By Loretta Worters, Vice President, Media Relations, Triple-I
Maritime Day is a time-honored tradition that recognizes one of the United States’ most important industries. It is observed on May 22, the date in 1819 that the American steamship Savannah set sail from Savannah, Ga., on the first ever transoceanic voyage under steam power.
“National Maritime Day was created by an Act of Congress in 1933 to celebrate our nation’s mariners – the Merchant Marine,” John A. Miklus, president of the American Institute of Marine Underwriters (AIMU), the trade association representing the U.S. ocean marine insurance industry. “Today, it has expanded to include the entire maritime industry and domestic water-borne commerce, of which marine insurance is a very important part.”
John Miklus, president, American Institute of Marine Underwriters
Marine insurance covers the loss or damage of ships, cargo, terminals, and any transport by which the property is transferred, acquired, or held between the points of origin and the destination. Cargo insurance is the sub-branch of marine insurance, though marine insurance also includes onshore and offshore exposed property, (container terminals, ports, oil platforms, pipelines), hull, marine casualty, and marine liability.
“The U.S. ocean marine insurance industry covers every imaginable kind of vessel and cargo, whether it’s a small pleasure craft or yacht, on up to the largest cruise ship or container ship calling on a major port here in the United States,” said Miklus, a former marine insurance underwriter with extensive marine insurance and reinsurance experience.
“Marine insurance and marine commerce are often thought of as an invisible industry,” he said. “People see an Amazon truck arrive but have no idea how that package found its way to their front doorstep.”
Insurance is designed to manage risks in the event of unfortunate incidents like cargo losses, damage to expensive ships, environmental disasters due to oil pollution, piracy and recently supply chain issues.
Miklus is passionate about the marine insurance business and is proud of the work of AIMU and the industry it serves.
“Today, in modern commerce, 90 percent of the goods found in our homes probably arrived on a container ship,” Miklus said. “As vital parts of commerce, these goods all need to be insured, and our member companies of AIMU insure those goods.”
The coronavirus pandemic and the financial challenges it presents have fueled growth in captive insurance – a form of self-insurance in which one or more entities establish their own insurance company. They also may insure the risks of organizations other than their major owners.
“Wholly owned” captives are set up by large corporations to finance or administer their risk financing needs. If such a captive insures only the risks of its parent or subsidiaries, it is called a “pure” captive. Multiple companies may also form a “group captive.”
Captive formations nearly doubled in 2020, according to a recent survey by Marsh. The global insurance broker and risk advisor’s survey of more than 1,300 captives also shows that gross written premiums in this area grew from $54 billion in 2019 to nearly $61 billion in 2020.
In January 2022, the National Collegiate Athletic Association (NCAA) board of governors unanimously approved a $175 million fund to create a captive for event cancellation. With insurers unable to cover risks related to the coronavirus pandemic – which falls under the umbrella of communicable diseases policies – because of the potential for unsustainable costs, the captive structure has become a more popular method to protect from losses.
The NCAA formed its captive after the 2020 NCAA basketball tournament was cancelled due to COVID-19, resulting in a $270 million payout – or about 40 percent of what the 1,200 participating schools would have earned for the tournament. In 2021, the NCAA limited the number of fans at the tournament, with the organization’s coverage allowing it to pay the total $613 million to members last year. However, their coverage for 2022 had expired, and communicable disease coverage was now difficult to find.
“When the NCAA looked to renew coverage for the 2022 tournament, a lot of it was going to look similar,” said John Beam, a broker for Willis Towers Watson, “but there is not coverage for communicable disease right now.”
The sports and entertainment industry experienced losses between $6 billion and $10 billion as the coronavirus pandemic raged on, with premiums in event insurance increasing between 25 percent and 50 percent. For many organizations, captive insurance provides a viable alternative for these risks.
Workers’ comp and captives
The coronavirus pandemic has also affected captive owners in the workers’ compensation field. Indeed, the pandemic, alongside the ensuing “Great Resignation,” during which employers have struggled to retain staff, has made many captive owners potentially more willing to pay workers’ comp claims, according to a panel at the recently held Captive Insurance Companies Association international conference.
