University sports physician sexually abused girls and women $500 Million
2019 Hotel settlement to victims of 2017 mass shooting that killed 58 people and injured others $800 Million
2019 Construction workers dropped subway beam, crushing spine of cyclist $110 Million
2019 Individual paralyzed after riding bicycle into open construction trench $20 Million
2020 Class action alleging injuries from coil birth control device $1.6 Billion
2021 Convenience store employee’s lack of training and security resulted in escalation of robbery, causing traumatic injury to plaintiff $91 Million
2021 Failure to warn of faulty boat design, resulting in the death of child $200 Million

As a consequence of the skyrocketing judgements, insurance carriers are paying for astronomical jury awards, which has in turn pressured them to modify the way that reserves are calculated to pay for future claims. The new factors to consider are the lingering post-pandemic challenges related to supply chains, and the increase in labor and material cost. At the same time, this is also prolonging the time that insurance claims are open due to costly materials and shortage of labor.

  1. Mistrust of Corporations

 The general consensus of today’s society is that corporations operate purely for profit, and they are not to be trusted to do the right thing. Having this mindset only encourages more people to hire an attorney and file a lawsuit. At the same time, it promotes a biased decision to vote in favor of individuals over a corporation being sued, regardless of the facts. In many cases, community associations are treated like corporations. Many jurors are also becoming desensitized to large awards; this could be as a result of the shifting views of social/corporate responsibility.

 4. Litigation Funding

This is a viable way for attorneys to pursue lawsuits where plaintiffs have limited resources. If a third-party investor evaluates a claim and anticipates a potential large payout, they will provide funds to plaintiffs, especially if it is against large companies, or insurance companies defending their insured. In the past, individuals with limited resources would take the first offer to settle. However, having access to litigation funding is allowing them to drag cases out longer than needed with the frivolous intention to secure a larger payout. Plaintiffs only have to give up a percentage of the proceeds, attorneys get their portion, and third party investors accumulate more profits for the next case – everybody wins except the insurance carriers.

This is a fast emerging issue and is significantly affecting the insurance industry. Due to its profitability, its use is expected to continue growing. According to a report published by Burford Capital, the largest provider of commercial legal finance in the world, litigation funding has grown 414% in the U.S. from 2013 to 2017. It’s now a multi-billion-dollar business with more than $11.3 billion committed by litigation funders.

 Furthermore, there are only two states in the U.S. that have adopted new regulations that require plaintiffs to disclose if they are being supported by a third-party investor. The lack of disclosure laws for litigation funding is increasing the incentive for frivolous cases and causing insurance companies to sustain higher claims expenses. It is a way to blindside insurance companies because they don’t have a way to anticipate if plaintiffs have enough financial resources to prolong a case. Many experts predict that jury awards will continue to grow as income inequality increases.

How does this affect my Community Association?

Underwriting guidelines have tightened, and most carriers have incorporated new eligibility requirements to qualify for Umbrella programs. Community associations should keep the below exposures in mind when going through the new underwriting process if they want to maintain their insurability:

  • Events that involve fireworks or alcohol
  • Activities or events open to non-members
  • Short term rentals or a high rental occupancy
  • Open liability and property claims, details will be required
  • Commercial occupancy, details will be required
  • Aluminum wiring
  • Armed security
  • Restricted or excluded activities for athletic participants or sports
  • Restricted or excluded activities related to amenities such as horseback riding, kayaking in lakes, and inflatable devices.
  • Directors & Officers Liability must have defense outside the limit (DOL)
  • Lack of a Risk Transfer Mechanism (hold harmless and indemnity agreements along with insured service providers)
  • Specific A.M. Best rating for the underlying carriers that write the General Liability, Auto Liability, Employer’s Liability and Directors & Officers Liability. Generally, A-VI or Better is required.

How to navigate today’s market challenges?

In order to meet our community associations insurance needs, the insurance industry will need to account for social inflation and litigation funding. Underwriters and actuaries are modifying the way they assess liability exposures, which is why we are experiencing so many delays during the renewal process for Umbrella policies. Regrettably, social inflation is not anticipated to diminish any time soon. Pursuing large jury awards is indirectly harming policy holders, such as community associations. If insurance premiums increase, loss assessments will need to be increased as well.

Given the current challenges in 2022 in the insurance landscape, it is imperative for board members and community managers to partner with credentialed and experienced professionals that will guide them through this social inflation crisis and will help them mitigate liability claims. Insurance brokers who hold the CIRMS (Community Insurance Risk Manager Specialist) professional credential should be sought out. They are trusted advisors capable of shaping expectations and educating community associations, rather than simply brokering transactions. This year’s challenges will force insurance brokers to evolve, work smarter, and find creative solutions.


By Jessica M. Knutsen, CIC, EBP, CIRMS

Jessica has been practicing insurance for 16 years. She is a vice president at the USI Community Association Insurance Practice. She has built expertise developing risk management plans and insurance programs for community associations. Jessica holds the Certified Insurance Counselor (CIC) professional designation, the Educated Business Partner Distinction (EBP) and the Community Insurance & Risk Management Specialist (CIRMS) designation administered by Community Associations Institute (CAI). She was recognized as the 2020 Educator of the Year and 2021 Volunteer of the Year by the Washington Metropolitan Chapter of CAI, and she currently serves in the CAI National Business Partner Council in an at-large position (insurance broker).