Softening the Impact of a Hard Insurance Market
The year 2020 started inauspiciously with a hard security insurance market in the United States. This meant security firms experienced rising premiums and tightening underwriting guidelines, largely due to concerns about claims, costly legal settlements, and risk management in the industry.
These issues were only exacerbated by the emergence of COVID-19 and civil unrest. Although security officers have stepped up admirably in their communities through this year’s uncertainty, the impact of these trends points to the need for increased attention to risk management and loss control strategies.
Why Are We in a Hard Market?
During the 2010s, insurance for the security industry was experiencing a soft market; the market was competitive, so security firms had many insurers from which to choose, while insurance rates for the industry trended downward over the decade. Looser underwriting guidelines meant it was easy for security firms to obtain coverage, even if they did not have a perfect claims history.
As 2020 began, however, the security industry hardened. In a hard market, insurance rates usually rise and underwriting guidelines become stricter, as fewer insurance companies write a line of business and their appetite for risk shrinks. This all makes it more difficult and costly for businesses to secure coverage.
The industry’s current hard market is mainly due to a trend of large legal settlements that drove up the cost of claims. This is called social inflation—a trend towards increasingly expensive insurance claims driven by increasing costs for settlements and litigation. Other factors contributing to high claims costs and the hard market include the security industry’s history of reporting claims late; late claims become more time-intensive and costly to settle. Plus, the cost of doing business has increased. For example, commercial auto insurance claims have become costlier to settle as vehicles have become more technologically sophisticated and more expensive to repair.
In addition, throughout 2020, the security industry was affected by the COVID-19 pandemic and widespread civil unrest. Backed by decades of improvements in workers’ compensation risk management, security firms responded swiftly to the pandemic by providing officers with personal protective equipment (PPE) and adapting post orders, such as conducting temperature checks or stepping up car patrols to address changing needs. This summer, as tensions rose between communities and their police departments, security officers were contracted to take on roles such as guarding businesses in areas affected by looting. As recently reported in the Wall Street Journal, the country is seeing an unprecedented demand for private security.
This response to the urgent issues of 2020 is a testament to the adaptability of the security industry. However, placing security officers in new roles raises concerns that the trend towards costly litigation, settlements, and claims may only be exacerbated. On its face, this may seem driven by concerns of injury to security personnel. However, we have seen very few workers’ compensation claims related to COVID-19 or civil unrest. Rather than physical risks to guards, these trends are creating the greatest concern with contracts.
Liability and Security Contracts
Historically, contracts between security firms and their clients have exacerbated the severity of insurance claims. Large companies that hire security firms often seek to be indemnified in contracts for any accidents or injuries resulting from incidents involving security officers. This allows the client to shift financial responsibility to the security firm, leading to what are called action over or third party over claims. Even if a security officer is injured due to the negligence of the client, the client may be able to sue the security firm for the cost of the claim. While this has led some insurers to create coverage exclusions for action over claims, some larger clients are refusing to allow action over exclusions in their contracts. Another important issue in contracts is a waiver of subrogation. With this language in place, the security firm waives its rights of recovery against the client for their negligence.
Broad interpretations of contract language during litigation are helping drive social inflation of security insurance rates. Court decisions have held private security firms liable for injuries to third parties, or individuals the security officers were not explicitly tasked with protecting. In such a scenario, a security officer’s post orders specify they must protect only the employees of a company and its property. However, they are still held liable for failure to protect if, for example, a delivery driver is assaulted while on company property on the theory that the injured party is a third-party beneficiary of the terms of the contract, whether such protection was intended by the contract or not.
Contract Risk Management
Although I cannot dictate specific contract language because I am not a lawyer, I can offer a perspective on contract risk management. Carefully worded contracts are the first line of defense against assuming undue liability and the financial burden that goes with it. In many cases, security firms are able to provide their clients with standard contracts that have been drafted and approved by an attorney. These contracts allow firms to manage their liability when someone is injured and control the costs of claims by:
- Indemnifying the security firm against their clients’ negligence or omissions through hold harmless clauses;
- Clearly stating the security firm is not an insurer and the client should have its own general liability and property coverage;
- Stating that security officers are on site to deter, not eliminate all risks;
- Excluding third-party beneficiaries—security officers are only responsible for protecting the client and its employees, not every person on the client’s premises; and
- Making post orders specific and clear and consistent with the terms of the contract.
Clients may request that they be added to the security firm’s insurance policy as an additional insured. While in most cases this cannot be avoided, the security firm should insist that coverage be limited to liability arising out of security work and losses caused by related negligent acts.
Of course, not every client will agree to sign the security firms standard contract and, in many instances, firms are asked to sign a non-standard contract supplied by the client. These contracts often shift as much liability as possible onto the security firm through indemnification clauses, waivers of subrogation, and hold harmless clauses. Unfortunately, large, powerful companies offer security firms little wiggle room in revising contracts. In that case, firms will have to weigh the financial costs and benefits of taking on the work versus the potential liability they maybe exposing their business to.
Preventing Long Tail Claims
As mentioned above, workers’ compensation and general liability claims have historically been reported late in the security industry, which means it takes longer to settle these claims. Claims that have a long lag time between reporting and settlement are called “long-tail claims.” Among a sample of security firms, general liability claims took an average of about three months to report; about 5 percent of the claims took three years to report.
General liability claims become significantly more complex and expensive when there is a long period of time between when an incident occurs and when it is reported. On the workers’ compensation side, security officers report injuries to the client rather than their employer, and the employer reports claims to its broker, rather than its insurance company. The average cost of a workers’ comp claim is typically higher if it is reported late, due to the employee’s recovery time and increased medical costs. Ultimately, this can have a negative impact on the insured business’s insurability and premiums.
Let’s look at the example of an incident at a gated community run by a homeowners’ association (HOA). The HOA contracted a security officer to monitor the entrance, so he spent his time in a booth. While he was on duty, a shooting involving two residents happened elsewhere in the community; the officer did not know about it, and he could not have prevented it. When the officer and his firm later learned about it, they did not report the claim because it did not directly involve them. However, the HOA reported the incident to its insurer immediately, who then discovered a security officer had been on duty. The claim then landed on the security firm. By the time the insurer was able to begin settling the claim, the security officer involved had left the post and the company. Plus, everyone’s memories of the event were fuzzy and had been shaped by retelling the story several times to police, other claims adjusters, and lawyers.
This points to a simple guideline: Always report any major injury or incident to your insurer. Even if the security officer could not react to the incident, and even if it is outside the post orders, notifying the security firm’s insurer puts everyone in a defensible position. The insurer can gather information when memories are fresh and begin an investigation if warranted. Simply reporting a claim or potential claim does not automatically increase insurance rates. An injury to an employee should be reported to the employer immediately. In turn, the employer should aim to report it to its insurance carrier within 24 hours. In all claims, timely reporting is associated with lower settlement costs.
We may see a hard insurance security market for several years, but the efforts of individual security firms and officers can soften the impact of the hard market and build on the industry’s risk management strengths. As the industry grows and security officers fill new, critical roles in society, it is more important than ever to keep an eye to risk management.
Tory Brownyard, CPCU, 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. Brownyard is a highly regarded subject matter expert in the field of security insurance and has contributed to industry publications such as Security magazine and has been featured regularly in leading insurance publications. He can be contacted at [email protected].