In May 2018, the American Law Institute (ALI) gave final approval to its “Restatement of Law, Liability Insurance.” Portions of the restatement continue to prove controversial, and state legislators have begun pushing back against it.
The ALI is an independent organization of legal professionals that seeks to clarify and simplify U.S. case law to help judges in their decisions. To this end, the ALI publishes a variety of materials that describe what the case law says in various areas, including insurance. One of the materials the ALI publishes is called a “restatement of law,” which attempts to describe common law and its statutory elements. It’s basically a way for judges to know where the law currently stands on a variety of issues.
The latest restatement addresses liability insurance and includes provisions that have met with vocal opposition from state legislatures, the insurance industry, and lawyers. These include, among other things, possible changes to how insurance policies can be interpreted; how coverages are triggered for “long-tail” claims (claims that can last for many years, like environmental losses); and how an insurer might be held responsible for breaching its duty to defend.
Opponents argue that some provisions of the restatement could fundamentally – and improperly – change how liability law operates. That in so changing liability law, the restatement arrogates powers to regulate insurance that properly belong to state legislatures. That many aspects of the restatement do not accurately reflect current state case law and weigh the scales against the legal rights of insurance companies. That portions of the restatement are less a description of law than they are a “wish list” for what the law should be.
Others have called these criticisms of the restatement unfounded or have sought a more balanced response to its changes.
How this will all shake out remains to be seen: will the restatement of law for liability insurance begin to make its mark in case law? Will legislation against the restatement continue to spread? Only time will tell.
I once took an Uber in Fairfield, Ohio. As we sat at a light, the driver pointed to an empty big box storefront.
“What’s that building look like?” he asked. I said it looked like an empty big box storefront.
“That’s right. You know where it went?” I said no, confused. He pointed down the street a few hundred yards away to a brand-new big box store.
“There it is. You know why they moved down the street? Taxes. Lower sales tax across the county line.”
I was reminded of that story of fiscal competition at its finest when reading about Apple’s recent decision to close two of its stores in the Dallas suburbs.
Or more accurately, as Ars Technica reported, Apple’s decision to close two stores within the federal court jurisdiction of the Eastern District of Texas. Rumor has it that Apple’s move could be in response to intellectual property litigation. Per Ars Technica:
The Eastern District is known for its extremely patent-friendly judges, and so for decades patent plaintiffs have set up shop there and sued defendants located all over the country. Prior to 2017, the law allowed a plaintiff based in the Eastern District of Texas to sue defendants there if defendants had even tenuous connections to the district. And, of course, a company of Apple’s size has business ties to every part of the country.
These plaintiffs are often called “patent trolls,” which the Electronic Frontier Foundation defines as companies or individuals that cheaply purchase patents (often “overbroad and vague” patents, at that) and then threaten expensive litigation against companies allegedly in violation of said patents:
These letters threaten legal action unless the alleged infringer agrees to pay a licensing fee, which can often range to the tens of thousands or even hundreds of thousands of dollars.
Many who receive infringement letters will choose to pay the licensing fee, even if they believe the patent is bogus or their product did not infringe. That’s because patent litigation is extremely expensive — often millions of dollars per suit — and can take years of court battles. It’s faster and easier for companies to settle.
The Eastern District has been a favorite venue for this kind of litigation – even after the Supreme Court sought to rein in so-called “venue shopping” in a 2017 decision. Ars Technica explains:
[U]nder the Supreme Court’s 2017 TC Heartland decision, a defendant can only be sued in a district where it “resides”—meaning where it was incorporated—or “has a regular and established place of business.”
Apple’s two stores in the Eastern District would likely count as “regular and established places of business” for patent-law purposes. So under the new rules, continuing to operate the stores makes it easier for patent plaintiffs to sue Apple in the Eastern District.
Apple has not confirmed that its move is related to patent-troll litigation. But, tellingly, the company is replacing its two shuttered stores with a new store…directly across the border of the Eastern District. Sometimes, the best offense is a good defense.
Congress has passed the 2018 Farm Bill and President Trump is expected to sign the bill into law. A key part of the bill (once enacted) will legalize hemp cultivation and sale on the federal level – with certain restrictions, of course. The previous farm bill only permitted individual states to develop programs for hemp cultivation.
Hemp is an agricultural commodity that’s used in tens of thousands of products, everything from textiles to industrial products to food. But when we talk about hemp, there are a few things that underwriters and other insurance professional should be aware of.
“Hemp” has a specific definition. Under the bill, hemp is defined as the plant Cannabis sativa L. that contains less than 0.3 percent THC, the cannabinoid that gets users high. THC levels in hemp are so low that they can’t get users high.
