Nuclear Verdicts Drive Rising US Liability Claims

Five emerging liability claim trends are reshaping the risk landscape, finds a report by Allianz Commercial.

By: R&I Editorial Team | November 21, 2024

nuclear verdicts drive liability loss trends

Five key liability claim trends, including the rise of nuclear verdicts and the use of artificial intelligence in legal processes, are set to significantly impact businesses and insurers, reshaping the risk landscape, according to a report by Alllianz Commercial.

“As technology and the world evolve, the insurance market faces a number of new challenges which are leading to increasing liability loss trends,” stated Alfredo Alonso, global head of liability insurance at Allianz Commercial. “These increasing loss trends are influencing insurers’ perspectives on issues such as capacity deployment, especially in the U.S., and the profitability of both older and future underwriting years. Collaboration among stakeholders is crucial to managing these changes and controlling liability claims costs.”

The number one trend is the surge in so-called “nuclear verdicts” – jury awards exceeding $10 million — in the United States in recent years. Even more concerning is the rise of “thermonuclear verdicts,” which surpass the $100 million mark. According to research by Marathon Strategies, 2023 saw a 27% increase in the number of nuclear verdicts against companies over 2022, while thermonuclear verdicts jumped by 35%, the report noted.

Several factors are driving this trend. Growing mistrust of corporations, erosion of tort reform, and changes in jury pool demographics have all contributed to the proliferation of these outsized awards. Additionally, the normalization of large verdicts has shifted public perception of what constitutes appropriate compensation. Plaintiff attorneys have also honed their tactics, employing psychological strategies such as “reptile theory” – which aims to incite fear and anger in jurors – and “anchoring” – a technique that establishes an unreasonably high award amount in jurors’ minds, Allianz Commercial reported.

The impact of these nuclear verdicts on the insurance industry and businesses has been profound, according to the report. Over the past decade, liability claims in the U.S. have surged by 57%, largely due to these enormous jury awards. In 2023 alone, U.S. commercial casualty insurance losses totaled $143 billion – significantly higher than the $108 billion cost of global natural catastrophes in the same year.

Certain insurance lines are bearing the brunt of this trend. Commercial general liability, auto, and product liability have been hit particularly hard, with loss severity in these areas far outpacing economic inflation. For instance, the average loss severity increase for product liability over the 10-year period leading up to 2023 was 20.4%, compared to an average annual economic inflation rate of just 2.7%.

Efforts to address this issue are underway, albeit with mixed results, per the report. Some states have implemented tort reform measures to limit the size and scope of verdicts. Florida, historically the second-ranking state for nuclear verdicts, saw a notable decrease in 2023, with the sum of nuclear verdicts falling to $492 million. However, other states have moved in the opposite direction, expanding liability in wrongful death cases.

Arne Holzheuer, global practice group head for liability in the chief claims office at Allianz Commercial, offers a sobering perspective on the situation: “The only way is up when it comes to awards in the U.S. Attorneys continue to find new ways to bring cases in front of plaintiff friendly juries in so-called ‘judicial hell holes’, where most insureds are minded to settle, rather than risk a nuclear verdict from a jury trial. But this then sets a high benchmark for all the other plaintiffs that are in waiting.”

Pharma Class Actions

The pharmaceutical and chemical industries are facing a growing wave of billion-dollar class action lawsuits, with recent high-profile cases setting new precedents. Johnson & Johnson’s proposed $6.5 billion settlement for over 50,000 cases alleging cancer-causing talc products exemplifies the scale of these legal challenges. Similarly, Monsanto has reportedly reached settlement agreements in nearly 100,000 weedkiller-related lawsuits, valued at approximately $11 billion.

These cases highlight a concerning trend for the industry: a single harmful product or ingredient can spark multiple actions across numerous producers. For instance, at least four major manufacturers of ranitidine-based heartburn products are currently facing tens of thousands of cases in the U.S. over cancer allegations.

“It’s just the commercial reality of the pharmaceuticals sector – when a drug becomes a top seller, generic manufacturers market it alongside the brand manufacturer and if there is a problem, they all get pulled into class action litigation,” Holzheuer said.

