More Contractors Increase Deductibles to Reduce Insurance Premiums
As construction projects become larger and more complicated, contractors are taking on more of the risk by increasing their builder’s risk insurance deductibles, according to a recent report.
Michael Cusack, executive vice president of insurance broker Alliant Specialty, told Insurance Business magazine that contractors are willing to take on more of the risk as those that have strong internal risk management regimens will be rewarded with lower premiums, particularly if they can stave off expensive claims.
There are a number of factors at play that are driving this transfer of risk:
- Claims costs are skyrocketing as the cost of rebuilding and materials has continued rising.
- Increasing litigation.
- Larger and larger liability lawsuit settlements and jury awards, and an increase in “nuclear” verdicts of $10 million and more.
“Contractors are taking on more deductible risk and manage that risk effectively using in-house protocols, and the ones that can do that will be the most successful,” Cusack told the trade publication.
“Construction jobs are getting much bigger, and the risks are becoming more complicated. If contractors can develop the systems and the personnel to manage risk, they can do it more efficiently and therefore be rewarded for that,” he explained.
The reason that you carry contractor insurance coverage in the first place is to protect your business from an accident or incident that could be financially devastating, such as a fire that wipes out all of your progress and destroys the materials and supplies that you had stored on-site.
Considerations
Increasing a deductible obviously comes with risk, particularly if you end up having multiple claims.
Raising your deductible amounts can be a smart business move that saves you money on your monthly or yearly premium payments. The extra money can help you grow your business, invest in new equipment, and even increase your available cash flow. But the best use of the extra cash is to create a contingency fund that you can draw on in case you incur a claim.
If you are comfortable assuming some additional risk yourself, and have resources you can draw on if they’re needed, talk to us about the possibility of raising your deductible. If the savings are enough to cover the deductibles on one or two claims, it may be worth making the change.
To make taking on more risk financially viable, you’ll have to prioritize risk management at your worksites. Emphasize the importance of safety to your supervisors, crew members and subcontractors.
By conducting regular safety training, providing personal protective equipment and strictly enforcing safe work practices, you can reduce the risk of on-site accidents and minimize damage and injury claims.
One other major risk to contractors is theft and vandalism. To lower this risk, builders have been erecting fences and walls around worksites since the dawn of construction. Today, there are cost-effective solutions to increase site security and reduce risks, such as:
- Online cameras and smart sensors on the job site can enable continuous monitoring for unauthorized access, unlawful activities, CO2 levels and real-time water leak detection systems like WINT’s water intelligence platform.
- Adequate lighting is much cheaper to procure, and built-in motion sensors can help save energy (while deterring potential trespassers to the site).
- GPS tracking tags on vehicles, equipment and even valuable materials can make it easier to recover them if they are stolen.
- Mobile applications for your workforce management can be a helpful tool in creating ongoing and interactive safety training, and risk-reporting programs to reduce the risks of human error and negligence.
Talk to us first
Builder’s risk premium calculations can be complex, and taking the step to increase your deductible has to be done with forethought and care.
Call us to review your policies before renewal and we can do a deep dive into your policy and risk management practices to see if increasing your deductible is a good move for you.
Businesses Struggle with Risk Protection Gaps
Nearly half of middle-market businesses feel unprepared for key threats despite implementing various risk management strategies, according to Nationwide Insurance’s latest “Agency Forward” survey.
The survey found that while 90% of businesses have formal risk management policies that are reviewed regularly, 21% lack a business continuity plan, leaving them exposed to potential disruptions that could severely impact their operations.
Additionally, 45% lack a disaster preparedness plan, and only half have a fleet safety program in place.
These shortfalls create vulnerabilities that could lead to financial and operational setbacks.
The survey found that companies allocate an average of 6% of their budgets to risk management and safety. Industries with higher risk exposure, such as construction and manufacturing, dedicate a larger share — 19% and 13%, respectively.
Key business concerns
Middle-market businesses identified their top risks over the next two years as:
- Costs and finances (42%),
- Economic and regulatory factors (40%), and
- Technological disruption (26%).
Economic downturns, supply chain disruptions, cyber-security threats and regulatory changes are the most pressing risk management priorities, each cited by 42% of respondents. However, only 5% of businesses listed natural disasters as a risk management priority, which could be a blind spot given recent climate-related disasters affecting various industries.