Hemp is not marijuana. Hemp is a plant in the genus Cannabis, a genus which includes marijuana and hemp. These two plants are chemically distinct. Marijuana is still illegal under federal law.
Hemp and hemp-derived products can cross state lines. Importantly, hemp can cross state lines in interstate commerce under the 2018 bill. Under the 2014 Farm Bill, only individual states could establish programs for hemp cultivation.
Hemp cultivators will be licensed. Not just anyone can grow hemp. The bill directs state and federal agencies to develop regulatory procedures for licensing hemp cultivators.
Hemp and hemp-derived cannabinoids are non-psychoactive. A popular chemical found in Cannabis plants (including marijuana) is “cannabidiol” (CBD). CBD has some properties like THC but can’t get users high. Hemp-derived CBD is being infused into all sorts of consumers products, from facial creams to chocolate. There’s also at least one cocktail bar in Brooklyn that will add a shot of CBD to your martini.
The FDA has a stance on CBD – and it’s not permissive. But speaking of chocolate, the U.S. Food and Drug Administration (FDA) has said that it’s illegal to sell CBD-added food and food products across state lines. Whether it’s legal to sell CBD-added food within a state depends on that state’s law (this National Law Review article has more information on the issue).
Insurance claims are happening more often and they’re getting a lot more expensive – fast. The consequences are alarming. Premiums are rising for consumers and businesses. Coverage is getting scarce for some risks. Some insurers are increasingly concerned about how to keep liability insurance sustainable into the future.
But why are bigger claims happening more often? And what can the insurance industry do about it?
Advisen Ltd. held its inaugural “Big Nasty Claims Conference” on September 20 to explore these and other questions, featuring expert insight from across the insurance value chain: defense counsels, brokers, claims and insurance professionals, and risk managers.
Plaintiff’s attorney litigation strategies have evolved – and are paying off big
You’ve seen the headlines. $4.69 billion verdict for women alleging that talc baby powder caused ovarian cancer. $101 million verdict for a driver allegedly injured after his car was struck by a truck. The list could go on for what seems like forever.
And if it feels like these are unprecedented numbers happening at unprecedented rates, that’s because they are. There’s been a remarkable uptick in punitive damages from claims that went to trial, noted Jonathan Drummond, Head of Casualty – North America at Willis Towers Watson.
John Manning, keynote speaker at the conference and partner at Manning Gross & Massenburg LLP, made the case that some of this uptick is because of new plaintiff’s attorney litigation tactics. Using the so-called “reptile strategy” (based on this 2009 book), plaintiff’s attorneys have been successfully creating massive risks from what used to be fairly straightforward claims.
The reptile strategy involves appealing to what is known as the reptile brain — the part of the brain said to favor safety and survival over logic. What this often means in the courtroom is a subtle distortion of legal standards and burdens of proof. Manning argued that this allows plaintiff’s attorneys to essentially re-define “negligence” in the jurors’ minds to mean the failure of a company to be absolutely perfect and absolutely safe (a far cry from the actual legal standard).
Naturally, this standard of perfection is impossible to uphold. But the reptile strategy’s use of emotional appeal to waive away the need for actual causation can influence the jury to demand compliance with the impossible – and hence multi-million or billion-dollar verdicts against companies whose products might have posed only the slightest possible risk of danger, if at all.
This is particularly true in what Christopher Morrison, Senior Vice President at Swiss Re, called “high sympathy, high damages” claims with low liability – that is, claims where liability is pretty straightforward. He explained that these are the cases where the plaintiff’s attorneys are willing to take risks to move the needle away from traditional legal standards because, to win a big settlement, liability needs to be proven beyond the scope of the actual facts of the case.
The consequences of this strategy are impacting traditional legal standards themselves. Manning said that, in his view, the reptile strategy is “the number one factor in moving the line of demarcation of burden of proof for negligence and causation analysis.” “There’s a lot more ‘next asbestos’ if they [the plaintiffs’ bar] don’t have to prove medical causation at the trial,” he added, referencing the recent ruling regarding Monsanto’s Roundup weed killer.
Same old claims, new massive losses
These massive verdicts coming out of claims litigation are having a trickle-down effect. Claims settlement costs are also increasing, absent any trial – because huge verdicts mean a new “floor” for what a plaintiff’s attorney will demand in settlements. As Mia Finsness, Managing Director of Casualty Claims at Markel Corporation, noted, “one runaway verdict can drive the whole discussion on what settlements look like – you get massive settlements before you get to trial because plaintiff’s attorneys will just say they want huge money and that sets a floor.”
