Five Public Sector Insurance Trends to Watch in 2025

Authors: Shannon Gunderman Dorothy Gjerdrum

Gallagher's Public Sector and K-12 Education practice is continuously monitoring the risk management and insurance landscape that affects our clients. In this article, we highlight five trends that warrant careful review and understanding. Our goal is to provide thoughtful considerations and actionable insights to help entities like yours navigate these volatile and evolving exposures.

1. The AI dilemma

Artificial intelligence (AI) has experienced explosive growth, with many organizations rushing to adopt and exploit its enormous power. However, along with its beneficial potential, AI brings significant risks that can lead to allegations of copyright infringement, deceptive trade practices, discrimination and breaches of privacy laws. This dilemma has caused hesitation among many public entities when deciding whether to implement AI programs. Therefore, it's important that organizations deploy a strategy that strikes a balance between staying technologically competitive to enhance productivity and managing the challenging risks of AI implementation. Some of the risks to consider are:

• Data privacy and security. Public sector organizations handle a lot of sensitive information. That includes the personally identifying data of employees, taxpayers and program participants; medical information; student and family records; and confidential information produced in legal cases and law enforcement actions. Using AI systems to analyze and process such data would require robust policies and procedures to prevent and respond to breaches and misuse. Data protection regulations, such as the Health Insurance Portability and Accountability Act (HIPAA) in the US and the General Data Protection Regulation (GDPR) in Europe, add extra layers of complexity.
• Lack of technical expertise and resources. The specialized knowledge needed to implement AI may not be readily available in government agencies, which often face budget constraints and competition with the private sector for talent. This "skills gap" can slow or prevent the development and deployment of AI initiatives, leading to reliance on external consultants, which can be costly and may not always align with the organization's unique needs and objectives. Additionally, integrating AI into existing systems and processes may require significant changes to infrastructure and workflows, which can be time-consuming and resource intensive. It's also true that there may be an element of competition introduced — among schools or local governments — as some become early adopters and others resist incorporating AI into daily operations.
• Ethical considerations and bias. AI algorithms can perpetuate or exacerbate biases if not carefully designed and monitored. These biases can result in discriminatory outcomes in law enforcement, social services and healthcare, where decisions can have profound impacts on individuals' lives. Public sector organizations must ensure that AI systems are designed and implemented with fairness and inclusivity. This requires establishing clear ethical guidelines and governance frameworks to guide the responsible use of AI, ensuring that it serves the organization and the public good.

2. Law enforcement liability: The usual suspects

Law enforcement liability is a perpetual concern in the public sector, with insurance and risk management challenges that continue to evolve.

• Claims and lawsuits. One of the primary difficulties in law enforcement is the increasing number of claims and lawsuits alleging excessive force, wrongful arrest or civil rights violations. These claims can result in substantial financial settlements or judgments, placing a heavy burden on insurers and their insureds.
• Insurance and underwriting. Along with the rising frequency and severity of claims has come notable increases in rates for insurance coverage. Insurers, facing higher risks and potential payouts, have responded by raising premiums, tightening underwriting standards and, in some cases, reducing the availability of coverage. This escalation poses a significant financial challenge for public entities, many of which operate under constrained budgets. The increased cost of insurance can divert funds away from other critical services, creating difficulty for local governments striving to balance fiscal responsibility with the need to protect their law enforcement agencies from potential liabilities.
• Changing legal landscape. The volatility in insurance rates is compounded by the evolving legal landscape and public sentiment towards policing practices. Insurers must continuously adapt to changes in legislation and court rulings that impact liability exposures. Additionally, public pressure for law enforcement reform and accountability can influence the types of coverage and limits that insurers are willing to offer. This dynamic environment requires insurers and government entities to work collaboratively to develop risk management strategies that mitigate potential liabilities while ensuring that law enforcement agencies are adequately protected.

Overall, the challenges of law enforcement liability insurance underscore the need for innovative risk financing solutions and proactive risk management to address the complexities of this critical coverage area.

3. Property's perennial problems

The property insurance market continues to face challenges that are impacting both insurers and policyholders. Although early data shows a slowing of rate increases across many sectors, that's often not the case for public sector and K-12 risks. The frequency and severity of natural disasters, unreliable or outdated property valuations, and regulatory changes all contribute to higher policy premiums and reduced coverage.