Leveraging technology
Technology is playing an increasingly important role in risk management, with 76% of surveyed businesses utilizing some form of digital solution.
Owners reported improved efficiency and compliance to regulations, enhanced data analysis and reporting, and better real-time monitoring of risks as a result of their technology use.
While only 11% have fully integrated technology into all aspects of risk management, 65% use it selectively.
The most common digital tools include:
- Cyber-security solutions (78%),
- Compliance and reporting software (67%), and
- Supply chain management software (58%).
However, technological adoption is not without challenges. Business owners cite the cost of safety measures (38%), maintenance of safety equipment and technology (31%) and keeping up with evolving safety standards (30%) as significant barriers to effective risk management.
How companies can better manage risk
To close these protection gaps and strengthen their resilience, mid-market businesses should consider the following strategies:
- Develop a comprehensive business continuity plan — Organizations without a continuity plan should work with risk management professionals to create one, ensuring they have a roadmap for responding to disruptions.
- Review the company’s compliance with regulations and laws — It’s important that your human resources team stays on top of regulations and legislation to ensure the organization doesn’t run afoul of them, which can result in penalties and fines.
- Enhance disaster preparedness — Natural disasters may be a low priority for many businesses, but proactive planning can prevent severe financial and operational consequences. Developing an emergency response plan can help mitigate potential damage.
- Analyze workplace accident data — Managing workplace safety is key to any company’s risk-management efforts. You should track incidents and thoroughly investigate each accident or near miss to find out what led to the event.
- Invest in technology for risk mitigation — Consider expanding your use of AI, predictive analytics and cloud-based risk management platforms to identify and address vulnerabilities before they become major issues.
- Regularly review and update risk management policies —As regulations and business risks evolve, you should regularly assess your policies to ensure they remain effective and aligned with industry best practices.
- Integrate risk management with business strategy — Risk management should not be seen as a separate function but as a core component of business success. Leaders should align their risk strategies with company objectives to ensure a seamless approach to resilience.
Expect to See Surcharges on Your Policy for the L.A. Fires
Even if you have a business or a home that was not affected by the recent wildfires in Los Angeles, you will likely see a surcharge to help pay for them on your next property insurance policy renewal.
The state-run California FAIR Plan, which is the market of last resort when policyholders are unable to find coverage from private carriers, expects its total loss from the Palisades and Eaton fires to come in at $4 billion.
Under its charter and state law, if it exhausts its funds, the plan can surcharge all commercial property and homeowner’s insurers in the state after approval from the state insurance commissioner.
Commissioner Ricardo Lara approved the Fair Plan’s request in early February to surcharge insurers a total of $1 billion, which will be assessed depending on each insurer’s market share. Under state law, those carriers are allowed to pass half of their assessment on to their policyholders in the state. It’s unclear how much each policy will be surcharged, but the fee will partly be based on the size of each policyholder’s annual premium.
Without the assessment, the FAIR Plan would run out of funds by the end of March and be unable to pay all of the claims from the fires, as well as claims from unrelated or future events and operating expenses, including the cost of increasing staff to respond to the disaster.
The state of play
The L.A. fires are one of the costliest natural disasters in the history of the country. Consulting firm Milliman estimates that the wildfires will cost $23 billion to $39 billion in insured losses.
As of Feb. 11, the Fair Plan had paid out about $800 million in claims, leaving it with about $1.2 billion in cash on hand.
It has also tapped reinsurance, which is basically insurance for insurance companies. It has multiple layers of reinsurance, but it cannot access all of them until it spends more of its funds on claims. It now has access to the first tranche of coverage worth $350 million after it met its $900 million deductible.
The FAIR Plan can access additional layers of reinsurance based on the claims incurred and outstanding reserves up to a $5.78 billion limit. To access all layers of available reinsurance, the plan would have to pay out about $3.5 billion, including the $900 million deductible, and copays. That’s more than its cash in hand.
After accounting for its reinsurance package, the FAIR Plan expects to pay out $2.3 billion of the remaining $3.1 billion reserved for unpaid losses from the fires.
How it will affect your policy
To help the plan pay for the $1 billion shortfall, it will surcharge each property insurer in the state based on their market share two years prior to the assessment. Every carrier that sells commercial property and homeowner’s insurance in the state will be assessed.
