The frequency of litigation in liability insurance claims is increasing incrementally as impacts of the COVID-19 pandemic subside. While litigation remains a small percentage of overall claim volume, the cost of resolving those claims is disproportionately large, accounting for almost half of all claims costs. Notably, the cost for litigated claims is increasing at a rate that exceeds standard inflation, bolstered by phenomena like social inflation, which reflects changes in attitudes toward liability and responsibility.
Escalation is not inevitable, however. Organizations and their insurers are allocating additional attention and resources to execution of litigation avoidance and mitigation. Measures can be taken to control costs associated with litigation and resolve claims without an attorney. Emphasizing care and attention in the claims process can help to reduce the frequency and severity of litigation while improving claims outcomes.
Controlling for impacts of inflation on litigation costs
If the cost of goods and services is increasing nationwide alongside interest rates, then we can assume the price tag on litigation and other claims-related expenses (repairs, medical procedures) is also higher than in previous years. Some cost increases are unavoidable; to this end, claims specialists may consider factoring in a 3% to 8% price increase on typical costs when making loss projections and establishing reserves.
At Sedgwick, we’re seeing increases not in the volume of litigation but in the value of litigation, such as larger awards. Interestingly, litigation cost increases are exceeding the standard rate of inflation—a sign of social inflation, a phenomenon in which the frequency and severity of litigation decisions are influenced by factors beyond simply economics. Significant changes in societal beliefs and expectations of increasingly higher compensation for injuries are two factors that can drive liability litigation outcomes inconsistent with historical trends. Large-sum settlements and publicized decisions with particularly punishing resolutions can also stir social sentiment, often prompting an uptick in nuclear verdicts and class-action lawsuits.
Utilizing data to identify litigation trends and prioritize performance
Trial tactics signal the rare occasion in which a claim has gone to litigation—again, an outcome representing only 1% of all claim decisions. For these situations, however, it’s imperative that chosen counsel possess the expertise and success record necessary for an expedient settlement. Emerging technologies support this selection process.
As an industry leader in tech-assisted claims solutions, Sedgwick employs complex AI-powered algorithms to search litigation histories extensively and determine, based on favorable case results, the effectiveness of outside counsel charged with managing litigation on behalf of the company and our clients. The Attorney Scorecard can identify firm performance based on individual cases (lawsuits) they’ve closed in the past. Sedgwick’s data analytics team designed the program to offer an apples-to-apples comparison of litigation outcomes when “sorted by” severity of injury, jurisdiction—you name it.
Emphasizing care, avoiding litigation
Of course, it’s ideal to avoid litigation before it becomes an option. Companies should be proactively implementing model workplace practices that are clearly defined, documented, communicated and compliant. Due diligence to create an effective risk management program will enable regular monitoring of risk exposures, which supports stronger loss control.
Remember that when a liability claim is accepted, the implication is that liability exists. It’s critical to identify and let the claimant know right away what is covered under liability, as they may have interest in working with an attorney.
Once liability is established, data trends analysis and predictive modeling can be utilized to identify if a claim bears the “telltale” characteristics that indicate the claimant will seek representation. If so, claims managers can lean into tactical but care-forward case management techniques to convey to the claimant that an attorney is not necessary for satisfactory outcomes. An empathetic approach to claim advocacy pairs well with a focus on resolution.
That said, there are signs you could be headed for litigation. It’s relevant if an attorney is involved and at which stage in the claim cycle they’re introduced. The primary factor linking a new claim to litigation is whether representation was secured at the first notice of loss. If you look at the trends, in 70% of litigated claims an attorney was involved within 14 days of the claim being filed.
Should parties move to trial, the defense should aim to extinguish any potential for social inflation by adopting tactics that “humanize” the company—like selecting an empathetic physical presence to represent the organization in the courtroom; ensuring witnesses are well prepared with positive narratives; and that proceedings convey an embedded moral code.
Learn more > Read our liability litigation observations and trends 2023 commentary paper.