Legal system abuse, including frivolous lawsuits and inflated claims, is driving insurance claims costs to record highs, particularly in liability lines, disrupting the industry and impacting policyholders, insurers and independent agents, according to Triple-I.
Defining and Understanding Legal System Abuse
Legal system abuse involves actions that unnecessarily increase the costs and time required to settle insurance claims. Examples include filing frivolous lawsuits, inflating claims, ubiquitous attorney advertising that glorifies lawsuits and promises big payouts, and third-party litigation funding (TPLF), Dale Porfilio, Triple-I’s chief insurance officer, wrote in an article published in Agent for the Future. In TPLF, hedge funds and other financiers invest in lawsuits in exchange for a percentage of any settlement or judgment, which can incentivize holding out for bigger payouts and drawing out litigation.
These abusive practices increase claims costs while being nearly impossible for insurers to forecast and mitigate. Legal system abuse often compounds with other elements like economic inflation to further shift loss ratios and disrupt cost forecasts, making claims management even more challenging, Porfilio said.
“It is one driver of the market that we see right now,” noted Luke Bills, president of independent agent distribution at Liberty Mutual and Safeco Insurance. “Carriers start to withdraw. That’s a huge impact for independent agencies. We’re starting to see this across all lines of business.”
The effects of excessive claims costs due to legal system abuse ripple through the entire insurance industry, impacting policyholders, insurers and agents alike, according to Porfilio.
As claims payouts and premiums rise, it becomes more difficult for agents to sell coverage. Insurers may also pull back on the types of risks they are willing to cover, diminishing coverage availability in the market. Understanding and deterring legal system abuse is crucial for maintaining a healthy, affordable insurance market for all.
Role of Agents in Deterring Abuse
As legal system abuse threatens insurance coverage availability and affordability, agents play a crucial role in mitigating its effects on customers. By being proactive in client conversations, staying engaged with their customer base, and offering guidance throughout the claims process, agents can help their clients navigate the challenges posed by legal system abuse and remain a trusted advisor in an increasingly complex insurance landscape, Porfilio emphasized.
According to Bills, agents should be the policyholder’s first call after an insurable event. “We are seeing a significant increase in attorney-represented claims coming in at first notice of loss,” he said, noting that this trend is becoming more common even in personal lines.
At the point of sale, agents can discuss best practices for managing risks as part of the conversation on coverage options. They can also guide clients through the claims process when an insurable event arises.
To help curtail legal system abuse, Porfilio suggested that agents may want to consider integrating the following guidelines into their operations:
Know your customers to understand their financial situation and coverage needs. Adequate coverage is an integral component of a strong financial management plan, and agents should be ready to point clients to pertinent resources.
Be proactive in conversations about rising rates and help clients explore affordable coverage options that work with their budget. Explain that insurance rates rise for everyone due to more frequent claims and higher claims costs.
Stay engaged with your client base to increase awareness of policy responsibilities and the pitfalls of legal system abuse. Use communication channels, such as e-newsletters, to share tips on avoiding scams and understanding agreements like assignments of benefits.
Reach out proactively when you realize a client may have experienced an insurable event. Offer to answer questions and guide them through the claims process, reminding them that attorney and third-party involvement can significantly reduce their portion of any payout.