How public liability could catch you out

I was having a conversation with a colleague who called to talk to me about giving appropriate advice on casualty exposure – noting that there are so many pitfalls in recommending appropriate limits where businesses have lots of people on their site at one time.

Earlier in the year, I wrote an article on ‘How much employers liability do I need?’ which made the point that as the value of currency erodes through inflation, so does the value of the cover limits that we purchase.

What’s the problem?

Lots of factors can increase the cost and frequency of claims for liability:

• Inflation
• Increases to settlement values (due to Ogden Discount Rate)
• The hard insurance market meaning increased retentions
• Increase in claims frequencies due to more litigious actions
• Upward pressure on wages
• Increase legal costs

These factors are impacting upon the amount of cover being utilised by claims on a per claim basis, especially where there are multiple claimants or life-changing injuries.

Businesses have been ok until now, what’s changed?

It’s true that most businesses will likely never utilise the amount of cover they have in force – typical slips, trips, and falls will only account for a mere fraction of the limit businesses have insured in most cases. Many insurers’ starting limits are £2m or £5m for public liability, while average claims will likely only be in the thousands.

Claims settlement figures have increased rapidly in the wake of Ogden discount changes and, although it has eased since a second change in 2019, most businesses hadn’t reacted after the initial reduction in the discount rate to equip themselves with higher liability limits. This means there is still likely to be huge pressure caused by infrequent high severity liability claims events.

Why is this a challenge to brokers, insurers, and customers?

Premium for liability in the most part is usually affordable and is calculated depending on only a few factors. In most instances, smaller businesses with low footfall (either by employee or the public) may only need to slightly increase their liability limits to account for increased costs which would more adequately protect the business from macro-factors. The challenge for businesses is that in a cost-of-living crisis there is so much pressure on them to find savings, and usually insurance spending is one such cost to be scrutinised. If your business has never had to use £10,000 of liability cover so far, why should you listen to a broker who is recommending that you increase the cover from £5m to £10m?

The point of these covers is to protect businesses from catastrophic events. Brokers should be advising customers on risk transfer, and it is ultimately down to the customer how much they want to spend. All a broker can do is advise. This is pertinent for businesses that have lots of people on site, for both employers and the public. Just think: a smaller social club often used to host birthday parties or village fairs might have 200 people present. It’s not a big business, but its liability exposure is potentially 10 times greater than a CNC machining company with 20 people making machined components turning over millions every year.

Brokers should be making their customers aware of the cost to insure additional or higher limits and should be advising on casualty accumulation for many businesses. Insurers should also be vigilant to potential increases in market demand for additional limits. Customers should be looking at the realistic liability risk and ensuring they are equipped with the knowledge to adequately transfer the risk they are comfortable with.

Has your current broker spoken to you about why you should consider increasing your public liability limit and the relatively low costs involved in doing so?  Are you comfortable with the cover you have in place, or would you welcome an up-to-date assessment of the risks your business faces?

To arrange for an assessment of your business risks, contact us at 020 7543 2807.

References

Michaelide. N, et al, (1997), The Premium Rating of Commercial Risks, Actuaries Journal, https://www.actuaries.org.uk/system/files/documents/pdf/0397-0491.pdf [Accessed 8/12/2022]

ABI, (2021), The discount rate change – what is means to Customers, Association of British Insurers, The Discount Rate | ABI