The growing threat of legal system abuse

If it seems like legal system abuse is on the rise, it isn’t your imagination. According to a 2024 report by the American Property Casualty Insurance Association (APCIA), in recent years there has been a significant increase in the frequency and severity of claims above and beyond what had previously been customary.

Social inflation, which is often driven by legal system abuse, has resulted in a rising number of more expensive claims, settlements and verdicts that are driving up costs for consumers and businesses alike.

“At Nationwide, our data shows that the percentage of general liability claims that hit their commercial coverage limits nearly doubled between 2012 and 2022,” notes Geoff Borger, AVP casualty claims at Nationwide. “We have found that loss frequency is down over this same period, but there is a sharp increase in severity over the last few years.”

AN EVOLVING PHENOMENON

Legal system abuse has been driving social inflation in recent years, notably through third-party litigation financing (TPLF) and related aggressive litigation tactics. TPLF is when a funder unrelated to the case, such as a hedge fund, provides money to the plaintiff to pay for attorney fees, expert witnesses and other relevant expenses. If the plaintiff is awarded damages by court judgment or in a settlement, the funder receives a portion of the damages.

“In TPLF-funded litigation, the financial risk of a lawsuit is transferred from the plaintiff’s attorney to an investor,” explains Borger.

Juries are also awarding bigger payouts with what are commonly known as nuclear verdicts, which includes an award of $10 million or more. The APCIA report states that this kind of verdict has grown so substantially that a new category has emerged: so-called thermonuclear verdicts of $100 million or more.

Many attorneys also advertise these payouts on billboards for members of the public to see every time they drive by. According to APCIA, the American Tort Reform Association reports that attorneys in the U.S. spent $2.4 billion on billboards, print ads, local television commercials and radio spots in 2023 – a sharp increase over what was spent in the five previous years.

Borger contends that the sheer volume of legal advertising has made the sky-high nuclear and thermonuclear verdicts seem common to potential jurors, which may help perpetuate the issue.

“Passing that billboard can desensitise you to that amount, and the next time you’re on a jury, a sum like $15 million may seem standard issue,” he notes. “It jades your perception and becomes normal.”

A LASTING IMPACT

Legal system abuse is having a significant effect on both insurers and insureds. When liability claims rise due to TPLF and related tactics, risks become more expensive to underwrite. In turn, premiums and other expenses can go up for consumers.

Nationwide’s data demonstrates just how significant this issue has become. Based on 10-year severity trends, general liability premiums are expected to double every 14 years, but six-year severity trends now show premiums doubling every 8.6 years. This steep increase over such a short period underscores the far-reaching impacts of this growing issue, with consumers and insurers bearing the brunt of the pain.

“The cost of excessive litigation and legal system abuse gets passed on,” Borger says. “We all pay the price.”

MITIGATING RISK

Borger says that the insurance industry must look for innovative solutions to address the growing issue of legal system abuse. This includes leveraging AI to analyse claims in the early stages.

“The status quo won’t work,” he says. “We need to evolve along with the environment we find ourselves in. We need to move just as fast.”

This includes coming up with new strategies to operate more efficiently and expand expertise, as well as collaborating across the industry and with the defence bar to educate consumers about the downside of legal system abuse.

It also means having a steadfast commitment to act in the best interest of insureds, which Borger says is fundamental to Nationwide’s promise to its partners.

“Our unwavering dedication to prioritising our members’ best interests drives us to deliver exceptional service, even in this challenging environment,” says Borger. “We have the talent, skill and specialised expertise needed to handle the most complex and severe claims, which allows us to get the best outcome for our insureds.”