“Loss costs in casualty have always been increasing,” said Andy Barberis, Executive Vice President of Commercial Claims at AIG, “but over the last five to 10 years the increase has been exponential.” There doesn’t seem to exist a cap on where loss costs could end, he added, and these recent trends are of significant concern for the future sustainability of the insurance industry.
And not all verdicts need to be massive to have an effect. It was a running theme throughout the panels that claims that once cost $1 or $2 million to settle are now going for much more. “Things that used to be routine, we’re seeing a doubling or quadrupling of the verdicts,” said Kevin A. Maloney, Senior Vice President at Allied World. Over time, these individual increases can add up to big losses.
One panel was asked if “litigation financing” might have something to do with increasingly aggressive claims settlement on the part of the plaintiffs’ bar. (Litigation financing is when third-parties fund a plaintiff’s lawsuit in exchange for a portion of a settlement.) The short answer: a lack of transparency about when litigation is being financed by outside parties makes it hard to know if this is a widespread phenomenon. “Transparency is a real issue regarding funding. It’s hard to know they [financiers] even exist because right now there are few requirements for disclosure,” Finsness said.
Several lawyers said they had only incidentally found out third-parties were funding litigation, such as when a plaintiff’s attorney was very aggressively pursuing a high settlement and admitted to being funded.
Tort reform is unlikely, so strong legal defenses are crucial
Could tort reform help rein in aggressive litigation and massive verdicts? The mood at the conference was that the prospect for enactment of any meaningful tort reform is becoming an ever more unrealizable reality.
Instead, strong legal defenses that recognize and counter reptile strategies and other plaintiff’s attorney tactics are crucial.
For one, the conference experts stressed unity among parties to a defense; that is, making sure everyone is on the same page to preclude a plaintiff’s attorney from “driving a wedge” between the defense. Communicate “early and often” was also stressed– insureds, brokers, risk managers, and counsel need to share information and coordinate defense strategy as early as possible.
In other words, be more strategic. Plaintiff’s counsel on the other side of the fence, observed William Passannante, an attorney with Anderson Kill P.C., “will pool resources and share information and contact each other to form a united front,” especially when there’s potential for a big settlement. “I don’t know if I see the same willingness among defense counsels,” he added.
Finsness agreed, arguing that effective defense counsel and coordinated strategy are crucial components of satisfactory claim settlement.
Emerging risks might completely change the litigation landscape
Panel members were asked what they think could be the “next asbestos” to hit the insurance industry:
Talc-related litigation – the potential population of plaintiffs dwarfs that of the asbestos population.
The opioid crisis continues to increase litigation and claims exposure for many books of business.
Concussion litigation, especially with the increased attention on long-term brain injuries suffered by football players.
Climate change litigation, particularly the recent cases seeking to hold individual companies liable for alleged climate change-related damages.
Exposure “leakage,” in which old issues crop up in new contexts. Finsness noted that PFOA (chemicals used in a number of products) contamination could potentially become a product liability issue.
Premises security. Will venues become liable for shootings or other acts of violence on their premises?
The upshot being: claims are happening more often, are getting more expensive – and may be cropping up for new exposures that could haunt the insurance industry for decades to come.
On June 12, Advisen held a webinar entitled “Big nasty claims. What are the large loss trends in the casualty sector?” To qualify as big and nasty, the casualty claims stem from injury and/or property damage resulting from incidents such as train derailments, chemical spills and food contamination, frequently involving multiple parties, and costing $100 million or more each.
Advisen’s large loss dataset yielded some interesting insights into trends in this area, and Jim Blinn, Advisen’s moderator, was joined by two Allied World claims experts, James Minniti and Paul DeGiulio.
Advisen’s dataset reveals that pharmaceutical and medicine manufacturing, transportation equipment manufacturing, and machinery and electronics manufacturing are the top three industries involved in large claims, with public administration in fourth place.
Railroad accidents and derailments, a frequent source of large claims, are attractive to the plaintiffs’ bar because the technology is often available to have prevented the accident, but has not been implemented, said the panel.
Concussion litigation, another source of big claims, contains many coverage issues and coverage litigation is happening concurrently with trials. The National College Athletic Association has its first concussion trial this week, and a lot of people will be watching as the organization is expected to be a target for more lawsuits. Concussion injury defendants also include colleges and high schools.
When it comes to predicting which lawsuits may results in large claims, James Minniti said that looking at the plaintiffs’ lawyer’s name is a good bet, “you can be reasonably sure it’s going to be a bad case” if a certain top-notch plaintiffs’ attorney or firm is involved. Paul DeGiulio added that the venue is also important, for lawsuits tried in Philadelphia or Los Angeles the cost could be much higher.
