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Advisen Front Page News - Wednesday, March 31, 2021

Nuclear Verdicts: Can the Trend Be Reversed?


Nuclear Verdicts: Can the Trend Be Reversed?

By Kevin Maloney, Allied World

While the explosive impact of nuclear verdicts against transportation companies seems to grab the most headlines, extraordinary jury awards are being handed down against companies in all industries. In courtrooms across the U.S., the average damage award in cases involving a single fatality has jumped exponentially in recent years, from $2 million in 2012 to $5.1 million in 2019, according to Advisen. The factors fueling rising jury verdicts are well documented – ranging from jurors’ anti-corporate biases to an emboldened plaintiff’s bar that has a financial incentive to go the distance at trial backed by investors willing to fund its efforts.

If allowed to continue unchecked, nuclear verdicts pose an existential threat to the casualty insurance market as we know it and, consequently, to the financial bedrock of companies nationwide. Can the trend be reversed? If so, how?

Take a Cue from Total Quality Management (TQM)

TQM, which gained popularity in the 1980s as an ongoing process to drive improvement by rethinking the status quo, can provide a jumping off point for considering the means and methods to help mitigate nuclear verdicts in the long term. Thoughtful and strategic solutions are essential for businesses and insurers alike. Getting to them requires raising questions that may not have answers yet but will spark dialogue and drive the process forward.

Can Anti-Business Perceptions Be Changed?

Bias against big business did not develop overnight, but gradually, fueled largely by societal trends such as the growing wealth gap, which has been exacerbated by the global pandemic. Will bias against corporate executives be amplified if these wealth disparities continue to grow?

This may go hand in hand with a societal outcry for redistribution of wealth. Are the courts going to be a go-forward vehicle to “balance the scales” of what some potential jurors view as economic inequity? Is the dynamic changing from punishing a defendant for wrongdoing to a “deep pocket theory” where jurors believe a company should compensate the injured plaintiff regardless of fault on its part? These two concepts combined have oftentimes placed corporate defendants at a decided disadvantage, even prior to the opening statements.

In another trend, millennials and post-millennials tend to be keenly attuned to social responsibility and consider a company’s social track record and philanthropy when deciding who to work for and do business with. Will this trend spill over into the courtroom, with companies that are viewed to be walking the talk of social responsibility faring better in front of juries?

The impact of the global pandemic is another lingering question mark. Along with individuals and small businesses, many companies have been hit hard by the economic impact of the global pandemic. Will jurors be less likely to demonize big businesses that struggled during this time?

Of course, businesses can also promote more positive perceptions of their operations by demonstrating safety and training practices that are beyond reproach. Many large verdicts have come when plaintiffs paint a picture of a corporation’s pattern of lapses in these programs. When a company can show that it takes safety seriously and its practices are continually being honed and adhered to, they can shut down a key avenue for inflating verdicts.

Can new defense counsel actions and incentives combat the trend?

These days the compensation of plaintiffs’ attorneys is frequently tied to verdict size, giving them financial incentive to drive higher verdicts, rather than settle.

Defense firm compensation, meanwhile, remains largely tied to hourly rates and billable hours. Could defense counsel be better incentivized, in some instances, to further mitigate/avoid a potential nuclear verdict? What would that look like? Perhaps a sliding hourly rate, a commitment of future work, or both?

In addition, plaintiffs’ attorneys actively share information on litigation strategy and work together to fuel a common cause of elevating the benchmarks juries use to assess “meaningful” payouts. Could increased information sharing help defense firms combat nuclear verdicts?

What role can the insurance industry play?

Nuclear verdicts have had a major impact on the casualty insurance market. Many insurers have left the excess casualty market altogether, while others are scaling back and closely managing limits. As cutbacks in capacity continue, companies will have difficulty building their needed excess casualty towers.

When carriers scale back limits deployment or engage in a quota share in lieu of larger individual excess placement shares, other issues may be presented. Quota share participants need to be cognizant that although their share of a particular settlement may be capped by a quota share arrangement, an adverse result for the client can have ripple effects. Today’s verdict ceiling may become tomorrow’s floor.

