Recent data shows that insurance litigation increased nearly 50% between 2017 and 2021. What long-term trends are behind this significant uptick in litigation?
Katheleen Ehrhart: The biggest driver for the increased amount of litigation has been COVID. Business interruption and supply chain shortages impacted business and individuals alike, and the resulting insurance claims led the way to the sharp uptick in the amount of litigation. There has also been a steady increase of litigation surrounding hurricanes, with over a quarter of federal court cases related to insurance resulting from a hurricane-related claim. While the early reports are that a large number of those impacted by Hurricane Ian were without flood coverage, given the losses incurred by Florida residents as well as other states, the amount of weather-related coverage disputes is likely to grow over the next year or two.
Is litigation risk insurance changing the cost/benefit analysis of businesses in terms of managing their legal risks? And what litigation can we expect as a result of adverse judgment insurance?
Ehrhart: Litigation risk insurance is relatively new and offers businesses a chance to manage legal risk that might stem from litigation. Policies cover different aspects of litigation risk such as adverse judgment insurance, providing coverage for a defendant in the event of an adverse judgment. This type of insurance can offer a defendant a counterbalance to the strategic asymmetry of large class actions (in particular litigation financed plaintiffs) where the plaintiffs’ risk is distributed across multiple entities or individuals but an uninsured defendant is burdened with the entire risk. This can decrease the pressure on defendants to consider an early and unattractive settlement offer instead, in particular with lawsuits with questionable merit.
Where is COVID having the most impact on litigation besides the insurance industry?
Ehrhart: While various decisions by employers to put into place vaccination and other COVID-related requirements have been the most evident drivers of litigation, some less obvious COVID-related labor and employment issues have begun to surface, as well. Employers have to determine how to navigate remote or hybrid work, as well as what tools can be used to monitor productivity. The law is not clear about whether monitoring is a privacy or confidentiality issue.
Another issue is the status of mental health days and whether companies who started providing them due to the stressful effects of the pandemic will continue to do so. Should employees be compensated for these and, if so, do policy initiatives need to be updated? Employment issues such as these continue to arise, necessitating legal counsel, as well as the anticipation of whether decisions surrounding these issues will open up the company to potential challenges regarding new policies.
What will be the next “asbestos-claims” type issue to hit the insurance industry and drive litigation?
Ehrhart: It’s unclear whether either will rise to the level of asbestos-type claim litigation, but two of the biggest risks insurers are keeping their eyes on are climate change and cyber-risk. With extreme weather events brought by climate change expected to keep rising, insurance professionals expect rising claims and related challenges. These go beyond just the destruction of homes and businesses, as seen by the recent Hurricane Ian, but can put entire supply chain, food and power systems at risk. Cyber risk has already been on the forefront of insurers minds but with the COVID pandemic and the increased use of digital technology by remote employees, blurring the lines between office and home, companies and individuals are further open to cyber risks and attacks. With the increase in use and companies’ maintenance of cyber risk policies, insurers have tightened terms and conditions to reduce unexpected losses. With this tightening coverage, coverage challenges and litigation are sure to follow.
For years the reinsurance/insurance industry has resolved disputes through the arbitration process. Is arbitration still a viable route? Does it bring any real time or cost efficiencies as compared to litigation?
Ehrhart: Arbitration is still alive and well in the reinsurance/insurance industry. It gives companies a forum that provides, and in fact invites, issues to be decided by arbitrators generally steeped in industry knowledge and with a good handle on custom and practice. Understanding how the industry and its participants work together can be critical in deciding issues between reinsurers and insurance companies which more often than not require specialized knowledge and understanding related to complicated insurance concepts. While the size of any arbitration (amount of discovery, motion practice, etc.) is naturally driven by the size of monetary value at issue, more often than not, arbitrations still provide the participants a faster and more cost-efficient result than they may get if they were to litigate those issues in court. Arbitrations can often be completed within 12 to 18 months.