Here are the market shares of the top 10 insurers in 2023, the year assessments will be based on:
- State Farm 19.7%
- Farmers 14.7%
- Liberty Mutual 6.5%
- CSAA 6.4%
- Mercury 6%
- Allstate 5.7%
- AAA of Southern California 5.5%
- USAA 5.3%
- Travelers 4.3%
- Nationwide 3.1%
Avoiding Wage & Hour Lawsuits in a Connected, Remote Work World
While wage and hour lawsuits filed against employers around the country declined between 2022 and 2023, there were still nearly 6,000 complaint filings under the federal Fair Labor Standards Act.
These types of complaints are the most common employee actions against employers and they typically cover failure to pay workers for hours worked, overtime infractions or requiring them to work during their lunch period.
With the onset of remote work and mobile devices, the chances of an employee working off the clock have increased substantially.
For example, if a manager texts a non-exempt employee while they are home and during non-working hours and asks them to send a client an e-mail, they are essentially requiring the employee to work unpaid.
If your require or allow your staff to work off the clock, the employee must be compensated for all of that time. This means that even if you did not ask the employee to work, you may still be required to compensate them, as long as:
- You know or have reason to believe that the employee is continuing to work, and
- You are benefiting from the work being done.
This is true regardless of where the work is performed at in the office or at home, for example.
Nine steps to protect your business
To protect your business from being sued for wage and hour infractions:
- Calculate overtime correctly. In some cases, an employee is paid by salary or piecework, and may receive bonuses and commissions. All of these are factors that must be considered in correctly calculating overtime pay.
- Keep detailed records of everything related to wages and hours.
- Do not allow non-exempt employees to remotely access their work e-mail account.
- If you give an employee access to their work e-mail at home, ensure that they are paid for their time in reviewing and responding to e-mails when not at work.
- Educate managers about text messaging or e-mailing non-exempt employees when they are off the clock. Conversely, tell non-exempt staff avoid answering text messages or e-mails about work when they are off the clock.
- Do not allow employees to take lunch at their assigned work area. If a worker answers a phone call or writes an e-mail during a lunch break (even if they weren’t not ordered to do so), they may be entitled to payment for time worked.
- If an employee is asked to stay after their scheduled end time to finish up a project, they need to remain on the clock and paid for that time.
- If a supervisor knows that a worker is staying late to finish a project, that time is compensable, even if the supervisor never asked them to stay late.
- Have in place a written policy that bars unauthorized work or unauthorized overtime. Ensure that your employee handbooks and wage and hour policies and procedures are up-to-date and compliant.
Insurance
If an employee is successful in an FLSA claim, they may recover twice the amount of their unpaid wages, plus a mandatory award of attorney fees, which often far exceed the amount of any unpaid wages.
Many employers purchase employment practices liability insurance to help cover the costs of employee lawsuits, but policies typically exclude coverage for wage and hour claims.
However, there are some insurers that will provide a wage and hour defense-cost-only sublimit on the EPL policy.
There are some specialized insurance policies that are sold by offshore companies that will cover wage and hour infractions, the costs of litigation and awards. However, they are uncommon.
In light of the scarcity of coverage, it’s important that you have in place strong policies to deter employees from working unauthorized overtime.
How the L.A. Fires May Affect Your Commercial Property Insurance
The fires that have ravaged large swaths of homes and businesses in Los Angeles are likely to significantly alter the California commercial property insurance market. Policyholders may need to brace themselves for surging premiums, policy non-renewals and uncertainty.
These wildfires will result in record payouts by insurers. Moody’s RMS estimates insured property losses from the fires will be up to $30 billion, and uninsured property losses will be billions of dollars more.
So many insurers have in recent years already left the state or drastically curtailed the number of policies they write due to the wildfire threat, that the scale of these fires could push more of them to do the same.
Besides the hit to insurers, the L.A. fires are likely to have severe consequences for the state’s market of last resort for home insurance, the California FAIR Plan, which said it may see more than $3 billion worth of claims from the fires.
The FAIR Plan does not have the resources to cover damages above $2.3 billion at this stage. If its ultimate claims exceed that, all property insurers in the state will be surcharged — and likely will pass those fees on to policyholders.
Here’s a look at the current state of the market and how commercial property policies may be affected.
The state of the market
The homeowner’s and commercial property insurance market in California is in a state of crisis.
Dozens of insurers have pulled out of the state and the ones who have opted to stay have dropped policies in high-risk areas or they have gotten more selective about the properties they are willing to insure.
