Purchasing the “right” amount of coverage is not possible. There is a tradeoff among the availability of coverage, the price of coverage, the company’s other financial resources, projections of how much a single claim and accumulation of claims might cost, and a number of other factors. Learning what one’s peers are doing can be helpful, and the broker Marsh annually publishes a study, most recently “Limits of Liability 2005: Balancing Price Against Need,” that reports on insurance-purchasing trends of businesses.
Among the nearly 3000 companies surveyed, the average amount of liability limits purchased was $75 million. According to Marsh, one significant factor that correlates to the amount of limits purchased is whether the insured previously has suffered a $5+ million loss. For this group, the average limit purchased was $199 million compared to $64 million for companies that haven’t experienced such a loss within the last five years. (p. 5)
Companies with revenues of less than $200 million purchased on average $33 million in limits; companies with more than $10 billion revenues purchased $262 million (p. 16). By industry sector, the chemical and pharmaceutical industry purchased $112 million in limits; transportation $90 million; rubber/plastic $46 million; construction $46 million; and health care $37 million. The attachment point for excess coverage purchased by companies with $1 billion of sales averaged $3.7 million (that is, below that figure companies have primary coverage and retentions/deductibles).
Another way to look at liability limits is to gauge the cost of insurance as a percentage of revenue. Chemical and pharmaceutical companies paid 94¢ per $1000 of revenue (which ignores the quite substantial availability problem in this sector for product-liability insurance), whereas food producers pay 22¢, and retailers 15¢. In contrast, health-care companies paid $1.47, transportation companies $1.44, and construction companies $2.37. In 2005, the average cost per $1000 of revenue was 39¢. Flipping the question around, the cost of $1 million of coverage was $22,852 for chemical and pharmaceutical companies, $29,895 for construction companies, $52,004 for health-care companies, and $5,684 for printing and publishing companies. In 2005, the average cost of $1 million of coverage was $13,222 (p. 17, 21).
Based on Marsh’s analysis, a lot of action is occurring on the motor-vehicle side, with jury verdicts increasing substantially (of the top 100 verdicts in 2004 according to the National Law Journal, 14 were motor-vehicle incidents, up from 4 the year before). Vehicular liability accounted for 5 percent of all liability cases in which $1 million or more was awarded, and 23 percent of cases where punitive damages were awarded. (p. 6) Companies with larger number of vehicles purchased higher (aggregate) policy limits, with companies having more than 5000 vehicles purchasing (on average) $309 million in limits at the cost of $23,093 per million and companies having 100 or fewer vehicles maintaining $47 million in limits at the cost of $7396 per million. (p. 7)
For all tort claims, a wrongful-death verdict involving an adult male produced damages on average (in 2003) of $3,628,830 and with a woman, $2,711,639. (p.8)
This information all is descriptive, not prescriptive; these data do not answer the question what a particular company should do – how much coverage and what type it should purchase. Companies have different appetites for risk and different sensitivities to price changes. Some companies value the reputation of the insurer on the claims side at the expense of the cheapest price today. Some companies value longstanding relationships with their carriers; others view insurance as a pure commodity to be rebid. The long-tail on claims can make the long-term financial strength of the insurer an important factor, and the cheapest carrier today may not still be around when the bill comes due to pay. As Marsh emphasizes, striking a balance “between the cost of excess liability insurance and their specific coverage needs” involves a fair degree of “art” and not just science. (p. 3).
The other aspect that Marsh’s study cannot track is the suitability of coverage to the loss exposures. When companies ask me as a policyholder lawyer to review the terms of a policy or policies they are considering purchasing, I often see that the language is not well tailored to their needs. For me, the key question is not coopering up new language necessarily but ensuring that management understands what types of risks it faces that the policies might not cover. Certainty is what is key, and knowing what is and is not covered allows a company to plan – and for managers to be accountable. It’s easy to buy a policy with a lot of limits – even for a cheap price. The trick is to purchase policies both at reasonable price points and that are more likely to perform when the company needs its coverage most.