Litigiousness

Litigiousness

ASBESTOS ILLNESSES

It can take as long as 40 years after exposure to asbestos for someone to be diagnosed with an asbestos-related illness. A large number of workers who may have physical signs of exposure to asbestos but not a debilitating disease are filing claims now out of concern that if they later develop an illness, the company responsible may be bankrupt, due to other asbestos claims. A March 2013 bill before Congress would require trusts set up to pay asbestos claims to file detailed quarterly reports.

In December 2012 A.M. Best increased its estimate of ultimate insurance industry asbestos losses to $85 billion, up from its previous estimate of $75 billion made in 2011. See further information below and in Insurance Issues Updates: Asbestos Liability.

INSURERS' LEGAL DEFENSE COSTS

Lawsuits against businesses affect the cost of insurance and the products and services of the industries sued. According to Towers Watson, an actuarial consulting firm, the American civil liability (tort) system cost about $265 billion in 2010 in direct costs, up from $180 billion in 2000. Tort costs rose 5.1 percent in 2010 after dropping 1.2 percent in 2009. Absent payouts from the April 2010 Deepwater Horizon drilling rig explosion, tort costs would have shown an overall decrease of 2.4 percent in 2010, according to Towers Watson. The U.S. tort system cost $857 per person in 2010, up from $820 per person in 2009. Most lawsuits are settled out of court. Of those that are tried and proceed to verdict, Jury Verdict Research data show that in 2011 the median, or midpoint, plaintiff award in personal injury cases was $55,000, up 46.7 percent from $37,500 in 2006.

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 relatively high in some lines such as products liability and medical malpractice, reflecting the high cost of defending certain types of lawsuits, such as medical injury cases and class actions against pharmaceutical companies. For example, in addition to $762 million in products liability incurred losses in 2012, insurers spent another $874 million in settlement expenses, equivalent to 114.7 percent of the losses.

 

DEFENSE COSTS AND COST CONTAINMENT EXPENSES AS A PERCENT OF INCURRED LOSSES, 2010-2012 (1)

($000)

  2010 2011 2012
  Amount As a percent of
incurred losses
Amount As a percent of
incurred losses
Amount As a percent of
incurred losses
Products liability $899,174 54.7% $1,140,230 72.0% $873,860 114.7%
Commercial multiple peril (2) 1,881,223 44.7 1,896,935 37.6 2,022,739 46.0
Medical malpractice 1,809,106 61.4 1,793,296 57.5 1,685,867 45.7
Other liability 5,270,556 25.5 4,464,140 25.0 4,959,838 24.8
Workers compensation 2,502,138 11.2 3,087,836 12.6 3,053,222 12.4
Commercial auto liability 927,259 10.5 960,961 10.3 1,090,969 10.4
Private passenger auto liability 3,946,241 6.2 3,960,967 6.2 4,343,521 6.7
All liability lines $17,235,697 13.8% $17,304,365 13.8% $18,030,016 14.0%

(1) Net of reinsurance, excludes state funds.
(2) Liability portion only.

Source: SNL Financial LC.

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MEDIAN (1) AND AVERAGE PERSONAL INJURY JURY AWARDS BY TYPE OF LIABILITY, 2011

(1) Represents the midpoint jury award. Half of the awards are above the median and half are below.

Source: Thomson Reuters, Jury Verdict Research Series.

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PERSONAL INJURY AWARDS

According to Thomson Reuters, in 2011 the median (or midpoint) award in personal injury cases was $55,000, up from $39,149 the previous year. The average award rose from $654,755 to $741,450 during the same period. Thomson Reuters notes that average awards can be skewed by a few very high awards and that medians are more representative of typical awards. In cases of products liability, the highest median award was in transportation products cases ($2,643,000). In cases involving business negligence, the highest award median was against transportation industries ($573,276). In disputes concerning medical malpractice, the highest award median was in childbirth cases ($2,452,214).

 

TRENDS IN PERSONAL INJURY LAWSUITS, 2007-2011 (1)

Year Award median Probability range Award range Award mean
2007 $37,463 $9,000 - $248,079 $1 - $102,714,734 $827,880
2008 40,000 10,000 - 226,729 1 - 188,000,000 837,426
2009 39,932 9,879 - 207,639 1 - 77,418,670 752,742
2010 39,149 10,000- 200,000 1 - 71,000,000 654,755
2011 55,000 11,500 - 300,000 1 - 58,619,989 741,450
Overall $40,000 $9,485 - $235,000 $1 - $212,580,000 $782,020

(1) Does not include punitive damages.

