Category Archives: Legal Environment

Auto Insurers’ Performance Improves, But Don’t Expect Rates
to Flatten Soon

Several metrics that influence auto insurance premium rates are starting to improve, but it will take time for these improvements to be reflected in flattening rates, according to a recent Triple-I Issues Brief.

Direct premiums written and underwriting profitability improved dramatically in 2023.  Additionally, 2023 net written premium growth of 14.3 percent is the highest in over 15 years. These are great gains, but it’s important to remember that they come on top of results in 2022 that were the worst in recent years.

The number of drivers on the road and miles driven have returned to pre-pandemic levels – but the risky driving behaviors that led to high losses during the pandemic have not improved. More accidents with severe injuries and fatalities have driven up claims and losses in terms of both vehicle damage and liability, while attracting greater attorney involvement and legal system abuse. Compounding these conditions has been historically high inflation, which puts upward pressure on the material and labor costs, increasing the cost of claims.

Telematics technologies, which allow insurers to analyze risk profiles and tailor rates based on individual driving habits, offer the possibility of some relief. By providing feedback that can influence driving behavior, telematics has been shown to lower risk and help reduce the cost of insurance. An Insurance Research Council survey found 45 percent of drivers said they made significant safety-related changes in how they drove after participating in a telematics program. Another 35 percent said they made small changes.

But broader risk and economic factors are likely to keep premium rates high in most cases for the foreseeable future.

Legal Reforms Boost Florida Insurance Market; Premium Relief Will Require More Time

Legislative reforms put in place in 2022 and early 2023 to address legal system abuse and assignment-of-benefits claim fraud in Florida are beginning to help the state’s property/casualty insurance market recover from its crisis of recent years, according to a new Triple-I Issues Brief.

Claims-related litigation is down, the “depopulation” of the state’s insurer of last resort continues apace, and underwriting profitability – while still in negative territory – has improved significantly. Insurers also benefited from a relatively mild 2023 Atlantic hurricane season and a meaningful increase in investment income, posting a net profit for the first time in seven years.

But it’s important to remember that the crisis wasn’t created overnight and that it will take time for the reforms and other developments to be reflected in policyholder premiums. Homeowners should not expect their rates to decline in 2024, despite the improved industry performance, although some regional insurers have filed for small decreases.

“Rates may moderate some compared to prior years,” said Mark Friedlander, Triple-I director of corporate communications, “but rising replacement costs – combined with expected higher reinsurance costs for the June 1 renewals – are going to continue to drive average premiums upward in 2024.”

One factor keeping upward pressure on rates is fraud and legal system abuse. With only 15 percent of U.S. homeowners insurance claims, the state accounts for nearly 71 percent of the nation’s homeowners claim-related litigation, according to Florida’s Office of Insurance Regulation.

There are early signs that recent legislative reforms are beginning to bear fruit. In 2023, Florida’s defense and cost-containment expense (DCCE) ratio – a key measure of the impact of litigation – fell to 3.1, from 8.4 in 2022, according to S&P Global.

But the catastrophe-prone state faces a number of natural challenges, from a projected “extremely active” 2024 hurricane season to wildfires, flooding, and severe convective storms.

“Hurricanes get the most media attention,” Friedlander said, “but severe convective storms inflict comparable losses. And it only takes one bad hurricane season to wipe out the benefits of one or more mild years.”

Learn More:

2024 Wildfires Expected to Be Up From Last Year, But Still Below Average

CSU Researchers Project “Extremely Active” 2024 Hurricane Season

Lee County, Fla., Towns Could Lose NFIP Flood Insurance Discounts

FEMA Reauthorization Session Highlights Importance of Risk Transfer and Reduction

Triple-I “State of the Risk” Issues Brief: Hurricanes

Triple-I “State of the Risk” Issues Brief: Flood

Triple-I “State of the Risk” Issues Brief: Convective Storms

Triple-I “State of the Risk” Issues Brief: WildfireTriple-I “State of the Risk” Issues Brief: Legal System Abuse

Auto Insurers Contend With Rising Costs

By Max Dorfman, Research Writer, Triple-I

Auto premiums continue to increase as rising labor and material prices, alongside natural disasters, are forcing insurers to contend with significant losses.

