Rancho Mesa's Alyssa Burley and Vice President of the Human Services Group Sam Brown discuss how litigation funding contributes to higher claim amounts and insurance premiums.
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Director/Host: Alyssa Burley
Guest: Sam Brown
Producer/Editor: Lauren Stumpf
Music: "Home" by JHS Pedals, “News Room News” by Spence
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Transcript
Alyssa Burley: Hi, this is Alyssa Burley with Rancho Mesa's Media Communications and Client Services Department. Thank you for listening to today's top Rancho Mesa news brought to you by our Safety and Risk Management Network, Studio One. Welcome back everyone. My guest is Sam Brown, Vice President of the Human Services Group with Rancho Mesa. Today we're going to talk about litigation, funding, contributing, to higher claim amounts in insurance premiums. Sam, welcome to the show.
Sam Brown: Thanks for having me, Alyssa.
AB: Of course. So I was floored when I read your article about this. I suppose I instinctively knew that the cost of insurance has increased due to the increase in litigated claims, but I hadn't really thought of it in this context before. So in your article, you mentioned the term social inflation when explaining the increase. of insurance claim costs. Will you explain what that is?
SB: Sure. So social inflation is the term used to describe this trend where the outcome of lawsuits, whether it be judgments or settlements, is just growing at a very rapid pace. So, these reasons are typically socio -economic, legal, and behavioral trends that produce these costly lawsuits. One thing that we probably need to include in that is a sympathetic jury. They may side with the plaintiff and decide a very large settlement or decision because there's a human factor involved and that should be included in social inflation. And then, of course, what we're going to talk about today is that new factor which is referred to as third -party litigation financing.
AB: Okay. “Third -party litigation financing” caught me a little off guard when I read that. What is happening when a third -party gets involved in these lawsuits?
SB: Yeah, it's pretty disturbing to learn what's happening, but litigation financing refers to the practice of private equity companies, hedge funds, and other investors taking seemingly a calculated risk to invest in lawsuits. So really, they're looking for a return on their investment like any good hedge fund would do.
AB: This seems crazy though.
SB: And they're looking for opportunities or lawsuits where they feel there could be a large payout. They want to fund the legal fees so that a plaintiff may go ahead and pursue this lawsuit in exchange for a portion of the settlement or decision.
AB: Yeah. All right. Well, this seems like it could have a significant impact on the overall costs associated with these claims and ultimately the cost of insurance premiums. So what's a typical scenario where a third party might invest in a lawsuit?
SB: Right. So what's happening is that the former insurance executives who are no longer working in insurance are now advising these investment funds and those that are well-heeled and well-funded on how to pick out lawsuits where the potential verdict or settlement or decision could spell big payout. So these investment companies then are funding the plaintiff's legal fees in exchange for a portion of that settlement. The payoff for the plaintiff is that they feel like this could result in increased damage awards with a very well-funded legal team.
AB: Right. Yeah, I could see how that would be appealing if you think that if you have all this funding behind you, you can get the best attorneys.
SB: Exactly.
AB: Yeah. All right, so what are some of the consequences of this type of investment? And I hate using that term investment for this, but what are some of those consequences when a third party gets involved?
SB: Right. So it could lead to prolonged litigation because all of a sudden, maybe a smaller offer of settlement is no longer attractive to the plaintiff.
AB: 'Cause now we're paying. paying multiple entities.
SB: Right, but then conversely, it could result in a quick decision, which may not be to the plaintiff's advantage if the investor is looking for a quick hit.
AB: Right.
SB: Litigants may also receive only a fraction of the award per the arrangement, but then also what we're seeing is litigants are demanding higher settlements to cover the cost of those investments, right? It's like, well, I know I'm only getting x % of the settlement, so I'm going to ask for more, thereby prolonging the litigation, as we mentioned. And then funding agreements may impact an attorney's judgment when representing a client. And for that reason, some states don't allow this arrangement at all.
AB: Okay.
SB: Now, the ultimate downside occurs when underwriters and underwriting departments are going to charge higher policy premiums to account for social inflation and to account for this trend or perhaps reduce appetite, which means that the underwriters are no longer willing to quote on a particular segment of the industry because they just don't feel like they can do it profitably or the risk is too great. So that could make coverage very difficult to obtain and maybe impossible to obtain.
AB: Yeah and that really affects everyone.
SB: The consumers.
AB: Yeah. All right, so what's the solution for reducing the impact of these third -party investing in this type of lawsuit?
SB: So transparency is a big one, as well as a lot of times, financial opportunities or loopholes will outpace regulation and legislation for a time, but that will catch up. up hopefully. We need it to happen sooner rather than later, where legislation and regulation can start to implement guidelines and restrictions that are going to protect the interests of both the policyholders and the insurance companies.
AB: All right, and this is something that affects really all of our clients or could affect all of our clients, whether it's in human services, construction, landscape, really anybody could be affected by this. So Sam, if listeners have questions about social inflation or other risk management topics, what's the best way to get in touch with you?
SB: I can be reached at 619-937-0175 or e -mailed at sbrown@ranchomesa.com.
AB: All right, Sam. Well, thank you for joining me in Studio One.
SB: Yeah, great to be here. Thanks.
AB: This is Alyssa Burley with Rancho Mesa. Thanks for tuning in to our latest episode produced by Studio One. For more information, visit us at RanchoMesa.com and subscribe to our weekly newsletter.
