Emerging factors forecast a continued rise in insurance litigation

Nearly three years have passed since the COVID-19 pandemic shocked global economies. From supply chain interruptions and shortages to an overwhelming shift to remote work, the pandemic’s effects on individuals and businesses alike have been nothing short of substantial. Nowhere else were these effects clearer than with insurance-related litigation, causing crammed court dockets, trial delays, and an increased volume of cases referred to mediation because of the ability to attend remotely.

With fears of an economic recession ahead, coupled with the overall increase in litigation since the start of the pandemic, claims professionals should not expect the rate at which their claims are litigated to decrease. Moreover, they should be prepared for the eventual impacts of inflation. McKinsey & Company has estimated that inflation alone increased property and casualty insurer loss costs by $30 billion in 2021, with ~75% attributed to personal lines.

Solutions for accommodating busy litigation seasons ahead

As the pandemic forced many to work remotely, it also forced the legal industry to adapt to “remote litigation,” allowing for hearings, depositions, mediations, and even trials to be conducted via telephone/videoconferencing. The resulting time saved in not having to travel to attend such proceedings has arguably allowed for higher volumes of litigation to be maintained. Adopting these adaptations long-term could help accommodate the expected rise in litigation. For example, the Florida Supreme Court recently proposed several procedural amendments to help alleviate the increase in litigation, codifying practice methods that developed during the “remote litigation” following the COVID-19 pandemic, such as permitting remote appearances for non-evidentiary hearings and attending mediation via remote videoconferencing.

Mediation is often offered or requested by claims professionals on behalf of insurers as part of their pre-suit claim investigations, regardless of the eventual coverage determination. If litigation ensues, in many jurisdictions mediation is a requirement prior to trial. Statistically, less than 1% of all cases end up going to trial (see circuit civil filings data from the Florida Office of the State Courts Administrator). Litigated claims will often settle at mediation, if not sooner, and if not, they’re disposed of prior to trial (see county civil filings data from the Florida Office of the State Courts Administrator).

Regardless, claims professionals should expect their claims to go into litigation at increasing rates. A recent report from joint industry groups titled “It’s Not Just the Weather” describes the landscape well: “Unlike perils such as hurricanes, wildfires and tornados – which can be readily modeled and priced by insurers – legal system abuses, fraud and misguided regulation cannot.”

Continuing the rising tide of insurance litigation

Overall, the percentage of insurance claims that went into litigation rose ~47% from 2017 to 2021. An exponential increase was seen in business interruption cases in 2020, largely due to the COVID-19 pandemic and insurance claims made relating to those interruptions.

A staggering share of the nation’s insurance litigation is accounted for by Florida, and the state’s recent responses offer a glimpse at other, albeit controversial, efforts to address the trend. In 2019, Florida accounted for ~76% of all homeowners’ property and casualty lawsuits, despite the fact that only 8% of all homeowners’ insurance claims were filed in the state that same year.

In an attempt to curtail the exponential rise in property and casualty litigation, Florida lawmakers introduced SB 2D, which limited the award of attorney fees in assignment of benefits litigation (“AOB”) and restricted fee multiplier awards. Previously, such awards were available to prevailing plaintiffs in insurance litigation, but no such award was available to the insurers if they were successful in litigation, thus pressuring insurers to settle claims to avoid the risk of losing at trial and thereby also paying for the plaintiff’s attorney fees with a multiplier applied.

More claims in litigation, coupled with increased settlements to avoid the risk of trial, resulted in higher insurance premiums for homeowners. Not surprisingly, the enacted SB 2D has been heavily contested by AOB contractors and has only added to the increase in Florida’s insurance litigation. Several insurers have already faced financial downgrades from the continuous litigation, with others announcing plans to eventually withdraw from Florida’s insurance market.

The new landscape: Cybersecurity and cryptocurrency

Litigation of property insurance claims primarily involves breach of contract disputes, followed by petitions for declaratory relief in instances where a final coverage determination was not made. These causes of action are plentiful in property and casualty litigation, but claims professionals should be prepared for an eventual increase in claims regarding cybersecurity incidences and claims for cryptocurrency theft.

Claims for both types of losses have been made on both homeowners and commercial property policies, often seeking coverage under ID theft or business interruption. The majority of policies do not have specific coverages or language regarding either cybersecurity events or cryptocurrency theft, and those that do are far from complete. With that understanding, the legal industry is anticipating an increase in litigation of these claims, and without clear coverage language or exclusions in their policies, insurers should expect to see petitions for declaratory relief in attempts to have the courts determine these types of coverages. Courts across the country have already made determinations on what constitutes a “physical loss” in these types of claims, but it’s to the benefit of insurers and claims professionals to have these distinctions in coverage addressed specifically in their policies, in order to avoid costly litigation.

Statistically, cyber insurance claims have risen 100% consistently for the last three years, and the related cyber insurance market is projected to be worth $25 billion by 2026, compared to its current ~$9.5 billion value. Knowing that such claims and litigation are on the horizon, insurers are currently taking aggressive positions to rescind policies on misrepresentations in initial applications, and their focus will need to turn to a due diligence review of insureds’ “cyber hygiene” internal practices before issuing policies with cyber insurance coverage.

Insurance litigation has been steadily on the rise in recent years, and even attempts to remedy the issue seem to have led to new problems. The ever-increasing risk of cybersecurity incidents and emerging threats related to cryptocurrency theft are exacerbating the looming threat of litigation for insurers. With no sign of decline, carriers should treat each claim with the expectation that it may be tried to completion, including diligent response, record keeping, investigations and following established procedures carefully from the very beginning.

Julius Matusewicz and Bret L. Freeman are attorneys at Trenam Law in Tampa and members of the firm’s Litigation and Dispute Resolution practice group. Matusewicz and Freeman represent insurers throughout first-party property insurance claims and disputes. Matusewicz may be contacted at jmatusewicz@trenam.com and Freeman may be contacted at bfreeman@trenam.com.

Related:

The (somewhat) hidden costs of social inflation

Arbitration: Embrace it or avoid it? Considerations for small businesses

Hurricane insurance bad faith lawsuits see dramatic surge