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Shock Verdicts
Shock Verdicts: Insurers Sound the Alarm as Billion-Dollar Jury Awards Drive Up Claims Costs

Insurers say they’re struggling to restrain social inflation—fueled by a rash of so-called “shock verdicts”—that has harmed the industry and threatens the overall economy.
  • Tom Davis
  • March 2022
Illustration by Angel Negrón.

 

Key Points

  • Rising Premiums: Largely because of social inflation, several lines of insurance have had, on average, premium hikes anywhere from 5% to 25% every quarter since mid-2019 after premiums were largely flat for five years, according to a Swiss Re report.
  • Reduced Coverage: Trucking companies that paid for $50 million in coverage a few years ago now can’t get any more than $1 million. The cost of that sharply reduced coverage, meanwhile, is as much as 300% higher than what truckers were paying five years ago, insurers say.
  • Economic Disruptions: Without insurance, fewer truck drivers and their employers will be available to satisfy the public’s consumer needs when they’re already challenged by supply chain disruptions, according to the Insurance Information Institute.

Someone had to pay. In this case, it was Beer Belly's Sports Bar, a Texas establishment that gave a man too much to drink one November night in 2017. He ran a red light and killed a woman and her 16-year-old granddaughter with his car.

It was left up to a jury in December to decide how much. And decide they did: $300 billion, quite possibly the highest damage award in U.S. history, a number that matches Apple Inc.'s entire 2021 revenue.

Just a few years ago, getting close to $1 billion in a liability case seemed impossible. But these so-called “shock verdicts,” once rare, are now becoming a more frequent reality. Insurers say they've come with a hefty price that goes way beyond what the jury awards.

Insurers and their advocates are responding to the increase in shock verdicts with a variety of strategies, including campaigning for tort reform, pushing for greater transparency about increasingly sophisticated litigation-funding programs and building better alliances with business groups and legislators.

“What we want to make sure of is that what comes out of that is fair to not only the defendant but also the plaintiff, in that things aren't excessive,” said David Perez, chief underwriting officer, Liberty Mutual Global Risk Solutions. “Once we get too excessive in the tort system—and it's happening now—that cost ultimately gets paid by customers in general.”

Facing the consequence of rising premiums and growing claims costs, insurers say they're sounding the alarm that shock verdicts also have had a devastating economic impact, extracting hundreds of millions of dollars in damages from the transportation industry in recent years as it struggles to operate amid supply chain disruptions and sharply reduced insurance coverage.

“There is little awareness of the costs to consumers and insurance customers of the rising costs of social inflation,” said Thomas Holzheu, chief economist Americas, Swiss Re.

Thomas Holzheu Swiss Re

“There’s a sense of using large verdicts as an instrument to create justice, and that inequality has been an issue.”

Thomas Holzheu
Swiss Re

Related: Insurers: Third-Party Litigation Is Fueling Rise in Shock Verdicts

Higher Premiums and Reduced Coverage

In a sample of cases taken from 2010 to 2019, the share of verdicts that resulted in awards of more than $5 million rose from 29% to 37% for general liability, and from 22% to 29% for vehicle negligence cases, according to a December 2021 Swiss Re report, US Litigation Funding and Social Inflation.

The median award for verdicts larger than $1 million rose from $8.2 million to $10.3 million for general liability awards, and from $6.1 million to $7.9 million for vehicle negligence cases, the report said.

What are also called “nuclear verdicts” have particularly impacted the medical field, said Holzheu.

“Medical malpractice is clearly an area where we have a lot of large-scale verdicts where insurance prices have been affected over a longer time,” Holzheu said. “The availability and the price of [medical malpractice] cover affects physicians, OB-GYNs. They're struggling with that. It's availability of medical services. The affordability is affected and so on.”

Plaintiff awards in the commercial trucking industry—which has been blamed for driver mistakes that have led to tragic accidents—have risen dramatically in number and size.

The American Transportation Research Institute, in a 2020 report entitled Understanding the Impact of Nuclear Verdicts on the Trucking Industry, looked at litigation data on 600 cases between 2006 and 2019. It found 26 cases during the first five years of the study where the awards exceeded $1 million; in the last five of those years, there were nearly 300.

In many cases, insurers are now paying out more money in claims than they're receiving from premiums. Conning Inc., a U.S. insurance asset manager and provider of insurance research, estimated the average combined ratio for U.S. general liability in 2020 at 105.0 and for medical malpractice at 112.7, the seventh consecutive year of underwriting losses for both lines, according to the Swiss Re report.

In response, directors and officers, umbrella and commercial auto insurers have, on average, raised premiums anywhere from 5% to 25% every quarter since mid-2019 after being largely flat for five years, according to the Swiss Re report.

The challenges of social inflation will likely force the transportation industry to cut capacity, insurers say. Trucking fleets are assuming higher risk levels through higher deductibles, self-insurance, expanding use of insurance captives and lower levels of excess liability coverage, said Perez. Trucking companies are buying less coverage, or they're leaving the business entirely. Or, even worse, they're driving without insurance, Perez said.

Perez said there are cases of trucking or logistic companies that may have purchased up to $50 million in limit for liability in coverage a few years ago that now can't afford more than $1 million. The cost of that sharply reduced coverage, meanwhile, is as much as 300% higher than what truckers were paying five years ago, said Craig Dancer, managing director, transportation industry practice leader, Marsh.

