Lawsuits & Premiums: Are Legal Battles Driving Up Your Insurance Costs?

Imagine opening your latest insurance bill, only to find the premium has jumped—again. While factors like weather and rising repair costs often take the blame, there’s a less-discussed culprit potentially impacting your wallet: the increasing number of lawsuits and their effect on the insurance industry. According to a recent survey, a staggering 64.3% of Americans are concerned that excessive insurance lawsuits are affecting their premiums. But how exactly do these legal battles translate to higher costs for policyholders, and what can be done about it?

The Ripple Effect: How Lawsuits Impact Insurance Premiums

Insurers operate by pooling premiums to cover potential claims. When payouts increase due to litigation, these costs are inevitably passed on to policyholders. Several factors contribute to this phenomenon:

Larger Payouts: Over the past decade, jury awards have tripled, significantly increasing insurers’ expenses. These “nuclear verdicts,” where damages exceed $10 million, are becoming more common and can lead to substantial financial strain on insurance companies.
Increased Legal Expenses: Defending against lawsuits is expensive, regardless of the outcome. Insurers incur significant legal fees, which contribute to their overall costs of doing business.
Extended Settlement Times: Lengthy legal battles tie up resources and delay claim settlements, adding to the financial burden on insurers.

These increased costs create a ripple effect throughout the insurance industry, influencing premiums across various sectors, from auto and homeowners to commercial lines. As Michael Coffey, founder of 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.”

The Role of Third-Party Litigation Funding

A significant driver of rising insurance costs is third-party litigation funding (TPLF). This practice involves outside investors, such as hedge funds, financing lawsuits in exchange for a portion of any settlement or jury award. TPLF can incentivize plaintiffs to pursue larger settlements and prolong legal battles, further driving up costs for insurers.

With the rise of TPLF, insurers are increasingly factoring potential legal exposure into their pricing models, underwriting standards, and claims management practices. This means that even policyholders with clean claims histories may see their premiums increase due to the growing prevalence of litigation funding.

What Types of Insurance are Most Affected?

While the impact of lawsuits can be felt across various insurance sectors, some are more vulnerable than others. Commercial auto, professional liability, product liability, and directors and officers liability insurance are particularly susceptible to the effects of social inflation and large verdicts.

The Consumer Impact: Paying More for Coverage

The financial burden of excessive lawsuits is ultimately borne by policyholders. According to a survey by the Insurance Information Institute and Munich Reinsurance America, excessive lawsuits add an estimated $6,664 annually to premiums for a typical family of four. This added expense can strain household budgets and make insurance coverage less affordable for many Americans.

What Can You Do? Steps Policyholders Can Take

While the issue of rising insurance costs due to litigation may seem daunting, there are steps policyholders can take to mitigate the impact on their premiums:

Document Claims Thoroughly: Accurate and detailed documentation can help streamline the claims process and reduce the likelihood of disputes escalating to litigation.
Choose Insurers with Strong Claims-Handling Reputations: Select an insurance company known for its fair and efficient claims handling practices.
Conduct Annual Policy Reviews: Regularly review your insurance coverage with a licensed agent to ensure it meets your needs and that you are taking advantage of any available discounts.
Maintain a Clean Claims History: Avoiding accidents and traffic violations can help keep your insurance rates down.
Ensure Adequate Coverage: Having sufficient coverage can reduce the likelihood of disputes arising from underpaid claims.
Improve Your Credit Score: A good credit score is often associated with lower insurance rates.
Increase Your Deductible: Opting for a higher deductible can lower your premium, but ensure you can comfortably afford the out-of-pocket expense in case of a claim.
Bundle Your Policies: Many insurers offer discounts for bundling multiple policies, such as home and auto insurance.

Seeking Legal Guidance

If you’re involved in a personal injury dispute, consulting with a qualified attorney is crucial. A knowledgeable legal professional can help you understand your rights, navigate the complexities of the legal system, and advocate for your best interests.

The Path Forward: Reforming the Legal System

Many believe that addressing the root causes of excessive litigation is essential to controlling insurance costs. Some potential reforms include:

Regulation of Third-Party Litigation Funding: Implementing regulations to increase transparency and accountability in TPLF.
Tort Reform: Enacting measures to curb legal system abuse and reduce frivolous lawsuits.
Promoting Alternative Dispute Resolution: Encouraging the use of mediation and arbitration to resolve disputes outside of the courtroom.

The Bottom Line

While various factors influence insurance premiums, the impact of lawsuits cannot be ignored. By understanding how legal battles drive up costs and taking proactive steps to manage your risk, you can help protect yourself from the financial burden of rising insurance rates.