In 2017, an 18-year-old college student was killed after being struck at a high rate of speed by a commercial vehicle. The victim was sitting in stand-still traffic at the time. The commercial vehicle's driver was on his 25th hour behind the wheel, surpassing the maximum driving time permitted under Federal Motor Carrier Safety Administration rules. The initial traffic build-up was caused by another commercial truck driver who flipped his vehicle while distracted by his phone. The 18-year-old victim's parents filed a wrongful death lawsuit against both carrier companies for their roles in the incident and a verdict of $1 billion was awarded to them.
"Nuclear" verdicts like this one, or verdicts over the $10 million mark, are one of the most concerning trends over the last 10 years. According to The National Law Journal, the average jury award among the top 100 U.S. verdicts more than tripled between 2015 and 2019, skyrocketing from $64 million to $214 million. As the insurance market evolves, it is important for businesses to understand the current trends, be proactive with insurance protection and risk mitigation practices.
What’s causing nuclear verdicts?
There are three societal trends driving the increase in nuclear verdicts. They include the use of litigation financing by plaintiffs, eroding tort reform and above all, distrust of businesses, particularly large corporations. These trends are not only driving these mega-verdicts, but also causing higher costs to insurance companies and higher insurance premiums, often referred to as social inflation.
What is litigation financing?
Lawsuits can get very expensive and often, the $450/hour attorney fee is enough to scare away any plaintiff from pursuing a case. Litigation, or 3rd party, financing has helped tip the scales.
Litigation financiers are 3rd parties unrelated to the lawsuit who agree to cover all or part of the costs for the lawsuit in exchange for a portion of the favorable settlement. Litigation financing has resulted in an increase in the number of cases going to trial and an increase in larger jury verdicts since plaintiffs can aggressively pursue their cases and get larger settlements. And for those jury awards above the $10 million mark, the investment by these financiers really pays off.
What is tort reform and why is it eroding?
Tort reform refers to state regulations designed to limit the length of time a lawsuit can be filed, as well as set monetary caps on damages that can be awarded. These reforms have been legislatively modified or challenged on constitutional grounds in several states. Opponents believe tort reforms lower settlements to the point where it’s not worth it to an attorney to take a case. Should tort reform continue to erode, there could be fewer restrictions on punitive and noneconomic damages, statutes of limitations and contingency fees—all of which can drive up the cost of claims and exacerbate social inflation.
How are large verdicts tied to corporate distrust?
The overall public sentiment toward large businesses and corporations is deteriorating, and anti-corporate culture is more prevalent than ever. A number of factors are contributing to this increasing distrust, including highly publicized issues related to the mishandling of personal data and social campaigns like the Occupy Wall Street movement. This has had a huge impact on how businesses are perceived by a jury in court, and organizations are held to a high standard for issues related to the way they conduct their business. In fact, juries are increasingly likely to sympathize with plaintiffs, especially if a business’s reputation has been tarnished in some way in the past. As a result, plaintiff attorneys are likely to play to a jury’s emotions rather than the facts of the case.
Compounding this issue, there’s an increasing public perception that businesses—especially large, well-funded ones—can cover the cost of any damages. This means juries are likely to have fewer reservations when it comes to prosecuting companies to the fullest extent of the law.
How do nuclear verdicts impact the insurance market?
Nuclear verdicts have a huge impact on the insurance market. As verdicts grow beyond $10 million, the primary liability limits are exhausted and umbrella coverage is then accessed. For businesses in many industries, the availability and affordability of umbrella coverage is in jeopardy. The market has hardened, and underwriters have very little capacity or appetite these days. Companies must act now to understand their exposures and implement risk management practices.
What can businesses do to protect themselves?
While it’s impossible to completely eliminate the threat of litigation, it’s important to take the steps needed to ensure your business is prepared for a lawsuit. This is increasingly crucial as social inflation continues to drive up the cost of claims. Here are a few ways your organization can protect itself:
- Consider purchasing an umbrella policy— Commercial umbrella insurance provides financial protection above the limits of your organization’s other liability policies. It enhances existing liability coverages, helping you respond to gaps in insurance and substantial claims. These policies offer additional protection for a variety of concerns, including libel, vehicle accidents, third-party property damage, product liability and customer and employee injuries.
- Protect yourself from employment practices claims—Employment practices claims are common and can be particularly devastating given social inflation trends. To protect your business, review your employee handbook regularly and ensure policies related to sexual harassment, workplace violence and similar issues are communicated effectively. Doing so can help your defense should a claim be brought against you. For additional protection, you may want to consider purchasing standalone employment practices liability insurance.
- Promote a safety culture—A safety culture sets the standard for overall safety at your company. The organization should demonstrate a commitment to employee health and safety by implementing safe work practices and prescribing the mentality that unsafe actions are not tolerated. In a strong, successful safety culture, the Integral Culture model, everyone feels responsible for safety and pursues it on a daily basis by going beyond the “call of duty” to identify unsafe conditions and behaviors, and to intervene to correct them. As a result, a company with a strong safety culture typically experiences few at-risk behaviors, and consequently experiences lower accident rates, lower turn-over rates, lower absenteeism and higher productivity.
- Work with an experienced insurance professional focused on risk mitigation—The insurance market is constantly evolving, and in the face of social inflation, it’s vital to have a knowledgeable insurance professional advising your business on insurance protection and mitigating risks. Be sure to partner with a broker who has strong carrier relationships and knowledge of your industry.