The Bigger Picture

For the past few years, claim costs and frequencies have been at astronomical heights. The type of claim seeing the biggest increase in severity and numbers are liability claims. Currently, what is happening in the litigation landscape has been coined “legal system abuse”.

What is “legal system abuse”?

In the insurance sense, it is unnecessarily increasing the cost and time taken to settle insurance claims. It is when a policyholder, plaintiff attorney or third party uses the legal system for something other than it’s intent: seeking justice. Ultimately, this negatively impacts the entire economy as a whole.

There are many compounding factors to legal system abuse but here are a few:

• Nuclear jury verdicts: The American people are angry at big corporations. Certain plaintiff attorneys use fear tactics among jurors and propose using their power to send big corporations a message. Some are using their jury service as a way to affect change and gain power back. Though intentions could be good, the result is driving up the costs of goods, services and the availability of insurance for everyone.
• Inflating claims: This occurs when a policyholder or attorney exaggerates the extent of damage or injury than they are entitled to.
• Attorneys false advertising: These types of advertisements praise lawsuits and make big monetary promises.
• Third Party Litigation Funding: AKA “TPLF” is a $26 billion dollar global industry which is expected to expand to $30 billion by 2028. Third Party Funding occurs when hedge funds and financiers invest in lawsuits in exchange for a larger percentage of the settlement reward.

More on Third Party Funding

These monetary incentives can increase the risk of plaintiffs or attorneys holding out for a bigger payout. In turn, this increases litigation time and claim costs. Since 2020, third parties have been getting involved earlier as a way to steer policyholders towards litigation. This is their attempt to take control over the claim. Many times, they even pressure claimants to sign agreements that enables third parties to bill or sue the insurance company without further input from the policyholder. Additionally, there are no requirements for lawyers to disclose to their clients that they are receiving TPLF funds. Many people do not realize that the settlement typically disproportionately favors parties other than the victim and defeats the purpose of litigation which is to seek justice. The terms of TPLF leaves the majority of the settlement to investors and lawyers rather than the victims.

Legal System Abuse’s impact on insurance

In addition to all the rate increases and coverage restrictions or shut downs due to weather patterns, legal system abuse is having the same effect. Insurance is a shared risk pool. This means that hurricanes happening in FL, wildfires in CA and this increase in unnecessarily high claim payouts affect us all. Insurance carriers are being forced to restrict coverage, increase premiums and/or completely stop writing business. One of the biggest issues for insurance carriers is, unlike weather, the costs for these claims are impossible to forecast. The entire business model of the insurance industry is being able to predict payout and weather trends.

It’s important to stay educated and understand that if the abuse continues, insurance companies won’t be there to provide adequate (or maybe any) coverage for businesses. This creates a domino effect on the entire economy.