Category Archives: Legal Environment

Health & Safety, Legal Environment

Evolving Conceptions of Gun Liability

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By Max Dorfman, Research Writer, Triple-I

Two recent developments – one the result of litigation, the other imposed by statute – warrant insurers’ attention, as they reflect shifts in legal thinking on potential firearms-related liability.

Nearly 10 years after the Sandy Hook Elementary School massacre in Connecticut, during which 20 first graders and six staff members were killed, a federal bankruptcy court in Alabama agreed to insurance payments totaling $73 million from gun manufacturer Remington Arms. The payment will be dispersed to the victims’ families who participated in the lawsuit.

This is the first time a gunmaker has been held accountable for a mass shooting in the United States. The ruling could force insurers to become more prudent in how they cover these companies. The risks of such settlements must be considered, particularly as the political and legal landscape continues to evolve.

The case revolved around the notion that Remington negligently sold civilian consumers assault-style rifles, which the plaintiffs argued are only suitable for use by military and law enforcement personnel. This, they argued, breached the Connecticut Unfair Trade Practices Act by the sale or wrongful marketing of the rifle.

Remington, which filed for bankruptcy protection in July 2020, contested that the plaintiffs’ legal arguments don’t apply under Connecticut law and invoked a federal statute, called the Protection of Lawful Commerce in Arms Act, which generally immunizes firearms manufacturers, distributors, and dealers from civil liability for crimes committed by third parties using their weapons.

The plaintiffs were able to demonstrate that the Remington used an “aggressive, multi-media campaign that pushed sales of AR-15s through product placement in first-person shooter video games and by touting the AR-15’s effectiveness as a killing machine,” according Josh Koskoff, lead counsel and partner at the Connecticut law firm Koskoff, Koskoff & Bieder, which represented the Sandy Hook families. 

San Jose takes notice

San Jose, Calif., recently approved the nation’s first mandatory gun liability insurance requirement. The news comes four months after a mass shooting on a light rail in the city, which resulted in nine deaths.

San Jose Mayor Sam Liccardo said gun liability insurance will be similar to car insurance, promoting responsible gun ownership, storage, and use, with the fees for possession of firearms potentially hovering between $25 and $30 a year.

Though this insurance cannot legally cover deliberate harm caused by a gun owner, it nonetheless marks a novel way to confront potential mass shootings. Second Amendment activists in San Jose contest the mandatory insurance, stating that this will primarily affect lawful gun owners and not criminals.

While the San Jose measure might remain an anomaly, it reflects a shift in thinking on firearms-related liability. Most insurers do not offer stand-alone gun liability coverage, and no other municipalities appear to be in the process of requiring it. But shifting public sentiment could lead to other ways to address gun violence through the courts and by statute.

Auto Insurance, Insurers and the Economy, Legal Environment

Triple-I, CAS Quantify Social Inflation’s Impact on Commercial Auto

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The phenomenon known as “social inflation” accounted for $20 billion in commercial auto liability claims between 2010 and 2019, a new study by Triple-I and the Casualty Actuarial Society (CAS) finds.

Social inflation isn’t a new term. Warren Buffett used it in the 1970s to describe “a broadening definition by society and juries of what is covered by insurance policies.” It has since become common parlance among insurers and risk managers for a range of factors causing losses in certain lines to rise faster than general inflation would predict. These include:

  • Class-action lawsuits;
  • Growing awards from sympathetic juries;
  • Third-party litigation funding, in which investors finance lawsuits against large companies in return for a share in the settlement; and
  • Rollbacks of tort reforms that were intended to control costs in the wake of the 1980s “liability crisis”.

Hard to measure, important to understand

Reliably quantifying social inflation for rating and reserving purposes is hard because it’s just one of many factors pressuring pricing. The paper, authored by actuaries James Lynch and David Moore, uses “standard actuarial metrics and visualizations to demonstrate how actuarial insights can be presented to an interested lay audience, such as lawmakers, regulators, the news media, and the public.”

This is an important contribution to the public policy discussion because actuaries are well positioned to spot shifts in loss severity.

Separately, Triple-I has published an “Issues Brief” that succinctly describes the drivers of social inflation, as well as its potential impact on insurers, policyholders, and the economy and society.

“More frequent suits and bigger awards can lead to increased insurance costs as rates are adjusted to reflect the changing risk profile – or even to insurers ceasing to write particular forms of coverage,” the brief says. “Higher premiums tend to be passed along to consumers in the form of higher prices and, in extreme cases, can ripple through the entire economy, creating conditions analogous to the 1980s liability crisis.”

