The Rising Cost to Insure Security
The settlement sums usually make headlines: $10 million for negligence; $45 million in damages; $55 million for failure to perform duties. These figures represent large settlements in court cases involving security firms. In many ways, these cases are isolated incidents, but they are just a few of the high-profile or high-cost negligent security lawsuits settled over the past decade. Although they are infrequent, large claims have broad ramifications for the business of security and the role of security officers.
This rash of large insurance claims in the United States has also been reshaping the security insurance market. Over the past decade, the security industry has enjoyed open underwriting guidelines and declining insurance rates. Now that many of these large claims are maturing and being settled, insurers need to be careful about what risks they choose and how accounts are priced.
Case Studies in Large Claims
Often, large settlements only hint at the magnitude of the pain, suffering, and even loss of life suffered by the plaintiff. Consider the case of the real estate broker, philanthropist, and mother who was seriously injured in October 2011 while shopping at an open-air mall in East Harlem, New York. She and her son were leaving a store when two boys threw a heavy shopping cart from an elevated walkway above the parking area. After falling 70 feet, the object struck the plaintiff and caused her extensive injuries.
The walkway was considered a common area of the mall and under the purview of the mall’s security contractor. In the litigation that followed this suit, the security firm was found partially liable for $45 million in damages. This case took about seven years to settle.
In another case, a teenager was seriously disabled after a shooting in a Fontana, California, public housing apartment complex in August 2006. While sitting outside with friends late at night, the high school student was shot several times by a someone who had been partying elsewhere in the complex. A security officer—who understood his post orders as “observe and report”—had talked to partygoers but did not succeed in breaking up the gathering. Again, the security firm was held partially (and significantly) liable in this $55 million settlement.
What Case Studies Teach Us
Cases such as these can be shocking, figuring prominently in local and national news stories, but their notoriety may lead us to believe they are frequent. Very few security firms ever file a significant insurance claim. Still, these cases can teach us a few crucial lessons about the state of the security insurance market.
We are seeing a combination of higher settlements and more frequent claims in the United States. Security firms are increasingly implicated in settlements. There is no pattern to these claims other than the fact that they involve large settlements.
The U.S. legal environment is changing. Many observers believe Americans are becoming more litigious.
When these claims do happen, they are significant. This is a major concern for insurers when underwriting the security industry. Large, unforeseen claims are difficult to plan for, and stable insurance markets run on predictability.
Large claims involving injuries, death, and other significant damage take a long time to close. Between legal fees and the costs of investigation, time spent in litigation is expensive. The longer a claim is open and on the books for an insurer, the more expensive it is.
Thus, a more severe claim takes more time to settle, which means it costs more for the insurer—and the policyholder, who is often not insured at limits that can handle multimillion-dollar settlements.
Effects on Security
The security insurance market has been a soft market for the last 10 years. That means premium rates have dropped for many accounts. In fact, some security firms are enjoying lower insurance rates today than they had 15 years ago. Yet as severe claims mature, insurers who have been insuring the U.S. security industry for extended periods are facing the financial reality of large settlements.
That means the market is hardening. In a hard insurance market, insurers have less capacity for taking on insureds with a history of severe or frequent claims. They will have stricter underwriting guidelines, meaning they may assign higher prices to accounts or reject submissions for accounts with imperfect risk profiles. In many ways, this is a market correction. Some insurers have reduced rates dramatically during the height of the soft market. More conservative insurers will not need to ask their insureds for as steep an increase.
Insurers are also concerned about and responding to the increased active shooter risk exposure facing the security industry. Active shooter incidents have increased in frequency in the United States over the past several years, and security officers are often the first line of defense against these assailants. Claims can be brought against security firms for failure to prevent these tragedies, and significant damages can be levied against the security firms. These realities may also affect insurance rates.
For security firms, this changing market may mean fewer options for insurance coverage, as some insurers pull back from the security market. Other insurers will non-renew accounts (effectively dropping that insured). Many are increasing rates for 2020.
What You Can Do
These market trends are in effect, and there is little any of us can do to prevent this from impacting the security industry. Businesses across the industry will feel a pinch.
Still, judicious risk management practices can help prevent being dropped by an insurer or help control rates for an individual insured.
Security Management is an excellent resource for articles on risk management and loss control, and I have written here on topics ranging from using contract wording that limits liability to how the industry can reduce distracted driving accidents.
Local insurance brokers are a go-to resource on risk management. They can help connect you with resources from your insurer.
Proactive risk management and loss control may help reduce the impact of rising insurance rates on individual businesses while also protecting the overall health of the industry.
Tory Brownyard, CPCU (Chartered Property Casualty Underwriter), is president of Brownyard Group, an insurance program administrator with specialty programs for select industry groups. In addition to his responsibilities as president, he currently spearheads the Brownguard security guard insurance program. He can be contacted at TBrownyard@brownyard.com.