As  Triple-I previously found in its January report, Insurance Economics and Underwriting Projections: A Forward View, “commercial auto underwriting losses continue, with a projected 2023 net combined ratio of 110.2, the highest since 2017,” according to Jason B. Kurtz, FCAS, MAAA, a Principal and Consulting Actuary at Milliman. Combined ratio is a standard measure of underwriting profitability, in which a result below 100 represents a profit and one above 100 represents a loss. 

Insurers are now having to increase rates in response to losses that are expected to keep rising.

“Nobody wants to have that higher-price bill,” said Sean Kevelighan, Triple-I’s CEO. However, he added companies “need to price insurance according to the risk level that’s out there.”

While inflation is partially to blame for these increases, natural disasters are also contributing to rising costs—and not only in traditionally disaster-prone areas like Florida and California.

As the overall P&C industry has struggled with severe convective storms, hurricanes, and other natural disasters, these losses have also been felt in commercial auto. In fact, 2023 witnessed around two dozen U.S. storms,  each with losses of around a billion dollars or more. This included major lightning, hail, and damaging winds around many areas of the of the U.S.

“While a lot of these storms don’t make national headlines, they do tend to be very costly at the local level,” says Tim Zawacki, principal research analyst for insurance at S&P Global Market Intelligence. “And the breadth of where these storms are occurring is something that I think the industry is quite concerned about.”

While disasters and economic inflation continue to roil commercial auto, so too does social inflation. As the Triple-I previously reported, “social inflation,” which is the presence of inflation in excess of economic inflation, has also significantly contributed to increases in commercial auto premiums.

Triple-I found that “from 2013 to 2022, increasing inflation drove losses up by between $35 billion and $44 billion, or between 19 percent and 24 percent. The pandemic brought significant change to commercial auto liability, decreasing claim frequency while increasing claim severity more dramatically.”

This increased claim severity is at least partially due to changing driving patterns since the pandemic, including distracted driving, which involves behaviors like cellphone use while behind the wheel. A Triple-I Issues Brief, Distracted Driving: State of the Risk, enumerated these concerns, which have undoubtedly played a role in rising commercial auto premiums.

Indeed, a confluence of issues are playing into rising auto premiums. While natural disasters are out of the control of insurance providers and their policyholders, other factors must be addressed to steady the cost of this line of insurance. This includes telematics and usage-based insurance, which has gained more acceptance since the pandemic.

Still, it is incumbent on insurers, policyholders, and policymakers to create a more sustainable market for auto insurance, working together to tackle the challenges of both climate risk and dangerous driving behavior.

Evolving Risks Demand Integrated Approaches

Even as the Smokehouse Creek Fire – the largest wildfire ever to burn across Texas – was declared “nearly contained” this week, the Texas A&M Service warned that conditions are such that the remaining blazes could spread and even more might break out.

“Today, the fire environment will support the potential for multiple, high impact, large wildfires that are highly resistant to control” in the Texas Panhandle, the service said.

This year’s historic Texas fires – like the state’s 2021 anomalous winter storms, California’s recent flooding after years of drought, and a surge in insured losses due to severe convective storms across the United States – underscore the variability of climate-related perils and the need for insurers to be able to adapt their underwriting and pricing to reflect this dynamic environment. It also highlights the importance of using advanced data capabilities to help risk managers better understand the sources and behaviors of these events in order to predict and prevent losses.

For example, Whisker Labs – a company whose advanced sensor network helps monitor home fire perils, as well as tracking faults in the U.S. power grid – recorded about 50 such faults in Texas ahead of the Smokehouse Creek fires.

