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.
- Benefits due under the policy were withheld. In this
case, one must establish that a valid claim under the terms of the policy
existed; the insured would need to document that the claim was erroneously
denied by the insurer.
- The reason for withholding benefits was unreasonable.
Whether the insurance company acted reasonably must be evaluated objectively,
taking into consideration the situation and facts as they existed at the time
of the decision under dispute. Negligence alone is unlikely enough to prove a
bad faith claim.
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.
- Cyber security and data breach. The average cost of data
breach litigation was $3.62 million, with the loss cost per affected record
or file being $141.
- Employment-related losses. The average claim takes 275
days to resolve, the average cost to defend and settle is $125,000, the
median judgment is approximately $200,000, and 25 percent of employment cases
result in a judgment of $500,000 or more.
- Securities actions. In 2016, plaintiffs filed 270
federal securities cases, a 44 percent increase over the prior year; 3.9
percent of US exchange-listed companies were subject to class action filings
in 2016, 39 percent above the historical average.
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.
- Georgia
- Alabama
- New Jersey
- Missouri
- West Virginia
- Florida
- Mississippi
- California
- Louisiana
- Illinois
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.
- Jefferson County, Texas
- New York, New York
- San Francisco, California
- Los Angeles, California
- Chicago or Cook County, Illinois
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.
- Enforcing meaningful venue requirements
- Overall treatment of tort and contract litigation
- Treatment of class action suits and mass
- Consolidation suits
- Damages arguments
- Proportional discovery
- Effective use of scientific and technical evidence
- Trial judges' impartiality
- Trial judges' competence
- Juries' fairness
- Quality of appellate review
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.
- Jury selection. With the central driver for the outcome
of all court trials involving jurors, the increasing frequency of the use of
jury consultants is the best indicator of how a keen understanding of human
nature and natural biases can manipulate people. This confirms the central
importance of picking the "right" jurors as directly correlated to
the desired outcome.
- Leveraging artificial intelligence (AI) and predictive
analytics. The increasing investment in InsurTech (more than $400
billion as of 20195) is producing models and
tools driven by AI that can leverage the right litigation data sources to
choose which cases to try and which cases to settle.
- Managing generational perceptions. The differences among
generations has been discussed regularly in the last 5 years with a heavy
emphasis of millennials, who are coming into greater positions of power and
influence in all organizations; acknowledging the substantive differences in
opinions, priorities, and sensitivities is increasingly recognized as a key
focus of lawyers on both sides who hope to convince jurors of their
arguments.
- Attitudes toward corporations. One of the generational
distinctions is a growing distaste for businesses that operate in ways that
more jurors of a certain profile find unwelcome or even repugnant. Right or
wrong, this must be accounted for in picking and communicating with not just
juries but also with plaintiffs in other case-related communications (e.g.,
settlement negotiations).
- Managing the potential for emotionally driven outcomes.
Whether driven by anger, sympathy, dislike, perceptions of offense, and/or
disrespect or from the potential for "lottery mentality," each of
these attributes can represent a land mine of sorts to the defense, requiring
exceptional people assessment and influencing skills to mitigate.
- Mitigating the "reptile brain" tactic.
Influencing juror decision-making by appealing to their "reptile
brains," the "oldest" part of the brain and the part
responsible for primitive survival instincts, is the essence of this concept.
Recognizing its potential to move jury decisions in unwelcome directions
requires urgent attention to its possible use.6
- Mitigating "anchoring" tactics.
"Anchoring" occurs when an individual depends on an initial piece
of information to make subsequent judgments in the process of making
decisions. This tactic has moved juries to deliver large damage awards based
on this "fight or flight" behavior, a function of the "reptile
brain" theory.
- Mitigating "third-party funding" tactics. Also
known as litigation financing or lawsuit lending, "third-party
funding" refers generally to the practice of providing money to a party
to pursue a potential or actual lawsuit in return for a portion of any
damages awarded by a jury or a settlement reached by the parties.
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
- Safeguard the integrity of the litigation process by doing the
following.
-
- Reducing forum shopping
- Ensuring that juries represent the entire community (from which
they're selected)
- Stopping frivolous lawsuits
- Providing proportionality in discovery
- Ensuring class actions benefit the public, not just lawyers
- Supporting sound science and expert evidence in the courtroom
- Safeguarding the right to appeal
- Promoting fairness in judgment interest accrual
- Curbing predatory and unsound lawsuit lending practices
- Preventing misleading lawsuit advertising
- Precluding recovery when a plaintiff is primarily responsible for his
or her own injury
- Fairly and proportionately allocate liability based on fault
- Address damages "run wild" by doing the following.
-
- Ensuring that damages for medical expenses reflect actual costs
- Providing juries with full information on a plaintiff's actual
losses
- Placing reasonable bounds on subjective noneconomic damage
awards
- Protecting due process in punitive damages determinations
- Providing juries with full information on a plaintiff's actual
losses
- Placing reasonable bounds on subjective noneconomic damage
awards
- Protecting due process in punitive damages determinations
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.