Litigiousness
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INSURERS' LEGAL DEFENSE COSTS
Lawsuits against businesses affect the cost of insurance and the products and services of the industries sued. According to Tillinghast, an actuarial consulting firm, the American civil liability (tort) system cost $247 billion in 2006, down 5.5 percent from $261.4 billion the previous year. The decrease in 2006 costs is the first since 1997. Most lawsuits are settled out of court. Of those that are tried and proceed to verdict, Jury Verdict Research data show that in 2006 the median, or midpoint, plaintiff award in personal injury cases was $35,000, $10,000 less than the previous year.
Insurers are required to defend their policyholders against lawsuits. The costs of settling a claim are reported on insurers' financial statements as “defense and cost containment expenses incurred.” These expenses include defense, litigation and medical cost containment. Expenditures for surveillance, litigation management and fees for appraisers, private investigators, hearing representatives and fraud investigators are included. In addition, attorney legal fees may be incurred owing to a duty to defend, even when coverage does not exist, because attorneys must be hired to issue opinions about coverage. Insurers’ defense costs as a percentage of incurred losses are high in some lines such as products liability and medical malpractice. There are many possible reasons for this: cases are becoming more complex; insurers are spending more money to defend individual cases; and the cost of defending certain types of lawsuits, such as asbestos cases, may be increasing.
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COST OF U.S. TORT SYSTEM, 1990-2006
($ billions)
Source: Tillinghast-Towers Perrin.
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GROWTH OF TORT COSTS, 1951-2006
| - Tort costs averaged $825 per person in 2006, $57 less than in 2005.
- Tort costs accounted for 1.87 percent of the gross domestic product (GDP) in 2006, down from 2.10 percent in 2005.
- Tillinghast predicted that tort costs would rise about 2.5 percent in 2007 and 4.5 percent in 2008, reflecting increased litigation related to subprime mortgages, among other trends.
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MEDIAN (1) AND AVERAGE PERSONAL INJURY JURY AWARDS, 2000 AND 2006
($000)
(1) Represents the midpoint jury award. Half of awards are above the median and half are below.
Source: Reprinted with permission from Current Award Trends in Personal Injury. Copyright 2008 by LRP Publications, 747 Dresher Road, P.O. Box 980, Horsham, PA 19044-0980. All rights reserved.
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COST OF CLAIMS AND LIABILITY LIMITS
Litigiousness is not only pushing up the cost of insurance but also the amount of insurance that businesses must buy to protect themselves against lawsuits, potentially driving up the price of goods and services for all consumers.
In its latest annual survey, the broker Marsh reviewed the excess liability insurance buying decisions of more than 7,200 organizations worldwide, including some 2,700 U.S. companies. Excess liability insurance, also known as excess casualty insurance, increases the liability protection provided by a company’s liability insurance. It is designed to provide protection from infrequent catastrophic accidents or occurrences. The following chart indicates the percentage of U.S. firms experiencing a loss of $5 million or more. Those that experienced such a loss tended to purchase much higher limits of liability coverage.
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U.S. FIRMS EXPERIENCING A LOSS OF $5 MILLION OR MORE, 2003-2007 (1)
(Percent)
(1) Loss experience in the past 5 years.
Source: 2007 Limits of Liability Report, © Marsh Inc. 2007.
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U.S. AVERAGE EXCESS LIABILITY LIMITS RELATIVE TO LOSS EXPERIENCE, 2003-2007
(Average limits purchased, $ millions)
(1) Loss experience in the past 5 years.
Source: 2007 Limits of Liability Report, © Marsh Inc. 2007.
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CASUALTY COST OF RISK PER $1,000 OF REVENUE, 2005-2006
Source: Marsh Inc.
| - Commercial policyholders reduced their cost of casualty risk per $1,000 of revenue by 16 percent in 2006, according to a 2007 Marsh survey.
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LEGAL MALPRACTICE AND OTHER OCCUPATIONAL NEGLIGENCE CASES
Median compensatory awards in occupational negligence cases range from $15,000 for funeral home negligence to $600,000 for abuse by clergy, according to a 2002 Jury Verdict Research analysis of jury awards for emotional injuries resulting from occupational negligence. The median award in legal malpractice cases is $167,000; the median award for psychiatrist/psychologist negligence is $200,000. Average awards in such cases range from $60,000 for funeral negligence to $1.3 million for cleric negligence. The average award for legal malpractice and psychiatrist/psychologist negligence is $643,000 and $639,000, respectively.
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