Sedgwick: Attorneys Involved in Claims Sooner and More Often

Attorneys are involved in a growing share of insurance claims and they are being retained much sooner, Sedgwick said in a paper released Tuesday.

The private claims administrator said its data shows that in 2021, attorneys were involved in about 55% of litigated auto claims on the day the claim was opened or before, up from about 43% in 2017. For general liability claims, attorneys were involved in 54% of litigated claims on the first day, compared to 43% in 2017.

Sedgwick said the share of litigated claims in those lines still represents less than 1% of the total, but the percentage is increasing incrementally year after year. Litigation increases costs. Milliman reported that for commercial auto, the average cost to resolve a claim with an attorney was 34 times higher than the cost to resolve claims with no lawyer involved.

What’s more, litigated claim expenses, such as legal defense, surveillance, appraisals and special investigations, also continue to rise, Sedgwick said. Data from the National Association of Insurance Commissioners shows that defense and cost containment expenses made up 12.8% of incurred losses in 2019, up from 12.3% in 2017.

“The impact of the growing costs of litigated cases is a significant driver of total claims costs, and the growth is significantly outpacing normal inflationary factors,” the report says.

Between 2014 and 2019, the average bodily injury claim increased an average of 5.5% each year, three times the inflation rate for that period. A 2020 study found that from 201 to 2018, the size of jury awards grew by 33%, compared to a 1.7% inflation rate and a 2.9% increase in healthcare costs, according to data from the American Transportation Research Institute.

Like other insurance industry reports before it, Sedgwick’s paper states that social inflation and “nuclear verdicts” are driving up claims costs. The median of the 50 largest jury verdicts (half higher, half lower) was $27.7 million in 2014 but $54.3 million in 2017, according to the report, which cited data from Swiss Re and Burford Capital.

Swiss Re said there has also been a proliferation of class-action lawsuits. Specifically, aggregate settlement amounts for workplace class actions grew to $3.62 billion in 2021 from $1.32 billion in 2018, the report says, citing a report from the Seyfarth Shaw law firm.

Segwick said the COVID-19 pandemic is driving litigation rates even higher. The report says more than 6,300 lawsuits related to the pandemic had been filed as of December 2020. The Deepwater Horizon oil spill, by comparison, resulted in fewer than 1,000 lawsuits.

“An additional concern is that the pandemic may influence the evolution of social inflation by causing liability standards to be broadened, adding to a growing anti-corporate sentiment,” the report says. “In addition to commercial auto, social inflation trends are having noteworthy adverse impacts on lines including medical malpractice, directors and officers, excess and umbrella.”

Sedgwick recommends several strategies to cope with the issue. Among them:

• Cultivate an enterprise risk management culture to set expectations for safe and responsible practices.
• Seek to reach an amicable pre-trial settlement when a suit is filed.
• Develop a trial team that “humanizes” the organization.
• Use analytics to gain insights into litigated matters.

“While indicators continue to suggest that the size of verdicts and even nuclear verdicts may continue to increase for the foreseeable future, insurers and their customers can collaboratively develop effective strategies to avoid and mitigate litigation and its costs,” the report says.