Guide to casualty insurance for financial institutions

What is the purpose of casualty insurance?

Casualty insurance is actually a catch-all term for a number of diverse coverages. The common thread that binds these various lines is that they are all concerned with losses caused by injuries. Casualty insurance helps manage the cost of legal liability imposed for injury or damage to the property of others. Many of these coverages are compulsory policies such as workers compensation or auto liability. The overarching principle behind all casualty coverages is the financial compensation to individuals, or the general public, for damages arising from injury caused by negligence.

Casualty insurance is composed of the following coverages:

  • Workers compensation and employers liability
  • General and products liability
  • Automobile liability and physical damage
  • Umbrella and excess liability
  • Product recall and product contamination

What risks are covered?

Injury to employees – Workers compensation

For many U.S. companies, workers compensation is the largest cost component of their casualty program. The concept of compensating employees injured in the course of their work goes back to ancient Babylon. However, true worker’s protection under law wasn’t enacted in the U.S. until the early part of the twentieth century.

Workers compensation is a no-fault system for workplace injuries. Employees give up their right to sue their employer for negligence, and employers give up their rights to defend based on the employee’s possible contributory negligence. Workers compensation insurance is compulsory and covers all medical costs, disability payments, death benefits, and lump sum awards (for permanent and temporary injuries to specific body parts). Payment levels are set statutorily by the states where the insured does business.

Workers compensation is composed of two separate coverages:

  • Part One covers the benefits your company is required to pay under state law.
  • Part Two provides coverage for suits filed by an employee against a third party where there is a contract between the employer and the third party which requires the employer to hold the third party harmless.

Unlike other casualty insurance policies, Part One of the Workers Compensation policy generally has no limit. Employers liability coverage (Part Two) is applicable in

  1. rare cases of egregious or gross negligence by an employer
  2. for damages sustained by the employee’s dependents because of the employee’s work related injuries
  3. claims paid by 3rd parties to the insured’s employees who then seek recovery from the insured

The insurance coverage is subject to a limit; typically $1 million per accident (except in NY where the WC insurer must provide unlimited coverage).

Injury to others – General liability & product liability

General liability policies insure against claims by third parties for damages arising out of bodily injury and property damage (e.g. a slip and fall by a visitor on company premises, a plant explosion causing injuries and/or damage to surrounding areas.) Product liability insures against claims by third parties for damages arising out of bodily injury and/or property damage caused by the insured’s products. These liability policies usually provide for the legal defense against third parties as well as coverage for damages (i.e. settlements and judgments).

Injury to others caused by vehicles – Auto liability

Auto liability insures against claims by third parties for damages arising out of bodily injury and/or property damage caused by vehicles owned, leased, rented, or used on company business. These liability policies provide for the legal defense against third parties as well as coverage for damages (i.e. settlements and judgments.)

Injury to anyone beyond limits of coverage – Umbrella and excess liability

Umbrella and excess liability insurance provides additional amounts of coverage for general, products, auto, employer’s liability and possibly other ancillary liability insurance coverages (e.g. international liability, marine liability, etc.) and again usually provide coverage for defense costs.

What risks are not covered?

Most states have adopted some form of “comparative negligence test” allowing recovery based on each person’s relative negligence.

Casualty coverages come with a variety of exclusions.  These exclusions typically apply to

  • unlawful or intentional acts
  • unquantifiable risks
  • exposures that are usually covered elsewhere by other types of insurance

Contributory negligence can limit or in some cases nullify certain casualty coverages. (Contributory negligence is the common law doctrine that if a person’s own negligence contributed to their injury, the injured party would not be entitled to full damages.) Most states have adopted some form of “comparative negligence test” allowing recovery based on each person’s relative negligence. However, as mentioned, workers compensation explicitly waives such contributory negligence rights on the part of the employer.

Contractual liability can also limit coverage. This occurs when the insured explicitly assumes the financial consequences of another’s negligent acts or omissions resulting in injury. This generally happens when one party to a contract agrees to indemnify the other party for potential injuries as part of their agreement. Examples include

  • leases between landlords and tenants
  • work done by a contractor for a 3rd party
  • contracts between retailers or wholesalers and manufacturers or suppliers and manufacturers, etc.

