Litigation's Impact on Liability Claims Continues To Grow

Dark brown gavel with a gold band around it resting on one hundred dollar bills that are spread out

April 27, 2022 |

Dark brown gavel with a gold band around it resting on one hundred dollar bills that are spread out

The number of claims that have attorney involvement at first notice of loss continues to grow, according to a new report from Sedgwick, while litigation rates and costs continue to rise.

Meanwhile, social inflation and other factors continue to increase the severity and frequency of litigation, Sedgwick reports, though the COVID-19 pandemic temporarily muted the effects of social inflation.

In addition, so-called nuclear verdicts (those greater than $10 million) are becoming both larger and more frequent, and class-action filings and settlements are growing both in the number and size of awards, Sedgwick says.

In the April 11, 2022, report, titled Liability, Litigation Trends, Drivers, and Strategies, Sedgwick notes that at the time it published its May 2020 report examining liability litigation trends and practices, the world was becoming wrapped in the COVID-19 pandemic that has affected nearly every aspect of our lives over the past 2 years.

While it remains to be seen how the experiences of the pandemic will affect the future of liability litigation, social inflation, and jury deliberations, the key findings in this year's report remain very much the same as those in the 2020 version, Sedgwick says.

The Sedgwick report notes that attorney representation at the claim level is the primary precursor to litigation of general liability and auto claims. And, over the past 5 years, there has been an increasing number of claims filed with an attorney representing the claimant or notice of representation occurring within a short period after the initial filing, the Sedgwick report says.

Sedgwick notes that the percentage of auto liability and general liability claims that ultimately went to litigation and had representation in place within 24 hours of the first report of the incident both stood at just under 43 percent in 2017. By the end of 2021, however, the percentage for both had risen to more than 54 percent.

While litigation in general liability and automobile liability represents less than 1 percent of claim activity, the overall rate continues to increase, the report says. Of note, however, is that when assessing the costs associated with litigated versus nonlitigated claims, any increase in litigation adds significantly to claims costs, Sedgwick says.

In addition, litigated claim expenses such as legal defense, surveillance, appraisals, and special investigations continue to rise, according to Sedgwick. The report cites data from the National Association of Insurance Commissioners (NAIC) that showed those costs as a percentage of total incurred losses increasing by 4 percent from 2017 to 2019. Depending on the specific line of business, they can account for as much as one-third or even one-half of total incurred losses, the NAIC data shows.

"The impact of the growing costs of litigated cases is a significant driver of total claims costs, and the growth is significantly outpacing normal inflationary factors," the report says. Between 2014 and 2019, the average bodily injury claim cost nationwide grew by an average of 5.5 percent annually, Sedgwick says—3 times the rate of inflation.

The commercial auto sector has been particularly affected by the increase in the frequency of awards exceeding $10 million, the Sedgwick report says. It cited a 2020 study by the American Transportation Research Institute that found that between 2010 and 2018 the size of jury awards grew by 33 percent while inflation grew by 1.7 percent and healthcare costs increased 2.9 percent.

The report notes that while most cases are settled before trial, the size of awards in cases litigated to a decision continues to increase. The report also notes the increase in the number of nuclear verdicts, citing a study by Verdict Search that showed that between 2019 and 2020 there was an increase of more than 300 percent in awards of $20 million or more compared to a previous study on verdicts between 2001 and 2010.

Between 2010 and 2018, the average size of transportation verdicts greater than $1 million increased 1,000 percent, while the number of cases with verdicts over $1 million increased by more than 200 percent, the report says, citing data from the American Transportation Research Institute.

According to the Sedgwick report, social inflation is one of the chief emerging risks facing both insurers and policyholders. The report notes the findings of a 2021 Milliman study that showed losses growing faster 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 reliant on consistencies, social inflation presents a challenge to the common theory by generating data inconsistent with past patterns," the Sedgwick report says.

While the COVID-19 pandemic had the effect of subduing these litigation trends for a time with lockdowns reducing activity, less road traffic, and delayed court cases, the pandemic's impact on litigation trends appears to be ending, Sedgwick says.

And, the report notes, "the COVID-19 pandemic itself is projected to generate more litigation than any incident in US history. Over 6,300 pandemic-related cases were filed prior to December 2020." By comparison, the Deepwater Horizon oil spill resulted in fewer than 1,000 cases, Sedgwick says.

Litigation around vaccine mandates and workplace pandemic issues account for a significant portion of workplace-related class actions filed between 2020 and 2021, Sedgwick says. Other sources of litigation include business interruption and related coverage issues, interrupted contract performance, event refunds, tuition refunds, civil rights issues, product claims, and more, Sedgwick says.

"An additional concern is that the pandemic may influence the evolution of social inflation by causing liability standards to be broadened, adding to a growing anti-corporate sentiment," the report says. "In addition to commercial auto, social inflation trends are having noteworthy adverse impacts on lines including medical malpractice, directors and officers, excess, and umbrella."

With the growing litigation trends and their mounting impact on liability claims, organizations must focus on promoting litigation avoidance at the claims stage, the Sedgwick report says.

"Tactics such as advocacy, timely communication, and a resolution focus will help ensure that claims do not become litigated," Sedgwick says. "Further, utilization of predictive modeling to identify claims likely to become litigated can prompt an aggressive workflow to push appropriate and timely resolution."

Businesses also should develop enterprise risk management cultures that set high expectations for safe and responsible practices and processes throughout the organization, Sedgwick says, along with conducting regular risk assessments. Environmental, social, and governance programs that document the organization's commitment to safe and responsible conduct can also help reduce the impact of litigation.

When litigation does occur, organizations should strive for pre-trial settlements, Sedgwick says. And when cases do proceed to trial, they should ensure that defendant witnesses are well prepared and focus on trial themes that look to "humanize" the company.

April 27, 2022