Claims Management
Bad Faith, Litigation Trends, and Emerging Tactics
Christopher Mandel | January 10, 2020
Footnotes
3 "Commercial Litigation versus Other Civil Litigation, and Emerging Commercial Litigation Trends," Smith, Gambrell and Russell's Litigation Blog, 2019.
4 Ibid.
5 Innovator's Edge, 2019.
6 Christina Marinaks and John Wilinski, "The Reptile Brain Strategy: Why lawyers Use It and How To Counter It," Litigation Insights, March 3, 2016.
7 "101 Ways To Improve State Legal Systems," U.S. Chamber Institute for Legal Reform, September 2019.
Claim costs—including insured, self-insured, and partially retained/insured—are the heart of the total cost of risk (TCOR). All other components of this measure pale in comparison by orders of magnitude. While there are many components of claim costs, litigation and legal costs contribute significantly to the total cost of claims.
Much of these costs stem from the retention of outside lawyers rather than using staff counsel from within insurance companies to defend threatened or actual litigation. Staff counsel is not without its own expense, though, as they are typically engaged in supervising outside counsel. This cost may not often be captured as a component of litigation cost.
In recent years, controlling the outcomes of litigated cases, when subjected to juries for adjudication, has become increasingly challenging. In the extreme, the less-controlled outcomes are referred to as "nuclear verdicts," as the awards are sometimes greater than $10 million. The more accurate view of these cases is that the outcomes are "unexpected," since the results were either not anticipated or considered a worst-case scenario and thus a very low likelihood.
Regardless, there is a growing number of casualty litigation cases that present a financial and reputational risk rarely seen in prior decades of US litigation trends. And, while these outcomes may be judged "affordable" to the defendants in cases, they are nonetheless shocking considering their improbability.
Bad Faith Litigation
"Bad faith" exposure has been an aggravated exposure of insurers for some time. When juries find that a defendant has acted in "bad faith," they are exposed to outsized verdicts that can test policy limits.
"Bad faith" is a term commonly used in the law of contracts and other commercial dealings. It is the opposite of good faith, which is the observance of reasonable standards of fair dealings in trade expected of every merchant. Bad faith is an intentional dishonest act by not fulfilling legal or contractual obligations, misleading another, entering into an agreement without the intention or means to fulfill it, or violating basic standards of honesty in dealing with others. Most states recognize an implied covenant of good faith and fair dealing, which is breached by acts of bad faith, for which a lawsuit may be filed for the breach. 1
Under common law tort theory, an insurer owes its policyholders the duty of fair dealing in "good faith" as a result of the unique relationship among the parties. Proving a claim of bad faith in common law generally requires the insured to substantiate the following two things.
While bad faith drives some of the unexpected litigation outcomes, the trends are more often a complicated set of factors that, when combined, tend to inflame the opinions of jurors, who then act with punishment as a motive for their awards.
Litigation Trends
Verdicts associated with bad faith conduct are significant. The 10 largest bad faith verdicts from 2013 to 2018 averaged approximately $21 million. 2 A few specific areas of increased general civil litigation exposure got much attention in 2019. These include the following.
Recent case volumes at one national law firm show that the volume of litigation and the time required to resolve cases are increasing. Civil case filings increased 5 percent overall for 2016, and the median time from filing to disposition was 9.2 months, up 5 percent from 2015. 3
Commercial litigation trends for 2017 indicate that companies with high-risk cases have quadrupled since 2015. There is clear evidence that businesses are seeking faster and more efficient resolution of cases via settlement and that company spending on employment, intellectual property, and class-action litigation are all increasing as exposure expands in each of these areas. 4
State Exposure
Exposure to litigation varies widely from state to state and from jurisdiction to jurisdiction within states. According to the Institute for Legal Reform (US Chamber of Commerce), the following are the 10 worst states (10th being worst) for civil litigation outcomes in the United States.
It should be noted that the data shows that the most expensive states are 2.1 times more so than the least expensive states.
The following are the five worst (fifth being worst) jurisdictions for civil litigation outcomes in the United States as of 2018.
In another October 2018 report from the Institute for Legal Reform titled Costs and Compensation of the U.S. Tort System, the authors found that in 2016, total costs and compensation paid in the US tort system was $429 billion or 2.3 percent of US gross domestic product (GDP). Of this amount, 57 percent went to plaintiffs with the balance being the cost of litigation, insurance, and other risk transfer costs.
Of the $429 billion, $250 billion (58 percent) is attributable to commercial and general liability exposures, $160 billion (37 percent) is attributable to auto exposures, and $19 billion (4 percent) is attributable to medical malpractice litigation.
Florida had the highest costs as a percentage of GDP (3.6 percent). When measured on the cost per household, the states with the highest costs (California, Florida, New York, and New Jersey) were at more than $4,000 per household (versus $2,000 for the lowest cost states).
The Institute for Legal Reform conducted a survey of over 1,300 general counsel/senior litigators who offered the following elements as the most significant drivers of these trends.
Emerging Tactics and Best Practices
There are a variety of strategies and tactics on both the prosecution and defense sides that can affect the exposure to outsized or unexpected results in civil litigation. Here are a few of the tactics and strategies that have shown effectiveness or that represent outcome aggravation factors, requiring close attention.
The Institute for Legal Reform has developed comprehensive and detailed recommendations for change and improvement in the civil tort system to potentially improve the prospects for future litigation trends. The following are some of their recommendations under two key strategies. 7
Managing litigation effectively and identifying the drivers that could improve trends are challenging tasks. However, litigation outcomes that sometimes produce hard-to-explain awards based on factors other than objective evidence tilt the civil legal system in costly directions that can also contribute to societal dysfunction. It is, therefore, worthy of time, attention, and investment in innovation and improved litigation process.
Central to this consideration is how the aggrieved party is treated and how they view and react to the way they're treated by the players within the process. In this regard, claim professionals must commit to recognizing that claimants/plaintiffs are people under duress and deserve to be treated fairly with compassion, even those represented by attorneys. Other strategies, improved processes, and best practices are being increasingly leveraged by stakeholders to militate against this growing exposure, exacerbated by an increasingly litigious society. All stakeholders have roles in shifting these trends to a balanced, logical approach to resolution. Collaboration toward equitable, fact-based outcomes should be the focus.
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