Lawsuit Costs: How Litigation Impacts Your Insurance Premiums

The American dream of owning a home, driving a car, or running a business is increasingly intertwined with the realities of potential lawsuits. What many people don’t realize is that the cost of litigation extends far beyond legal fees and court settlements. It significantly impacts insurance premiums for everyone. In fact, a recent survey indicates that excessive lawsuits add approximately $6,664 annually to the insurance premiums for a family of four. This blog post will delve into the intricate relationship between lawsuit costs and insurance premiums, exploring how litigation affects various types of insurance and what you can do to mitigate these rising costs.

The Ripple Effect: How Lawsuits Drive Up Insurance Premiums

When a lawsuit is filed, insurance companies face a range of expenses, including:

Claim Payouts: The most direct cost is the settlement or judgment awarded to the plaintiff.
Legal Expenses: Insurers incur significant costs defending their policyholders, including attorney fees, court costs, and expert witness fees.
Settlement Times: Lengthier legal battles mean higher costs.

These expenses don’t simply vanish; they are factored into the premiums that all policyholders pay. As Michael Coffey, a founding partner at Coffey Modica LLP, explains, “Lawsuits in the United States lead to higher insurance premiums because they directly increase insurers’ costs through larger claim payouts, higher legal expenses, and longer settlement times. Insurers then spread these added costs across all policyholders in the form of increased premiums, even affecting those who never file a claim themselves.”

This ripple effect is particularly pronounced in states with a high volume of litigation or a history of large jury awards.

Types of Lawsuits That Impact Insurance Premiums

A wide array of lawsuits can influence insurance premiums, impacting various sectors:

Personal Injury Lawsuits: These lawsuits, arising from car accidents, slip and falls, or product liability claims, can significantly impact auto, homeowners, and umbrella insurance premiums.
Insurance Bad Faith: Lawsuits against insurance companies for denying legitimate claims, delaying payments, or unfair billing practices can lead to increased premiums as insurers try to recoup losses from such litigation.
Commercial Liability Lawsuits: Businesses face lawsuits related to workplace injuries, contract disputes, and property damage. These lawsuits drive up the cost of commercial liability and umbrella insurance policies.
Product Liability Lawsuits: Manufacturers and sellers can be sued if their products cause harm, leading to higher premiums for product liability insurance.
Professional Liability Lawsuits: Professionals such as doctors, lawyers, and financial advisors can be sued for negligence or errors in their services, impacting professional liability insurance premiums.

The Role of Third-Party Litigation Funding

One of the key contributors to the rise in insurance lawsuits is “third-party litigation funding,” where investors fund lawsuits in exchange for a portion of the jury award. This practice can lengthen trials, encourage demands for larger awards, and ultimately cost insurance companies more. The increased capital enables claimants to withstand long legal battles and encourages plaintiffs to reject reasonable settlements, holding out for potentially higher jury awards.

Specific Examples of Premium Increases

The impact of lawsuits on insurance premiums can be seen across various types of coverage:

Homeowners Insurance: Home insurance costs can spike after lawsuits, with one study showing an average increase of 21% after a lawsuit, even if the homeowner wins the case.
Auto Insurance: States with high rates of litigation and generous legal systems often have the highest auto insurance premiums.
Commercial Insurance: Businesses that have been sued before often face soaring court judgments and jury awards, pushing up the cost of commercial liability and umbrella insurance policies.

What Can You Do to Protect Your Insurance Premiums?

While you can’t control the legal system, there are steps you can take to mitigate the impact of lawsuits on your insurance premiums:

Increase Liability Coverage: Consider increasing your liability coverage to protect yourself from significant financial losses in case of a lawsuit.
Maintain a Clean Claims History: A history of few or no claims can help keep your premiums down.
Choose Insurers Wisely: Select insurers with strong claims-handling reputations.
Document Claims Thoroughly: Proper documentation can prevent disputes from escalating into litigation.
Review Policies Annually: Conduct annual policy reviews with licensed agents to ensure adequate coverage.
Support Legal Reform: Advocate for reforms that address legal system abuse and promote fairness in the insurance system.
Consider an LLC: If you own a business, forming a limited liability company (LLC) can protect your personal assets from business-related liabilities.
Follow Best Practices for Contracts and Agreements: Have an attorney draft or review contracts and agreements to minimize the risk of disputes.
Opt for Umbrella Coverage: When standard insurance coverage isn’t enough, consider umbrella coverage for additional protection.

The Importance of Understanding Your Insurance Rights

It’s crucial to understand your rights as a policyholder and what your insurance policy covers. If you believe your insurance company has acted in bad faith by denying a legitimate claim or delaying payment, consult with an attorney to explore your legal options.

Conclusion

The cost of lawsuits has a significant and often hidden impact on insurance premiums. By understanding the relationship between litigation and insurance costs, you can take proactive steps to protect yourself and advocate for a fairer legal system. While individual lawsuits may seem isolated, their cumulative effect ripples through the insurance industry, affecting everyone’s bottom line.