Insurance attorneys address the impact of nuclear verdicts
The legal industry has ranging views on just how much social inflation and explosive lawsuit verdicts will affect insurance.
Many policyholder attorneys believe that nuclear verdicts are a response to a crisis and therefore justify premium increases and more numerous policy exclusions.
Meanwhile, the insurance industry maintains that nuclear verdicts and social inflation, which Berkshire Hathaway CEO Warren Buffett once described as “a broadening definition by society and juries of what is covered by insurance policies,” pose tremendous issues.
Juries will likely continue to render nuclear verdicts at a significantly increased rate, often far outpacing inflation, resulting in higher premiums charged to consumers to avoid potentially catastrophic losses in one fell swoop.
As the topic of nuclear verdicts surges, the editors at the Insurance Coverage Law Center have capitalized on our relationship with several insurance-industry thought leaders and members of our Editorial Advisory Board to help illuminate the growing trend.
Laura Gregory, CPCU, is a partner at Sloane and Walsh and a member of the firm’s insurance recovery group: ”Nuclear verdicts impact on claims handling and underwriting. If a claim has facts, which increase the likelihood of a very high verdict that could go beyond the policy limits, they must be treated extremely carefully at every step. And settlement (or another form of alternative dispute resolution) needs to be strongly considered at each step. If punitive damages are sought, then it must be determined whether the policy excludes coverage of punitive damages and whether the jurisdiction allows for insurance coverage of punitive damages.
Nuclear verdicts also impact underwriting: What types of risks to write and increased information gathering regarding the risks they do write, which may then result in improved safety. When losses increase in value it will always impact premium to those with a significant loss history, but also to other insureds, and will likely be passed along to others through the cost of products and services. Further, this may also lead to the addition of exclusions preventing coverage of punitive or exemplary damages, particularly in states with histories of nuclear verdicts, where punitive damages are allowed and/or where punitive damages are insurable. Additionally, nuclear verdicts will impact the availability of higher coverage limits or coverage at all in industries that are particularly at risk for nuclear verdicts, e.g., the transportation/trucking industry.”
Sean C. Griffin is a member of Dykema Gosset and had the following comments: “Nuclear verdicts — that is, verdicts high enough to threaten a company’s viability — have increased for three reasons, none of which have to do with any particular case’s merits, but all of which challenge insurance defense attorneys.
First, increased income inequality, wherein many if not most people feel like they are ‘falling behind’ economically, can spur working-class jurors to ‘reward’ a plaintiff far beyond the plaintiff’s damages, particularly if the award comes from the deep pockets of a big insurance company.
Second, the 2008 financial crisis, which prominently featured AIG, caused more people to think in terms of us versus ‘them,’ with insurance companies usually falling into the ‘them’ category.
Finally — and this is going to sound strange — climate change is a factor. Climate change has increased the number and the strength of hurricanes, with hurricanes making their way into areas of the country that rarely, if ever, see such weather. Each hurricane damage claim brings more people into contact with their insurance companies, which in turn means more people potentially dissatisfied with their payout. Every dissatisfied policyholder is a potential juror motivated to express their frustration with their own insurance company against whichever insurer happens to be sitting in the defendant’s seat.”
Joe Monteleone is a partner at Weber Gallagher: ”We will start with the premise that a nuclear verdict is one of $10 million or greater. They are almost always a surprise because, despite any worst-case predictions, a verdict of that magnitude is never truly expected.
The impact of these verdicts on insurance is already palpable.
For example, premiums for trucking industry risks have increased significantly. Underwriters can always be more diligent in assessing risks, but the most effective means to address the issue is through rate increases. There used to be an insurance maxim that there is no such thing as an unacceptable risk, only inadequate premium. Of course, what cannot be effectively addressed by better risk selection and rate increases, leads to the ultimate solution of withdrawing altogether from a class of business. We have yet to see this in trucking or other insurance sectors. Likely the first players to exit will be excess insurers, as the risk will be unacceptable in light of the relatively light premium compared to primary layers.
Another problem area is municipal liability, particularly with regard to police professional covers. Even before the tragic killing of George Floyd last year, there were increasingly large verdicts after civilian deaths while in police custody or in the process of arrest. Now, fewer of these cases are being tried, but we have instances of ‘nuclear settlements,’ to wit the $27 million with the Floyd family earlier this year.
Within my own particular area of expertise, D&O insurance, historically, very few cases are tried to a verdict, even less than in other areas of civil litigation. Nonetheless, the in terrorem effect of a possible nuclear verdict has resulted in nuclear settlements over the past several years. Many of these settlements have been in the hundreds of millions of dollars to a securities plaintiff class, and a few have exceeded a billion dollars.
Tort reform measures help insurers to a degree in dealing with the potential for a nuclear verdict, but we have had significant tort reform legislation over the past twenty to thirty years that has not curtailed the current spate of nuclear verdicts. While insurers champion tort reform, the preference of many insurers is to simply get an adequate rate to deal with the exposure. After all, that is what insurance is all about!”
William G. Passannante, co-chair of Anderson Kill’s Insurance Recovery Group, had the following comments: “The insurance industry cries, ‘wolf’ yet again, this time using a made-up sensationalist label, ‘nuclear verdicts.’ According to ALM’s Verdict Search, there were half as many verdicts over $10 million in 2019 as in 2010, as J. Robert Hunter notes. But no matter. Whatever the guise, the story is similar.
The insurance industry’s response to real or imagined crises follows a script. After a disaster, assert a ‘crisis,’ use the crisis to justify premium increases and policy exclusions.
When September 11 claims hit, the insurance industry ‘reeled.’ Terrorism exclusions and the TRIA’ backstop’ followed. When the product liability ‘crisis’ hit, insurance companies’ reeled’ — then wrote product liability ‘laser’ exclusions. When asbestos suits emerged, the industry added asbestos exclusions. When environmental claims had their heyday, the ‘reeling’ industry wrote pollution exclusions. In each of these ‘crises,’ the insurance industry survived and thrived, narrowed coverage terms, and raised premiums.
My law firm and I have been pursuing policyholder rights for decades and have seen a number of these insurance industry profit-driving crises. The focus on nuclear verdicts is no different. The industry will reap profits while purchasers of insurance policies must fight to obtain the benefit of the insurance policies they purchased.”
Eric Stern is a partner at Kaufman Dolowich Voluck: ”Due to the risk of nuclear verdicts, insureds should be sure to provide notice of claims and lawsuits to their entire tower, even if the damages do not seem to indicate the likelihood of the excess limits being implicated. The potential for a nuclear verdict may mean that excess insurers, even high-level excess insurers, may be triggered. As a result, excess insurers should be notified, updated on the progress of litigation and invited to participate in settlement discussions.
Moreover, while the causes of nuclear verdicts differ, oftentimes the driver of nuclear verdicts is a high award of punitive or exemplary damages. Insurers should work with competent coverage counsel to make sure that they are aware of the policy’s coverage obligations with respect to punitive or exemplary damages as well as whether the applicable jurisdiction has laws or public policy against coverage for such damages.
Of course, the last stop of protection for an insurer against a large verdict is its policy limits. Regardless of the size of a verdict awarded, the insurer does not owe more coverage than afforded by the policy.
When purchasing insurance, insureds should be aware of the potential for nuclear verdicts and procure enough insurance to cover them for such a loss.”
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