Slips to Lawsuits: The Future of Liability Risks for Businesses

Navigating the complex landscape of business operations, you’re likely to encounter various types of liability risks that can impact your business’s financial health and reputation. 

In the past three years, a remarkable 230% surge has been witnessed in the number of Canadian businesses encountering legal disputes, with seven out of ten businesses being affected. The financial ramifications of these disputes were significant or moderate for half of the businesses surveyed. Additionally, an overwhelming 70% of respondents reported investing a substantial amount of time grappling with legal issues. 

Whether it’s a slip on a wet floor, technology issues, or professional advice that leads to a client’s financial loss, these scenarios underscore the critical need for effective risk management. From seemingly minor mishaps to data breaches, businesses face a constant stream of potential liability risks. This article explores the evolving landscape of these risks and how they might impact companies in the years to come.

The Future of Business Liability Exposures

Customer Accidents

You need to be aware of the legal implications when customers face accidents within your business premises. An example is the common trip-and-fall incidents where liability often hinges on the presence of hazards. For instance, if a customer trips while distracted by their phone, your business could still be held accountable if the hazard that caused the fall was preventable.

People have become increasingly dependent on their devices, even scrolling, texting, or shuffling music while they walk. This can increase a person’s risk of tripping, bumping into another pedestrian, or walking into traffic distractedly.

Speakers at the RIMS Canada Conference in Ottawa shared that if they’re found liable, retail, public sector, and commercial fleet companies may be unprotected due to the severity of this risk.

“By failing to take reasonable measures to prevent their own injury, there’s increased pressure on you to contain and to create safe environments for anything that’s open to the public,” said Lisa O’Brien, vice president, regional liability manager for Zurich Canada.

Technology

A new challenge that is emerging is the potential liability risks associated with the metaverse. While current concerns focus on established technologies like AI, a survey by the Geneva Association, an insurance industry group, suggests the rapidly developing metaverse could introduce entirely new categories of liability concerns for business owners.

The metaverse is envisioned as a fully immersive virtual environment where users interact through avatars. This raises complex questions about responsibility. Data security breaches could be more intricate, and privacy concerns are paramount as users’ biometric data gets integrated into the virtual world. 

Ownership of virtual assets may not translate to real-world legal rights, making copyright and trademark infringement murky. Finally, user interactions pose a significant challenge. Harassment and even assault could occur within the metaverse, and it’s uncertain who would be held liable – the platform owner, the participants, or both.

“The metaverse does not currently exist,” the GA report stated, “Indeed, many of the foundational technologies have yet to be fully understood in isolation, let alone how they can be combined to define the architecture of fully immersive virtual ecosystems.

Nonetheless, if the metaverse develops as some predict – by 2026, Gartner expect[s] 25% of people will spend at least one hour a day in a metaverse for work, shopping, education, social media and/or entertainment – it could have important liability implications.

Cases of Liability Exposures

Case 1: Air Canada chatbot error shows liability implications of AI

A Canadian court ruled that Air Canada must compensate a passenger for a flight booked based on misinformation provided by the airline’s AI chatbot. In an article by Canadian Underwriter, they reported that the passenger inquired about bereavement fares, and the chatbot said they could be applied retroactively, even though the airline’s policy webpage stated otherwise. The court found Air Canada responsible for the chatbot’s inaccurate information, highlighting the importance of companies ensuring their AI tools provide reliable data to avoid potential liability.

Tribunal member Christopher C. Rivers wrote in the decision,

While a chatbot has an interactive component, it is still just a part of Air Canada’s website. It should be obvious to Air Canada that it is responsible for all the information on its website. It makes no difference whether the information comes from a static page or a chatbot.

Companies are liable for the information provided by their chatbots, regardless of whether it’s presented on a static webpage or through an interactive AI tool.

Case 2: How Pride Toronto got swept up in the entertainment line’s hard market

In a recent article, the Canadian Underwriter reported that the cost of insurance for Pride Toronto’s recent parade and festival events has significantly increased this year. The organization’s executive director reports a 300% rise in insurance premiums compared to previous years.

Recent incidents involving mass casualties and inflationary pressures have created the issue of having a limited number of insurers willing to provide coverage for large events. As a result, insurers have become more vigilant in examining risks associated with such events.

To ensure the safety of policyholders during large events, carriers are carefully scrutinizing their security measures and risk management protocols. This includes evaluating various aspects such as event set-up, site planning, evacuation procedures, emergency response plans, and other potential exposures like the number of staff and volunteers present or active shooter protocols. Experts caution that some events may struggle to obtain insurance coverage, particularly if they do not have robust risk management plans in place.

