Law Enforcement Challenges
Author: Robert Lowe and Courtney Ramirez, Alliant
Law enforcement liability has become increasingly difficult to insure in recent years. Many factors, including the public’s perception of law enforcement, have exacerbated adverse verdicts against municipalities. This has made it harder for insurance companies to appropriately set limits and premium amounts.
The 2014 shooting of Michael Brown by a police officer in Ferguson, Missouri, was a turning point in the public’s opinion of law enforcement and how they were treated in court cases. Nuclear verdicts existed before this event, but following the Michael Brown shooting, a material change transpired. Looking at the top 50 verdicts against municipalities from 2014 to 2018, the median average has increased from $27M to over $54M, according to data from law firm Shaub, Ahmuty, Citrin & Spratt, and these are only the cases that went to trial.
Police perception is not the only shift driving changes in verdicts. Social inflation, which is the rising cost of insurance claims due to an increase of litigated cases with substantially higher jury awards, is another item impacting the courts. In an age where professional athletes sign nine figure contracts and social media influencers make seven to eight figures per year, people seem to be desensitized to the value of money, which makes for larger jury awards. For example, the Justice Department settled the Parkland Shooting incident for $127,000,000. When one sees numbers like this, awarding $20,000,000 for a case seems like nothing.
Litigation Funding, although not a new concept, continues to be prevalent, especially when the case involves a law enforcement or a municipality. Litigation Funding is when a firm funds/fronts all of the costs to take a claim against a municipality to trial. The firm will determine their decision to fund based on the possible settlement amounts, probability of success, the expected duration of the case and, of course, their 30% return on investment. When these firms see the big payouts and likelihood of winning (particularly when they employ the reptile theory, which is a trial strategy where the plaintiff’s legal team will try to make the defendant so unlikable that the jury will award a higher amount), it appears that public entities have the deck stacked against them. While most municipalities have seven figure retentions and then purchase insurance to cover above that, more claims into the insurance layer leads to increased insurance costs.
All these items are impacting insurance companies not only because costs in this area are increasing but, for over a decade, liability costs for municipalities have been underpriced. When claim payments on a carrier’s overall book exceed the premium dollars coming in, it is not sustainable. The frequency and severity of law enforcement claims in recent years has defied underwriting and actuarial projections. Unprecedented/large losses that were anticipated to occur once every ten years are now occurring at roughly double the pace.
Carriers are looking to limit their exposure and many that have been forced to reduce capacity (deployment of limit) and amend appetite (increasing retention levels or changing coverage provided). Many carriers are leaving the market entirely. The remaining carriers are looking to charge significantly higher rates. In some states, municipalities are being pushed to increase retentions by more than 50%.
Long-term, this market is not sustainable for the public entity buyer and something has to change. Taxpayer dollars are being spent on settlements and throwing money at a problem will not fix it. It is not far-fetched to imagine a world where a city goes bankrupt due to high verdicts/settlements and/or choosing to self-insure the risk. Finding a way to provide affordable coverage for municipalities in this environment is not an easy problem to solve. Close attention will need to be paid to how carriers continue to address this area of risk.