Amy O’Brien, vice president of third-party administer sales at Gallagher Bassett Services Inc., a claims service provider, said the initial phases of the pandemic saw many insurers denying COVID-19-related claims. Claims asserting exposure at work were difficult to prove, and many captives questioned if the claims were associated with claimants’ work. Additionally, there were possible regulatory changes that these captives were concerned about.
“With medical costs continuing to rise, the most significant dynamic in terms of any company controlling their workers’ compensation costs and claims is ensuring that there are adequate tools in place to help mitigate medical costs for claimants under their workers’ compensation,” said Dustin Partlow, senior vice president at Caitlin Morgan Insurance Services and an expert in captive insurance solutions.
“But with omicron and the Great Resignation, we’re seeing a change where employers are saying, ‘What can I do to get this person back to work sooner?’” Gallagher’s O’Brien said.
Approximately 90,000 claims were processed by Gallagher Bassett that covered a COVID-19 issue, with over 60 percent of cases closed without payment, frequently due to the fact that there were no related medical expenses, O’Brien said. But the 40 percent that did result in a payment averaged $4,000 per case.
“The employee is more valuable now – so they are being treated right. The employer is saying: ‘What can I do to keep this person?’,” O’Brien added.
Cyber incidents are the top threat to businesses, according to the latest Allianz Risk Barometer survey, up from third place in 2021. This result follows several significant data breaches and hacks last year, including the Colonial Pipeline ransomware attack, which caused a six-day shutdown and cost the company $4.4 million to regain access to its systems.
Business interruption fell to the second most important concern in a year marked by the continued presence of the coronavirus pandemic, cyberattacks, and natural catastrophes. Still, the report notes that the pandemic “has exposed the fragility and complexity of modern supply chains and how multiple events can come together to cause problems, raising awareness of the need for greater resilience and transparency.”
Natural catastrophe risk ranks third on the list – a jump from sixth in 2021. Global insured catastrophe losses increased to $112 billion in 2021, the fourth highest on record, according to Swiss Re.
While cyber is ranked as a more immediate threat to business than climate change, the report says these two perils are “linked by the fact that two of the most significant impacts expected from changes in legislation and regulation (the fifth top risk) in 2022 will be around big tech and sustainability.”
Pandemic outbreak fell to fourth place for 2022, with many companies comfortable that they are now better prepared for the consequences of these occurrences. According to the report, 80 percent of respondents believe they are “adequately” or “well” prepared.
The 11th annual report was developed from a late 2021 survey of 2,650 risk management experts from 89 countries and territories, including Allianz customers, brokers, industry trade organizations, risk consultants, and underwriters, with a focus on large- and small to mid-size companies.
Construction material costs rose dramatically in 2021, altering the underwriting and pricing of commercial property insurance. A recent report by Westchester – Chubb’s excess and surplus specialty product group – details the causes of rising commercial property insurance prices and how they can be mitigated.
The report cites three main factors driving the increase:
More frequent and severe insured losses due to extreme weather;
A supply chain crisis that has generated higher costs for construction materials; and
Rising inflation, which totaled nearly 7 percent in December 2021 from the previous year’s period and is the largest one-year increase in the past 40 years.
Weather, extreme and unpredictable
According to NOAA National Centers for Environmental Information, there were 20 weather-related disasters with losses exceeding $1 billion occurred in the United States between January and September 2021. Between 1980 and 2020, the average number of these types of losses was seven.
In the first half of 2021, about $42 billion in insured property losses were recorded by the insurance industry, representing the highest figure in a decade, according to Swiss Re.
Despite this dramatic rise in losses, the report says, catastrophe risk models “may not fully capture the potential losses attributable to unusual weather events like the December 2021 tornado outbreak, Hurricane Ida, and Winter Storm Uri.” The unpredictability of these storms, alongside a need for better hydrological, topological, and geospatial data gathering and analysis, continues to pose a threat for insurers trying to anticipate risks associated with commercial properties.
Supply chain
2021 also saw a fluctuation of pricing changes for many materials — particularly those used for building – courtesy of the pandemic’s disruption of the global supply chain. Although the exorbitant lumber prices fell in the second half of the year, the prices of materials like copper piping and tubing dramatically increased, according to the report. This posed a challenge for insurers to approximate future costs for underwriting and pricing purposes.
