Litigiousness

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, 2006-2015 (1)

($ billions)

    Losses  
Year Beginning reserve Incurred (2) Paid Ending reserve (3)
2006 $25.2 $1.7 $2.6 $24.1
2007 23.2 2.5 2.5 23.5
2008 23.5 1.1 3.7 20.5
2009 20.6 1.9 2.0 20.4
2010 20.5 2.4 2.3 20.6
2011 20.6 1.8 1.8 20.6
2012 20.4 1.9 2.0 20.3
2013 20.4 2.0 2.1 20.3
2014 20.3 1.5 2.4 19.4
2015 19.4 1.7 2.8 18.3

(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: NAIC data, sourced from S&P Global Market Intelligence, Insurance Information Institute.

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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. Travelers Insurance 2015 Business Risk Index showed that legal liability was the fourth-highest rated worry for business leaders in the United States, down from No. 3 a year earlier. Of 1,210 business leaders surveyed, 56 percent indicated they worry about it somewhat or a great deal.

Businesses address their liability concerns through many types of risk management, of which insurance is an important component. A Swiss Re study indicated that the United States in 2013 had the largest commercial liability insurance market in the world both in premium volume ($84 billion) and as a percentage of Gross Domestic Product (0.50 percent). More than half of all global liability premiums were written in the United States.

 

Top 10 Largest World Commercial Liability Markets, 2014

(US$ billions)

    Direct premiums written   Liability as a percentage of
Rank Country Liability Total nonlife GDP (1) Total nonlife GDP (1)
1 United States $86.6 $539.3 $16,805.4 16.1% 0.52%
2 United Kingdom 10.6 101.0 2,713.9 10.5 0.39
3 Germany 8.6 92.9 3,751.9 9.2 0.23
4 France 6.7 83.3 2,812.5 8.1 0.24
5 Japan 6.3 85.5 4,913.0 7.3 0.13
6 Canada 5.0 50.6 1,831.0 9.9 0.27
7 Italy 5.0 46.3 2,133.5 10.8 0.23
8 Australia 4.9 32.7 1,501.0 14.9 0.33
9 China 4.2 105.5 9,603.2 3.9 0.04
10 Spain 2.1 31.2 1,369.5 6.9 0.16
  Total, countries shown $140.0 $1,170.0 $47,400.0 12.0% 0.30%
  Total, all countries $165.0 $1,600.0 $77,400.0 10.3% 0.21%

(1) Gross domestic product.

Source: Swiss Re.

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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 $1.2 billion in products liability incurred losses in 2014, insurers spent $953 million on settlement expenses, equivalent to 77.4 percent of the losses.

 

Defense Costs And Cost Containment Expenses As A Percent Of Incurred Losses, 2013-2015 (1)

($000)

  2013 2014 2015
  Amount As a percent
of incurred losses
Amount As a percent
of incurred losses
Amount As a percent
of incurred losses
Product liability $1,166,236 75.1% $952,997 77.4% $1,037,576 70.5%
Medical malpractice 1,656,257 53.3 1,873,835 43.2 1,871,109 53.8
Commercial multiple peril (2) 2,096,543 37.7 2,083,103 39.1 1,977,804 34.7
Other liability 4,914,500 25.4 4,366,030 21.1 4,786,370 19.9
Workers compensation 3,035,186 12.3 3,357,813 12.9 3,305,927 13.7
Commercial auto liability 1,207,682 10.7 1,266,051 10.6 1,541,787 11.4
Private passenger auto liability 4,600,395 6.8 4,714,942 6.5 4,923,908 6.2
All liability lines $18,676,799 14.0% $18,614,771 13.1% $19,444,481 12.8%

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

Source: NAIC data, sourced from S&P Global Market Intelligence, Insurance Information Institute.

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Median And Average Personal Injury Jury Awards By Type Of Liability, 2014

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

Source: Reprinted with permission of Thomson Reuters, Current Award Trends in Personal Injury, 55th edition.

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PERSONAL INJURY AWARDS

Most lawsuits are settled out of court. Of those that are tried and proceed to verdict, Jury Verdict Research data show that in 2014 (latest data available) the median (or midpoint) award in personal injury cases was $75,000, up from $70,000 in 2013. The average award also rose in 2014 and was $1,055,480 compared with $1,010,069 in 2013. Thomson Reuters notes that average awards can be skewed by a few very high awards and that medians are more representative. In cases of product liability the highest median award was in industrial/construction products cases ($2,541,000). In disputes concerning medical malpractice the highest median award was in childbirth cases ($2,160,420). In cases involving business negligence the highest median award was against manufacturing industries ($743,000).

Awards of $1 million or more accounted for 18 percent of all personal injury awards in 2013 and 2014, up from 17 percent in the prior two-year period. In 2013 and 2014, 76 percent of product liability awards and 51 percent of medical malpractice awards amounted to $1 million or more, the highest proportion of awards. Vehicular liability, and premises and personal negligence liability cases had the lowest proportion of awards of $1 million or more, at 8 percent and 11 percent, respectively.