Bob Marshall, Whisker Labs founder and chief executive, told the Wall Street Journal that evidence suggests Xcel Energy’s equipment was not durable enough to withstand the kind of extreme weather the nation and world increasingly face. Xcel – a major utility with operations in Texas and other states — has acknowledged that its power lines and equipment “appear to have been involved in an ignition of the Smokehouse Creek fire.”

“We know from many recent wildfires that the consequences of poor grid resilience can be catastrophic,” said Marshall, noting that his company’s sensor network recorded similar malfunctions in Maui before last year’s deadly blaze that ripped across the town of Lahaina.

Role of government

Government has a critical role to play in addressing the risk crisis. Modernizing building and land-use codes; revising statutes that facilitate fraud and legal system abuse that drive up claim costs; investing in infrastructure to reduce costly damage related to storms – these and other avenues exist for state and federal government to aid disaster mitigation and resilience.

Too often, however, the public discussion frames the current situation as an “insurance crisis” – confusing cause with effect. Legislators, spurred by calls from their constituents for lower premiums, often propose measures that would tend to worsen the problem because they fail to reflect the importance of accurately valuing risk when pricing coverage.

The federal “reinsurance” proposal put forth in January by U.S. Rep. Adam Schiff of California is a case in point. If enacted, it would dismantle the National Flood Insurance Program (NFIP) and create a “catastrophic property loss reinsurance program” that, among other things, would set coverage thresholds and dictate rating factors based on input from a board in which the insurance industry is only nominally represented.

U.S. Rep. Maxine Waters (also of California) has proposed a Wildfire Insurance Coverage Study Act to research issues around insurance availability and affordability in wildfire-prone communities. During  House Financial Services Committee deliberations, Waters compared current challenges in these communities to conditions related to flood risk that led to the establishment of NFIP in 1968. She said there is a precedent for the federal government to step in when there is a “private market failure.”

However, flood risk in 1968 and wildfire risk in 2024 could not be more different. Before FEMA established the NFIP, private insurers were generally unwilling to underwrite flood risk because the peril was considered too unpredictable. The rise of sophisticated computer modeling has since given private insurers much greater confidence covering flood (see chart).

In California, some insurers have begun rethinking their appetite for writing homeowners insurance – not because wildfire losses make properties in the state uninsurable but because policy and regulatory decisions made over 30 years ago have made it hard to write the coverage profitably. Specifically, Proposition 103 and its regulatory implementation have blocked the use of modeling to inform underwriting and pricing and restricted insurers’ ability to incorporate reinsurance costs into their premium pricing.

California’s Insurance Commissioner Ricardo Lara last year announced a Sustainable Insurance Strategy for the state that includes allowing insurers to use forward-looking risk models that prioritize wildfire safety and mitigation and include reinsurance costs into their pricing. It is reasonable to expect that Lara’s modernization plan will lead to insurers increasing their business in the state.

It’s understandable that California legislators are eager to act on climate risk, given their long history with drought, fire, landslides and more recent experience with flooding due to “atmospheric rivers.” But it’s important that any such measures be well thought out and not exacerbate existing problems.

Partners in resilience

Insurers have been addressing climate-related risks for decades, using advanced data and analytical tools to inform underwriting and pricing to ensure sufficient funds exist to pay claims. They also have a natural stake in predicting and preventing losses, rather than just continuing to assess and pay for mounting claims.

As such, they are ideal partners for businesses, communities, governments, and nonprofits – anyone with a stake in climate risk and resilience. Triple-I is engaged in numerous projects aimed at uniting diverse parties in this effort. If you represent an organization that is working to address the risk crisis and your efforts would benefit from involvement with the insurance industry, we’d love to hear from you. Please contact us with a brief description of your work and how the insurance industry might help.