If an unexpected major storm hits a heavily populated region, thousands of homes may need to be repaired or replaced at the same time, pushing the cost of goods and labor – and, ultimately, insurance – even higher. In November 2021, the report says, it was estimated that commercial properties were undervalued for insurance underwriting purposes by more than 30 percent.
Inflation
In addition to pandemic-driven cost increases, underwriters are concerned about the broader inflation picture and its potential impact on interest rates.
“High inflation of the 1970s and early 1980s, for example, adversely affected the industry, resulting in weaker underwriting performance and reserve levels,” the report says. “Rising interest rates, on the other hand, deteriorated the value of fixed income assets.”
Economists recently polled by Reuters said they expect the U.S. Federal Reserve to tighten monetary policy to tame persistently high inflation at a much faster pace than they believed a month earlier.
Where do we go from here?
Westchester’s report offers several strategies to help combat rising commercial property insurance costs:
Insurers, reinsurers, modeling firms, brokers, and risk managers need to develop more accurate and near-real-time data on building condition, drainage systems, real estate trends, and access to construction materials and labor;
Risk managers and property owners should consider entering agreements with contractors before weather events to ensure that materials and services are available when the need arises;
To ensure more comprehensive underwriting of a building’s replacement value, more frequent and in-depth property damage risk appraisals from qualified sources are needed; and
Insurers should consider upgrading loss prevention services provided to commercial property owners and rewarding policyholders with discounts and credits for taking certain risk-mitigation measures.
Insurance industry decision makers and thought leaders gathered yesterday for the Triple-I Joint Industry Forum (JIF) in New York City to share insights on managing risk in the post-pandemic world.
The in-person, daylong program was conducted in accordance with New York City’s COVID-19 protocols. Topics ranged from climate and cyber risk and the impact of “runaway litigation” on insurer losses and policyholder premiums to the challenges and opportunities presented by “the Great Resignation” for acquiring and nurturing talent in the industry.
The panels featured speakers from across the insurance world, academia, and media. Watch this space next week for panel wrap-ups.
Videos and voice recordings manipulated with previously unheard-of sophistication – known as “deepfakes“ – have proliferated and pose a growing threat to individuals, businesses, and national security, as Triple-I warned back in 2018.
Deepfake creators use machine-learning technology to manipulate existing images or recordings to make people appear to do and say things they never did. Deepfakes have the potential to disrupt elections and threaten foreign relations. Already, a suspected deepfake may have influenced an attempted coup in Gabon and a failed effort to discredit Malaysia’s economic affairs minister, according to Brookings Institution.
Most deepfakes today are used to degrade, harass, and intimidate women. A recent study determined that up to 95 percent of the thousands of deepfakes on the internet were pornographic and up to 90 percent of those involved nonconsensual use of women’s images.
Businesses also can be harmed by deepfakes. In 2019, an executive at a U.K. energy company was tricked into transferring $243,000 to a secret account by what sounded like his boss’s voice on the phone but was later suspected to be thieves armed with deepfake software.
“The software was able to imitate the voice, and not only the voice: the tonality, the punctuation, the German accent,” said a spokesperson for Euler Hermes SA, the unnamed energy company’s insurer. Security firm Symantec said it is aware of several similar cases of CEO voice spoofing, which cost the victims millions of dollars.
A plausible – but still hypothetical – scenario involves manipulating video of executives to embarrass them or misrepresent market-moving news.
Insurance coverage still a question
Cyber insurance or crime insurance might provide some coverage for damage due to deepfakes, but it depends on whether and how those policies are triggered, according to Insurance Business. While cyber insurance policies might include coverage for financial loss from reputational harm due to a breach, most policies require network penetration or a cyberattack before it will pay a claim. Such a breach isn’t typically present in a deepfake.
The theft of funds by using deepfakes to impersonate a company executive (what happened to the U.K. energy company) would likely be covered by a crime insurance policy.
Little legal recourse
Victims of deepfakes currently have little legal recourse. Kevin Carroll, security expert and Partner in Wiggin and Dana, a Washington D.C. law firm, said in an email: “The key to quickly proving that an image or especially an audio or video clip is a deepfake is having access to supercomputer time. So, you could try to legally prohibit deepfakes, but it would be very hard for an ordinary private litigant (as opposed to the U.S. government) to promptly pursue a successful court action against the maker of a deepfake, unless they could afford to rent that kind of computer horsepower and obtain expert witness testimony.”