In the 1980s, liability claims were pushing the U.S. insurance industry to the brink of collapse. Tort reforms – ranging from capping non-economic damages and limiting contingency fees to specifying statutes of limitations and eliminating “joint and several” liability – were enacted, and losses declined. It has been argued that legislative efforts to roll back these reforms in many states have contributed to social inflation, but the research is not conclusive.

Legal Environment

California Takes Top Spot on ATRA’s “Hellholes” List; Pennsylvania Falls to No. 4

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California has reclaimed its top spot on the “Judicial Hellholes” list maintained by the American Tort Reform Association (ATRA).

“California’s appellate courts are the first to hold e-commerce companies strictly liable for products sold on their sites,” ATRA writes in its 2021-2022 report. “Baseless Prop-65 lawsuits thrive in courts, and the volume of litigation continues to skyrocket.”

The report also points to what it calls “frivolous” Private Attorney General Act (PAGA) and Americans with Disability Act (ADA) lawsuits and says the state’s Lemon Law “provides windfalls for plaintiffs’ lawyers.”

New York State is a close number two, ATRA says, “as the two jurisdictions battle it out for the most ‘no-injury’ class action lawsuits and the most claims under the ADA.” It adds that New York “is a preferred jurisdiction for asbestos litigation and, like California, the legislature ignores the need for reform and continues to push a liability-expanding agenda.”

Georgia has risen to number three on the basis of what ATRA calls the “significant deterioration” of its civil justice system.

“The Georgia Supreme Court eliminated apportionment of fault in certain cases and expanded bad faith liability for insurers,” ATRA says. “It also adopted an expansive view of jurisdiction of its courts over out-of-state businesses. Nuclear verdicts are bogging down business, and third-party litigation financing is playing an increasing role in litigation.”

Pennsylvania fell from number one to number four, but ATRA says this “was in no way a reflection of progress or improvements made in the state, but rather indicative of the number of issues plaguing other jurisdictions.”

ATRA is a Washington, D.C.-based group formed in 1986 and dedicated to tort and liability reform. It has published the Judicial Hellholes report since 2002. 

Legal Environment

Runaway Litigation Drives Up Costs, Premiums,JIF Panelists Say

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Credit for all photos in this post: Don Pollard

By Loretta Worters, Vice President, Media Relations, Triple-I

Costs associated with increasing lawsuits and “nuclear verdicts” continue to challenge insurers’ capacity to provide coverage, according to panelists at Triple-I’s Joint Industry Forum (JIF).

“Excessive growth in insurance settlements is top of mind for many,” said Frank Tomasello, J.D., executive director of The Institutes Griffith Insurance Education Foundation, who moderated the JIF Runaway Litigation panel. The panelists explored definitional issues and controversies surrounding this phenomenon and assessed its impact with a look ahead to what is needed to inform next steps.

“Certain observers dismiss runaway litigation, suggesting it’s a ‘phantom threat’ used to justify premium increases,” Tomasello said.  “Industry leaders, however, point to data evidencing its existence in various lines of business, including commercial auto liability.”

Michael Menapace, an attorney with Wiggin and Dana LLP and a Triple-I Non-resident Scholar, noted that insurers’ claims expenses are increasing faster than inflation “due to a combination of increased litigation defense costs, higher percentage of plaintiff verdicts, and increased jury awards.” 

Sherman (Tiger) Joyce, president of the American Tort Reform Association (ATRA), said the analysis should examine where litigation is having the greatest impact on expenses, whether it’s a line of business, type of litigation, or a geographic region.  “Where is it real, where is it not?  If it is real, why are defense costs up?  Why are plaintiffs winning more?” 

To offer guidance in this regard, the ATR Foundation publishes each year its list of Judicial Hellholes.

Rick Merrill, founder and CEO of Gavelytics, a litigation analytics software firm, said his company is well positioned to help answer these questions.

“We can’t do as well as insurers, who can speak to the cost side,” Merrill said. “They are better positioned to determine price; but where we can add value is in trying to understand why this has occurred.”

Merrill cautioned against reliance on anecdotes.

“The much more modern approach to litigation analysis is measuring things in an empirical fashion,” he said. “Understanding whether or not the rates of trial wins are up or down, understanding whether the grant rates of certain key motions are up or down, those are things we do, and that adds a lot to the conversation.”

Workers comp and commercial auto

Menapace noted that there are increased costs, particularly in workers compensation and commercial auto — specifically, trucking. 

