Liability Exposure South of the 49th Parallel

To a Canadian, these staggering U.S. legal award amounts may sound unbelievable. But they are a tough reality these days in the U.S. court system. Today, it is one thing to insure a customer doing business exclusively in Canada – and quite another thing when, for whatever reason, your client (or your clients’ product or service) happens to venture south of the 49th parallel.

In putting the dire monetary risk involved into perspective, David Duke, a noted U.S. defense attorney with Young, Moore and Henderson P.A. of Raleigh, N.C. notes “in the unfortunate event that you or your client is sued in the U.S., you might feel like Dorothy in the Wizard of Oz – as though you have just landed in a strange, distant land”. Getting into an accident or dispute in the U.S. means there is a very real chance that you’re going to go to court. It is that simple. At fault or not, the U.S. legal system is a whole different ballgame with a unique set of rules.

STARK CONTRASTS

It is not uncommon to face multi-million dollar judgments south of the border. While personal injury awards (compensation for pain and suffering and other non-pecuniary damages) are capped at less than $300,000 in Canada, there is no such ceiling in the U.S.

“If you have a tort liability and you are in south Florida, grab your ankles, it’s going to hurt!” says Duke. “New York, South Texas…these are just some of the most notorious hotbeds for high verdicts,” he adds (see chart 1).

In recent years, court award amounts in the U.S. have gone through the roof, to put it mildly. An article in the February 2003 edition of The National Law Journal titled “The Largest Verdicts of 2002” notes the total value of 2002’s 100 largest court awards as nearly 350% more than the 2001 total. If that is not shocking enough, consider the fact that punitive damage award amounts have increased tenfold – from US$3.2 billion in 2001 to US$32 billion in 2002 – for the same number of cases.

ANTI-BUSINESS

Why is this happening? Well, a lot points to “juror anger”. One recent study of jury behavior shows that, in the wake of Enron and other corporate scandals, there is more distrust than ever of corporations.

These days, aggressive plaintiff attorneys have emerged styling themselves as business “killers” and are wildly advertising their ability to win multi-million dollar verdicts on behalf of “the little guy”. In fact, the situation has deteriorated so poorly that the U.S. Chamber of Commerce has spent US$100 million since 2000, and will spend another US$50 million or more this year, to challenge judges supported by trial lawyers and labor unions.

FOREIGN BIAS

Inherent bias against corporations in the U.S. legal system is widespread. But be aware: if you are a Canadian insurance company with a Canadian insured being sued in the U.S., you now have a “second major strike” against you, one that U.S. insurers do not face – a strong bias against foreigners in the courtroom overall and among jurors especially. This has been the case for years, but in the current political climate, the average American juror looks upon Canadians with even less regard for our country’s failure to support the U.S. in the war in Iraq.

To be successful within the U.S. system you need top flight defense lawyers. Why? For starters, U.S. plaintiff attorneys are most often working on a contingency fee basis. As those fees typically range from 33%-40% of the final settlement or court award, these lawyers do not tend to go away easily. There are also associations of plaintiffs lawyers across the U.S. who have banded together to share strategies and tactics on how to sue specific industry groups, like the one that specializes in suing trucking companies. After all, the average juror has had a scary experience or two with a “big bad truck” bearing down on them on the highway. Throw in a foreign truck, and you have the makings for a real party.

Another major problem is that plaintiff attorneys today are able to get more information that 20 or 25 years ago they would never think of getting. U.S. plaintiff attorneys are able to dig deep, looking for anything they can use to inflame a jury, such as employee hiring, training and disciplinary practices. If they find your insured’s actions somewhat negligent in the past with regard to any employee, they will use that to demonstrate overall negligent practices on behalf of the whole company, inferring that those practices must have affected this particular loss somehow. That is why it is critical to know how to train your U.S.-exposed insureds on best proactive operational practices. The difference between your insured being prepared or not before a U.S. loss occurs can be worth millions of dollars.

SETTLING LAWSUITS

Based on the above conditions, it is therefore important to know when (and how) to settle a lawsuit in the U.S. Unfortunately, the tools, tricks and tradecraft required to do this are quite different and more complex than in Canada, with far greater consequences. Having settled losses in Canada just does not come close to giving a claims examiner the skills or confidence they need to navigate the murky U.S. claims waters effectively. It is over before it starts. One could almost compare it to giving a firefighter a water pistol to put out a four-alarm fire.