An exception might be wealthy celebrities, Carroll said, but they could use existing defamation and intellectual property laws to combat, for example, deepfake pornography that uses their images commercially without the subject’s authorization.
A law banning deepfakes outright would run into First Amendment issues, Carroll said, because not all of them are created for nefarious purposes. Political parodies created by using deepfakes, for example, are First Amendment-protected speech.
It will be hard for private companies to protect themselves from the most sophisticated deepfakes, Carroll said, because “the really good ones will likely be generated by adversary state actors, who are difficult (although not impossible) to sue and recover from.”
Existing defamation and intellectual property laws are probably the best remedies, Carroll said.
Potential for insurance fraud
Insurers need to become better prepared to prevent and mitigate fraud that deepfakes are capable of aiding, as the industry relies heavily on customers submitting photos and video in self-service claims. Only 39 percent of insurers said they are either taking or planning steps to mitigate the risk of deepfakes, according to a survey by Attestiv.
Business owners and risk managers are advised to read and understand their policies and meet with their insurer, agent or broker to review the terms of their coverage.
“The cyber landscape to me looks a lot like the counterterrorism landscape did before 9/11.” – Garrett Graff , historian and journalist
Before Sept. 11, 2001, terrorism coverage was included in most commercial property policies as a “silent” peril – not specifically excluded, therefore covered. Afterward, insurers began excluding terrorist acts from policies, and the U.S. government established the Terrorism Risk Insurance Act (TRIA) to stabilize the market.
TRIA requires insurers to make terrorism coverage available to commercial policyholders but doesn’t require policyholders to buy it. Originally created as three-year program allowing the federal government to share losses due to terrorist attacks with insurers, it has been renewed four times: in 2005, 2007, 2015, and 2019.
An evolving risk
Terrorism risk has evolved in complexity and scope, and some in the national security world have compared U.S. cybersecurity preparedness today to its readiness for terrorist acts two decades ago.
“The cyber landscape to me looks a lot like the counterterrorism landscape did before 9/11,” historian and journalist Garrett Graff said during a recent Homeland Security Committee event at which scholars and former 9/11 Commission members urged lawmakers to increase funding for the Cybersecurity and Infrastructure Security Agency (CISA) and other federal agencies focused on preventing attacks.
Cyber is more complicated, said Amy Zegart, co-director of Stanford University’s Center for International Security and Cooperation, due to the private sector’s role “as both a victim and a threat vector. There are more people in the U.S. protecting our national parks than there are in CISA protecting our critical infrastructure.” Cyberattacks like the one on the Colonial Pipeline underscore this reality.
When TRIA was reauthorized in 2019, a crucial component was the mandate for the Government Accountability Office (GAO) to make recommendations to Congress on amending the act to address cyberthreats. The trillion-dollar infrastructure bill now being considered in Congress proposes $1.9 billion for cybersecurity, with more than half set aside for state, local, and tribal governments. It would establish a Cyber Response and Recovery Fund for use by CISA.
“Silent cyber”
Like terrorism before 9/11, much cyber risk remains silent. Silent cyber – also called “non-affirmative cyber” – refers to potential losses stemming from policies not designed to cover cyber-related hazards. If silent cyber isn’t addressed, insurer solvency could be affected, ultimately hurting policyholders.
The United Kingdom’s Prudential Regulation Authority in 2019 sent a letter to all U.K. insurers saying they must have “action plans to reduce the unintended exposure” to non-affirmative cyber. Later that year, Lloyd’s issued a bulletin mandating clarity on all policies as to whether cyber risk is covered. This led many insurers to exclude cyber or include it and price the risk accordingly.
“Other regulators and the rating agencies have been less vocal about the issue” writes Willis Towers Watson, “and, until recently, efforts to address silent cyber have been limited.” Some insurers – most notably in the specialty mutual sector – updated their policies in the mid-2010s to provide clarity on cyber. But, until recently, movement elsewhere has been sporadic, Willis writes.
