Attorney Involvement Continues to Increase the Cost of Commercial Claims

How can insurers protect their business from excessive litigation? Let’s take a look at the forces behind this growing phenomenon and how you can be proactive in your defense.

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Increased attorney involvement in commercial claims is a direct cause of substantial loss ratios, with costs continuing to rise. These growing costs result from high legal involvement rates, social inflation, third-party litigation funding, and bad-faith lawsuits filed by attorneys.

How can you protect your business from excessive litigation? Let’s take a look at the forces behind this growing phenomenon and how you can be proactive in your defense.

The High Cost of Litigation in Workers’ Comp

It’s no surprise that workers’ compensation claims become much costlier when litigation is involved. But just how much more expensive?

Research has found that for workers’ compensation claims with attorney involvement, the average indemnity costs are 390 percent higher than for unrepresented claims ($77,807 vs. $15,936). The median cost was 740 percent higher. It’s no wonder that temporary total disability days were 285 percent higher and claim duration 295 percent longer than when comparing attorney-involved claims to unrepresented claims.

This isn’t an anomaly: Edward Bernacki and Grant Tao found similar numbers in Louisiana data, and California’s Workers’ Compensation Research Institute tracked the same trends. It is clear that attorney involvement increases claim costs and lost days for the worker by factors of three or more.

Commercial Auto Losing Billions

While combined ratios have been mild in workers’ compensation in the last five years (86.1 – 92.2), in commercial auto they have ranged from 98.8 to 111.1, making auto one of the least profitable commercial lines.

Commercial auto underwriting profit has been steadily declining since 2005. Over the last five years, total underwriting profit (loss) exceeded $22 billion.

Many factors are driving these negative results, and the costliest is litigation and the wake it creates. A study commissioned by the American Property Casualty Insurance Association found that attorney representation in commercial auto claims drove a 21.3 percent increase in total loss costs in 2019 compared to 2015.

Attorneys Follow the Money

Plaintiff attorneys generally view insurance companies as citadels of power with vaults full of money. They see their job as raiding the citadel, unlocking the vaults, and giving the money to injured parties (and to themselves). Modern-day Robin Hoods as it were—except the original Robin Hood didn’t take 40 percent for himself. Plaintiff attorneys have played this role quite well. And that’s a one-sided view; at the end of the day, policyholders and society suffer from opportunistic litigation. In fact, plaintiff attorney behavior can be considered more in line with the Sheriff of Nottingham taxing society.

A few shocking facts about attorney involvement in commercial claims:*

  • The median award for all litigated claims grew 33% to $100,000 between 2012 and 2019, while the average award rose by 50% to $1.7 million.
  • The number of awards to injured parties greater than $1 million granted by juries and judges increased by 235% in 2012–2019 compared to 2005–2011.
  • The median of the 50 largest injured party verdicts was $53 million in 2017, up from $26 million in 2014.
  • Today, attorneys become involved in claims before they are reported to a carrier at an alarming rate. A study by Sedgwick found that of litigated commercial auto claims, 54.7% of them have attorney involvement before, or the same day as, the report to carrier date. This measure was at 42.7% only four years ago. Meanwhile, 66.9% of litigated claims have attorneys involved within the first 14 days of being reported.

*Source: American Property Casualty Insurance Association

Judgments Go Nuclear

As the numbers attest, massive judgments in favor of the plaintiff are becoming more commonplace. They are a significant element of social inflation, a trend of many factors affecting premium and loss increases in the insurance industry.

Drivers of these judgments include:

  • Cultural attitudes moving toward support of the “little guy,” especially when confronting large corporations.
  • Demanding—and worsening—working conditions, enabling litigators to characterize employers as uncaring, insensitive, derelict and abusive. Plaintiff attorneys leverage this trend to sway jurors and judges in their favor.
  • In commercial auto lines, the improper use of cell phones while driving, the lowering average age and experience of drivers, the limited availability of truck drivers, and aggressive driving in general contribute to a higher frequency of accidents, often more “spectacular” in nature.

Augmented Intelligence is a Second Set of Eyes on Casualty Claims

Mubbin Rabbani // Mubbin Rabbani, vice president of product at CLARA Analytics, has over 15 years of product management experience focusing on commercial insurance claims. Prior to joining CLARA, he served in senior product leadership positions at Liberty Mutual, Agero, and Deloitte. At CLARA, he is responsible for delivering innovative solutions that address critical operational and financial levers in the claims value chain.

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