Learn More:

Triple-I “State of the Risk” Issues Brief: Wildfire

Triple-I “State of the Risk” Issues Brief: Flood

Triple-I “Trends and Insights” Issues Brief: California’s Risk Crisis

Triple-I “Trends and Insights” Issues Brief: Risk-Based Pricing of Insurance

Stemming a Rising Tide: How Insurers Can Close the Flood Protection Gap

Tamping Down Wildfire Threats

New Illinois Bills
Would Harm — Not Help — Auto Policyholders

Two bills proposed in Illinois this year illustrate yet again the need for lawmakers to better understand how insurance works. Illinois HB 4767 and HB 4611 – like their 2023 predecessor, HB 2203 – would harm the very policyholders the measures aim to help by driving up the cost for insurers to write personal auto coverage in the state.

“These bills, while intended to address rising insurance costs, would have the opposite impact and likely harm consumers by reducing competition and increasing costs for Illinois drivers,” said a press release issued by the American Property Casualty Insurance Association, the Illinois Insurance Association, and the National Association of Mutual Insurance Companies. “Insurance rates are first and foremost a function of claims and their costs. Rather than working to help make roadways safer and reduce costs, these bills seek to change the state’s insurance rating law and prohibit the use of factors that are highly predictive of the risk of a future loss.”

The proposed laws would bar insurers from considering nondriving factors that are demonstrably predictive of claims when setting premium rates.

“Prohibiting highly accurate rating factors…disconnects price from the risk of future loss, which necessarily means high-risk drivers will pay less and lower-risk drivers will pay more than they otherwise would pay,” the release says. “Additionally, changing the rating law and factors used will not change the economics or crash statistics that are the primary drivers of the cost of insurance in the state.”

Triple-I agrees with the key concerns raised by the other trade organizations. As we have written previously, such legislation suggests a lack of understanding about risk-based pricing that is not isolated to Illinois legislators – indeed, similar proposals are submitted from time to time at state and federal levels.

What is risk-based pricing?

Simply put, risk-based pricing means offering different prices for the same level of coverage, based on risk factors specific to the insured person or property. If policies were not priced this way – if insurers had to come up with a one-size-fits-all price for auto coverage that didn’t consider vehicle type and use, where and how much the car will be driven, and so forth – lower-risk drivers would subsidize riskier ones. Risk-based pricing allows insurers to offer the lowest possible premiums to policyholders with the most favorable risk factors. Charging higher premiums to insure higher-risk policyholders enables insurers to underwrite a wider range of coverages, thus improving both availability and affordability of insurance.

This simple concept becomes complicated when actuarially sound rating factors intersect with other attributes in ways that can be perceived as unfairly discriminatory. For example, concerns have been raised about the use of credit-based insurance scores, geography, home ownership, and motor vehicle records in setting home and car insurance premium rates. Critics say this can lead to “proxy discrimination,” with people of color in urban neighborhoods sometimes charged more than their suburban neighbors for the same coverage.

The confusion is understandable, given the complex models used to assess and price risk and the socioeconomic dynamics involved. To navigate this complexity, insurers hire teams of actuaries and data scientists to quantify and differentiate among a range of risk variables while avoiding unfair discrimination.

While it may be hard for policyholders to believe factors like age, gender, and credit score have anything to do with their likelihood of filing claims, the charts below demonstrate clear correlations.

Policyholders have reasonable concerns about rising premium rates. It’s important for them and their legislators to understand that the current high-rate environment has nothing to do with the application of actuarially sound rating factors and everything to do with increasing insurer losses associated with higher frequency and severity of claims. Frequency and claims trends are driven by a wide range of causes – such as riskier driving behavior and legal system abuse – that warrant the attention of policymakers. Legislators would do well to explore ways to reduce risks, contain fraud other forms of legal system abuse, and improve resilience, rather than pursuing “solutions” to restrict pricing that will only make these problem worse.

