Expert Commentary

Bad Faith, Litigation Trends, and Emerging Tactics

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.

Claims Management
January 2020

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.

  1. Georgia
  2. Alabama
  3. New Jersey
  4. Missouri
  5. West Virginia
  6. Florida
  7. Mississippi
  8. California
  9. Louisiana
  10. 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.

  1. Jefferson County, Texas
  2. New York, New York
  3. San Francisco, California
  4. Los Angeles, California
  5. 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.

1 "Bad Faith," Free Dictionary by Farlex, 2019.

2 Property Casualty 360

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.

Opinions expressed in Expert Commentary articles are those of the author and are not necessarily held by the author's employer or IRMI. Expert Commentary articles and other IRMI Online content do not purport to provide legal, accounting, or other professional advice or opinion. If such advice is needed, consult with your attorney, accountant, or other qualified adviser.

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