Source: Thomson Reuters, Jury Verdict Research Series.

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AVERAGE PERSONAL INJURY JURY AWARDS, 2007-2011

Source: Thomson Reuters, Jury Verdict Research Series.

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CASUALTY COST OF RISK PER $1,000 OF REVENUE, 2006-2007

Source: Marsh Inc.

 

  • The casualty cost of risk per $1,000 of revenues dropped by 6 percent from $1.88 in 2006 to $1.77 in 2007 for companies surveyed by Marsh in both years. The overall drop was 23 percent in 2007, taking into account new and repeat participants.

DIRECTORS AND OFFICERS LIABILITY INSURANCE

Directors and officers liability insurance (D&O) covers directors and officers of a company for negligent acts or omissions and for misleading statements that result in suits against the company. There are various forms of D&O coverage. Corporate reimbursement coverage indemnifies directors and officers of the organization. Side-A coverage provides D&O coverage for personal liability when directors and officers are not indemnified by the firm. Entity coverage for claims made specifically against the company is also available. D&O policies may be broadened to include coverage for employment practices liability (EPL). EPL coverage may also be purchased as a stand-alone policy.

Fifty-eight percent of corporations purchased D&O coverage in 2012, according to the Cost of Risk survey from the Risk and Insurance Management Society. The pickup rate was greatest for banks, with 75 percent of banking industry respondents purchasing the coverage, based on the survey of 1,459 corporations. A report, based on a survey of 325 U.S. corporations conducted by Towers Watson at the end of 2012, found that the average D&O limits purchased by the group was $98 million, and the median limits purchased was $75 million. For public companies the average limit was $132.6 million. For private companies the average was $48.5 million. Seventeen percent increased their D&O limits in 2012, down from 25 percent who had raised their limits in 2011. In the latest survey, 36 percent of respondents reported having had a claim in the past 10 years, with nonprofits reporting the highest proportion of claims (63 percent), as compared with public companies (33 percent) and private companies (27 percent).

 

TYPES OF DIRECTORS AND OFFICERS LIABILITY CLAIMS, 2003-2012 (1)

(1) Based on participants in the survey that reported one or more claims over the 10-year period.

Source: 2012 Directors and Officers Liability Survey, Towers Watson.

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  • The percentage of respondents reporting derivative shareholder/investor lawsuits, the most widespread claim, dropped from 42 percent in 2011 to 40 percent  in 2012.
  • Regulatory claims grew fastest,  with  the percentaging reporting such claims rising from 19 percent in 2011 to 23 percent in 2012.

 

DIRECTORS AND OFFICERS LIABILITY CLAIMS BY TYPE OF CLAIMANT IN THE UNITED STATES, 2003-2012 (1)

(1) Based on participants in the survey that reported one or more claims over the 10-year period.

Source: 2012 Directors and Officers Liability Survey, Towers Watson.

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DIRECTORS AND OFFICERS LIABILITY CLAIMS BY BUSINESS OWNERSHIP, 2002-2011 (1)

(1) Based on participants in the survey that reported one or more claims over the 10-year period.

Source: 2011 Directors and Officers Liability Survey, Towers Watson.

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EMPLOYMENT PRACTICES LIABILITY

Employment practices are a frequent source of claims against directors, officers and their organizations. Organizations that purchase insurance for employment practices liability (EPL) claims typically either buy a stand-alone EPL insurance policy or endorse their directors and officers liability (D&O) policy to cover employment practices liability. In 2011, 14 percent of public companies responding to a Towers Watson survey shared or blended their D&O limits with another coverage such as EPL or fiduciary liability, compared with 44 percent of private companies and nonprofits.

In 2011, 37 percent of the respondents to a survey of risk managers by the Risk and Insurance Management Society said they bought EPL policies. The pickup rate was greatest for the consumer staples industry, with 55 percent of respondents purchasing the coverage, followed by telecommunications (50 percent) and banks (46 percent). Chartis was the leading writer, based on EPL premiums written, with a 30.3 percent market share in 2011, followed by Chubb (10.7 percent), Zurich (14.5 percent), Alterra (6.0 percent) and AXIS (4.2), according to the survey.

 

TRENDS IN EMPLOYMENT PRACTICES LIABILITY, 2008-2012

Year Median (midpoint) award Probability range (1)
2008 $242,560 $63,750 - $673,032
2009 207,235 60,000 - 600,281
2010 172,000 50,000 - 385,000
2011 291,500 81,280 - 556,338
2012 70,000 12,544 - 265,000

(1) The middle 50 percent of all awards arranged in ascending order in a sampling, 25 percent above and below the median award.

