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The Real Costs of Social Inflation

How increased use of third-party litigation financing, attorney involvement, and other plaintiffs’ tactics affect businesses and insurers

April 11, 2022 Photo

Lawsuit abuse continues to be a growing threat to fairness in our legal system and is a substantial contributor to increasing costs of goods and services for individuals, families, and businesses. A significant factor in this rise in costs is the increasing rate of plaintiffs’ attorney involvement in everyday disputes and transactions, and the trend is growing in commercial automobile insurance where it threatens the delivery of goods and services nationwide. Often, attorney involvement delays resolution of disputes, increases costs, and results in lower net settlement amounts for claimants. This means that the attorneys who interject themselves in these disputes can be the principal beneficiaries—not the injured party.

Plaintiffs’ attorney involvement is increasing through the use of aggressive tactics such as inflammatory attorney advertising and by becoming involved in the claims process increasingly earlier. A 2017 analysis by X Ante/Kantar Media found that plaintiffs’ lawyers’ drug-injury advertisements on television, radio, and social media had increased by more than 60% since 2008. Their sensationalized, misleading claims may put patients at risk by discouraging appropriate medical care or safe drug usage according to a study by the U.S. Chamber Institute for Legal Reform entitled, “Bad for Your Health: Lawsuit Advertising Implications and Solutions.”

Inflationary Risks

Increasingly, plaintiffs’ lawyers are partnering with litigation and medical financers to seek inflated liability claims and litigation damages so they can profit, even at the expense of the claimant. These forms of claims financing are occurring more frequently and inflate the costs we all must pay for goods and services. A recent report by Swiss Re entitled, “U.S. Litigation Funding and Social Inflation: The Rising Costs of Legal Liability,” found that litigation financing “contributes to higher awards, longer cases and greater legal expenses.” More importantly, the report found that “Third-party litigation financing also diverts a greater share of legal awards to the funder rather than the plaintiff.” It was estimated that, in U.S. cases, “up to 57% of legal costs and compensation go to lawyers, funders, and others [when financing is involved] compared to 45% in typical tort liability cases.”

Plaintiffs’ lawyers are leveraging bolder strategies such as reptile theory and juror anchoring to obtain outsized awards not supported by evidence. In essence, they engage in scare tactics and demands to punish defendants instead of merely compensating victims for their actual harm. This is so customary now that well-prepared defense counsel engage in trial motions practice to limit the use of these incendiary tactics.

The increased use of third-party litigation financing, attorney involvement, and other tactics adds to the social inflation confronting businesses and insurers. An often-used term these days, social inflation simply represents the departure of claims costs from customary measures of fairness and reasonableness. We are all unfortunately familiar with massive, single-claimant personal injury jury verdicts, which now can result in billion-dollar verdicts. Though it can be hard to precisely account for the impact of social inflation, a recent joint paper by the Insurance Information Institute and the Casualty Actuarial Society, “Social Inflation and Loss Development,” estimated that “social inflation increased commercial auto liability claims by more than $20 billion between 2010 and 2019.” Though the paper focused primarily on commercial auto liability, evidence of similar trends was found in other lines, as well.

Not surprisingly, all of this has a cost. According to the U.S. Chamber Institute for Legal Reform, the cost that individuals and businesses bear for lawsuit abuse, or the “tort tax,” is on the rise and currently exceeds $3,300 per household nationally, with costs in many states well above that figure. This tort tax extends beyond the direct cost of lawsuits. A study sponsored by Citizens Against Lawsuit Abuse found that the ripple effect of the tort tax impacts 2.2 million jobs nationally and wipes out more than $435 billion in economic activity.

Furthermore, COVID-19 has been a catalyst for targeting a variety of industries for litigation. According to the American Tort Reform Association, during the period of March 2020 through December 2020, more than 176,000 television advertisements for legal services mentioning the coronavirus aired in the U.S. at an estimated cost of $34.4 million. It should be no surprise that, by February 2021, at least 8,200 lawsuits related to COVID-19 were filed in the U.S.

In many cases, advertising encourages consumers to sue in order to be compensated for losses. However, evidence suggests most claimants do not improve their recoveries by involving an attorney, but rather increase costs while delaying resolution of the claim. In the end, the real winners are the lawyers and the associated third-party litigation and medical lenders that seek to bring claims and cases to trial in the hope of a supersized verdict that will enlarge their own recoveries.