Another situation an insurer will likely find itself in: losses where the plaintiff’s attorney will be asking for far more than the policy limit, of say US$10 million. While you feel it is likely worth considerably less than that, the jurisprudence range is so wide that it could, on a bad day in court, go as high as they are asking.

But, what if they are willing to settle for the full policy limits right away. Just say no? Well, it is not that simple. Your insured will likely be sending you a legal letter advising you to settle within policy limits, which, if you do not, would allow your insured to go after you in a “bad faith” action for the amount over policy limits that they had normally been liable for. In the U.S., that could be in the millions of dollars.

BROKERS BEWARE

For a Canadian broker there is a very real errors and omissions (E&O) risk present. So, ensure you match your U.S.-exposed insured with an insurer who can properly handle the minefield of U.S. risk, one who can also help you learn how to train your insured to be ready for the risks they face down south. Pick carefully: a cheaper price upfront can sometimes be a lot more expensive at the end of the day.

And, in the U.S., it can take years for bodily injury or liability claims to fully develop, far more so than in Canada. There are no magic tables to tell someone how to reserve a U.S. loss. The majority of Canadian insurance personnel, who have no material experience in handling serious U.S. claims, typically under-reserve their existing claims exposures and unfortunately do not find out until too late. So do not let the loss experience that you receive from an insured’s previous Canadian insurer fool you. To play in the U.S., you have to understand and properly estimate your impending claims costs and apply meticulous exposure rating to properly pricing insurance products. The real deal is in having statistically credible data, knowing the right U.S. laws, jurisprudence and local biases, and above all else, experience. U.S. claims development has killed so many U.S. insurers – it is just that much harder for Canadians.

DEATH SPIRAL

Too often, Canadian insurers follow the same “death spiral” when it comes to underwriting U.S. exposure. The extra zeroes in the premiums for a U.S.-exposed line of business can seem rather attractive (especially with the top-line volume and marketshare mentality that was so prevalent in the insurance industry up until recently).

The spiral starts when they jump into a U.S.-exposed line and start writing business. After the first year or two, they look at the portfolio’s loss ratio (almost always dramatically under-reserved at that point, due to the reasons noted above), and mistakenly believe they are profitable. The line now looks deceptively lucrative, to the point where the insurer thinks it can cut the prices even further, thereby gaining marketshare and still generating excellent” returns. With an increased appetite, such beguiled insurers underwrite even more, with further price cuts – they think they’ve found the “magic formula”.

But, after a few years, such insurers find that the prior-year claims on their books in this line are starting to develop, and settle for 10 times their reserve levels. Multiply that by many claims in the U.S.-exposed book of business, and suddenly the insurer finds itself in a bank-breaking, high triple-digit combined ratio mess. Jobs are lost and departure from the line is made.

The effect this can have on the brokers and insureds can be devastating. One telling example is long-haul trucking insurance which has one of the highest business failure rates of any line of insurance in North America. The estimated average combined ratio, fully developed, for Canadian insurers of long-haul trucking in the soft market years from 1996-2001 was north of 150%! So beware: life expectancy for companies who dare to price without the knowledge is historically short. The bottom-line is that there is no “magic formula” for finding a cheaper way to write U.S. exposed business (chart 2, which shows values for long-haul trucking claims in the U.S. versus what they would likely have been like in Canada, tells the whole story).

EYES OPEN

All in all, if you are going to take on U.S. risk, go in with your eyes open, arm yourself with the right expertise and make sure you are willing to make the long-term investment. For an insurer, building the infrastructure to properly handle Canadian insureds with true U.S. exposure is critical, costly – all of which takes time. Remember, the lack of understanding of U.S. exposure has killed the performance of many Canadian insurers in the past.

We may think of Americans as our “friendly cousins” to the south, but in today’s legal climate we are not likely to be embraced as family if we are embroiled in an insurance dispute in a U.S. court. Choose your partners and your risks wisely, price carefully, pay attention to safety, compliance and hazard management issues and, above all else – try to stay out of the U.S. courts!