Alan Hollingsworth, chief sales officer and Ontario sports and entertainment practice leader at Hub International says,

A limited number of insurers have an interest in providing insurance coverage on events, and that’s everything from general liability to event cancellation, to property insurance,” said Hollingsworth. “It’s very specialized and, as a result, there are just fewer insurers involved in providing coverage in that space.

In short, the underwriter’s meticulous risk mitigation requirements may pose a significant liability concern for event organizers, potentially forcing some events to cancel due to lack of coverage.

Case 3: How ransomware claims are trending

Canadian Underwriter shared a new report by the Canadian Centre for Cyber Security, which identified ransomware as a major threat to Canada. The report highlights ransomware’s prevalence and its potential to severely disrupt an organization’s operations.

Cyber insurance is undergoing a shift as ransomware attacks become more prevalent. Previously, policies focused on third-party liability, protecting companies from lawsuits if a data breach impacted customers. Now, the primary concern is first-party ransomware, where attackers encrypt a company’s own data and demand a ransom to decrypt it.

When cyber [insurance] started 15, 20 [or so] years ago, the concern was always the third party,” Michael O’Connor, associate vice president of technology/cyber and professional lines at Sovereign Insurance, said. “You know, you have to monitor credit, and someone’s going to sue you because you lost their health data. And that’s less prevalent than the first-party claims these days. 

In a study conducted in 2022, it was revealed that ransomware has affected a diverse range of Canadian organizations, with no apparent pattern based on industry sector. Among the sectors, the manufacturing sector accounted for 18% of the ransomware victims in Canada, closely followed by business and professional services at 14%. This highlights the widespread impact of ransomware attacks across various sectors in the country.

The rise of first-party ransomware claims has led insurers to be more cautious about insuring high-risk third parties, like managed service providers managing multiple clients’ networks. 

The Evolving Liability Payout Landscape

In Canada, past awards and industry standards provided a framework for predicting future litigation costs. However, the trend of massive US verdicts throws this into question. Furthermore, large US awards often target corporations with the intention of punishment, impacting not just manufacturers but also distributors and other parties involved. The growing number and complexity of lawsuits further complicate the situation.

In 2019, notable verdicts included an $8 billion judgment against Johnson & Johnson for their Risperdal drug, a $2 billion verdict against Bayer’s herbicide Round-Up, and an $11 billion ruling against PG&E in relation to wildfires. The number of legal claims continues to rise, encompassing various areas such as concussion litigation, auto liability, and climate change.

Furthermore, it is concerning that multiple parties are now becoming entangled in lawsuits. For instance, in the opioid industry, litigation is no longer confined to manufacturers; distributors and packagers are now also being targeted. 

The insurance industry traditionally uses past losses to determine future pricing, making the situation particularly difficult for excess casualty coverage, where the risk of massive awards was previously considered low. Insurers are likely to respond with increased premiums, higher deductibles, and potentially reduced coverage. This will significantly impact Canadian companies, who may face limited risk-transfer options and require proactive strategies to mitigate their exposure. 

Planning for the future:

Initiate early discussions with your advisor to differentiate your business’s risk profile and demonstrate strong risk management practices to safeguard your reputation and financial health against potential legal challenges.

By tailoring risk mitigation strategies to address specific vulnerabilities and ensuring that insurance coverage is up-to-date, businesses can position themselves to withstand the legal challenges that may arise. This strategic approach to risk management is not just about avoiding legal pitfalls; it’s about fostering a safer, more resilient foundation for the future growth and success of your enterprise.

FAQs

What does a liability hazard refer to in a business context?
A liability hazard in a business can include various risks such as general liability, product liability, premises and operations risks, professional liability, or contractual liability. For instance, a typical scenario might involve a customer slipping and falling on a wet floor within a store.

What are the most frequently filed types of liability claims?
The most common types of liability claims pertain to premises liability, including incidents such as slips, trips, and falls, elevator and escalator mishaps, stair collapses, falling objects, fires, and inadequate security.

Can you give an example of a general liability claim?
A general liability claim might arise if someone is injured due to your negligence and seeks compensation for medical expenses. For example, if a jogger trips over an object you left out and breaks an arm, you could be held responsible for their medical bills. 

What does liability mean in injury-related legal cases?
In the context of personal injury or medical malpractice, liability refers to the legal responsibility one party has for the damages caused by their negligence or intentional misconduct. This typically involves a claim against the liable party’s assets to cover the damages incurred.

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