October 7 through October 11 is Lawsuit Abuse Awareness Week, an initiative to raise awareness of the growing misuse of the U.S. civil justice system.
Consulting firm Sedgwick released a report on May 31 which found that the involvement of third-party funders in lawsuits, or third-party litigation funding (TPLF), contributes to social inflation, which describes the cost of insurance claims rising faster than overall economic inflation. Third-party financiers invested more than $3.2 billion in court cases in 2022, representing a 16% increase from 2021.
TPLF is also one factor driving larger verdicts, which are another contributor to social inflation. Plaintiffs are not benefitting from these larger verdicts; a study conducted by Swiss Re found that plaintiffs receive 12% less compensation when a third-party financier is involved in the case.
Public relations firm Marathon Strategies found that New Jersey had 14 nuclear verdicts between 2009 and 2023, which totaled $1,480,387,446. New Jersey’s total nuclear verdicts were the seventeenth largest in the country. Nationwide, 89 lawsuits resulted in nuclear verdicts against corporate defendants last year, marking a 15-year high. The number of nuclear verdicts across the country rose by 27% in 2023, with the median size of nuclear verdicts increasing to $44 million, up from $21 million in 2020.
A report from the U.S. Chamber of Commerce Institute for Legal Reform (ILR) found that a rising number of nuclear verdicts, or verdicts larger than $10 million, is contributing to increasing insurance costs. These large verdicts are referred to as “nuclear” due to the “devastating” effect they can have on “businesses, entire industries, and society at large,” according to the report.
Nuclear verdicts can “undermine fundamental fairness and predictability in the rule of law” while also making goods and services more expensive. Nuclear verdicts also make insurance more expensive, and in some cases, make insurance coverage harder to attain.
A Fitch report states that in mid-2024, renewals saw rate increases of up to 15% for loss-affected accounts and 10% for no-loss accounts. However, reinsurers argue these increases are not enough to cover growing risks and are seeking further rate hikes and reductions in coverage limits and quota-share commissions.
Swiss Re notes that the convergence of these adverse trends has resulted in significant underwriting losses in the liability insurance market. From 2019 to 2023, direct combined ratios were 105% for other liability occurrence, 109% for commercial auto liability, and 106% for medical malpractice, leading to cumulative underwriting losses of $43 billion.
Companies like Uber and Lyft have joined calls to clamp down on TPLF, recognizing its role in encouraging frivolous lawsuits and exacerbating the financial strain on businesses.