Event-driven action
The recent proliferation of ransomware attacks leading to business interruption has led to cyber insurance – which began as a diversifying, secondary line – becoming a primary insurance-purchasing consideration. Unfortunately, while policies are available, many policyholders still incorrectly expect to be covered under their property and liability policies. Confusion around cyber coverage can lead to unexpected gaps.
“In a best-case scenario, a cyber incident may trigger coverage under multiple policies and increase the available total limit to respond to a covered event,” said Adam Lantrip, CAC Specialty’s cyber practice leader. “In a more common scenario, multiple policies may be triggered but not coordinate with one another, and the policyholder spends more on legal fees than the cost of having purchased standalone cyber insurance in the first place.”
Cyber risk will only grow in significance, complexity, and cost as the world becomes more wired and interdependent. The costs of cyberattacks are potentially massive and need to be mitigated in advance.
By Captain Andrew Kinsey, Senior Marine Risk Consultant at Allianz Global & Corporate Specialty
When an Amazon package arrives at our door, we scarcely give any thought to what it took to get here. It’s likely that your school supplies or article of clothing has traveled a great distance across the ocean by vessel.
International shipping accounts for 90 percent of world trade, and the old saying “there’s many a slip ‘twixt the cup and the lip” is appropriate. Much can go wrong between the point of origin and destination — and lately Marine insurers are keeping a close eye on developments in our climate, the economy, and public health that could influence the odds of a successful delivery.
The annual Safety and Shipping Review produced by Allianz details trends and developments in shipping losses and safety and is a valuable resource for Marine insurers. Here are some of the major highlights.
Losses at sea
First, let’s look at losses of vessels at sea, where the trend is stable. There were 49 total losses of 100 gross tons or more in 2020, compared to 48 a year earlier. Credit better safety measures, regulation, improved ship design and technology, and advances in risk management. Behind the numbers, however, are a host of volatile factors, such as extreme weather, machinery breakdown, fires, and even piracy. Ship operators can improve fire detection and firefighting on large vessels and ensure that machinery has been inspected and is in good working order. Also, weather impacts can be mitigated by improving forecasting and vessel routing.
Another big concern of insurers is shipping containers lost at sea. Last year, more than 1,000 fell overboard in the first few months due to rough weather and heavier loads. A surge in demand for consumer goods is another factor; in response, containers are being stacked aboard at unprecedented heights, leading to concerns that they aren’t being properly secured. In all, more than 3,000 containers were lost at sea in 2020, compared with a longer-term average of 1,382 per year.
Pandemic impact
Next is the global pandemic, which has had little effect on Marine insurance claims to date. It’s quite possible that claims could increase as more vessels are put back in service and we see the effects of delayed maintenance. Another big concern is crews confined to their ships in ports due to public health mandates, which delays crew changes and medical treatment. Crew fatigue leads to human error – a major cause of many losses.
These are factors that warrant immediate action by all stakeholders in the supply chain, including cargo owners. One solution is to designate merchant seaman as vital workers so they can receive vaccines and move about freely.
Bigger ships, bigger problems
Size does matter in global shipping. Remember the ship stuck in the Suez Canal for over three months? The Ever Given incident was a vivid illustration how hard it is to free large vessels. When it takes more equipment and more manpower, someone must pay. Not to mention the societal and economic cost of supply-chain disruption. There’s a real possibility we will see bare shelves and lots of “items unavailable” this holiday shopping season.
So if bigger vessels cause bigger problems, why are there so many of them? It’s all about economies of scale and fuel efficiency, and shipping companies really can’t be blamed for trying to comply with increased environmental regulations and attempting to reduce their operating costs. However, large vessels pose problems for the supply chain, often overwhelming ports when so many containers are dropped off at once.
Vessel size also has a direct correlation to the potential size of loss, and this is an issue that keeps Marine insurers up at night. Too often, cargo is misdeclared or improperly declared, which can result in fires. For example, if self-igniting charcoal, chemicals or batteries are not properly stowed, the risk of ignition escalates dramatically. And if the item is improperly declared in the first place the crew doesn’t know what it’s dealing with in an emergency.
Compounding the problem is inadequate fire detection and firefighting capabilities on large vessels; for this reason, the International Union of Marine Insurers (IUMI) is rallying stakeholders to establish more stringent standards.