Learn More

New Triple-I Issues Brief Takes a Deep Dive into Legal System Abuse

Illinois Bill Highlights Need for Education on Risk-Based Pricing of Insurance Coverage

How Proposition 103 Worsens Risk Crisis in California

Louisiana Still Least Affordable State for Personal Auto, Homeowners Insurance

IRC Outlines Florida’s Auto Insurance Affordability Problems

Education Can Overcome Doubts on Credit-Based Insurance Scores, IRC Survey Suggests

Colorado’s Life Insurance Data Rules Offer Glimpse of Future for P&C Writers

It’s Not an “Insurance Crisis” – It’s a Risk Crisis

Indiana Joins March Toward Disclosure of Third-Party Litigation Funding Deals

Litigation Funding Law Found Lacking in Transparency Department

Who’s Financing Legal System Abuse? Louisianans Need to Know

Legal system abuse in Louisiana costs every one of its citizens more than $1,100 annually, according to the American Tort Reform Association (ATRA). The state’s litigation environment was also cited by the Insurance Research Council (IRC) when reporting how Louisiana is the least affordable U.S. state for both auto and homeowners insurance. And then there’s shadowed Third-Party Litigation Financing (TPLF) continuing to sneak its way into this costly conundrum, with virtually no one understanding who’s behind it and what ulterior motives they may have.

Louisiana’s state lawmakers passed a measure (Senate Bill 196) last year aimed at reducing legal system abuse and litigation costs, but the measure was vetoed by former Governor John Bel Edwards.  The Litigation Financing Disclosure and Security Protection Act would have required plaintiffs to disclose whether their legal fees were being financed by a third-party with no obvious stake in the civil court case’s outcome, other than financial gain, or even worse foreign manipulation of America’s legal system.

Third-party litigation financing (TPLF), a multi-billion-dollar asset class which provides the financial resources for plaintiffs to file lawsuits, is growing exponentially because the U.S. legal system has increasingly become a place to secure huge paydays. Much like other shadowed banking tactics, financiers prefer to stay anonymous to avert regulatory scrutiny. However, beyond the financial gains, evidence is pointing toward foreign, even tax-free sovereign investments footing the bills.

Louisiana’s own U.S. House Speaker Mike Johnson (R-LA) is keenly aware of the potentially problematic foreign investment issues of TPLF, introducing federal legislation weeks before his recent election and being handed the leadership gavel. If passed into law, The Protecting Our Courts from Foreign Manipulation Act would stop foreign entities and governments from financing litigation in U.S. courts and shine a light on a shadowy part of this nation’s legal system. Similar legislation was introduced in the U.S. Senate and co-authored by another Louisianan, Senator John Kennedy (R-LA).

Much as Louisiana’s federal elected officials are working to address issues involving legal system abuse, such as TPLF, the State of Louisiana will benefit more directly by focusing on what’s happening in its own back yard. There is a simple formula to what combining increased climate risk with legal system abuse does – it creates a crisis in terms of affordability and availability of insurance.

The price of insurance is the effect of increased risk, not the cause. Louisiana’s high legal costs are driving up prices on virtually all goods and services for its citizens. Taking important steps toward litigation (and litigation financing) reform should be a top consideration in 2024.

A condensed version of this op-ed was published as a letter to the editor by Triple-I CEO Sean Kevelighan in February 2024 in The Baton Rouge Advocate and the New Orleans Times-Picayune.

Chubb Highlights Perils Keeping High-Net-Worth People Awake at Night

According to a recent Chubb survey of 800 high-net-worth individuals in the United States and Canada, 92 percent are concerned about the size of a verdict against them if they were a defendant in a liability case – yet only 36 percent have excess liability insurance.

When it comes to liability, Chubb says respondents are most worried about auto accidents, allegations of assault or harassment, and someone working in their home getting hurt. Damage awards are rising dramatically for a number of reasons, according to Laila Brabander, head of North American personal lines claims for Chubb.

“Economic damages historically were based on factors such as the extent of an injury and resultant medical expenses or past and future loss of income,” she said. “But we are seeing a rise in non-economic damages, such as pain and suffering and post-traumatic stress disorder, that overshadow actual economic losses.”

Brabander described a case in which a client at a yoga studio fell onto the person next to her and was sued by the injured party for pain and suffering.

“The same plaintiffs’ tactics to encourage large verdicts in commercial trucking, auto liability, product liability and medical malpractice suits are now being utilized to push for larger jury awards against our high-net-worth clients,” Brabander said.