When carriers have less risk on an account, they may have less opportunity to significantly impact the defense strategy and possibly less opportunity to bring their expertise and resources to the table to help stop this trend and mitigate large damage awards and claims. Although a specific carrier may limit their payout on that individual risk, the plaintiff’s bar realizes that all boats rise with the tide, and they collectively want yesterday’s ceiling to be tomorrow’s floor.

Co-insurance is another concept to consider as well as increasing self-insured retentions. Although getting parties to work together with interests aligned is not an easy feat either. At some point, the costs may outweigh the perceived benefits.

Perhaps there should be a renewed focus on tort reform.  Lobbying for tort reform was a very popular concept in the 80’s and 90’s and it may be time to revisit this as a solution. Certain judicial caps may free up Appellate Courts for more germane issues and not just lower runaway verdicts. Judicial verdict caps could also encourage more cases to proceed to trial by capping the potential runaway verdict volatility, shifting some of the uncertainty from defendant to plaintiff.

Insurers should keep an eye on the big picture, lest we risk winning the battle (protecting balance sheets in the short-term) but losing the war against a potentially out-of-control liability system.

One possibility is carriers providing lower limits at the bottom of the tower, then participating on a quota share basis moving up the tower and playing again at the top of the tower where they can influence and advocate for claims and litigation management to bring their expertise to bear in the hopes of mitigating potentially inflated loss payouts.

A Final Note

Are there paths to address the nuclear verdict problem or are they inevitable?

The results experienced by insurers as a result of escalating defense costs, large settlements and nuclear verdicts have necessitated significant rate increases. This phenomenon will likely continue as losses continue to escalate.  But increasing rates year over year cannot be the only long-term remedy. Clients with healthy balance sheets and the ability to invest in safety and risk management methods will arguably make for a better risk.

There may also come a point when larger entities begin to explore self-insuring by either establishing a captive or finding an alternative risk management vehicle. This solution could eliminate a client’s need for carriers altogether and the trend could begin to have a long-term effect on the insurance industry.

It is important to explore solutions and find ways to help insureds mitigate exposure to excessive damage awards, while at the same time maintaining a robust and sustainable liability insurance market that will serve businesses well over the long term. Taking a cue from TQM, let’s keep the dialogue going, examine this problem from multiple angles and do what we can to promote ongoing, long-term improvement, together.

About the author: Kevin A. Maloney, Senior Vice President – North America Casualty, Allied World Insurance Company (“AW”). Kevin is also AW’s Real Estate & Financial Institutions Practice Leader. As Senior Vice President – North America Casualty, Kevin is responsible for helping AW’s Regional Offices to continue to achieve sustained profitable growth.  Kevin oversees cross-sell of AW insurance products across multiple lines. Prior to AW, Kevin was an Executive Vice President at AIG from 1998 – June 2012 (14 years).    Kevin is a graduate of St. John’s University, with a BS in Marketing.  Kevin has the following Insurance Industry Designations: CPCU, ARM, AIM, AIS, CRIS & ARe.

This material is provided as a resource for informational purposes only. It is not intended as, nor does it constitute, legal, technical or other professional advice or recommendations. While reasonable attempts have been made to ensure that this information is accurate and current as of its publication date, we make no claims, guarantees, representations or warranties, either express or implied, as to the accuracy, completeness or adequacy of any information contained herein. Consult your professional advisors or legal counsel for guidance on issues specific to you.  Additionally, this material does not address all potential risks and may contain time-sensitive information. No responsibility is assumed to update this material and there is no guarantee or representation that this information will fulfill your specific needs or obligations. This material may not be reproduced or distributed without the express, written permission of Allied World Assurance Company Holdings, Ltd, a Fairfax company (“Allied World”). Actual coverage may vary and is subject to policy language as issued. Risk management services are provided by or arranged through AWAC Services Company, a member company of Allied World. © 2021 Allied World Assurance Company Holdings, Ltd. All rights reserved.

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