Marissa Van Der Westhuizen, Claims Manager at iTOO Special Risks
In the pursuit of growth and the day-to-day operations of businesses, an “intangible” yet very real risk arises in the form of liability claims. Recent headlines about product recalls, construction failures, defective workmanship, and bodily injuries linked to certain products illustrate how businesses often downplay the impact of these risks.
The challenge of liability claims lies in two key aspects: uncertainty and complexity. While a claimant may quickly conclude that liability exists after experiencing an adverse outcome, a thorough legal assessment often tells a different story. In liability cases, the legal principle is that damage rests where it falls—that is, the injured party must bear the loss unless it can be shown that negligence caused the harm, justifying a shift of liability to the responsible party. This process involves several considerations, including the interpretation of contracts, outsourcing arrangements, disclaimers, witness consultations, and expert opinions.
In recent years, insurers have observed a steady rise in both the frequency and size of liability claims, with no industry immune. The reasons for this increase vary: heightened awareness and assertion of rights, rising medical costs due to technological advances, and, in some cases, sheer desperation. Liability claims are also frequently inflated, with the validity of each claim determined on a case-by-case basis. However, the overall trend of increasing claims significantly impacts businesses, both large and small.
The severe financial consequences of a liability claim demand careful risk management and the continual reassessment of “adequate” insurance cover. Although South Africa is not as litigious as the United States, the risks remain considerable. Given the increasing frequency and size of claims, it is essential to acknowledge the exposure related to legal defence costs. Even if a business has a robust defence, the financial burden of legal fees remains substantial. Liability policies generally include defence costs within the indemnity cover, making rising litigation expenses a critical aspect of exposure.
Globally, insurers and reinsurers are taking note of “social inflation,” a phenomenon characterised by rising litigation, third-party litigation funding, and higher court awards for damages, all of which contribute to the escalating cost of claims beyond standard inflation. South Africa faces additional challenges due to a strained court system. Depending on the High Court division, trial dates are being scheduled as far out as 2028. Prolonged litigation is often more frustrating for claimants than for defendants, but such delays can be prejudicial to both sides. There is ongoing debate about whether alternative dispute resolution mechanisms, such as mediation or arbitration, offer a viable solution.
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The answer ultimately depends on the specific nature of the dispute. Regardless of the approach taken, the exposure to legal costs—whether through extended litigation or alternative resolution processes—remains significant. Another factor driving the rising cost of liability claims is the diminishing availability of expertise to assess complex matters, such as construction and medical malpractice claims.
This presents a challenge, an opportunity, and perhaps even a responsibility for insurers to proactively address through skills development to ensure future sustainability.
As always, these challenges present an opportunity for adaptation and resilience. With effective risk management within the framework of liability cover, businesses can overcome these risks and unlock their potential.