Liability risks on the horizon

Fast moving economic and technological change around the world is producing new ways for individuals and companies to harm third parties, albeit unintentionally. The inevitable corollary is that the potential for businesses to be held liable for compensating victims is also multiplying.

The implications for insurers of this fast expanding casualty universe are huge, according to a new report from the Geneva Association, Forewarned is Forearmed. Written by the thinktank’s lead on evolving liability, Darren Pain, the detailed report is informed by input from liability experts at 26 global insurers.

The survey gives a collective perspective from the insurance sector and focuses specifically on firms’ potential liability exposures and the fallout for their insurers. Addressing the full range of liability insurance – both casualty and managerial/professional lines, the report provides a complete take on the contours of the commercial liability risk landscape.

Commenting on his findings, Pain tells Insider Engage that although big societal change has happened before, such as in the industrial revolution, factors are coalescing today that make tomorrow’s liability landscape much more complex.

The proliferation of digital technology is exposing organisations to new types of intangible risks, including liabilities to third parties harmed by their actions, Pain says. “For example, cybersecurity failures could intrude on others’ privacy, damage reputations and/or infringe intellectual property (IP) rights, all of which could lead to possible legal claims. Such intangible risks (including reputation) are difficult to assess and quantify.”

Also, there’s generally more heightened public scrutiny of corporate actions. Information about companies’ activities is easily available and widely disseminated, including through social media, he says. “This helps shape societal attitudes towards legal liability standards, whether expressed through more expansive judicial interpretations/juror attitudes about the appropriate perimeter of corporate responsibilities, or by increased regulatory oversight of behaviour and tougher sanctions for violations.”

In addition, specific institutional and behavioural developments are being catalysed by shifts in litigation practices such as the increased availability of finance to pursue legal claims. Pain says that while third-party litigation finance is widening access to justice, it’s also promoting frivolous litigation and fuelling excessive settlements.

Insurers will face new, ambiguous risks in the near future to do with virtual worlds and also from some all too real substances.

Fast moving developments in virtual reality will create fertile ground for liability risk, according to the report. Pain highlights how the outlook for the metaverse is extremely uncertain. He says it’s unclear how far it will extend beyond current online gaming to a fully immersive virtual environment with applications in mainstream commerce.

“Likewise, the precise institutional architecture it might adopt is far from clear; in particular, whether there will ever be ‘the’ metaverse or simply a continuation of multiple platforms with varying degrees of virtual reality and with or without interoperability between them.”

Three areas of liability risk in the metaverse stand out for insurers: data security and privacy, property rights, and user interactions.

Metaverse users might face novel privacy risks involving unauthorised transfers of personal and biometric data (e.g. facial expressions, gestures) to third parties, for example. Cybersecurity and data privacy breaches could also take on a more complex form.

Meanwhile, unlike in the real world, property ‘ownership’ in the metaverse does not confer legally enforceable rights to any physical property referenced by virtual assets, such as non-fungible tokens. This complicates issues relating to potential infringements of copyright and trademarks, the report explains.

User interaction in the metaverse might be an issue. When users interact through their avatars, certain exchanges can occur that would equate to breaking the law if they took place in the real world. Such incidents could be in breach of tort law (for civil claims such as negligence, defamation or nuisance) or criminal law (involving illegal acts and even crime such as assault, murder, burglary or rape).

Back in the real world, industrial contaminants, the nemesis of many insurers in the late 20^th century, will continue to stalk underwriters through the 21^st century.

Nearly half of the of liability insurance experts contributing to the report highlighted the industrial pollutants per- and polyfluoroalkyl substances (PFAS) and microplastics as very significant factors in their medium-term commercial liability outlook. Toxicological evidence of the adverse effects of many of these “forever” chemicals is growing, prompting an uptick in litigation and heightened regulatory scrutiny.

For insurers it’s painfully reminiscent of the Asbestos & Environmental era, but Pain points out that there are also important differences that could constrain successful litigation. In particular, there’s no signature disease tied to PFAS impacts in the same way there was between mesothelioma and asbestos, he says.

Also, the ubiquitous use of PFAS presents significant challenges to traditional theories of causation, which aims to attribute harm to the actions and omissions of a specific manufacturer or supplier of the hazardous substance or products that use it.

The situation may well still evolve, however, Pain warns. “Modified causation theories were adopted in tort cases to provide legal remedies to victims of asbestos-related disease. For example, courts allowed plaintiffs to recover where asbestos simply accelerated or contributed to the victim’s death or disability.

“Similarly, developments in PFAS tracking research and technology could yet dramatically affect how parties can prove or disprove causal links between any resulting harm and particular chemicals.”

As well as environmental harm, corporate social responsibilities and governance is going up the risk register. But is the potential for costly ESG related litigation also intensifying?

A big challenge for companies is that there is no widely agreed definition of the risks, impacts and practices that should be considered within the scope of ESG responsibilities and, correspondingly, to whom any related legal obligations are owed, Pain says. The evidentiary criteria that will be employed in litigation to establish legal liability are also not yet fully developed.

“So it’s not surprising that corporates are wrestling with how best to adapt and position themselves. This is not least because companies who may seek to do the right thing may inadvertently find themselves facing lawsuits for failing to take into account an unintended consequence of their (in)actions,” he says.

The heightened regulatory scrutiny on ESG means that companies cannot simply ignore the potential liability risks. Those companies that fall short of the required standards not only open themselves to regulatory action but could also face significant follow-on civil litigation.

A good example is cyber, where data breach and privacy regulations continue to expand, following the introduction of tough rules in Europe and places such as California, Brazil, China and India,” Pain says. “In the wake of a cybersecurity intrusion, directors and officers may have to defend claims against the company and themselves personally if they made a decision or took a course of action that breached their fiduciary duties – for example, failing to put adequate cybersecurity measures in place.”

Beyond simply repricing the available cover (including adjusting policy limits), the GA survey highlights a wide range of approaches that liability re/insurers can and do deploy to align new exposures with their risk appetite and risk-absorbing capacity. And re/insurers recognise the need to develop insurance solutions to meet new protection needs of companies, Pain stresses.

But it will mean improving exposure modelling of new and latent liability risks and developing partnerships with external experts to gather relevant data/intelligence - as well as better dialogue with insureds to help better understand potential liability risks, he says.

That way carriers can come up with more bespoke and modular affirmative products that expand the cover they can offer.