Mainstays like State Farm, Farmers and Allstate have stopped taking on new customers and have been shedding others they deem too risky. State Farm has dropped more than 100,000 policyholders in the last year alone.
Some common factors that can prompt a carrier to refuse coverage are the age of the roof (10 years for composite) or the age of the property (some insurers won’t insure a home older than 25 years).
Commercial property owners who have recently filed claims are often dropped as well by their insurers and find it hard to secure new coverage.
Besides the wildfire risk, the cost of repairs and rebuilding has skyrocketed in the last few years, which has driven rates higher.
The bottom line: The market was already turbulent before the L.A. fires.
Commercial property rates
Commercial property rates have been increasing an average of 20% a year recently, but many property owners have seen their rates double or triple. Even those who are forced to go to the FAIR Plan for coverage face significantly higher premiums, particularly if they live in a wildfire-prone area.
Besides wildfires, a number of other factors have converged to drive insurance rates even for properties in areas not prone to wildfire, like urban, suburban and industrial areas. These include:
- Inflation and rising repair costs — Rebuilding costs have risen more than 30% since 2020.
- Reinsurance costs — Insurance companies purchase their own insurance called reinsurance to manage risk, especially in catastrophe-prone regions. Reinsurers have raised rates and increased the thresholds for when they’ll start paying claims due to the increased risk in California.
While you’ve already experienced rate hikes for your commercial property policy, the size of rate increases over the past few years has been tempered by laws that restrict the factors insurers can use when calculating future rates.
New rules that just took effect in January 2025 will allow insurers to factor in expected future costs of natural catastrophes and the cost of reinsurance when pricing their commercial property policies.
The Department of Insurance has also been expediting rate increase requests, which in the past sometimes have taken years to get approved.
Moody’s has predicted that property rates will rise again as a result of the fires.
Risk to the FAIR Plan
As insurers leave the Golden State or refuse to cover properties in areas like the Pacific Palisades, Big Bear, Truckee and other wildfire-prone areas, more property owners have been forced to get coverage with the FAIR Plan, which has put it in precarious shape. As of Sept. 2024 (prior fiscal year-end), the FAIR Plan’s total exposure was $458 billion, a 61.3% increase from Sept. 2023.
Those sums are astounding, considering that the FAIR Plan’s annual written premium is $1.26 billion. Also, the plan had just $200 million in reserves as of Sept. 30 last year, and $2.5 billion in reinsurance.
Current estimates are that the FAIR Plan will likely face more than $3 billion in claims from the fires, mostly from homeowners, but also the hundreds of businesses that were damaged or destroyed.
Under state law, if the L.A. wildfires exceed its reserves and reinsurance, the plan can charge all private insurers in the state based on their portion of the insurance market for the first $1 billion above what the FAIR Plan can pay — and they can collect half of that from their policyholders.
For any funds needed above $1 billion, the FAIR Plan can seek approval to assess all policyholders in the state.
Any of those surcharges would be on top of premiums policyholders pay. However, there is talk that the California Legislature may come to the rescue with some sort of bailout.
One other issue: Property owners with the FAIR Plan must contend with its policy limits. For commercial properties, the most the plan will insure on any given property is $20 million (for homeowner’s insurance, it’s $3 million).
What you can do
Don’t lose hope if you have business property in California. Consider the following:
California’s property rates are still lower than in many other states. The current changes may reflect a market correction rather than an outlier spike in costs.
There is still insurance capacity with surplus insurers. If you can’t get coverage with a carrier that’s licensed in the state, we can help you find coverage in the non-admitted insurer market. These insurers are reliable even though they’re not licensed in California, but that also gives them flexibility in how they write policies, which they can better tailor for your individual needs.
The market is cyclical and will change. The current challenges are likely to stabilize as insurers adjust to the new risk environment, raise rates, change policy wording and regulatory changes are implemented. Market corrections, along with efforts to mitigate risks, such as improved fire safety measures, may restore balance.
Top Eight Business Risks for 2025
One of the keys to running a successful business is having in place a robust risk management system to ensure your company can guard against a growing number of threats that can derail operations or cause significant losses.
While each industry and company have different risks they face, a recent survey collected responses from risk managers around the world to identify the top risks facing businesses.
The “Allianz Risk Barometer 2025” highlights the key threats for organizations in an increasingly interconnected and volatile environment.