“After COVID started, we had more than a dozen states who implemented as a matter of policy a presumption that if a worker got sick with COVID, that it happened on the job,” Menapace explained. “The burden then shifted to the defendant/insurer to disprove that this happened. There was a public policy decision made in those states.”

In commercial auto, Menapace said, “We’re seeing in trucking and elsewhere the increased use of cameras – body cameras, cameras out in the public, dashboard cameras facing out or many trucking institutions now have cameras facing into the cab. Think about how powerful that might be in a court when, moments before the trucking accident, we now have on video the trucker who was checking Facebook, eating, or dozing off.

Reptile theory and litigation funding

Menapace also mentioned “reptile theory,” a popular plaintiff tactic in personal injury suits. Introduced in Reptile: the 2009 Manual of the Plaintiff’s Revolution by David Ball and Don Keenan, it started a movement that has evolved into seminars, retreats and law review articles aimed at understanding and exploiting the primitive, emotion-driven “reptile” portion of jurors’ brains.

Litigation funding – in which third-party investors assume all or part of the cost of a lawsuit exchange for an agreed-upon percentage of the settlement – is a growing issue that increases defense costs and the length of dispute, the experts said.  According to a recent Bloomberg article, hedge funds and others “are piling billions into the outcome of high stakes court cases at a faster rate than ever before,” turning litigation funding into a $39 billion global industry in 2019. The panelists concurred that requiring disclosure of third-party funding of litigation would be a great benefit for the industry if it were to happen. 

Learn More About Runaway Litigation on the Triple-I Blog

What Can Be Done About Nuclear Verdicts?

Litigation Funding and Social Inflation: What’s the Connection?

Litigation Funding Rises as Common-Law Bans Are Eroded by Courts

Legal Environment

What Can Be Done About Nuclear Verdicts?

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“Nuclear verdicts” are putting a strain on corporations and their insurers, an insurance executive writes in this month’s Best’s Review. Paul Horgan, head of U.S. national accounts for Zurich, says the insurance industry is acting to address this trend but can’t do it alone.

The phrase refers to “exceptionally high” jury awards that, Horgan says, “exceed what most would consider reasonable.” He adds that such verdicts are becoming more common “and are being driven, in part, by aggressive and effective plaintiff’s attorneys.”

Commercial trucking is one of the most industries most heavily affected by nuclear verdicts. When considering verdicts of more than $1 million, the average size of awards related to trucking incidents increased nearly 1,000 percent from 2010 to 2018, according to a study by the American Transportation Research Institute (ATRI).  

One piece of the picture

Nuclear verdicts are just one part of a larger trend that includes increases in class action suits and “litigation funding,” in which third-party investors assume all or part of the cost of a lawsuit in exchange for an agreed-upon percentage of the settlement. According to Bloomberg, hedge funds, private-equity, and sovereign wealth funds “are piling billions into the outcome of high stakes court cases at a faster rate than ever before,” turning litigation funding into a $39 billion global industry in 2019.

These and other aspects of runaway litigation are considered major contributors to “social inflation” – a common term for claims and losses rising faster than general inflation and leading to more expensive insurance for businesses and consumers.

“Just a few years ago,” Horgan writes, “the top verdicts in the United States were measured in the millions of dollars…. Today, it’s in the billions.” He adds that the median settlement of the top 50 U.S. verdicts rose from $28 million in 2014 to $58 million in 2018.

“Without a strong defense,” Horgan writes, “nuclear verdicts will become the norm, and the fallout will be devastating.”

Defense counsel have begun employing some of the same techniques as plaintiffs’ attorneys, according to Horgan, but more is needed to address runaway litigation. He says it’s “critical for corporations to exert pressure on their state and federal legislators to put an end to this.”

Learn More at JIF

At Triple-I’s Joint Industry Forum in New York City this week, a panel is being dedicated to the topic of runaway litigation, its impact on claims and losses, and what can be done about it. Moderated by Frank Tomasello, executive director of The Institutes Griffith Insurance Education Foundation, the panel features the following participants:

There’s still time to register by December 1, 2021 (11:59 p.m.).

Health & Safety, Legal Environment

With Violent Crime Up, Negligent SecurityIs a Looming Hazard

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By Maria Sassian, Triple-I Consultant

While property crime (except for car theft) has been on the decline, the United States has been experiencing a worrying surge in violent crime since the start of the pandemic.