At first glance, it appears the risks associated with global shipping are a moving target. But more careful scrutiny reveals patterns and trends that, when carefully analyzed, can lead to improved loss mitigation, thus reducing the “slips” that can occur in transit.
Captain Andrew Kinsey is Senior Marine Risk Consultant at Allianz Global & Corporate Specialty and chairs the technical services committee of the American Institute of Marine Underwriters, which is a Triple-I Associate Member.
August is International Pirate Month – mainly, I suppose, because it’s fun to say “Arrrg-ust” like a Caribbean swashbuckler from the movies. But many people outside the maritime and insurance industries don’t realize that piracy remains a costly peril in the 21st century – and, like so many other risks, it may have gotten worse during the COVID-19 pandemic.
Global insurer Zurich estimates the annual cost of piracy to the global economy at $12 billion a year and, according to the International Maritime Bureau’s Piracy Reporting Centre (IMB PRC), global piracy and armed robbery numbers increased 20 percent in 2020. IMB PRC’s latest annual report lists 195 actual and attempted attacks in 2020, up from 162 in 2019. It attributes the rise to increasing incidents within the Gulf of Guinea in Africa, as well as increased armed robbery activity in the Singapore Strait.
In its Safety and Shipping Review 2021, global insurer Allianz says, the Gulf of Guinea accounted for over 95 percent of crew members kidnapped worldwide in 2020.
“Last year, 130 crew were kidnapped in 22 separate incidents in the region – the highest ever – and the problem has continued in 2021,” the report says. “Vessels are being targeted further away from the shore – over 200 nautical miles from land in some cases.”
The COVID-19 pandemic may have played a role in this rise in pirate activity, as it is tied to underlying social, political, and economic problems.
The economic effects of the pandemic have been especially devastating in parts of the world where piracy tends to be a problem: job losses, negative growth rates, and increased poverty. According to the International Monetary Fund (IMF), China is the only major economy projected to have a positive growth rate in 2020. The economies of most other countries have shrunk, some by more than 9 percent. Overall, the global economy likely shrank by at least 4 percent in 2020, and the World Bank expects an additional 150 million people have been pushed into poverty.
The economic costs of the pandemic have been particularly challenging for piracy-prone countries, and pre-COVID economic conditions in many of these places almost certainly means slower recoveries.
“Pirates, criminals, and terrorists exploit poverty and desperation to seek recruits, gain support, and find shelter. To counter these threats, we need to raise awareness and educate people, especially youth, while providing alternative livelihoods and support for local businesses,” said Ghada Waly, Executive Director at the UN Office on Drugs and Crime.
Pandemic’s impact on crews
Crew relief is essential to ensuring the safety and health of seafarers. Fatigued crew members make mistakes, and there are serious concerns for the next generation of seafarers. COVID-19 is affecting training, and the sector may struggle to attract new talent due to working conditions.
Reduced availability of well-trained crews could leave vessels more vulnerable as the global economy and international trade rebounds.
In March, the International Chamber of Shipping warned that lack of access to vaccinations for seafarers is placing shipping in a “legal minefield” and could cause disruption to supply chains from cancelled sailings and port delays.
“Vaccinations could soon become a compulsory requirement for work at sea because of reports that some states are insisting all crew be vaccinated as a precondition of entering their ports,” Allianz writes. “However, over half the global maritime workforce is currently sourced from developing nations, which could take many years to vaccinate. In addition, the vaccination of seafarers by shipping companies could also raise liability and insurance issues, including around mandatory vaccination and privacy issues.”
COVID-19’s confounding implications for international piracy were illustrated last month, when more than 80 percent of a South Korean anti-piracy unit serving a mission off the coast of Somalia were found to have tested positive and were airlifted out. South Korea’s defense ministry has said the unit left the country in February unvaccinated. The government has defended the decision, citing lack of vaccine availability at the time.
Second post in a serieson social inflation and litigation funding
Litigation funding – in which third parties assume all or part of the cost of a lawsuit exchange for an agreed-upon percentage of the settlement – is often cited as contributing to social inflation. But, like so much else associated with social inflation, it’s unclear how widespread the practice is.
