Trend-watchers in the liability litigation space were thrown for a loop in 2020 when the COVID-19 pandemic upended practically all aspects of our lives. However, new data suggests that even a global pandemic cannot completely stop the trends in the associated litigation that grows with each passing year. The last two years saw a continuation of ongoing trends related to rising litigation costs, increased social inflation, and bigger awards in claims cases.
2022 Outlook and Pandemic Effects
Sedgwick’s May 2020 analysis of liability claims litigation trends and practices was published during a time when the future was uncertain. That analysis reflected a lot of skepticism, change, and doubt—much of which still exists in today’s ecosystem.
What we have found since that report is that litigation trends were only briefly subdued by the pandemic. The system certainly experienced a slowdown in cases as courts temporarily closed, along with many types of businesses during mandated lockdowns. This reduced the frequency of many types of risk exposures and cases. For example, a reduction in road traffic naturally resulted in a lower frequency of auto claims.
However, shifts in behavior during the pandemic also gave rise to shifts in severity in some instances. For example, in auto claims, while there was less traffic on the roads, average driving speeds increased, and accident severity levels spiked. The U.S. Department of Transportation’s National Highway Traffic Safety Administration saw an estimated 12% increase in traffic crash fatalities in the first three quarters of 2021, the highest increase in its reporting history.
The pandemic also gave rise to new types of claims and litigation circumstances, particularly involving vaccine mandates and workplace issues. For this reason, the pandemic itself is projected to generate more litigation than any incident in U.S. history, according to a June 2021 report from the American Bar Association entitled, “Brace for the Storm: The Tsunami of Pandemic-Related Litigation.”
With so much activity, there are several key areas to watch with respect to updates on recent developments and pandemic-related shifts that have happened since 2020.
Claims and Costs on the Rise
Litigation in general liability and auto claims cases represents less than 1% of all claims activity. However, the overall rate of litigation continues to rise incrementally with each passing year. Claimants getting early attorney representation is the primary precursor to litigation in these types of cases, so representation is also on the rise. As these two trends continue, the cost of litigation naturally continues to rise, as well. Even though non-litigated claims significantly outweigh litigated claims, any increase to litigation means a rise in claims costs for insurers.
Over the course of the last five years, an increasing number of claims have been filed with an attorney representing the claimant or notice of representation occurring within a short period of time after the initial filing. Sedgwick data found that, from 2017 to 2021, the percentage of auto and general liability claims that became litigated with representation in place within 24 hours of reporting a loss increased by 25.5%.
This is a significant underlying driver of total claims costs and is, today, one of the chief contributing factors in claims cost growth, outpacing inflation and other factors. The commercial auto sector, in particular, has been affected to a greater extent than many other lines, with awards surpassing $10 million and increasing in frequency.
Lasting Effects of Social Inflation
Social inflation is another major insurance risk factor and driver of growth in claims costs today. The term “social inflation” describes the phenomena driving the increasing frequency and severity of litigated claims over and above the general rate of economic inflation. The COVID-19 pandemic temporarily muted the effects of social inflation, but the rate of incurred losses has been consistently climbing over the last decade. As one example, growth in incurred losses for commercial auto liability has continued at an annual rate of 11% from 2010 to 2019, according to NAIC data.
Further, according to a 2021 Milliman study, losses are growing at a faster pace than insurance premium rate increases, possibly as an additional consequence of social inflation. The study asserts that, because actuarial estimates and loss projections rely on a theory based on consistencies, social inflation presents a challenge because it generates data inconsistent with past patterns.
While the COVID-19 pandemic continues, the initial shocks to the system have subsided. The past two and a half years of societal stabilization and rebuilding will bring social inflation top of mind again for insurers and their policyholders. Social inflation is expected to continue its consistent pre-pandemic rate of growth.
Experts theorize that the following trends are behind the ongoing growth in social inflation:
Legislative actions are changing. Shifts in legislative action can have big consequences on social inflation. Following the pandemic, legislative bodies rolled back previously enacted tort reforms that were originally put in place to control costs. Judges are also open to legislative actions to retroactively extend or repeal statutes of limitations, opening more opportunities for litigation.
Attorney involvement is increasing. Attorneys are spending more on advertising, especially following the pandemic. As noted previously, attorney involvement in liability claims is also on the rise and is happening earlier in the litigation process, driving up costs.
Class action lawsuits are on the rise. Recent statistics show a sharp increase in class action lawsuits within the past several years. According to data from Seyfarth Shaw’s “Workplace Class Action Litigation Report,” class action litigation more than doubled between 2020 and 2021.
Public opinion has shifted. Experts have observed changes in underlying beliefs about the appropriateness of filing lawsuits. Those who do litigate also have expectations of higher compensation. This is driven in part by how cases are reported in traditional news outlets and on social media. Reporting can normalize extreme verdicts that, in turn, shape public opinion, growing the public’s belief that corporations can and should pay increasingly larger sums when litigation results in adverse verdicts.