The American Property Casualty Insurance Association’s (APCIA) recent report conducted by actuarial firm Milliman highlights the harmful impact that increasing attorney involvement in commercial automobile claims is having on businesses and consumers across the country. The report, “Trends in Attorney Representation: U.S. Commercial Automobile Insurance,” examines trends in the losses, allocated loss adjustment expenses (ALAE), and the use of attorneys for the commercial automobile liability insurance line of business in the U.S. The report covers analyses for claims closed from 2015 through 2019 for accidents covered by commercial automobile liability insurance policies in the U.S.

The report concludes that the frequency of attorney representation has been increasing, the relative costs of resolving claims are significantly higher for claims with attorney representation, and such claims take considerably longer to resolve for claimants.

For claims with an attorney, the findings for 2019 compared to 2015 show a 21.3% increase in total loss, 2.9% increase in ALAE, and 19.1% increase in total loss and ALAE.

In fact, for claims that closed in 2019, the average loss for claims represented by an attorney was 14.3 times higher than the average loss for claims without an attorney. Similarly, the average cost for resolving a claim with an attorney was 34 times higher than the cost for resolving a claim without an attorney, and the average total loss and ALAE for a claim with an attorney was 15.3 times higher than the average cost for a claim without an attorney.

As the percentage of claims with an attorney increased during the 2015 to 2019 period, the percentage of loss and ALAE related to the claims with an attorney also increased. Among the claims that closed in 2019, 29.9% were represented by an attorney, and those claims account for 86.7% of all loss and ALAE. For claims that closed in 2019, an attorney was involved in more than 92% of the claims that had a loss of $100,000 or more.

The findings also illustrate that, between 2015 and 2019, there was a 50% increase in the percentage of claims with a loss of more than $500,000, from 1% in 2015 to 1.5% in 2019. Although claims with a loss of more than $500,000 accounted for only 1.5% of all claims in 2019, they accounted for almost half (45.4%) of all loss and ALAE. Claims with a loss between $100,000 and $500,000 accounted for 4.6% of claims and 29.2% of losses and ALAE.

For both claims with and without an attorney, cycle times were longer the greater the amount of loss. For claims with an attorney and amount of loss greater than $500,000 that closed in 2019, the average cycle time was 1,272 days. This represents an increase of more than 100 days from the average cycle time for claims with an attorney that closed in 2015. The average number of days from date of loss to claim closed for all claims with an attorney was 750 days in 2019 compared to only 195 days without an attorney.

Implications for Increased Costs

Increasing attorney involvement in commercial auto claims is a very real concern. Commercial auto operations play a vital role in the U.S. economy by ensuring products reach the shelves of retailers, goods arrive at every consumer’s doorstep, and parts and supplies reach manufacturers. Artificially increasing costs to trucking companies and other businesses through increased attorney involvement will not only directly impact those companies, but also result in broader repercussions for the economy and consumers.

A 2020 report from the American Transportation Research Institute (ATRI) entitled, “Understanding the Impact of Nuclear Verdicts on the Trucking Industry,” validated these concerns. Examining a newly created trucking litigation database of 600 cases, ATRI found that in the first five years of data (2006-2010), there were only 26 cases over $1 million, whereas in the last five years of data (2015-2019), there were nearly 300 cases. Additionally, ATRI found that from 2010 to 2018 “the size of verdict awards grew 51.7% annually at the same time that standard inflation grew 1.7% annually and health care costs grew 2.9% annually.”

APCIA and the property casualty insurance industry have long prioritized the importance of highway safety. We continue our work to advance technology to make commercial and personal vehicles safer, support policies to reduce distracted and impaired driving, and improve and modernize the nation’s infrastructure to ensure the safety of our roads and highways. Public policymakers should also focus on meaningful reforms to restore balance to the civil justice system. Regulating misleading and inflammatory attorney advertising can help reduce excessive, frivolous, and redundant lawsuits, which increase costs for individuals, families, and all businesses. 

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About The Authors
Stef Zielezienski

Stef Zielezienski is executive vice president and chief legal officer of the American Property Casualty Insurance Association.  stef.zielezienski@apci.org

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