Below are the top eight risks in 2025 and what you can do to protect against them.
1. Cyber incidents
Cyber risks like ransomware attacks, data breaches and IT outages remain the number one threat globally. With AI accelerating the sophistication of attacks, businesses have to double down on protection.
What you can do — Invest in robust cyber-security measures and training employees on how to detect threats and avoid clicking on links that contain malicious code. Regularly update systems, conduct penetration testing and educate staff on cyber hygiene.
2. Business interruption
Supply chain disruptions, often triggered by cyberattacks or natural disasters, have consistently ranked high. If one of your suppliers suddenly can’t provide you with goods your firm needs or a cyberattack affects your ability to function, you will lose money.
What you can do — Diversify suppliers, explore local sourcing and implement business continuity plans that include how to respond to each possible issue that could result in disruption to operations or sales.
3. Natural catastrophes
Events like hurricanes, wildfires, convective storms and flooding can cause significant losses, be that from damage to property and assets, injury to staff, employees being unable to work or business interruption.
What you can do — Put in place a disaster recovery plan that includes how members of your staff will communicate, possible alternative locations for operations, and how to protect your facilities. Evaluate disaster preparedness and explore insurance solutions.
4. Changes in laws, regulations
Regulatory shifts, especially around sustainability and emerging technologies like AI, are creating compliance challenges. Businesses will be faced with plenty of uncertainty under a new Trump presidency, considering his plans to pursue deregulation.
While a boon for business, it could lead to confusion, particularly for those who operate in blue states. As well, the new president’s promises of raising tariffs could lead to higher costs for many businesses that source products, parts and machinery from abroad.
What you can do — It’s important that you stay on top of regulatory and legal changes to avoid penalties or lawsuits. Engage legal advisors or compliance experts to navigate changing laws.
5. Climate change — The physical and operational impacts of climate change, such as extreme weather and resource scarcity, are intensifying and businesses need to harden their operations to cope.
According to the report: “Extreme temperatures can drive up energy demand, which is especially critical for industries reliant on cooling systems, potentially leading to operational cost increases. Water scarcity can threaten businesses reliant on water for operations, while biodiversity loss undermines ecosystem services which many industries depend on, for example, agriculture or maintaining crop yields.”
What you can do — Many of the same preparations businesses can make for dealing with natural catastrophes can also be used for climate change resilience.
6. Fire and explosion
Fires remain a leading cause of business interruption, especially with the rise of lithium-ion battery incidents. “The degree of disruption can be very high, as it can take longer to recover from than many other perils,” the report states.
What you can do — Ensure that you conduct regular fire safety audits and training to staff, particularly if you store flammable materials on-site. Regularly update your fire prevention protocols and provide emergency response training.
7. Macroeconomic developments
Economic uncertainties, including inflation and fluctuating monetary policies, pose challenges for budgeting and forecasting. This will be especially true under the Trump administration as he sets out to reverse Biden’s policies and pursues tariffs that could lead to trade wars.
What you can do — Keep abreast of market trends and adapt to macroeconomic changes with flexible planning. Staying agile and diversifying revenue streams can mitigate risks.
8. Market developments
Many experts believe it is unlikely that there will be a major stock market correction in 2025. Recovering earnings and Trump’s plans for deregulation and strong fundamentals should support continued growth.
What you can do — Strategic planning and market analysis are critical if your organization is reliant on stock market gains.
The takeaway
The above list of risks was gleaned from a survey of companies around the world, but many of the risks also apply to U.S. firms.
It’s important that businesses take a structured approach to managing their risks and creating plans for all eventualities that may affect them. That requires buy-in from management and a focus on protecting the company’s revenue stream, physical and digital assets, employees and supply chains.
Commercial Property Rate Hikes High, but Slowing
While commercial property insurance rates have been increasing for seven straight years, the pace of rate hikes has slowed a bit this year, according to a new report.
With many factors continuing to pressure rates, businesses should expect continued hikes for their commercial properties, with the biggest increases taking place in areas at higher risk of natural catastrophes, which vary depending on which part of the country they are located in.
The third quarter 2024 “Commercial Property/Casualty Market Index” by the Council of Insurance Agents & Brokers reported a 7.9% year-on-year increase in property insurance pricing, which is a significant drop from the 17.1% average rate increase noted in the same period of 2023.