Murder and non-negligent manslaughter rose 29.4 percent in 2020 from 2019, the biggest rise since recordkeeping began in 1960, according to F.B.I. data.  The trend continued in the first half of 2021, when the number of homicides increased 16 percent from the same period in 2020 and 42 percent compared to the same period in 2019. Aggravated assault increased 9 percent, and gun assaults were up 5 percent, according to the Council on Criminal Justice.

Crime analysts have suggested several possible contributing factors, including the many strains brought on by the pandemic; a pullback in enforcement by the police; and a spike in firearm purchases.

Negligent security

When a violent crime occurs on a business or residential property, the victims often can hold the owners liable for damages stemming from “negligent security.”  Negligent security cases are based on the obligation (“duty of care”) of a property owner or tenant to provide a safe environment for their customers, residents, or visitors. According to PropertyCasualty 360, such cases are a “significant and growing subset of premises liability.”

Examples of negligent security include:

  • Poor lighting,
  • Lack of security guards or guards who fail to do their job properly, and
  • Insufficient locks or other security devices.

The duty of care borne by property owners can vary based on the types of businesses they operate. A shopping mall with limited hours may have a lower duty of care than an assisted living facility charged with caring for vulnerable residents 24/7.

Negligent security cases incur significant investigation and settlement costs, though few make it to trial.  Cases that do go to trial can get widespread media coverage, and juries, sympathetic to violent-crime victims, can hand down massive awards.  In Georgia, for example, lawsuits stemming from criminal attacks in CVS and Kroger parking lots ended in verdicts of $43 million in Fulton County and $69.6 million in DeKalb County, respectively, in 2019. CVS and Kroger were held liable on the basis that they should have had more security.

Risk management

Property and business owners can prepare to demonstrate that they have taken reasonable precautions by making sure crime prevention practices are in place. Steps that can be taken include:

  • Have on-site security staff and make sure they follow up-to-date policies and procedures,
  • Make sure security equipment is up-to-date and working,
  • Make sure all staff is trained in security and in how to handle potentially dangerous situations,
  • Perform regular inspections on lighting, stairs, windows, and doors,
  • Maintain landscaping properly, and
  • Investigate all threats of criminal activity.

The role of insurance

Negligent security is part of the broader coverage of premises liability. Whether you are covered or not depends on your individual policy. If negligent security is excluded, it should plainly say so in the policy. If the policy language  is ambiguous, courts may favor the policyholder in a coverage dispute.

When you’re covered, your insurance underwriting professional will work with you to make sure recognized crime prevention practices are being followed on the property. That way you will be prepared to prove that you followed reasonable precautions if a violent crime occurs.

If a violent crime does happen and a negligent security insurance claim is filed, the insurer will want to respond quickly to investigate the security measures that were in place, retain legal counsel, and engage a premises security expert. Delays in developing a defense plan can adversely affect the outcome and cost of the case. It’s important for the policyholder to have an emergency call list in the event of a crime and to have someone from the claims group on that list.

An insurance adjuster can help to resolve complex claims quickly, as well as help property owners prevent future incidents. The adjuster might dig into a property’s history to illuminate what’s considered “normal” and what activities owners should reasonably have anticipated. A history of break-ins or muggings, for example, could establish that the owner knew about the risk and, therefore, should have strengthened security measures in response, according to Engle Martin & Associates, a loss-adjustment and claims-management provider.

The adjuster may also look at the property owners’ social media and online reviews for previous complaints about security.  If the owners issued warnings about criminal activity and shared their attempts to improve security, for example, that can bolster their defense, said Natalie Prescott, casualty claims manager at Engle Martin.

Taking appropriate security measures and understanding your insurance coverage will go a long way toward helping you be prepared if a violent crime happens on your property.  Of course, you should seek guidance from your insurance or legal professionals about your specific circumstances.

Business Risk, Emerging Risks, Legal Environment, Market Conditions

Litigation Fundingand Social Inflation: What’s the Connection?

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Second post in a series on 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.

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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. 

Previous in the series

Social inflation: Eating the elephant in the room

More from the Triple-I Blog

What is social inflation? What can insurers do about it? 

Litigation funding rises as common-law bans are eroded by courts 

Lawyers’ group approves best practices to guide litigation funding 

Social inflation and COVID-19 

IRC study: Social inflation is real, and it hurts consumers, businesses

Florida dropped from 2020 “Judicial Hellholes” list

Florida’s AOB crisis: A social-inflation microcosm 

Auto Insurance, Business Insurance, Business Risk, Emerging Risks, Insurers and the Economy, Legal Environment

Social Inflation:Eating the ElephantIn the Room

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  • It has been said the best way to eat an elephant is “one bite at a time.”
    Social inflation is an elephantine topic, so we’re launching a series of blog posts dedicated to each piece of it in turn, starting with litigation funding.