Another factor driving up the cost of settlements is the third-party litigation funding, in which firms  provide funding to plaintiffs and their lawyers in exchange for a percentage of the settlement. These private-equity firms began in the commercial space and are now funding lawsuits against individuals and their insurers.

High-net-worth people also are deeply concerned about the threats posed to their homes by extreme weather and climate-related events. Much of this concern may be due to increased development in coastal areas vulnerable to tropical storms and flooding and in the wildland-urban interface – areas in which development places property into proximity with fire-prone wilderness (see links below).

Chubb’s findings are based on a survey of 800 wealthy individuals in the United States (650 respondents) and Canada (150 respondents). Respondents had investable assets of at least $500,000, with the majority reporting assets of $1.5 million to $50 million and 12 percent reporting assets of more than $50 million.

Learn More:

Triple-I Issues Brief – State of the Risk: Wildfire

Triple-I Issues Brief – State of the Risk: Hurricanes

What Is Third-Party Litigation Funding and How Does It Affect Insurance Pricing and Affordability?

Triple-I Town Hall Amplified Calls
to Attack Climate Risk

By Jeff Dunsavage, Senior Research Analyst, Triple-I

I’m pleased and proud to have been part of Triple-I’s Town Hall — “Attacking the Risk Crisis” — in Washington, D.C. In an intimate setting at the Mayflower Hotel on November 30, 120-plus attendees got to hear from experts representing insurance, government, academia, nonprofits, and other stakeholder groups on climate risk, what’s being done to address it, and what remains to be done.  

Triple-I’s first-ever Town Hall was designed as a logical step in its multi-disciplinary, action-oriented effort to change behavior to drive resilience. Capping a year in which headlines about “insurance crises” in several states garnered major media attention, Triple-I and its members and partners recognized the need for clarification.

“What we’re seeing is not an ‘insurance crisis’,” Triple-I CEO Sean Kevelighan told the standing-room-only audience. “We’re in the midst of a risk crisis. Rising insurance premium rates and availability difficulties are not the cause but a symptom of this crisis.”

Whisker Labs CEO Bob Marshall discusses innovation with moderator Jennifer Kyung, Vice President and Chief Underwriter at USAA.

While the insurance industry has a critical role to play and is uniquely well equipped to lead the attack, simply transferring risk is not enough. A recurring theme at the Town Hall was the need to shift from a focus on assessing and repairing damage to one of predicting and preventing losses.

Three moderated discussions – examining the nature of climate risk and its costs; highlighting the need of strategic innovation in mitigating those risks and building resilience; and exploring the role and impact of government policy – gave panelists the opportunity to share their insights with a diverse audience focused on collaborative action.

The agenda was:

Climate Risk Is Spiraling: What Can Be Done?

Moderator: David Wessel, Senior Fellow and Director at the Brookings Institution and former Economics Editor for The Wall Street Journal.

Panelists:

Dr. Philip Klotzbach, Colorado State University, researcher and Triple-I non-resident scholar.

Dan Kaniewski, Managing Director, Public Sector at Marsh McLennan, Former FEMA Deputy Administrator.

Jacqueline Higgins, Head, North America & Senior Vice President, Public Sector Solutions, Swiss Re

Jim Boccher, Chief Development Officer, ServiceMaster.

Jeff Huebner, Chief Risk Officer, CSAA.

Innovation, High- and Low-Tech: How Insurers Are Driving Solutions

Moderator: Jennifer Kyung, VP, Chief Underwriter, USAA.

Panelists:

Partha Srinivasa, EVP, CIO, Erie Insurance.

Sam Krishnamurthy, CTO, Digital Solutions, Crawford.

Bob Marshall, CEO, Whisker Labs.

Stephen DiCenso, Principal,Milliman.

Charlie Sidoti, Executive Director, InnSure.

