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Why Insurance Limits Keep Going Up?
In recent years, many business insurance policyholders have experienced a noticeable increase in their liability insurance limits. As a result, the premiums have gone up as well.
The insurance limit requirements for tech companies vary based on their size, revenue, risk profile, and specific industry needs. Below are the typical insurance limit requirements for the most popular and essential lines of insurance:
General Liability
• General Liability Insurance protects tech companies against claims of bodily injury, property damage, and personal injury.
• Small to Medium Tech Companies: $1 million per occurrence / $2 million aggregate.
• Larger Tech Companies: $2 million per occurrence / $4 million aggregate or higher, depending on the company's exposure and client requirements.
For general liability insurance, the trend has been towards higher limits due to increased litigation and higher jury awards. Many tech companies now opt for limits of $2 million per occurrence and $4 million aggregate, particularly larger companies with significant exposure. This increase is driven by the growing risk of lawsuits related to bodily injury, property damage, and personal injury.
Tech Errors & Omissions (E&O)
• Technology Errors & Omissions (E&O) Insurance covers claims arising from errors or omissions in the services provided by tech companies, including software and hardware issues.
• Small to Medium Tech Companies: $1 million to $5 million per claim / aggregate
• Larger Tech Companies: $5 million to $10 million per claim / aggregate or higher, depending on the complexity and scope of services provided.
Technology Errors & Omissions (E&O) insurance limits have also seen a rise. Traditionally, small to medium-sized tech companies carried limits of $1 million to $3 million. However, over the past decade, these limits have increased to $5 million or even higher. Larger tech firms often purchase limits of $10 million or more. This trend is largely due to the increasing complexity of tech services and the higher potential costs associated with service failures or omissions.
Cyber Liability
• Cyber Liability Insurance provides coverage for data breaches, cyberattacks, and other cyber-related incidents.
• Small to Medium Tech Companies: $1 million to $5 million per occurrence / aggregate
• Larger Tech Companies: $5 million to $20 million per occurrence / aggregate, or higher for companies with significant exposure to cyber risks and handling sensitive data.
Cyber liability insurance has experienced one of the most significant increases in limits. A decade ago, limits of $1 million to $5 million were common. Today, many tech companies, especially those handling sensitive data or operating critical infrastructure, are purchasing limits of $10 million to $20 million or higher. This increase is driven by the escalating frequency and severity of cyberattacks, such as ransomware and data breaches, and the resulting financial impact on businesses. According to Woodruff Sawyer, the cyber insurance market has evolved significantly, with higher limits becoming more accessible due to improved cybersecurity controls and a reduction in claims experience in certain years.
Management Liability
• Management Liability Insurance (which includes Directors & Officers (D&O) insurance) protects the company and its directors and officers from claims made against them in their managerial roles.
• Small to Medium Tech Companies: $1 million to $5 million per claim / aggregate
• Larger Tech Companies: $5 million to $10 million per claim / aggregate, or higher, based on the company's risk profile and public exposure.
Management liability insurance, including Directors & Officers (D&O) insurance, has also seen an upward trend in limits. Historically, limits of $1 million to $3 million were standard for small to medium-sized tech companies. However, recent years have seen a shift towards limits of $5 million to $10 million or more. This increase is driven by a higher frequency of shareholder lawsuits, regulatory scrutiny, and the complex risk environment in which tech companies operate.
The overall limit increase trend has been influenced by a combination of economic factors, legal developments, and societal changes. Understanding these factors can help policyholders navigate the evolving insurance landscape and make informed decisions about their coverage needs.
Reasons Why Limits Keep Increasing:
Economic Inflation
Economic inflation is one of the primary drivers behind the rising costs of liability insurance. The U.S. Bureau of Labor Statistics reported a 3.4% increase in the Consumer Price Index (CPI) for all items in 2023, following a 6.5% increase in 2022. This inflation affects the cost of goods and services, including car parts, building materials, and labor. As repair and replacement costs rise, so do insurance premiums to cover these higher expenses.
Supply Chain Disruptions and Labor Shortages
The COVID-19 pandemic has caused significant disruptions in global supply chains, leading to shortages of essential materials and increased labor costs. These disruptions have particularly impacted the automotive and construction industries, where the cost of repairs and new construction has surged. For example, the National Federation of Independent Business reported that 40% of small business owners struggled to fill job openings in early 2024, with 89% citing a lack of qualified applicants. These shortages contribute to longer repair times and higher costs, further driving up insurance premiums.
Rising Legal Costs and Social Inflation
The concept of social inflation refers to the increasing costs of insurance claims due to societal and legal trends. This includes higher jury awards, more litigation, and elevated legal expenses. A study by Conning, an insurance consulting firm, found that social inflation contributed approximately $21 billion, or 14%, to commercial auto losses from 2010 to 2019. High-profile lawsuits and the growing tendency for large settlements have made liability coverage more expensive, prompting insurers to increase policy limits and premiums.
Cybersecurity Risks
Cyber liability insurance has also seen rising costs due to the increasing frequency and severity of cyberattacks, particularly ransomware. These attacks can result in substantial financial losses, including ransom payments, data recovery costs, and business interruption expenses. As cyber threats evolve, insurance companies are raising premiums to cover the growing risk of cyber incidents.
More Stringent Compliance
Insurance is an essential requirement in contracts and agreements. Counterparties have become more cautious about business risks, litigation, and cyber security exposure. Thus, the insurance requirements are now more ubiquitous. It specifically applies to earlier-stage tech companies selling into enterprises.
What is Excess Liability Insurance?
To satisfy higher limit requirements, companies usually go for excess insurance. Excess liability insurance provides additional coverage beyond the limits of a primary liability policy. It acts as a safety net, offering higher protection against large claims that exceed the coverage provided by standard liability policies. This type of insurance is essential for businesses and individuals who face significant liability risks and want to ensure they are adequately protected in the event of a major claim. To learn more about Excess, you can visit Koop's recent primer on Excess and Umbrella insurance.
The upward trend in liability insurance limits is driven by a complex interplay of economic, legal, and societal factors. Inflation, supply chain disruptions, natural disasters, social inflation, and cybersecurity risks all contribute to the rising costs of insurance. Understanding these factors and the importance of excess liability insurance can help policyholders make informed decisions about their coverage needs, ensuring they are adequately protected against the financial impact of large claims.
