Tackling The Growing Threat of Legal System Abuse

Severity, not frequency, is driving the rise in claims costs today. While the number of claims has generally declined, the average cost per claim has soared.

From 1994 to 2008, claim frequency declined and lawsuits tracked that trend, falling from roughly 5,800 to around 4,000 motor vehicle tort civil case filings in federal courts (Figure 1). That makes intuitive sense. Fewer accidents, fewer claims, fewer lawsuits. From 2008 to 2014, both claim frequency and lawsuit filings were relatively stable. Again, the relationship held.

But then something changed. From 2014 to 2023, claim frequency continued to fall—accidents were still declining—yet lawsuit filings rose sharply, climbing back above 6,000 by the end of this period.

That divergence is significant. Why were lawsuits increasing when accidents and claim frequency were going down? The data strongly suggest the answer is legal system abuse – exploitative attorney advertising, litigation financing, and plaintiff attorney tactics that are generating litigation independently of underlying accident trends.

Research conducted by the Insurance Information Institute and the Casualty Actuarial Society found that legal system abuse and related litigation trends have resulted in an estimated $231.6 billion to $281.2 billion increase in liability insurance losses over the past decade.

Litigation Financing Transparency Needed

Third-party litigation financing (TPLF) is when a funder unrelated to the case, such as a hedge fund, provides money to cover a plaintiff’s legal costs in exchange for a share of any damages awarded through judgment or settlement.

The treatment of insurance lawsuits as an asset class that can be packaged and sold to big money investors remains largely unfamiliar to the general public. Most people simply don’t know litigation financing exists or how it works.

In recent years, however, the Insurance Research Council (IRC) has seen increases in the percentage of respondents who say they know what it is. When TPLF is explained to them, there is strong consensus that litigants should be informed when outside investors are financially involved in their case. Such transparency is something nearly everyone (seven out of 10) agrees on, according to the IRC report.

Legal actions against insurance companies have traditionally been viewed as individuals taking on large corporations with deep pockets. Increasingly, however, third-party funding in litigation pits significant financial resources against insurers who are striving to maintain affordable premiums.

This shift in perception could influence juries who might have previously been inclined to award ‘nuclear’ verdicts against insurance companies.

The High Cost of Attorney Involvement

Importantly, representation rates are rising at all levels of claim size, not just large, complex claims where you might expect attorneys to get involved. Even smaller claims are seeing higher attorney involvement rates than in prior years.

And there is significant geographic variation. Attorney involvement varies widely by state and even by locality within a state. That variation is itself a signal: it tells us that legal and regulatory environments, local advertising density, and plaintiff attorney market activity are all shaping these numbers, not just the underlying injuries.

When comparing groups of similarly injured claimants, controlling for injury type and severity, it is possible to still see meaningfully different patterns between those with and without attorney representation.

Claimants with attorneys show different patterns of treatment—the types of providers they see, the sequence of treatment, and the duration all differ from unrepresented claimants with comparable injuries.

Similarly injured claimants with attorneys also have higher medical utilization. More visits, more procedures, more diagnostic testing. In some IRC studies, claimants with attorneys were seven times more likely to have an MRI.

Defining Legal System Abuse

Legal system abuse is when policyholder or plaintiff attorney practices increase costs and time to settle insurance claims to the detriment of consumers.

Exploitative Plaintiff Advertising: The Billboard Effect: Through erosion of judicial standards and authority, plaintiff attorneys spend billions annually on advertising, littering roads, television, and social media channels with promises of wealth for policyholders who retain their services.

Increasing Plaintiff Attorney and Contingency Fees: Insured claimants are receiving smaller portions of total settlements as attorneys as well as third-party litigation funders look to profit even more.

Eroding Caps on Damages: As a result of little to no limit on the damages in the U.S. judicial system, jury verdict payouts increased 27.5% on average when awards totaled $10 million-plus between 2010-2019, a U.S. Chamber of Commerce study found.

Shadowed Third-Party Litigation Funding: Without virtually any transparency or direct ties to litigated cases, institutional investors and even sovereign nations contribute significant amounts of capital toward litigation suits for the sole intent of making profit.
Source: WTW and III.

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And claimants with attorneys wait longer to receive their settlement. The process takes more time, which itself has cost implications.

Those increased costs translate, of course, into higher premiums, so it’s the broad population of policyholders bearing the cost of legal system abuse.

Attorney involvement is not just a flag for complexity; it’s a driver of behavior that changes nearly every dimension of how a claim develops.

Diagnose Early, Or Pay for It Later

Attorneys receive on average 32% of settlement in legal fees, decreasing reimbursement to claimants. That’s a significant share coming directly out of the claimant’s recovery before anything else is deducted.

On average, net reimbursement to claimants (settlement after subtracting legal fees and medical costs) is not higher for claimants with attorneys, according to IRC studies. The primary beneficiaries of the current system are the attorneys and, in funded cases, the third-party investors.

When the IRC asked claimants why they consulted an attorney, the most common answer was: “someone told me I should.” Not because they felt the insurer had treated them badly, but because a friend, family member, or advertisement prompted the conversation.

That’s the billboard effect in action, with many attorneys advertising large payouts for members of the public to see every time they drive by. Attorneys in the U.S. spent $2.5 billion on billboards, print ads, local television commercials and radio spots in 2024, according to the American Tort Reform Association. This represents a sharp rise compared to the previous five previous years.

Conversely, the most common reason people gave the IRC for not consulting an attorney is that the insurer handled the claim promptly and fairly. That is a powerful operational insight—quick, fair claims handling is one of the most effective tools an insurer has to reduce unnecessary attorney involvement.

One-in-10 accident victims reported that an attorney initiated contact with them after the accident, meaning the attorney reached out, not the other way around. That’s solicitation, and it’s a key driver of attorney involvement rates.

And the majority of claimants who do consult with attorneys do so within one week of the accident. That timing window—the first week—is critical. Insurers who reach claimants quickly and set the right tone in that window have a meaningfully better chance of managing the claim effectively. If claims departments don’t act early and decisively, attorneys fill the gap.

Lean in And Leverage AI

Maintaining the status quo is clearly not an option for the insurance industry. Instead, it is essential for insurers to adapt more quickly if they are to keep pace with this changing environment. Insurers need to find new, innovative solutions to tackle the increasing problem of legal system abuse. This includes leveraging AI technology to analyze claims in the early stages, improving efficiency, broadening expertise, and collaborating more widely across the industry to educate consumers about the risks of legal system abuse.

Kharkavets is head of claims, North America, insurance consulting and technology, and Porfilio is head of personal and commercial lines business development, for North America for WTW.