 

Trends In Personal Injury Lawsuits, 2008-2014 (1)

Year Award median Probability range (2) Award range Award mean
2008 $40,000 $10,000 - $225,780 $1 - $188,000,000 $836,978
2009 40,000 9,887 - 207,828 1 - 77,418,670 750,392
2010 39,216 10,000 - 200,000 1 - 71,000,000 653,898
2011 60,924 12,249 - 343,958 1 - 58,619,989 782,912
2012 75,000 19,100 - 356,481 1 - 155,237,000 1,097,759
2013 70,000 16,000 - 300,000 1 - 165,972,503 1,010,069
2014 75,000 16,412 - 400,000 1 - 172,061,728 1,055,480
Overall, 2008-2014 $50,000 $11,303 - $268,402 $1 - $188,000,000 $857,730

(1) Excludes punitive damages.
(2) Twenty-five percent above and below the median award. The median represents the midpoint jury award. Half of the awards are above the median and half are below. This helps establish where awards tend to cluster.

Source: Reprinted with permission of Thomson Reuters, Current Award Trends in Personal Injury, 55th edition.

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AVERAGE PERSONAL INJURY JURY AWARDS, 2009-2013

Source: Reprinted with permission of Thomson Reuters, Current Award Trends in Personal Injury, 54th edition.

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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.

Sixty-four percent of corporations purchased D&O coverage in 2014 according to the Cost of Risk survey from the Risk and Insurance Management Society, based on a survey of 1,457 corporations. Banks were the most likely to purchase D&O coverage, with 87 percent of industry respondents purchasing the coverage, followed by 85 percent of respondents in telecommunication services. JLT Specialty’s 2015 U.S. Directors and Officers Liability Survey of 157 U.S. organizations that purchase D&O liability insurance found that the group’s average D&O limits that were purchased was $131 million and the median limit purchased was $105 million. For public companies the average limit was $170 million. For private companies the average was $98 million. Twenty-four percent of public companies and 17 percent of private companies increased their D&O limits from their previous purchase. According to the 2014 survey 31 percent of respondents reported having had a claim in the past five years, with nonprofits reporting the highest proportion of claims (58 percent).

 

Types Of Directors And Officers Liability Claims By Ownership, 2011-2014 (1)

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

Source: JLT Specialty 2015 U.S. Directors and Officers Liability Survey.

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  • The percentage of respondents reporting derivative shareholder/investor lawsuits, the most widespread claim, dropped from 39 percent in 2013 to 35 percent in 2014.

 

Directors And Officers Liability Claims By Type Of Claimant In The United States, 2011-2014 (1)

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

Source: JLT Specialty 2015 U.S. Directors and Officers Liability Survey.

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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 2014, 9 percent of public companies responding to a JLT Specialty 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 67 percent of nonprofits.

In 2014, 35 percent of the 1,457 respondents to the 2014 Cost of Risk survey from the Risk and Insurance Management Society said they bought EPL policies. Banks were the most likely to purchase EPL coverage, with 59 percent of industry respondents purchasing the coverage, followed by telecommunications services (48 percent), consumer staples (46 percent), and consumer discretionary firms (45 percent). American International Group Inc. was the leading writer, based on EPL premiums written, with a 25.9 percent market share in 2014, followed by Chubb Corp. (11.5 percent), AXIS Capital Holdings Ltd. (10.9 percent), Zurich Insurance Group Ltd. (10.3 percent), and The Travelers Companies Inc. (5.7 percent).

 

Trends In Employment Practices Liability, 2010-2014

Year Median (midpoint) award Probability range (1)
2010 $172,000 $50,000 - $385,000
2011 271,000 83,811 - 552,500
2012 68,195 11,598 - 256,254
2013 100,000 15,772 - 250,497
2014 87,975 20,000 - 306,108

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

Source: Reprinted with permission of Thomson Reuters, Employment Practice Liability: Jury Award Trends and Statistics, 2015 edition.

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Employment Practices Liability, By Defendant Type, 2008-2014 (1)

(1) Based on plaintiff and defendant verdicts rendered.

Source: Reprinted with permission of Thomson Reuters, Employment Practice Liability: Jury Award Trends And Statistics, 2015 edition.

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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.

 

Post-Reform Act Class-Action Filings Of Securities Lawsuits By Industry, 1997-2015 (1)

Industry Average 1997-2014 2014 2015
Consumer 67 81 77
Communications 29 17 26
Technology 24 14 24
Industrial 17 10 19
Financial 35 26 17
Energy 8 15 11
Basic materials 4 4 9
Utilities 3 1 4
Other 1 2 2
Total 188 170 189

(1) Private Securities Litigation Reform Act of 1995.

Source: Cornerstone Research.

 

Post-Reform Act Class-Action Settlements Of Securities Lawsuits, 1996-2015 (1)

(2015 dollars)

Settlements 1996-2013 2014 2015
Minimum $0.1 million $0.3 million $0.4 million
Median 8.2 million 6.0 million 6.1 million
Average 55.6 million 17.0 million 37.9 million
Maximum 8.5 billion 265.3 million 970.5 million
Total settlements $80.9 billion $1.1 billion $3.0 billion
Number of settlements 1,457 63 80

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

Source: Cornerstone Research.

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  • The number of settlements grew to 80 in 2015 from 63 in 2015 due in part to three years of increases in case filings.
  • There were eight mega-settlements in 2015 ($100 million or more) compared with one in 2014, contributing to the increase in total settlement dollars.