“Social inflation” refers to rising litigation costs and their impact on insurers’ claim payouts, loss ratios and, ultimately, how much policyholders pay for coverage. It’s an important issue to understand because – while the tactics associated with it typically affect businesses perceived as having “deep pockets” – social inflation has implications for individuals and for businesses of all sizes.

The insurance lines most affected are commercial auto, professional liability, product liability, and directors and officers liability. There also is evidence that private-passenger car insurance is beginning to be affected. As increased litigation costs drive up premiums, those increases tend to be passed along to consumers and can stifle investment in innovation that could create jobs and otherwise benefit the economy.

For more on this, see: Social Inflation: Evidence and Impact on Property-Casualty Insurance by the Insurance Research Council (IRC).]

Much of what is discussed and published on the topic has been more anecdotal than data based. Reliably quantifying social inflation for rating and reserving purposes is hard because it’s just one of many factors pressuring pricing. We’ve found that the most meaningful way to think about social inflation and its components is to compare their impact on claims losses over time with growth in inflation measures like the Consumer Price Index (CPI).

Litigation Funding

It’s been said that the best way to eat an elephant is “one bite at a time.” Because of the diversity and complexity of social inflation’s causes and effects, we’re launching a series of blog posts dedicated to each one in turn. The first set of posts will look closely at litigation funding: the practice of third parties financing lawsuits in exchange for a share of any funds the plaintiffs might receive.

Litigation funding was once widely prohibited, but as bans have been eroded in recent decades, the practice has grown, spread, and become a contributor to social inflation.

[See: Litigation Funding Rises as Common-Law Bans Are Eroded by Courts on the Triple-I Blog]                                                                                                  

Litigation funding seemed a good place to begin this series because it’s a distinct legal strategy with a clear history that doesn’t involve a lot of the sociological subtleties inherent in other aspects of social inflation. We’ll look the emergence of the practice, how it came to the United States from abroad, and track its evolution with that of social inflation. We’ll also discuss the current state of litigation finance, along with ethical concerns that have been raised around it within the legal community.

This series will be led by IRC Vice President David Corum with support from our partners at The Institutes and input from our members, as well as experts beyond the insurance industry. As befits any discussion of a complex topic, we look forward to your reactions and insights.

More from the Triple-I Blog

What is social inflation? What can insurers do about it? (January 25, 2021)

Litigation funding rises as common-law bans are eroded by courts (December 29, 2020)

Lawyers’ group approves best practices to guide litigation funding (August 19, 2020)

Social inflation and COVID-19 (July 6, 2020)

IRC study: Social inflation is real, and it hurts consumers, businesses (June 2, 2020)

Florida dropped from 2020 “Judicial Hellholes” list (January 14, 2020)

Florida’s AOB crisis: A social-inflation microcosm (November 8, 2019)

Auto Insurance, Health & Safety, Highway Safety, Legal Environment

Studies: Car Crashes Rise as Recreational Cannabis Becomes Legal in States

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Connecticut this week became the latest state to legalize recreational use of marijuana, and more are expected to follow.

The increased marijuana use that accompanies legalization has raised concerns about road safety.

Researchers at Insurance Institute for Highway Safety (IIHS) and the Highway Loss Data Institute (HLDI) since 2014 have been examining how legalization has affected crash rates and insurance claims, and evidence is emerging that crash rates go up when states legalize recreational use and retail sales of marijuana.

The most recent of these studies, released on June 17 by the IIHS, shows that injury and fatal crash rates in California, Colorado, Nevada, Oregon, and Washington jumped in the months following relaxation of marijuana laws in each state. The five states experienced a 6 percent increase in injury crash rates and a 4 percent increase in fatal crash rates, compared with other Western states where recreational marijuana use was illegal during the study period.

Only the increase in injury crash rates was statistically significant.

“Our latest research makes it clear that legalizing marijuana for recreational use does increase overall crash rates,” says IIHS-HLDI President David Harkey. “That’s obviously something policymakers and safety professionals will need to address as more states move to liberalize their laws — even if the way marijuana affects crash risk for individual drivers remains uncertain.”