While rates are still rising, analysts say that the pace of increases may finally be catching up with the higher claims costs and other factors affecting insurers.
If your business insurance policy renewal is coming up, here’s an explainer of what is driving rates this year and what you may be able to do about it.
Rate increase drivers
A convergence of factors has caused this extraordinary rate-hardening cycle in commercial property insurance:
Catastrophe losses — This includes hurricanes, floods, wildfires, tornadoes and winter storms. As climate change intensifies, the U.S. and the world at large have seen a surge in the cost and scope of natural catastrophes.
Adding to what insurers pay after these events, Americans have also been migrating for decades to areas that are now most at risk of disasters. With higher population density comes more claims.
Insurers in the U.S. generally paid out increasingly large amounts for natural disasters in the last decade. In recent years the payouts have totalled:
- 2023: $81.6 billion
- 2022: $116 billion
- 2021: $108 billion
- 2020: $98 billion
Catch-up pricing — Insurers have been trying to catch up after years of underpricing their policies. They had done this by not keeping up with the cost of rebuilding, but also not requiring policyholders to increase their policies’ replacement costs to keep up with those higher costs.
Bright spot: It now looks like insurers have caught up with prior years’ underpricing as rate increases continue rising, but at a slower rate, depending on where you live.
Rising reinsurance rates — Insurers buy their own insurance by contracting with reinsurers, which share the risk. Due to rapidly rising catastrophe claims costs, these reinsurance firms have recorded substantial losses in the last few years due to natural catastrophe hits.
Facing financial pressure, reinsurers have:
- Raised their own rates substantially,
- Started requiring insurers to carry more of the risk,
- Tightened their terms, which also transfers more risk to the insurers, or
- Pulled out of markets altogether.
Bright spot: Reinsurance rates are leveling off for 2025 and the companies are starting to take on more risk once again, which could bring some relief to commercial property carriers.
Higher construction costs — The cost or construction and rebuilding has skyrocketed since 2019, due to higher material, energy and labor costs. However, that inflation has cooled as well.
Bright spot: According to CBRE, a real estate firm, in 2023 construction costs rose 4.9% year on year, compared to 14.1% between 2021 and 2022 and 11.1% between 2020 and 2021.
What you can do
Depending on where you live, insurance may be relatively easy to secure or it could be near impossible, forcing you to go to a state-run carrier of last resort.
Insurers have gotten picky about which properties they will insure, but as a property owner you can take steps to improve your insurability or reduce your rates, such as:
- Making sure you have a detailed property maintenance plan in place.
- Replacing or repairing the roof, electrical system and plumbing as necessary, particularly if it’s outdated or decades old.
- Having a disaster recovery and business continuity plan to ensure continued operations in case of an event.
- Installing sprinkler systems and leak-detection sensors that can alert you if there’s a water leak in the building.
- Thinking about increasing property deductibles.
- Giving us a call.
The Growing Risks of Vendor Technology to Your Business
While your organization may have its cyber-security protocols buttoned up using best practices, there is a growing risk to businesses from tech vendors that are used to run their operations.
According to the 2023 SecurityScorecard “Global Third-Party Cybersecurity Breaches” report, 98% of organizations have a relationship with a third party that has been breached and 29% of all breaches were attributed to an attack on a third party outside of the organization.
The findings reflect the growing risk to businesses as they use more third party apps, software and cloud services, some of which have access to troves of important company data.
Also, the costs of a cyberattack on a company’s vendor are often 40% higher than the cost to remediate an internal cyber-security breach.
The findings shine the spotlight on the growing risks from interconnectivity in digital supply chains and vendor relationships that affect virtually all businesses, in particular those that:
- Rely on tech vendors that keep day-to-day operations running.
- Entrust confidential information on clients and employees to a third party vendor.
- Use outside vendors for specific goods and services.
Another survey by the cyber-security firm OneTrust found that:
- 71% of organizations use more outside technology vendors than they did three years ago.
- 73% of businesses have experienced significant disruption caused by a third party, whether it be a data breach or ethical violation.
- 73% say outside vendors have more access to company data than they did three years ago.
- 80% have expanded their third party due diligence questionnaires in recent years.
Examples of third party relationships that may pose risks
- File transfer software
- Client management software
- Business management platforms
- Cloud services
- Hosting provider and external platforms
- Security software
- Outsourced software development
- Facilities management software.