With historical roots in Australia and the United Kingdom, funding of lawsuits by investors has taken hold in the United States in recent years. On the positive side, it can let plaintiffs employ experts to develop effective strategies – options once only available to large corporate defendants.
But it also can contribute to cases making it to court based more on investor expectations than on plaintiffs’ best interests.
Erosion of common-law prohibitions
Litigation finance was once widely prohibited. The relevant legal doctrine – called “champerty” or “maintenance” – originated in France and arrived in the United States by way of British common law. The original purpose of champerty prohibitions – according to an analysis by Steptoe, an international law firm – was to prevent financial speculation in lawsuits, and it was rooted in a general mistrust of litigation and money lending.
There’s an irony here, in that a major societal force driving social inflation today – distrust of corporations and litigation – once motivated the prohibition of a practice now widely associated with the phenomenon.
These bans have been eroded in recent decades, leading to increases in litigation funding.
“If you are trying to understand how we got here, I would say start in the 1990s,” says Victoria Shannon Sahani, a professor of law at the Arizona State University Sandra Day O’Connor College of Law. “The United States isn’t really a big player on the scene yet, but you’ve got Australia and the United Kingdom independently making moves in their legislatures that paved the way for litigation funding to become more prevalent.”
Between 1992 and 2006, Sahani says, “It was sort of the Wild West of Australian law in the sense that if you engaged in litigation funding, you always ran the risk that your agreement might be challenged.”
In 2006, the High Court of Australia provided clarity, saying litigation funding was permitted in jurisdictions that had abolished maintenance and champerty as crimes and torts. It was even acceptable for a funder to influence key case decisions.
The practice took time to gain traction in the United States because champerty prohibitions are left to states. Some have abandoned their anti-champerty laws over the past two decades. Some, like New York, have adopted “safe harbors” that exempt transactions above a certain dollar amount from the reach of the champerty laws.
“Given the stakes involve in many cases, it will be interesting to see whether litigation funders refrain from direct involvement.”
– David Corum, vice president, Insurance Research Council
Uncertainty as to market size
There is no consensus as to how much investors spend on U.S. lawsuits each year, according to Bloomberg law, “but it is not $85 billion, a number recently put forward as the ‘addressable market’ for litigation finance by a publicly traded litigation financier.”
That’s because the industry spent only about 2.7% of $85 billion during a 12-month span that started in mid-2018, according to a Westfleet Advisors survey.
“Does that low penetration rate portend explosive growth ahead?” Bloomberg Law asks. “Or is it an indication that litigation finance is a niche product most plaintiffs and lawyers find unnecessary?”
A key determinant of growth may be the willingness of funders to remain uninvolved in managing cases, said David Corum, vice president with the Insurance Research Council: “Given the stakes involve in many cases, it will be interesting to see whether litigation funders refrain from direct involvement.”
Benefit, bane, or both?
While funders tout the “David versus Goliath” aspect of helping small plaintiffs against corporations, opponents worry about introducing profit into a process that is supposed to aim at a just outcome. A settlement may be rejected because of pressure exerted by profit-seeking funders, and a plaintiff may walk away with nothing if the trial goes against them, opponents say.
Laura Lazarczyk, executive vice president and chief legal officer for Zurich North America, called litigation funding “abusive” and said harm “will be largely borne by insurers in defense costs and indemnity payments and by policyholders in uncovered losses and higher premiums.”
Critics also decry a lack of transparency. While the U.S. District Court for New Jersey held that third-party funding must be disclosed, attempts to pass federal disclosure legislation have been unsuccessful.
“It’s a multibillion industry with no regulation and no requirements for transparency,” said Page C. Faulk, senior vice president of legal reform initiatives at the U.S. Chamber of Commerce. “It is essentially turning our U.S. courtrooms into casinos, which is why the chamber is calling for disclosure.”
Such concerns led the American Bar Association last year to approve best practices for firms engaging in litigation funding. The resolution is silent on disclosure, but it urges lawyers to be prepared for scrutiny. It also cautions them against giving funders advice about a case’s merits, warning that this could raise concerns about the waiver of attorney-client privilege and expose lawyers to claims that they have an obligation to update this guidance as the litigation develops.
