The ongoing tobacco litigation in Atlantic Canada against major companies underscores the crucial role of liability insurance in mitigating corporate risks. According to Kent Rowe (pictured), president and chief revenue officer at Wedgwood Insurance, businesses need to structure their operations with comprehensive liability policies to safeguard against a wide array of potential lawsuits.
Rowe explained that the nature of unexpected lawsuits varies depending on the type of business and its inherent risks. For instance, companies increasingly face cyber liability, with ransomware and malware attacks becoming prevalent.
“There’s not a week that goes by where we don’t see or hear of a client that has a cyber loss," Rowe said, with ransomware demands ranging from $50,000 to as high as $500,000, depending on the value of the compromised data. Research from Palo Alto Networks found that the average cost of a ransomware attack for Canadian organizations is more than $1.1 million in 2023 compared to $458,247 in 2021 – a 150% increase.
Liability claims also have a "longer tail" effect, meaning incidents can lead to lawsuits years after they occur.
“An incident can occur today, and you may not know that a claim is being presented until two years from today,” Rowe said.
This delayed response is typical in cases of product recalls, slip-and-fall accidents, or construction-related issues that surface long after project completion. Directors and officers, along with employment practices, are also vulnerable to long-term claims such as wrongful dismissal lawsuits which arise years after an employee's termination.
Beyond cyber threats, Rowe pointed to the growing influence of social inflation on liability claims, particularly in the United States. Social inflation refers to the rising costs of claims driven by public and legal sympathy for claimants, which leads to higher court awards.
"The courts find themselves being sympathetic to the plight of the claimant, and a lot of social support tends to follow that," Rowe said.
The complexity of modern business operations has also contributed to a rise in liability claims. With higher expectations from clients, there is less tolerance for unmet contractual obligations or perceived service failures, which can quickly escalate into lawsuits.
"We operate in a world now that is far more complex from a risk perspective, with far greater expectations from the people we do business with," Rowe said.
To navigate these risks, businesses must have well-structured liability insurance policies tailored to their specific needs. Rowe stressed the importance of a thorough risk management overview, which identifies potential liabilities and structures coverage accordingly.
"There’s no one-size-fits-all approach to liability," he said, emphasizing that every business requires a customized liability portfolio to mitigate both financial and operational disruptions effectively.
Reputational risk is increasingly a concern for businesses, particularly as social media amplifies both customer praise and dissatisfaction. While reputational harm doesn't always fall under traditional liability insurance, it’s an emerging area of risk that companies need to manage carefully.
Rowe pointed out that "reputational risk is becoming more and more of an emerging topic," particularly in the U.S., though the trend is starting to take root in Canada as well.
For manufacturing companies, for example, a negative post on social media about a defective product can lead to far-reaching consequences beyond the immediate cost of fixing the issue or compensating the customer.
“The world is world is complex, and it's changing quickly,” Rowe said. “For a lot of businesses, the only thing that they have is their reputation.”
And, in an age where consumers expect transparency and accountability, especially younger, socially conscious generations, a damaged reputation can take years to rebuild. According to Rowe, younger generations "want to see businesses do right by people and do right by the environment," which means reputational risk will only become more critical as expectations evolve.
When it comes to balancing the cost of liability insurance with the potential financial impact of lawsuits, Rowe advises businesses to be proactive and err on the side of caution.
"Always get more than you think you need," he said. Liability coverage is about protecting a company’s assets, reputation, and long-term viability. Relying on the minimum coverage required by contracts or legal obligations may leave businesses vulnerable.
"You hate to be a doomsayer, but you have to imagine worst-case scenarios,” said Rowe. This is to ensure that the limits of liability coverage are adequate to handle multiple claims or major losses.
Beyond basic coverage, businesses should consider whether they need additional protection through umbrella or excess liability policies. These provide an extra layer of security in case primary coverage is insufficient. However, Rowe also warns against over-purchasing insurance out of paranoia. Good risk management practices, along with sound operational controls, can prevent losses and allow companies to purchase "an adequate amount of liability insurance without having paranoia take over."
This is where brokers come into play, helping businesses navigate the complexities of liability insurance. Brokers can offer expert guidance on specific coverage needs, helping companies strike a balance between cost and risk without sacrificing protection.
As risks evolve, so do the insurance products available to businesses. Rowe notes that, in the current market, capacity for liability insurance is strong. Despite the challenges posed by the COVID-19 pandemic, insurers are generally in a healthy position, and appetite for covering areas like cyber and employment practices liability (EPL) has recovered.
"Capacity right now, given where we are in the market, is fairly strong," Rowe said, adding that insurers are performing well financially and, as a result, are providing adequate coverage in key risk areas.
During the pandemic, directors and officers (D&O) coverage saw a significant spike in premiums, but Rowe said that this has leveled off in recent years. He also highlighted that even niche areas like environmental impairment liability, which can be difficult to insure, continue to have sufficient capacity in the market. For businesses dealing with complex risks, this is an encouraging sign that they can find the coverage they need without facing major market constraints.
To ensure they are fully protected, businesses must conduct a thorough analysis of their specific risks. Rowe suggested that companies look at several factors, including quantitative and qualitative risks, as well as asset-based, threat-based, and vulnerability-based risks.
"Looking at all those elements" allows companies to get a clearer picture of their exposure, which in turn helps them determine appropriate liability limits and coverage needs.
With the landscape of liability risk becoming more complex, this kind of analysis is critical for companies seeking to protect their financial health and reputation. By understanding their real exposure, businesses can make more informed decisions about how much coverage to purchase and which areas of risk to prioritize.
"Once that real exposure is identified, it makes it a little bit easier for people to determine which limits they should go with and which coverages they need," Rowe said.