PFAS Litigation

Another emerging trend with potentially far-reaching consequences is litigation surrounding per- and polyfluoroalkyl substances (PFAS). These synthetic chemicals, used extensively in industrial and consumer products since the 1940s, are now at the center of what some experts predict could become the next asbestos-level litigation crisis.

PFAS, often called “forever chemicals” due to their persistence in the environment, have been used in a wide range of products, from food packaging and cosmetics to firefighting foams and fabric treatments. However, scientific studies have linked PFAS exposure to various health issues, including increased cancer risk and damage to the immune system.

As awareness of these health risks grows, Allianz Commercial reported that litigation is focusing on three main areas: environmental pollution, water and waste treatment contamination, and personal injury actions. The latter currently centers on individuals working directly with PFAS products, such as firefighters.

The potential scale of PFAS litigation is staggering, with some estimates suggesting it could exceed $100 billion. Recent settlements by major PFAS producers have already reached significant sums, including a $10.3 billion settlement with public utilities in 2023.

Larry Crotser, head of key case management, North America at Allianz Commercial, notes, “Personal injury litigation is ongoing for those plaintiffs, often firefighters, who allege that certain cancers are caused by long term exposure to firefighting foam containing PFAS, but it’s too early to say with total confidence if PFAS bodily injury litigation will spill over significantly into the wider population.”

Growth of European Collection Actions

Europe is witnessing a significant surge in class action litigation. In 2023, a record-breaking 133 class actions were filed across the continent, marking a 10% increase from the previous year. This trend is particularly pronounced in the United Kingdom, Netherlands, Germany, and Portugal, which collectively accounted for 78% of all European class actions.

The UK, Europe’s largest market for class actions, saw the total claimed value of such lawsuits rise by 18% to €145 billion in 2023. Product liability, consumer issues, and personal injury cases emerged as the primary drivers, representing nearly a third of all class actions in the region.

This uptick in collective actions can be attributed, in part, to recent legislative changes in the European Union. The EU’s Representative Actions Directive, which came into force in December 2020, mandates that member states allow qualified entities, such as consumer organizations or public authorities, to bring collective actions on behalf of consumers and, in some cases, small businesses.

Additionally, an upcoming overhaul of the EU Product Liability Directive is set to expand the scope of liability and simplify the process for consumers to initiate legal action.

AI’s Influence on the Legal Profession

As the legal landscape evolves, artificial intelligence is playing an increasingly significant role in shaping the future of law practice.

AI tools are now being employed to automate various legal processes, including contract drafting, judgment preparation, legal research, and analytics. A survey by Thomson Reuters reveals that 70% of legal professionals anticipate AI and generative AI will have a transformational or high impact on the legal profession within the next five years, the report noted.

Leading law firms are already embracing this technological shift. In 2023, Allen & Overy launched an AI-powered platform to assist its lawyers in day-to-day legal work, covering areas such as contract analysis, due diligence, litigation, and regulatory compliance.

The influence of AI extends beyond streamlining legal processes; it has the potential to significantly impact the volume and nature of future class action litigation.

“AI could be used by the plaintiff’s bar and litigation funders, for example, to find emerging trends – such as trawling regulatory and scientific papers to find a new chemical classified as carcinogenic – as well make it faster and cheaper to administer class action litigation,” stated Peter Dowling, group head – personal injury and class actions at Allianz Commercial.

View the full report here. &

The R&I Editorial Team can be reached at [email protected].

Consistency and Stability

Sandy Bigglestone, Deputy Commissioner for the State of Vermont’s Captive Insurance Division

With the commercial insurance market so unstable, companies are turning to captives to house their exposures. Vermont, a long-time domicile, is getting increased attention because of their strong reputation and their leadership as the top domicile worldwide.

“All stakeholders enjoy the stable political and regulatory environment Vermont has to offer to operate in,” Bigglestone said.

Of course, a lot of consideration goes into deciding whether or not a captive is the right choice for a particular company. Businesses need to assess their exposures and their books to make sure they can adequately operate a captive.

