Nuclear verdicts raise alarm: Preventing legal system abuse

An award of $222 million was granted in a lawsuit against a power company; $440 million in a case involving a constructive termination case; and $730 million in a truck collision lawsuit…plus more.

Jury awards of $10 million+ — commonly referred to as nuclear verdicts because of their widespread destructive impact not only on insurers but on consumers as well — are increasing in both amount and frequency, as reported by the U.S. Chamber of Commerce Institute for Legal Reform (ILR) last year. In 2019, there was a 300% rise in nuclear verdicts, compared to the annual average from 2001 to 2010. The ILR report found that the median verdict grew from $19.3 million in 2010 to $24.6 million in 2019, a 27.5% increase.

Today, amounts are skyrocketing so much that a new term, “thermonuclear,” is being used to describe verdicts that far exceed the $10 million threshold. According to cases reported to VerdictSearch in 2022, jury verdicts were as high as $7.38 billion (in Texas), $2.04 billion (in Virginia), and $1.72 billion (in Georgia). These verdicts may be the result of “legal system abuse,” which is generally understood to mean tactics the plaintiff’s bar uses to escalate these unsupportable verdicts.

Legal system abuse includes tactics to initiate more lawsuits, drive up litigation expenses and settlements for defendants, and secure higher verdicts. Personal injury firms may frequently use aggressive marketing and advertising techniques to attract potential plaintiffs.

Plaintiff attorneys are skilled at tapping into jurors’ emotions in the courtroom to make their arguments resonate, in pursuit of successful decisions that can often lead to large jury verdicts. Some practices they may deploy include:

• Forum shopping: Filing lawsuits in specific jurisdictions where cases tend to result in more favorable verdicts.
• Jury anchoring: Setting a specific reference point or “anchor” on the value of the damages (even when numbers are arbitrary or have no correlation to the actual value) at the beginning of a proceeding to artificially influence the jury’s estimation of value. In other words, the more plaintiff attorneys ask for, the more they get.
• Reptile strategy: Efforts to appeal to jurors’ emotions that could trigger feelings of danger to influence their decision-making. Jurors may make decisions based on the feeling they are keeping themselves and their communities safe by holding a defendant accountable. This tactic can often be reinforced by shifting societal attitudes toward corporate defendants.

Beyond these kinds of litigation measures that are sometimes used by the plaintiff bar, another driver of legal system abuse is third-party litigation funding (TPLF) — a tool that allows investors, such as hedge funds or other third parties who are otherwise uninvolved in a case, to bankroll lawsuits in exchange for a portion of a judgment or settlement. Earlier this year, a report from the American Property Casualty Insurance Association suggested that more than $11 billion of capital is invested in TPLF in the U.S.

Since taking root in the U.S. around 2010, a small (but growing) number of states have enacted laws addressing TPLF: Several state legislatures have passed laws designed to increase transparency regarding such arrangements or to allow policyholders to void or rescind a contract with public adjusters. Courts in some states are similarly adopting rules that require transparency requirements.

However, there is still no nationwide requirement to disclose funding arrangements.

Although the increases in settlement amounts are designed to allow injured parties to be made whole, these higher amounts can also fill the pockets of others. For example, plaintiffs’ attorneys are benefiting from it; third-party litigation funders are reportedly profiting from it and have built an industry around it; and investors in these private firms are effectively “placing bets” on injured claimants’ cases. This systemic problem has negative impacts on insurance companies and their policyholders in the form of higher claim costs, which can lead to higher premiums.

Excesses in the tort system are another indicator of legal system abuse. The ILR found that the total cost and compensation paid in the U.S. tort system were $443 billion in 2020, yet only 53 cents of each dollar actually went to plaintiffs.

Impacts on insurance markets

In the past decade, the insurance/reinsurance industry has used metrics (e.g., median damages awarded in wrongful death lawsuits) to gain a better understanding of the impacts of legal system abuse, but it’s complex. Timely data is not readily available, and it’s difficult to parse individual factors that may impact the issue.

Lines of business that appear to be most impacted by legal system abuse in the U.S. are commercial trucking, comprehensive general liability, including product liability, medical malpractice, professional liability, and directors and officers (D&O) liability — all lines that are experiencing hard market conditions.

Despite efforts from some state lawmakers and the insurance industry to combat legal system abuse, it continues to grow and remains an enormous risk for insurers. Outcomes can include, at minimum, higher insurance premiums and increased financial strains on insurers and, ultimately, policyholders.

Strategies to mitigate the problem

As an industry, it is imperative that we continue to raise awareness and engage with policymakers about the negative impacts of legal system abuse while working on initiatives to help mitigate it. For instance, federal laws that increase the transparency of TPLF arrangements would help level the playing field between defendant and plaintiff.

The absence of nationwide transparency regarding TPLF and the escalation of legal system abuse adds uncertainty into the tort system, which makes casualty lines of business more difficult for insurers to model and price. However, prior experience should help to guide insurers in addressing limits and rates accordingly.

Insurers can also manage claims processes to help curb the impact of legal system abuse. Key practices can include:

• Plan: Continue to be proactive, deliberate, and efficient, particularly in long-tail liability lines and claims settlement. Plan for renewals to demonstrate exposures and propensity to losses.
• Prepare: Enhance defense case management to adequately prepare defendants and witnesses to offer a more effective counter to the plaintiff bar’s tactics. Engage mock juries to prepare and validate defense arguments, anticipate potential outcomes, and determine appropriate trial and/or settlement strategies.
• Probe: Employ data, analytics, and technology to improve exposure monitoring and risk modeling and to identify trends early. Analyze developments from a cross-functional perspective, pulling expertise from claims, legal, underwriting and data analytics departments.

These practices (and other strategies) can help until there are more longer-term fixes to our tort system. For now, carriers must operate knowing the U.S. legal environment is predictably unpredictable.

Maura Freiwald (MFreiwald@munichre.com) is the head of casualty at Munich Reinsurance America, Inc. [The material presented herein is for information purposes only and is not intended to be legal, underwriting, financial, or any other type of professional advice, and the recipient should consult with their own counsel or other advisors to verify the accuracy and completeness of any information used and to determine its applicability to the recipient’s particular circumstances.]

Related:

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‘They’re just killing us’: Defense Bar confronts rise in nuclear settlements

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