Is This General Liability Cost Driver on Your Radar for 2024?

In last year’s general liability trends report, we reviewed the leading cause of increased industry costs: social inflation. More recently termed, legal system abuse, it can be fueled by a variety of litigation risks such as advertising, social media, anchoring, the per diem argument, and third-party litigation funding (TPLF) that can adversely affect loss outcomes for businesses and consumers. This trend in anti-corporate sentiment continues to drive inflated jury awards, which have reached into the billions. The negative sentiment adversely affects businesses, consumers, and the overall economy in the form of higher costs associated with risk transfer. Legislative intervention, such as that recently enacted in Florida, may be the only resolution to prevent further worsening of this systemic issue. However, even with Florida’s recent tort reform, there still needs to be ongoing efforts to have reasonable and appropriate caps on damages.

“The more significant question now is, how much of these expenses will have to come out of the pockets of businesses and consumers?” said Todd McMillan, Vice President – Liability Claims at Safety National. “So, who is behind this invisible consumer tax? With little to no cap on spending, third-party litigation financiers are silently driving up legal expenses by prolonging litigation and forcing unreasonable settlement demands relative to the nature of the case. Until there is transparency in the prevalence of litigation funding sources, jury awards are likely to increase, resulting in potential rate increases and tighter terms for insureds.”

McMillan and Vik Ramaswamy, Director, Risk Services at Safety National, discuss the causes of this costly exposure and how insureds can work with their carriers to mitigate it.

What is driving continued legal system abuse?

While jury demographics, income inequality, and political factors can all contribute to large jury verdicts, there are a few primary drivers of costs. First, there is a significant devaluation of money. Juries are being influenced by a per diem pain and suffering damages argument and being anchored by requests to pay large verdicts. Consequently, jurors are increasingly numb to high-dollar awards, with increased exposure through social media that is progressively desensitizing them to the value of a dollar.

Second, is the use of a common trial strategy known as Reptile Theory. Used to influence a jury outcome, the plaintiff’s attorney states that if the defendant’s action or inaction were to continue that they could endanger the community and even the jury itself. If used successfully, the plaintiff’s attorney could then convince the jury to return a large verdict against the defendant.

Last, but maybe most important, is the increased use of third-party litigation funding. This allows third-party sources of capital to invest in lawsuits secretly in return for receiving a portion of the settlement or verdict. Now, with the potential of foreign investors being involved within our judicial system, there is added concern about national security and the ongoing lack of transparency towards all involved in these funding mechanisms. What if these investors are targeting companies in the U.S., including defense industry groups? What are the ramifications when they are accessing confidential information?

How can insureds mitigate their general liability risks?

Simple but effective technologies like security cameras can deter fraud and provide factual answers surrounding the circumstances of a given occurrence. Video footage can enable risk managers to decide whether they should pursue defense or out-of-court settlement. Additionally, effective utilization of camera systems is an element of a robust general liability program that markets look for when determining appetite and terms.

While having cameras is key, ensuring immediate and methodical response and corresponding incident investigation is critical for closing the loop and preventing litigation. Organizations should have procedures to attend to any injured persons, conduct accident investigations immediately after, and document any findings. Investigative steps should contemplate some of the following: saving any video footage that captured the incident, collecting supportive documents such as maintenance or housekeeping logs, and writing down any firsthand accounts by witnesses using open-ended interview techniques.

Despite these best efforts, claims can still end up in litigation. Throughout litigation, organizations should consider the ongoing and accumulating exposure and the chance of prevailing. In many instances, early resolution strategies may be the best option. Settling claims starts with the right team, where all parties have an opportunity to weigh the merits of early settlement versus prolonged litigation. A conference call with all stakeholders can help gain an understanding of the value and obstacles to settling and develop a clear plan of action to move forward.