Source: Thomson Reuters, Employment Practice Liability.

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EMPLOYMENT PRACTICES LIABILITY, BY DEFENDANT TYPE, 2006-2012 (1)

(1) Based on plaintiff and defendant verdicts rendered.

Source: Thomson Reuters, Employment Practice Liability.

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SHAREHOLDER LAWSUITS

Cornerstone Research has conducted annual studies of securities class-action lawsuit settlements and filings each year since the passage of the 1995 Private Securities Litigation Reform Act, enacted to curb frivolous shareholder lawsuits.

Filings

The number of securities class-action lawsuits filed rose from 152 in 2012 to 166 in 2013, up 9.2 percent, according to Cornerstone’s 2013 study. The 166 filings in 2013 compare with an annual average of 191 recorded between 1997 and 2012. In 2013 healthcare, biotechnology and pharmaceutical companies accounted for 21 percent of total filings. Filings related to the financial crisis as well as mergers and acquisitions and Chinese reverse merger filings have continued to subside. (Reverse mergers involve the acquisition of a private company by a public “shell” company, giving it access to capital markets.)

Settlements

The number of court-approved securities class-action settlements rose by 17.5 percent, from 57 in 2012 to 67 in 2013, according to Cornerstone Research. The 2013 increase was the first year-to-year increase since 2009. Driven by mega-settlements, total settlement amounts rose by 45.5 percent from $3.3 billion in 2012 to $4.8 billion in 2013. These mega-settlements (i.e., those in excess of $100 million) accounted for 84 percent of all 2013 settlement dollars, the second-highest proportion in the last decade. The median settlement amount fell by 47.9 percent to $358 million in 2013 and was 17.5 percent lower than the median settlement amount in the prior five years.

 

POST-REFORM ACT SETTLEMENTS OF SECURITIES LAWSUITS, 1996-2013 (1)

  1996-2012 2013
Minimum $0.1 million $0.7 million
Median 8.3 million 6.5 million
Average 55.5 million 71.3 million
Maximum 8.4 billion 2.4 billion
Total settlements $73.7 billion $4.8 billion

(1) Private Securities Litigation Reform Act of 1995; adjusted for inflation.

Source: Cornerstone Research.

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ASBESTOS-RELATED ILLNESS

Exposure to asbestos can cause lung cancer and other respiratory diseases. The first asbestos-related lawsuit was filed in 1966. A large number of workers who may have physical signs of exposure but not a debilitating disease are filing claims now out of concern that if they later develop an illness, the company responsible may be bankrupt, due to other asbestos claims. It can take as long as 40 years after exposure for someone to be diagnosed with an asbestos-related illness. In December 2012 A.M. Best increased its estimate of ultimate insurance industry asbestos losses from $75 billion in 2011 to $85 billion. A.M. Best attributes the jump to a spate of court rulings that increased insurance coverage for claimants, and a rise in claims related to mesothelioma, a fatal type of cancer identified with exposure to asbestos. In Congress a bill, Furthering Asbestos Claim Transparency, was introduced in March 2013. The bill would require asbestos trusts, set up by companies to deal with asbestos claims to file detailed quarterly reports on claims and their resolution with the Executive Office of U.S. Trustees. (See Insurance Issues Updates: Asbestos Liability).

 

ESTIMATED ASBESTOS LOSSES, 2003-2012 (1)

($ billions)

    Losses  
Year Beginning reserve Incurred (2) Paid Ending reserve (3)
2003 $18.2 $6.5 $2.2 $22.5
2004 22.5 4.3 3.3 23.5
2005 23.5 3.6 2.3 24.9
2006 24.9 1.6 2.6 23.8
2007 23.8 2.5 2.6 23.8
2008 23.8 1.1 3.8 21.1
2009 21.1 1.9 2.1 21.0
2010 21.0 2.4 2.3 21.1
2011 21.1 1.8 1.8 21.1
2012 21.1 1.9 2.1 21.0

(1) All amounts are net of reinsurance recoveries.
(2) Incurred losses are losses related to events that have occurred, regardless of whether or not the claims have been paid, net of reinsurance. Includes loss adjustment expenses.
(3) Because of changes in the population of insurers reporting data each year, the beginning reserve may not equal the ending reserve of the prior year.

Source: ISO, a Verisk Analytics Company.

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