There are significant advantages, however. “For low frequency, high severity risks, captives can access the reinsurance markets directly, so it’s very attractive for businesses to put a captive in place,” Bigglestone said.

And carriers are more accepting of captives as part of a broader insurance program.

“Captives are changing the relationship businesses have with commercial carriers,” Bigglestone said. “Commercial carriers are wanting to see companies with skin in the game; therefore, the relationships have evolved to be less transactional and more strategic.”

Balancing Bureaucracy

With 76 global domiciles, companies have a lot of options when it comes to selecting a captive partner. “Captive insurance domiciles compete globally for the business,” Bigglestone said. “If you were to put all 7,000-plus captive insurance companies around the world, all in New York, it wouldn’t have the same economic impact as 700 captives in Vermont does. The captive insurance industry is very important to our state and we will continue to support it in any way we can.”

Businesses should look for domiciles that balance a need for quality regulations with a process that isn’t overly bureaucratic and is seamless for business owners to navigate.

“Companies are attracted to an environment with quality regulatory standards and a stable regulatory environment,” Bigglestone said. “Vermont sets the regulatory standard in terms of financial analysis and examinations.”

In addition to quality regulations, firms will want to seek out a domicile that is agile enough to license captive insurance companies that fit their unique needs. It is important that a domicile have firm but fair regulation and the experience to consider new ideas and implement them. Companies must consider a variety of factors when choosing a domicile and not everyone will be the right fit for every company.

“You have to consider the captive owner and the industry sector that that owner operates in, as well as the insurance risks that are going into the captive program,” Bigglestone said. “Captive laws and regulations have to have a reasonable degree of flexibility to accommodate all the varying needs of owners and then impose rules based on the merits of each captive program.”

She added that creativity is a critical part of the process: “The ability to vet concepts and ideas with trusted individuals is key to having quality standards,” Bigglestone said. “And it can make captives appealing to insureds who are tired of commercial carriers not meeting the needs of the business, and who desire more control over their insurance programs.”

“When you think about the commercial marketplace, commercial insurers are supposed to operate in each jurisdiction in a competitive manner. Commercial carriers often look the same. They sell auto coverage to anyone with a driver’s license. The rules and regulations imposed upon commercial insurance companies are designed to be more formulaic for that reason,” Bigglestone said.

“Uniform regulatory standards apply to commercial carriers for the protection of the policyholders. These are standards all insurance regulators focus on, and standards captive insurance regulators need to understand, but with a specialized focus.”

A Quality Domicile Built for the Future

A combination of experience, regulatory standards and talent make Vermont a top domicile for companies looking to form a captive. The longevity of licensing captive insurance companies for over forty years is a testament to the quality work they’ve provided in the past and will continue to provide for many years to come.

Vermont’s reputation has helped the state attract and retain top captive talent, ensuring the businesses it serves are in good hands. The state has 32 employees dedicated to captives, and their average employee retention is 15 years. The Vermont Captive Insurance Association, the largest captive insurance trade organization, also helps companies connect with professional services needed to make their captive successful.

“There’s a whole host of service providers with proven expertise right here in Vermont,” Bigglestone said.

Taken together, Vermont’s resources, expertise and talent make it a prime domicile. They’ve been on a growth trajectory over the last few years and that’s unlikely to change anytime soon. Companies can trust their captive will be in good hands when they choose Vermont.

“Vermont has always competed on quality,” Bigglestone said. “We do have a mission and that hasn’t changed in over 40 years. It’s to maintain a system, or domicile that attracts quality business to Vermont, to promote our reputation in the industry, and to uphold a regulatory framework to protect the solvency of the companies that choose to place their business here.”

To learn more, visit: www.vermontcaptive.com

This article was produced by the R&I Brand Studio, a unit of the advertising department of Risk & Insurance, in collaboration with State of Vermont. The editorial staff of Risk & Insurance had no role in its preparation.

The State of Vermont, known as the “Gold Standard” of captive domiciles, is the leading onshore captive insurance domicile, with over 1,200 licensed captive insurance companies, including 48 of the Fortune 100 and 18 of the companies that make up the Dow 30.