Third party breach examples
The crash. An online store uses a cloud provider to run its business and an outage causes its website to crash, preventing orders from being fulfilled.
Effect: Contingent business interruption (coverage for third party events), in addition to other expenses and costs.
The backdoor attack. A vulnerability in software that connects to a company’s servers turns out to be a backdoor for attackers who install malicious code on the firm’s network.
Effect: The vendor attack could lead to business interruption and additional expenses.
The payroll vendor breach. The payroll company an employer uses suffers a breach, potentially exposing confidential information of clients and/or vendors.
Effect: This could constitute a privacy incident, potentially requiring notification to affected individuals and companies.
What you can do
As attacks on third party vendors continue to increase, it’s important you understand your firm’s third party risks, and how to measure and manage those risks.
Besides strengthening internal cyber-risk protocols, you should consider doing an analysis of your third party risks. While this will vary depending on the business and its industry, here are some ways you can get a better handle on your company’s vulnerabilities:
- Determine which vendors are critical to your operations. For the most critical, you can also determine which suppliers or providers your vendor uses.
- Define and quantify your risk with each third party tech vendor you use, to help you identify the damage to your organization should they suffer an attack that compromises their systems, and subsequently, yours.
- Create an incident response plan that maps out what steps your organization can take in case a vital vendor goes down. Test the plan against different types of scenarios and determine how you would respond. You should allow not only your IT people, but also the rank and file that use these systems to test the plan’s effectiveness.
- Verify that your critical vendors carry cyber-insurance coverage that would address losses your firm may endure if they suffer an event.
Insurance
To ensure that you are not left footing the bill for these types of incidents, review your cyber-insurance policies to see if they cover attacks or incidents on third parties that your firm uses. Call us for a review.
Expensive Litigation Is Driving Insurance Costs
Soaring court judgments and jury awards are pushing up the cost of commercial liability and umbrella insurance policies, particularly for businesses that have been sued before.
There are a number of factors at play, including massive “nuclear” jury awards for tens of millions of dollars, private equity-backed lawsuits and a phenomenon known as “social inflation” — when the costs of jury awards increase faster than the cost of living.
A 2024 A.M. Best report found that social inflation and large verdicts verdicts mostly affect commercial auto, professional liability, product liability and directors and officers liability insurance.
Policyholders are also facing more restrictive general liability coverage as insurers continue to reduce their exposure.
What’s happening
A 2024 study by reinsurance company Swiss Re found that social inflation had increased liability claims by 57% over the previous decade. The increase in 2023 alone was 7%. Another study showed that over a five-year period, the top 50 insurers in the U.S. had allocated half a billion dollars for litigation expenses.
The Insurance Information Institute in early 2024 pointed to legal-system abuse as a leading reason for auto insurance companies losing money to the tune of $1.10 for every $1 in premium.
“As dangerous roads and driving conditions as well as economic costs have been on the rise for several years,” the institute wrote, “the challenges presented by overzealous billboard attorneys are exacerbating the situation.”
Adding fuel to the fire is the increase in “nuclear verdicts” — when a jury awards damages of more than $10 million.
Fears of verdicts this large have encouraged businesses and their insurers to settle claims rather than fight them, leading to higher costs.
Lawsuits have also become investment vehicles. Private equity firms are funding lawsuits against businesses in return for a share of any awarded damages or settlements.
Recent ‘nuclear’ jury awards
- In 2021, a Florida jury awarded a landmark $1 billion verdict to next of kin of a motorist who was killed after a driver for Kahkashan Transportation Inc. was on his cell phone when he flipped his semi truck, plowing into the man’s vehicle.
- A Philadelphia jury in May 2024 ordered Exxon Mobil to pay $725 million to a service station mechanic who developed cancer after being exposed to benzene in gasoline.
- In June 2024, a California jury ordered entertainment mogul Alki David to pay $900 million to a former worker who had accused him of sexual battery.
What you can do
You business can reduce your chances of getting sued by:
- Focusing on risk management,
- Ensuring you hire good drivers and provide training that focuses on reducing risks of distracted driving,
- Preventing workplace discrimination and harassment,
- Maintaining clear and detailed documentation,
- Implementing sound business practices,
- Training employees on legal compliance, and
- Having clear contracts.
You can work with your insurance companies both on loss prevention and managing claims for losses that do occur. Finally, work with us to ensure that you have liability policy limits that are realistic in today’s world.