Liability insurance can raise policing standards, says captive

There is no denying the alarming rise in social tensions that has occurred in the US in recent years. Political polarisation has spilled on to the streets with increasing frequency, in the form of large-scale demonstrations that have at times escalated into violence. These tensions have shone a light on the considerable challenges faced by the police officers charged with maintaining the peace, even if these challenges have existed for many years.

The rise of the Black Lives Matter movement in particular, which during 2020 evolved into calls to “defund the police”, raised serious questions about police conduct. The question of how police officers should engage with the public they are paid to protect has rarely been more urgent.

When a police officer is convicted of misconduct it usually leads to a fine. What many of the protesters so concerned about police behaviour may not always be aware of is that in most cases it is not the officers who have been charged with an offence who pay the fine. In fact, the fine is more often than not paid by the state—meaning, as taxpayers, the protesters themselves.

Jeff Harrison, chief executive officer of Prymus Insurance, which was highly commended in Captive International’s US awards for 2020 in the new category of Best New Captive, is convinced this situation is untenable and has to change.

“None of the police has liability insurance,” Harrison says. “Imagine that: everyone has liability insurance, everyone except the police, who are the ones carrying guns around.”

The situation is beginning to change. States are looking at the situation and a number are working on legislation that would require police officers to take out some form of liability insurance. Colorado has already acted, becoming the first state to do so when its law came into force in June 2020. Its legislation requires police officers to pay 5 percent of their own settlement costs up to $25,000. It is illegal for the municipality to indemnify them for that portion of any fine.

Other states may not be far behind.

“A bill has been introduced in New York that would require police officers to take such insurance,” notes Harrison. “In all 15 states are looking at this kind of legislation.”

Seize the opportunity

That creates an opportunity for the insurance industry that commercial carriers have been slow to seize. Prymus has been faster off the mark: it is offering police liability coverage in Colorado, and stands ready to provide it in other states as they enact the necessary legislation to require it.

“By ensuring police officers have some skin in the game it will increase accountability,” explains Harrison. “Bad police officers who receive multiple fines could over time be priced out of doing their jobs as their premiums rise. Those who don’t make claims benefit from having low premiums, and rates are also reduced when they take things such as de-escalation training, or opt to carry a non-lethal weapon instead of a gun.”

Laws such as those passed in Colorado, and being developed in New York and elsewhere, will certainly drive growth, but no new laws are required to give the product relevance, says Harrison.

“States could simply start refusing to pay the fines for police officers, so officers should start buying liability insurance now in case that happens,” he warns. “The police actually have less risk in Colorado because at least there is clarity about what will happen if an officer is fined for excessive use of force.”

Prymus was not launched originally to offer police liability coverage. The captive is owned by Grubbs Infiniti, a Texas-based car dealership that was named as the number one dealership in 2016—an accolade it won again in 2020. It was originally conceived as a way to manage the cost of open lot insurance.

“Car dealerships, and especially used car dealerships, make most of their money selling insurance,” explains Harrison. “Around 80 percent of the profit made on a used car is generally made on the extended warranty—there is virtually no profit on the car itself.”

The dealership’s first captive provided reinsurance for these warranties, he says, before it joined a group captive for car dealerships.

“In 2018 we decided to create our own group captive, which launched in 2020, offering principally open lot insurance.” At that time Grubbs Infiniti was paying around $1 million in premiums for open lot insurance, he adds.

“Prymus is structured as a sponsored cell which allows us to create protected cells beneath that, where we can include third party coverage,” he says. The structure had the added benefit of allowing it to develop completely different and unrelated ideas: the police liability coverage is offered in a separate cell within the same captive structure.

It chose to base the new captive in North Carolina because the owner was impressed with the state’s protected cell legislation, and because the state was “comfortable with our being very aggressive in our strategy,” says Harrison.

The captive had nearly been launched considerably earlier. It had been working with Anne Marie Towle, who was set to offer captive management services before she made the move to Hylant. With Towle unavailable while she negotiated her move, Prymus decided to wait until she was established in her new role, before picking up and moving forward with her again.

Structure

Prymus has a very original structure that allows businesses to increase or decrease the amount of premium they retain to suit their risk appetite and reserves.

Harrison argues having a captive makes sense for almost every company, as long as it has sufficient scale to justify the effort of setting it up, but many are wary of taking the plunge out of fear of the unknown. Prymus allows them to dip their toes into the water to test the temperature before jumping right in, limiting the perceived downside exposure.

“Going from traditional insurance to a captive is a ridiculously big step,” explains Harrison. “Most people don’t want to take a risk like that, because the benefit to them personally as an employee is relatively small compared to the amount of blame they will get if things don’t work out.”

He adds: “It is about easing people into the captives industry, they can experience having a captive without those setting up expenses and all the decisions you have to make such as where to domicile,” says Harrison. “All that preparation can take years and it is a big investment if you aren’t sure it is going to work out.”

Harrison likens the structure to a rent-a-captive, but with even less risk for the client. “With a rent-a-captive they take all the risk,” he says. “The companies that have come in have found that retaining a small amount of premium feels like a discount.”

Prymus is inviting other car dealerships into the captive, as well as other businesses with open lots, such as office rental spaces, or any company with a similar risk profile, although as yet it has not signed anyone up.

It is the cell offering liability insurance for the police, however, that could deliver the most potentially far-reaching societal benefits. Prymus has created an advisory board, which already includes a police chief, to ensure it remains aligned with the needs of its new clients, and hopes to include relevant advocacy groups too, such as Mothers Against Police Brutality.

Harrison believes police forces will be receptive to the new product as they become more familiar with it. In that sense, Colorado represents a perfect test case, being a relatively small state with only around 25,000 police officers, says Harrison, compared to around 35,000 in New York City alone.

Police forces around the country will be watching with interest to see what impact the new law has on police behaviour, and how liability coverage protects officers serving on the front lines.

“Unions have been supportive of this liability cover because the premium payments can be made via membership fees,” notes Harrison. “Unions have provided legal defence fund programmes for years and including an indemnification policy creates a more complete programme to offer their members.”

Harrison insists the police liability coverage was never about the money, but about aligning the interests of police officers, the public and state treasuries. “We started developing this product before Colorado introduced its legislation, so there was no certainty there would ever be a market for this kind of coverage,” he says.

“This is our form of advocacy: we think police liability insurance is good for society and needs to happen. Having said that we think there is huge growth potential here and we are getting a huge jump on other insurers and could corner this market.”