The Dovetail: Claims Trends – Reinforcing the Need for Sound Loss Control

By John Kennealy, VP – Claims

We often share risk management information with our policyholders on things like protecting their buildings and property from weather damage, encouraging safe driving practices, and identifying common hazards found in their operations to keep employees and customers safe. One of the areas that we haven’t touched upon a lot is the emerging claims trends and how implementing sound loss control in their operations is essential when considering things like social inflation and litigation funding.

Social inflation is a term used to describe the rising costs of insurance claims resulting from things like increasing litigation, broader definitions of liability, and the increase in the number of outsized jury awards. It drives higher insurer claim payouts and loss ratios which ultimately leads to policyholders paying more for coverage. This issue has become more visible when considering nuclear verdicts, exceptionally high jury awards that surpasses what should be a reasonable amount.

Another concerning claims trend is litigation funding. Litigation funding began a few decades ago as a means to provide equal access to our nation’s legal system. David was finally able to meet Goliath on equal terms. Today, many experts note that litigation funding is the most important civil justice development of our time. Simply stated, the concept entails a third-party investor providing capital to a plaintiff in order to pursue a lawsuit. The investor has no connection to the litigation other than seeking a return on the investment. This is accomplished by taking an agreed upon portion of any recovery to which the plaintiff may be entitled. With the rise of nuclear verdicts, these kinds of investments can be viewed as betting against the reasonableness of juries. With funding in place, a plaintiff can now undertake costly litigation that might not otherwise be possible. If no recovery is obtained, i.e., if the defense wins the case, the investor loses on the (non-recourse) investment. From the investor’s standpoint, this arrangement provides diversification and access to alternative asset classes. When set up correctly, these arrangements will remain on the safe side of the Attorney Work Product and Attorney-Client Privilege doctrines.

In litigating third-party Commercial Auto and General Liability claims, insurance carriers like PLM have questioned on occasion whether funding is in place. Two key questions we have pondered are:

1. Should these arrangements ethically be disclosed?
2. Are they affecting the settlement process?

This brings forth even more questions like:

• Without disclosure, how can conflicts of interest be identified and redressed?
• Is the investor’s approval required for litigation and settlement decisions?
• Is litigation funding fanning the flames of social inflation and nuclear verdicts?
• How can a trial truly be impartial and only about the plaintiff’s damages if the jury doesn’t also know that the XYZ Funding Corporation stands to profit handsomely?

One thing seems for certain; litigation funding can complicate the settlement process as an additional party with a financial stake in the outcome may have a contractual right to call the settlement shots. In such situations, plaintiff attorneys may have to convince both their client and their investors that a given settlement amount is both fair and reasonable. And in cases where disclosure may not be compelled, a jury is deprived of knowing that a large portion of their award is actually going to an entity other than the plaintiff.

So, what does this mean for your clients? These litigation trends are driving up claims cost which leads to rising premiums. While litigation may not always be avoidable, risk management and following best safety practices can help prevent claims in the first place as well as provide the best defense for their organization should there be a claim. With new technologies, such as telematics and video footage, there are many new ways to build their defense to prevent lengthy and costly litigation.