• Natural disasters. One of the primary issues in property risk is the increasing frequency and severity of secondary losses, such as severe convective storms and hail and flood events, which have led to substantial losses for insurance companies. This has resulted in higher premiums and stricter underwriting criteria, making it more difficult for public entities and schools to obtain affordable coverage. Additionally, the unpredictability of climate change and weather patterns have worsened these risks, forcing insurers to constantly reassess their risk models and pricing strategies.
• Property appraisals and valuations. As property values fluctuate due to market conditions, it becomes challenging to ensure that properties are adequately insured. Inaccurate appraisals can lead to underinsurance, leaving organizations vulnerable to significant financial losses in the event of a claim. Conversely, overvaluation can result in unnecessarily high premiums, placing a financial burden on policyholders. The need for precise and up-to-date property evaluations is critical, and that's a difficult task for decentralized and complex public sector operations.
• Legal and regulatory changes. The property insurance market also is grappling with regulatory changes and evolving consumer expectations. Insurers must navigate a complex landscape of regulations that differ by region and jurisdiction, which can complicate the process of offering consistent and compliant insurance products. That is further complicated by the overlay of the Federal Emergency Management Agency (FEMA) and its tangled web of requirements for reimbursement.

4. Liability baggage: Unpacking the issues

Liability issues in the public sector present a complex array of challenges that can significantly impact government agencies and K-12 schools.

• Increasing litigation. Public sector organizations, including municipalities, school districts and law enforcement agencies, are frequently subject to lawsuits alleging negligence, civil rights violations or other wrongful acts. This trend is worsened by the growing willingness of individuals and advocacy groups to pursue legal action, often resulting in costly settlements or judgments that strain public budgets and resources. We're tracking growth in litigation funding that provides high investment returns for funders and is increasing awards and settlement amounts against public entities.
• Large jury verdicts. Jury verdicts in cases involving public sector liability can be unpredictable and, at times, be disproportionately large, reflecting public sentiment and the perceived accountability of government entities. High-profile cases, particularly those involving law enforcement activities or the sexual abuse of children or vulnerable adults, can lead to substantial financial awards that set precedents and influence future litigation.
• Legal and regulatory changes. Regulatory and legal changes further complicate the landscape of liability in the public sector. One example is the "revivor statute" that retroactively extends the time frame for filing sexual abuse lawsuits (and in some cases, removes the window for filing altogether). These extensions have caused insurers to grapple with providing coverage, sometimes for claims that are decades old.

5. Complexities of contractual risk transfer

Contractual risk transfer is a critical component in managing risk. However, the complexities involved in effectively transferring risk can negatively impact contract compliance and negotiation.

• Contract language. One of the primary difficulties in risk transfer arises from the intricate nature of contract language and the need for precise terms that make responsibilities and liabilities clear. Ambiguities or inconsistencies in contract clauses can lead to disputes over who is responsible for specific risks, potentially resulting in costly litigation and strained business relationships. Ensuring that all parties have a mutual understanding of the risk allocation is essential, yet achieving this clarity can be challenging, especially in multi-party agreements.
• Contract negotiation and responsibility. Negotiating agreements that involve risk transfer also presents its own set of challenges. Parties often have differing risk appetites and objectives, which can lead to protracted negotiations as each side seeks to minimize its own exposure while maximizing the transfer of risk to others. This can be particularly complex when dealing with subcontractors or third-party vendors, where the primary contractor must ensure that risk is appropriately passed down the supply chain.
• Contract compliance. Maintaining contract compliance once an agreement is in place requires ongoing diligence and monitoring. Organizations must ensure that all parties adhere to the agreed-upon terms, including insurance requirements, indemnity clauses and other risk transfer mechanisms. This can be difficult and time-consuming, requiring contract management systems and processes to track compliance and address any deviations promptly. Failure to effectively manage these complexities can result in unanticipated liabilities and financial losses, underscoring the importance of thorough risk assessment and good planning in the contractual risk transfer process.

Navigating the intricacies of contractual risk transfer demands a comprehensive understanding of legal, financial and operational considerations to achieve successful outcomes.