Ad-driven legal abuse a major issue for reinsurance – Munich Re

Nuclear and thermonuclear verdicts continue to escalate

Ad-driven legal abuse a major issue for reinsurance – Munich Re


By Kenneth Araullo

Nuclear verdicts and legal system abuse are key issues in the insurance industry, with many consumers unaware of the impact that large settlements have on American households, even for those not involved in lawsuits. Munich Re and the American Property Casualty Insurance Association (APCIA) recently conducted a survey on legal system abuse and the need for legislative changes.

Maura Freiwald (pictured above), head of casualty for Munich Re US, spoke with AM Best TV about the effects of legal system abuse and litigation funding on nuclear verdicts against insurers, and the industry’s efforts to combat the practice.

Freiwald explained that the survey aims to raise awareness among consumers, the insurance industry, and the business community about the need for change. She said that without action, legal system abuse could lead to higher insurance premiums, financial strain on insurers, and the depletion of municipal resources.

“Most consumers don’t necessarily know that legal system abuse hits everyone’s budget and that the investors, not necessarily the injured parties or the policyholders, are the ones that are making huge profits from these lawsuits or verdicts. This survey shows that consumers want legislators to take action. As nuclear and thermonuclear verdicts continue to escalate, so will risk for insurers and the cost for the victims, policyholders,” Freiwald said.

Understanding the impact of legal system abuse

Freiwald noted that over the past decade, the insurance and reinsurance industry has used metrics to understand the impact of legal system abuse, but it remains complex.

“The data does not necessarily become readily available. The lines of business that are most impacted by legal system abuse are commercial auto, general liability, including products liability, medical malpractice, professional liability, and D&O,” she said.

Several factors contribute to the current situation, including public sentiment, mistrust of companies, shifting jury pools, and a well-organized and well-funded plaintiffs bar, particularly in attorney advertising and third-party litigation funding.

“Just last week, I attended an industry presentation by ATRA [American Tort Reform Association], and they reported that, in 2023, $2.4 billion was spent on more than 26 million attorney ads. That’s 5% more than what they spent in 2022,” Freiwald said.

Third-party litigation funding, which allows hedge funds or other contributors to fund lawsuits in exchange for a portion of the judgment or settlement, also continues to grow. In 2022, Westfleet Advisors reported $13.8 billion in assets under management by litigation funders.

“Now, there is no evidence that legal system abuse is slowing down in 2023, but there is evidence that the severity is almost uniformly rising. In the five years prior to the pandemic, there was a 178% increase in the number of nuclear verdicts and the median value of those settlements increased by 41%. In the absence of transparency regarding third-party litigation funding, the escalation of attorney ads and the uncertainty of the tort system, this just adds complexity to the modeling and the pricing of the casualty lines of business,” she said.

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