Outdated Regs to Legal System Abuse: It Will Take Villages to Fix This

Moderator: Zach Warmbrodt, financial services editor, Politico.

Panelists:

Parr Schoolman, SVP and Chief Risk Officer, Allstate.

Tim Judge, SVP, Head Modeler, Chief Climate Officer, Fannie Mae.

Dan Coates, Deputy Director, DRS, Federal Housing Finance Agency.

Fred Karlinsky, Co-Chair of Greenberg Traurig’s Global Insurance Regulatory & Transactions Practice Group.

Panelists and participants alike appreciated the compact, action-focused, conversational nature of the single-afternoon event, as well as the opportunity to discuss areas in which their diverse industry- or sector-specific priorities and efforts overlapped.

If you weren’t able to join us in Washington, don’t worry. In his closing remarks, Kevelighan announced plans to take the program on the road with a local and regional focus, so stay tuned. You can contact us if you’re interested in participating in future Town Halls or other Triple-I events. You also can join the “Attacking the Risk Crisis” LinkedIn Group to be part of the ongoing conversation.

Louisiana Litigation Funding Reform Vetoed; AOB Ban, Insurer Incentive Boost Make It Into Law

By Max Dorfman, Research Writer, Triple-I

Louisiana lawmakers passed several bills to reinforce the state’s weakened property insurance market during the recently completed 2023 legislative session. These included one that would have required parties to a lawsuit to disclose third-party litigation funding agreements within 60 days of a filing. However, that legislation was vetoed by Gov. John Bel Edwards, and lawmakers do not plan to override it.

Also included was a broad ban on assignment of benefits (AOB), the practice by which policyholders sign over to a third party – a contractor, attorney, or public adjuster – their right to bill an insurance company directly for repairs or other services. While this is a common practice across the country, in some states – notably, Florida and Louisiana – it has been a source of extensive claim fraud.  

The Louisiana property insurance market has been significantly weakened since the state was hit by record hurricane activity during the 2020/2021 seasons. Indeed, 11 insurers that write homeowners coverage in Louisiana were declared insolvent between July 2021 and February 2023. Additionally, 12 insurers withdrew from the state and 50 companies stopped writing new business in hurricane-prone parishes, creating a capacity crisis.

A persistent problem

Legal system abuse has been a persistent issue in Louisiana for some time. The state’s “onerous bad faith laws contribute significantly to inflated claims payments and awards,” according to a joint paper published by the American Property Casualty Insurance Association (APCIA), the Reinsurance Association of America (RAA), and the Association of Bermuda Insurers and Reinsurers (ABIR).

These problems were highlighted in February 2023, when Insurance Commissioner Jim Donelon issued a cease-and-desist order against a Houston-based law firm, accusing it of fraud involving potentially hundreds of hurricane-related claims in his state. According to Donelon, the firm filed more than 1,500 Hurricane Laura claim lawsuits in Louisiana over the span of three months in 2022, prior to the deadline to file suits over the Category 4 major hurricane that struck the state in 2020.

“The size and scope of McClenny, Moseley & Associates’ (MM&A) illegal insurance scheme is like nothing I’ve seen before,” Donelon said in a press release. “It’s rare for the department to issue regulatory actions against entities we don’t regulate, but in this case, the order is necessary to protect policyholders from the firm’s fraudulent insurance activity.”

According to reporting by the Times Picayune/New Orleans Advocate, an investigation by the Louisiana Department of Insurance found the Houston-based law firm engaged in insurance fraud and unfair trade practices through Alabama-based Apex Roofing and Restoration and has faced accusations of criminal behavior and mounting sanctions.  MM&A has since shut down its operations in Louisiana.

Litigation funding reform vetoed

Third-party litigation funding occurs when investors finance lawsuits against large companies in return for a share in the settlement. Funding of lawsuits by international hedge funds and other financial third parties – with no stake in the outcome other than a share of the settlement – has become a $17 billion global industry, according to Swiss Re. Law firm Brown Rudnick sees the industry as even larger, at $39 billion global industry in 2019, according to Bloomberg.