Emergence of third-party litigation financing. Third-party litigation financing (TPLF) is the funding of litigation costs in exchange for a portion of the award. According to a study by Swiss Re entitled, “U.S. Litigation Funding and Social Inflation: The Rising Costs of Legal Liability,” litigation funding reached an estimated $17 billion worldwide in 2020 and is contributing to social inflation. TPLF is currently unregulated, and there have been reports of predatory lending practices and allegations of conflicts of interest in cases involving TPLF. Notably, in March 2021, Congress reintroduced the Litigation Funding Transparency Act, which, if enacted, would force plaintiffs’ counsel to disclose third-party funding.
While it is difficult to measure and observe change in social inflation with exactitude, the data and trends surrounding social inflation factors suggest that it will remain a key area of concern in the future.
Reinforce Risk Against Large Losses
Large-loss cases, including class action lawsuits, are a serious concern for insurers and policyholders. These cases are becoming both larger and more frequent, particularly as pandemic-related societal effects return closer to pre-2020 levels.
Many of the largest cases include nuclear verdicts. In a May 2021 article that appeared in Risk & Insurance, writer Kiara Taylor observed, “Although the generally accepted definition of a nuclear verdict is one that exceeds $10 million, this arbitrary damages threshold fails to capture the problem adequately. A nuclear verdict is the classic disproportionate response: It so far exceeds a reasonable damages amount that only emotional or punitive juror motives can explain it.”
Sedgwick’s 2020 litigation trends analysis identified nuclear verdicts as a trend on the rise. In the two years since the onset of the pandemic, even amidst a slowdown in court activity, nuclear verdicts have continued to grow in both frequency and size. The past year alone has contained several record-setting cases, including the first ever billion-dollar awards. The first was in August 2021, to the tune of $1 billion, and this record was topped only a few months later in December 2021 when a jury awarded more than $301 billion to the plaintiff.
On the other side of large-loss cases, class action lawsuit filings and settlements have grown in both number and size of awards. In 2021, the aggregate settlement amount of workplace class action suits, in particular, reached a staggering $3.62 billion, according to the Seyfarth Shaw class action lawsuit study.
While most lawsuits are still resolved prior to trial, awards in cases that are litigated to a decision are getting more costly. Insurers should be aware of these trends, which are expected to continue.
Avoidance and Mitigation Strategies
With such broad trends and, in some cases, uncontrollable causes and effects at play, it may seem difficult to identify paths for avoidance and mitigation. Companies should consider the following strategies to reduce the impact of liability litigation on their business.
First, companies should consider their internal safeguards for preventing potential claims situations from happening in the first place. Corporate governance and compliance tactics that cultivate a culture of risk management are a frontline defense against liabilities reaching the litigation stage. Company leaders should set and expect a high standard of safe and responsible practices in the workplace. Companies should also undergo frequent and regular assessments of risks to better understand potential exposures and prepare for situations where litigation may occur. Corporate environmental, social, and governance programs are another important area of risk management that can help companies take documentable accountability for responsible and safe action. This makes it more difficult for litigating attorneys to paint companies as profit-centric, indifferent, high-risk institutions.
Next, companies should focus on litigation avoidance at the claims stage as much as possible. Companies do have some control at this stage in the resolution progression, and should do as much as they can to avoid some of the risks that come with litigation and attorney involvement. Advocacy, timely communication, and focusing on conflict resolution will help ensure that claims do not result in legal actions.
Technology tools can also help with litigation avoidance. For instance, AI systems with predictive modeling can help identify claims that are more likely to generate lawsuits. With the help of smarter case identification, companies and their counsel can engage in a more aggressive workflow to push appropriate and timely resolution of these cases. If a suit is filed, seek to reach an amicable pre-trial settlement to avoid time-consuming, expensive, and more publicized jury trial cases.
Lastly, if a case does go to trial, there are specific trial strategies that companies can adopt to benefit their positions. Defense counsel should take the lead in informing and assisting with these tactics. Preparation is essential in creating a compelling defense. Witnesses should be well-prepared to provide strong supporting testimony and not fall into traps set by opposing counsel. Anyone involved in a case should prioritize a composed and empathetic physical presence when representing the organization. These representatives should always be present, attentive, and reliable, as they play an important role in humanizing corporate plaintiffs in the eyes of a jury.
In the future, as technology evolves, emerging analytics will help provide new and unprecedented insights into litigated matters. Millions of court documents are part of the public record. Leveraging machine learning, this data is being aggregated and processed to gain insights and predict advantages to assist in defending cases. With these insights, defendant companies and their counsel will be better equipped to anticipate the length and cost of a case, what strategies will be most successful during the various legal proceedings, and what damages may be expected, among other factors. It is an interesting and promising area to watch when considering tactics if litigation is the only option.
Looking Ahead
The pandemic and other world events have created unrest and uncertainty, and change continues in 2022. Uncertainty and unrest are a recipe for dispute in an already increasingly litigious environment. However, with change also comes opportunity. While indicators continue to suggest that the size of verdicts, and even nuclear verdicts, may continue to increase for the foreseeable future, insurers and their customers can collaboratively develop effective strategies to avoid and mitigate litigation and its costs. A better understanding of the challenges and deliberate planning can chart the path to more predictable outcomes.