Insurance records show a similar increase in claims under collision coverage, which pays for damage to an at-fault, insured driver’s own vehicle, according to HLDI’s latest analysis. The legalization of retail sales in Colorado, Nevada, Oregon, and Washington was associated with a 4 percent increase in collision claim frequency compared with the other Western states from 2012 to 2019. That’s down slightly from the 6 percent increase HLDI identified in a previous study, which covered 2012  to 2018.

While the evidence that crash rates have increased in states that legalized marijuana is mounting, it appears that further study is needed to determine whether marijuana use alone is responsible. Preliminary data suggests people who use alcohol and marijuana together are accountable for most of the crashes.

Another factor may be that marijuana users in counties that do not allow retail sales are driving to counties that do. The increased travel could lead to more crashes, even if their crash risk per mile traveled is no higher than that of other drivers.

Auto Insurance, Business Insurance, Business Risk, Emerging Risks, Legal Environment, Regulation, Workers Compensation

Cannabis Industry Prospects Brighten;Risks, Challenges Remain

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The future looks brighter every day for the cannabis industry.

From recent findings that cannabis components may lead to treatment or even prevention of coronavirus infection in lung cells to yesterday’s vote by the House of Representatives in favor of the Safe Banking Act, barricades to full legalization just keep falling.

This isn’t the first time the act – which would protect banks from federal penalties for doing business with cannabis-related businesses that comply with state laws – has made it through the House. It was first introduced in March 2019, and the House has approved it three times, only to have the Senate Banking Committee block its progress. But with the current Democrat majority, apparent bipartisan support, and growing public and state-government support for cannabis legalization, the fourth time just might be the charm.

Similar federal “safe harbor” legislation for the insurance industry – the Clarifying Law Around Insurance of Marijuana Act (CLAIM Act) – was introduced last month.

“More optimism”

The Drug Enforcement Agency characterizes cannabis as a Schedule I drug, defined as having “no currently accepted medical use and a high potential for abuse.” Without legislative change, banks and insurers can’t do business with business without risking running afoul of federal drug laws.

“There’s more optimism now and an assumption that they’re going to work to pass some of these bills that have been in motion for a while now, but never hit the point of actually moving forward,” said Max Meade, cannabis insurance advisor at Brown & Brown Insurance. “I’m also seeing more conversations around working to bundle some of these bills that they’ve been talking about and do a larger cannabis reform.”

As states continue to decriminalize marijuana to different degrees, one of the biggest issues facing cannabis businesses is the 280E federal tax burden, which means cannabis businesses can’t expense the normal cost of goods or anything a normal business can during the course of operation, from utilities to payroll and rent. This means marijuana businesses often pay federal income tax rates in the 65–75 percent range, compared to 15-30 percent  for other businesses. They are taxed on their gross revenues, unlike all regular businesses, which pay tax only on income after their expenses.

The Small Business Tax Equity Act would provide an exception into the Internal Revenue Code to let cannabis operators – as long as they’re in compliance with state laws – make the same deductions as any other business.

Easier to operate

Passage of these laws would make it easier for cannabis-related businesses to operate. The CLAIM Act would let these businesses obtain insurance to cover the same risks of theft, damage, injury, loss, and liability as all other businesses.  

“There are upwards of 30 surplus lines carriers and several managing general underwriters that currently service the cannabis industry across many lines of coverage,” the National Law Review reports. “There also is a small handful of admitted carriers that operate in California, and most recently in Arizona.”

While market capacity for property, commercial general liability, product liability and workers’ compensation coverage has expanded – these policies remain more expensive than the same coverage purchased by similar companies in other industries. Passage of the CLAIM Act would open the doors for more insurers and should bring the cost of insuring marijuana-related businesses much less expensive.

THC persistence a challenge

But challenges will remain – particularly with respect to the workplace. When marijuana was illegal under both state and federal law, employers would typically prohibit employees or employment candidates from using marijuana off-duty as a condition of employment. But as states have begun to permit medical marijuana, things have gotten a bit hazier.

No state requires companies to accommodate on-duty marijuana use. As with recreational marijuana, no state that permits medical marijuana requires employers to accommodate on-duty marijuana use, possession, or impairment. States will often explicitly state that medical marijuana laws don’t affect an employer’s drug-free workplace policy.

Does workers compensation cover a workplace accident in which the injured employee tested positive for marijuana? Persistence of THC – the main psychoactive compound in marijuana – complicates this question, and state courts have differed on this issue, depending on the individual details of each case.

THC persistence also complicates issues around impaired driving.