NCPA - National Center for Policy Analysis

Insurers Downsizing Liability Coverage

September 9, 2002

Commercial insurance companies are cutting back sharply on liability coverage for American corporations, industry sources report. Stung by corporate scandals and fearful of the hefty payments they will have to make to settle shareholder lawsuits, insurers are offering policies with higher deductibles and lower limits on overall coverage.

According to one industry observer, companies that were recently providing $50 million in coverage now offer $25 million. Companies that offered $25 million are now down to $10 million to $15 million.

Insurers are also demanding that corporations pay part of any court settlements or jury awards out of their own pockets.

  • As a result, corporations in telecommunications, energy, financial services and pharmaceuticals -- where the risk of being sued is thought to be highest -- could face payments of up to half the cost of any settlement.
  • The number of suits is skyrocketing -- with the number of federal class-action lawsuits for securities fraud, for example, rising to nearly 500 in the second quarter of 2002, from just over 100 in the first quarter of 2001.
  • Insurers estimate they will have to pay out $7.5 billion this year on policies for directors and officers -- even though they collected only $4.5 billion in premiums.
  • In recent years, the average size of settlements in securities lawsuits has increased drastically -- rising to $16 million in 2001 from less than half that before 1995.

The insurance industry believes companies don't make sufficient efforts to hold settlement costs down.

Source: Jonathan D. Glater and Joseph B. Treaster, "Insurers Scale Back Corporate Liability Policies," New York Times, September 7, 2002.

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