Without insurance, fewer truck drivers and their employers will be available to satisfy the public's consumer needs when they're already challenged by supply chain disruptions, said Dale Porfilio, chief insurance officer, Insurance Information Institute. “That's only going to make the challenge harder for commercial trucking firms to do what they do, to supply everything, whether it's your grocery store, Target, or Lowe's, Home Depot, or anything else. If you get to the point that prices can't be sustained, then you get into areas where availability can become a problem,” Porfilio said.

Dale Porfilio Insurance Information Institute

“The insurance industry exists to take care of policyholders in those moments of truth, when accidents happen and losses occur. It’s always been hard for the insurance industry, claims adjusters and lawyers alike to figure out, ‘How do you value a liability injury?’”

Dale Porfilio
Insurance Information Institute

Growing Mistrust

Amid the rise of large verdicts, corporate policyholders “are most frequently required to pay because they purchase high levels of insurance coverage,” according to Porfilio. Those areas of insurance affected the most include commercial auto, professional liability, product liability and directors and officers liability.

In a post on its website entitled “3 Factors Fueling Today's Supersized Verdicts,” Liberty Mutual cited “corporate mistrust” as likely playing a role in pushing juries to feel more sympathy for injured plaintiffs—and wanting to punish the so-called “offending companies.”

Liberty Mutual, in its website post, cited a study called the 2019 Edelman Trust Barometer that says only one in five respondents believes that “the system” is working for them, with nearly half believing the system is actually failing them. “This sentiment leads to a loss of faith and a desire for change, the report suggests, which may be spurring people to shift their trust to things they can exert control over—like verdicts,” according to the website.

Holzheu said plaintiffs also are hiring attorneys who are deploying a successful strategy before juries “that's more appealing to emotions rather than the pure legal merits of a claim.”

“It's applied psychology, basically. They have been successful in trying, testing and applying this to a lot of cases. We see there is a trend,” he said. “Then, it's also matched by changing attitudes of juries. They're more sympathetic toward plaintiffs. They are more critical toward corporations and institutions. There's a sense of using large verdicts as an instrument to create justice, and that inequality has been an issue.”

Thanks to social media and an increase in attorney advertising, Holzheu said, the public also is learning more about these cases and they're increasingly mobilized by a sense of disenchantment, dissatisfaction, unfairness and inequality. “Social media plays a role. It's easy to get information,” Holzheu said. “Then, information about signature cases also spreads more quickly. We know more about large verdicts, and that may contribute to what is anchoring the new normal. It's a question of changing expectations.”

Conversely, the defense side lacks the funding and coordination to counter the plaintiffs' bar, said Paul Horgan, head of U.S. National Accounts, Zurich North America. They're getting better at their work, but the defense has been routinely outplayed in liability cases in recent years, he said. Plaintiffs, through the discovery process, can ascertain how much insurance the defendant has—and how much they'll be able to pay if their insured is proven to be liable, he said.

Related: Insurers Call for Reform, Public Awareness in Fight to Curb Shock Verdicts

What happens as a result? Horgan described it this way: In a liability case, if the insured has $20 million in coverage from insurer A, insurer B and insurer C, the plaintiffs know they can sue for that amount—at the very least. So they'll ask for a $20 million settlement, regardless of the injury. “It's ridiculous. There's no way this is worth $20 million,” Horgan said.

Insurance claims adjusters are trained to be sympathetic to policyholders who are looking for fair compensation—and, in some cases, justice—following a loss or tragedy. Helping their customers, Porfilio said, is what insurance companies are supposed to be about.

“The insurance industry exists to take care of policyholders in those moments of truth, when accidents happen and losses occur. It's always been hard for the insurance industry, claims adjusters and lawyers alike to figure out, 'How do you value a liability injury?'” Porfilio said.

Figuring out fair compensation for a fatality is even harder, Porfilio said. “My mom was a stay-at-home mom for all of her life before she died from being struck by a car while bicycling,” he said. “She never earned an income. How do you value her life? It's her role as a mother, as a wife, as a grandmother, as a volunteer. There is no exact science to determine fair compensation for a loved one lost.”

Porfilio said insurers work to maintain a delicate balance of helping an aggrieved public while also trying to protect themselves and their consumers. “That's what we're talking about. What is life and health worth?” he said. “I don't want to be unduly critical of anybody in this entire equation because it's not cut and dried what these payouts ought to be.”

“To say that it's based on compensation alone minimizes what a person's contribution may be in all aspects of their life,” he added. “This is not easy. It is always going to be a difficult decision when we're talking about loss of life or severe injury.”

And getting the money may still be an issue. In the $300 billion Texas bar case, the family expects to get little to no compensation because the liquor license for Beer Belly's expired in September 2019 and the license has been canceled, a lawyer for the family, Craig Sico, told CNN. The attorney told the network that Texas does not require bars and restaurants that serve alcohol to have insurance.

The attorneys for the family, however, made it clear that the case was about justice. “The family hopes bartenders and alcohol servers will see the verdict as a message to take better care of their patrons and the public,” the law office of the plaintiff's attorney, John T. Flood, said in a Facebook post.


Tom Davis is managing editor. He can be reached at tom.davis@ambest.com.



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