Some states have considered mandating greater transparency around the practice, and Montana in May  approved legislation requiring certain disclosures in litigation financing. Louisiana’s Senate Bill 196 would have required parties to a lawsuit to disclose such arrangements within 60 days of filing a suit.

Insurer incentive grants boosted

The Louisiana Legislature also agreed to allocate an extra $10 million for the previously approved insurer incentive program, bringing to $55 million the amount available to insurers that agree to enter the state’s home insurance market to offer new coverage.

Also included in the bills is $30 million for a long-term grant program to help homeowners fortify their homes against hurricanes – a 50 percent increase over the amount Donelon discussed when planning for the legislative session.

Indiana Joins March Toward Disclosureof Third-PartyLitigation Funding Deals

Indiana has become the latest state to require disclosure of third-party litigation funding in civil lawsuits.

The legislation – signed into law by Gov. Eric Holcomb on April 20 – requires that each party in a civil proceeding and each insurer that has a duty to defend a party in court be notified of any litigation funding agreement before the case begins.

The U.S. Government Accountability Office defines third-party litigation funding as “an arrangement in which a funder who is not a party to the lawsuit agrees to help fund it.” Global multi-billion-dollar investing firms have made third-party litigation funding their sole or primary business and are experiencing strong growth.

As the market lacks transparency, estimates on its size can vary but, according to Swiss Re, more than half of the $17 billion invested into litigation funding globally in 2020 was deployed in the United States. Swiss Re estimates the market will be as big as $30 billion by 2028. Meanwhile, affordability of insurance coverage – especially for commercial auto products – has come under threat from increases in litigation and claim costs.

Several states have preceded Indiana in seeking to increase transparency around third-party litigation funding.  In 2018, New York enacted legislation that added Section 489 to the New York Judiciary Law. This law mandates the disclosure of litigation financing agreements in class action lawsuits and certain aggregate settlement cases. In the same year, Wisconsin instituted a statutory provision requiring the disclosure of litigation funding arrangements. West Virginia followed suit in 2019.

In 2021, the U.S. District Court for the District of New Jersey amended its rules to require disclosures about third-party litigation funding in cases before the court. The Northern District of California imposed a similar rule in 2017 for class, mass, and collective actions throughout the district.

In 2022, Illinois passed the Consumer Legal Funding Act (S.B. 1099), which implemented several statutory provisions regulating aspects of third-party litigation funding, but it doesn’t  address disclosure of these arrangements or information about the existence of a funding arrangement to defendants as part of claim litigation.

Litigation funding not only drives up costs – it introduces motives beyond achieving just results to the judicial process. This is why the practice was once widely prohibited in the United States. As these bans have been eroded in recent decades, litigation funding has grown, spread, and morphed into forms that can cost plaintiffs more in interest than they might otherwise gain in a settlement. In fact, it can encourage lengthier litigation to the detriment of all involved – except for the funders and the plaintiff attorneys.Top of Form

The National Association of Mutual Insurance Companies (NAMIC) applauded Indiana’s move.

“Litigation funding is a multi-billion-dollar industry that for years has driven up the length and cost of civil cases,” said Neil Alldredge, president and chief executive officer of NAMIC. “While there is much more that needs to be done to address this issue, this law represents important progress.”

Revealing litigation funding from a third party before commencement of a lawsuit “will help thwart opportunistic investors from promoting return on investment over client interests and siphoning value from clients away from policyholders, claimants and insurers,” Alldredge said.

Learn More:

What Is Third-Party Litigation Funding and How Does It Affect Insurance Pricing and Affordability?

U.S. Study of 3rd-Party Litigation Funding Cites Market Growth, Scarce Transparency

IRC Study: Public Perceives Impact of Litigation on Auto Insurance Claims

Litigation-Funding Law Found Lacking in Transparency Department

A Piecemeal Approach Toward Transparency in Litigation Finance

Lawyers’ Group Approves Best Practices to Guide Litigation Funding