Market characteristics

Almost all the largest insurance underwriters compete in these important lines of coverage. It is a deep and competitive market. While there are some industry-standard forms, particularly in workers compensation and auto, the use of manuscript forms and endorsements is widespread for larger institutions. As a result, coverage terms and conditions offered can vary significantly among insurers.

Most casualty policies in the U.S. have a term of one year. Although multi-year policies and multi-year price agreements are certainly possible, they are not the standard.

Appropriate limits

A large payroll demands a workers compensation program sufficient to manage the risk.

While financial institutions do not deal in products likely to cause bodily injury or maintain large fleets of vehicles like a manufacturing concern, they often employ large staffs. A large payroll demands a workers compensation program sufficient to manage the risk.

While state-mandated limits and the size of the institution will certainly impact the limits purchased, a typical casualty insurance program for a large financial institution might be structured as follows:

  • Primary insurance comprising workers compensation and employers liability, general, products and auto liability with limits of $1 million to $5 million and deductibles of $250k to $1 million.
  • Umbrella and excess liability limits of $100 million to $250 million. (Some large companies purchase upward of $1 billion.)
  • International casualty is typically done as a “controlled master program” with local casualty policies issued around the world and a centralized master policy dictating coverage terms and conditions.

Appropriate retentions

“Guaranteed Cost” insurance means that the insured pays a premium to an insurer who then will pay for all insured claims subject to the agreed policy limits. For large companies it is often more economical to pay their predictable losses themselves rather than transfer the payment obligation to the insurance company since the insurer will add on premium charges for its profit, expenses, and risk loadings in addition to expected losses. To accomplish this, insurance policies will sometimes specify a deductible amount per claim or incident or might attach above a specified self-insured retention amount.

The difference between a deductible and a self-insured retention is that the insured is obligated to reimburse the insurer for losses they pay to claimants within the deductible, but the insured is required to pay claimants directly for losses with a self-insured retention. There are other subtle mechanical differences that are beyond the scope of this discussion.

For large insureds, retentions can range from $250,000 to $5,000,000 per accident (also referred to as “per occurrence”). Insureds will select what they consider an appropriate retention based on:

  • Historical loss severity and frequency
  • Their financial ability to sustain an unexpected adverse loss event
  • Insurance market pricing for the risk

Other factors

Casualty insurance is individually underwritten and priced for each insured by each insurance company. Some of the relevant critical factors considered in pricing for financial institutions include:

  • Past loss experience
  • Revenue
  • Payroll and job classifications
  • Vehicles
  • Limits purchased
  • Retention levels
  • Acquisitions and divestitures
  • Changes in the insured’s financial condition

Emerging issues

  • Macroeconomic issues
    • Recession causes layoffs with lower payroll and therefore lowers WC premiums with less certainty about impact on losses.
  • Technological changes:
    • Driverless cars
    • Growing cyber exposure
  • Terrorism
  • Climate change

 


This post was co-written by Joe Peiser and Alex Levine.

AlexLevine_300Alex Levine is a member of the Willis National Casualty Group within Global Placement in NY since 2009. Prior to joining Willis he spent 27 years with J&H and Marsh where he served as the Global Casualty Practice knowledge manager. His experience includes large risk casualty client advisement and placement for traditional primary and excess casualty programs as well as alternative risk solutions.

joepeiser_300Joe Peiser is Head of Casualty Broking for Willis Towers Watson North America, responsible for the macro casualty broking strategy for all North American clients and the strategic relationships with our major insurance company partners worldwide.  Joe has been in the insurance industry since 1986, and joined Willis in 2014.


 

[i] Environmental liability insurance is sometimes included in the general category of Casualty.  Willis Towers Watson treats environmental coverage as a separate category as the injury is not, generally, to individuals, but to the public at large.

[ii] The Code of Ur-Nammu (2100 B.C.) may not offer sophisticated worker protection, but it is the first mention of monetary compensation for injury, with such unequivocal instructions as, “if a man knocks out a tooth of another man, he shall pay two shekels of silver.”

[iii] The final state to pass workers’ compensation legislation was Mississippi in 1948.

[iv]  There are some minor exceptions to these principles and they vary from state to state.

[v] State laws vary on workers compensation and contributory negligence, but as general rule employers waive their rights under this common law doctrine.

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