Florida’s small P/C insurers have withstood losses from Hurricane Irma and a legal environment that’s dubbed a “judicial hellhole” by the American Tort Reform Association, a recent article in S&P Global Market Intelligence reports.
The financial ratings firm Demotech affirmed the financial strength of over 50 companies in late March, a decision found “encouraging” by the CEO of the state-run Citizens Property Insurance Corp, Barry Gilway.
Gilway said that Demotech’s March actions is evidence of the resilience that smaller carriers showed during a year in which Hurricane Irma caused insured losses of about $8.61 billion, according to the latest Florida Office of Insurance Regulation tally.
Florida insurers face both weather-related risk and costs stemming from litigation on non-weather-related water-loss claims with an assignment of benefits (AOB) and other legal matters. To combat the AOB problem, Citizens has drawn-up changes in policy language, increased efforts to fight fraud and grew its managed repair program. In January, Citizens said it expects AOB and litigation costs would account for about 23 percent of its 2018 operating expenses, up from 16 percent in 2017 – an increase of $17 million.
The frequency and severity of water-loss claims over the past 2.5 years shows “extremely negative trends,” and that deteriorating trends have begun to spread northward within the state, said Gilway.
Citizens is reopening approximately 37 percent of claims related to Hurricane Irma as part of its ongoing work to help its policyholders, who have been frustrated by a shortage of contractors, the Insurance Journal reported. A spokesperson for Citizens said that it’s common for claims to be reopened, and that the majority of those reopened are non-AOB Irma claims.
The importance having a clear understanding of what your insurance policy does and does not cover was highlighted last week when several trade publications picked up a story about a wine collector who was sold about $18 million worth of counterfeit wine.
The collector had a property insurance policy, and when his claim was denied he sued for breach of contract. A California trial court upheld an earlier decision that the property policy simply does not cover fraud of the kind he experienced.
The judge’s opinion stated: “The plain language of the “PERILS INSURED AGAINST” provision makes it clear that the insurer was insuring against “direct and accidental loss . . . to covered property…” That is “against any losses to the wine not against any losses to the collector’s finances or to his unrealized expectations as to the value of the wine he had purchased.”
Florida is unique in that it has no objective bad faith standard, defining it as more than “mere negligence” without calling for a showing of evil intent. As a result, carriers need to watch for common pitfalls to reduce costly bad faith awards.
On March 14 Gen Re is offering its clients a webinar called Navigating the Bad Faith Minefield. Here are some of the bad faith related problems specific to Florida the webinar intends to cover:
The unique problems posed by “time limit” demand letters and how a missed deadline and/or failure to meet a key term “open up” the policy limit
Bad faith in a clear-liability case with a likely judgment exceeding a policy limit. Do carriers have an affirmative duty to offer the policy limit in such cases, even in the absence of a demand?
The tender traps that might be used to “set up” carriers for bad faith. How should carriers respond when presented with a serious injury case that involves low limits?
Accumulation risk, where a single event triggers losses under multiple policies in one or more lines of insurance, is emerging in new and unforeseen ways in today’s interconnected world, says a post at Swiss Re Open Minds blog.
From Ruta Mikiskaite, casualty treaty underwriter, and Catriona Barker, claims expert UK&International Claims at Swiss Re:
For example, Kilmore East-Kinglake bushfire, the most severe of a series of deadly wildfires in the Australian state of Victoria on Black Saturday, 7 February 2009, led to a settlement of A$500 million—the biggest class action settlement in Australian legal history.
Per Swiss Re’s post, the Royal Commission found that the fire was caused by poorly maintained power lines owned by power company SP AusNet and maintained by asset manager Utility Services Group. The Victoria State government was also held liable for its failure to provide sufficient prevention measures and inadequate warnings during the fires.
The issue of causation, especially when there may be multiple causes of loss, can be a tricky one for both insureds and insurers. It comes down to what caused the loss – and in what order.
Take the example of a major catastrophe, like a hurricane, where there may be property claims arising from both wind and water. Determining the cause of loss is key to determining whether there is coverage under the terms of an insurance policy because there are two policies in play, one for wind damage and one for flood damage.
Some jurisdictions subscribe to the “efficient proximate cause doctrine” while others subscribe to the “concurrent causation doctrine”.
The efficient proximate cause doctrine finds that where there is a concurrence of different perils, the efficient cause – the one that set the other in motion – is the cause to which the loss should be attributed.
Under the concurrent causation doctrine, when multiple perils contribute to a loss, coverage is allowed if at least one cause of the loss is covered by the policy.
In the case of Florida, a recent court decision adopted the concurrent causation doctrine, which will impact Hurricane Irma claims.