Claims costs have reached historical highs in recent years. Outpacing economic inflation, the rapid increase in claims frequency and severity has been seen most acutely in liability lines, driven by a complex mix of litigation-related factors.
While this trend has historically been referred to as “social inflation,” the Triple-I has collaborated with other industry thought leaders to offer a term that we believe better reflects the current litigation landscape: legal system abuse.
What is legal system abuse?
Legal system abuse involves actions that unnecessarily increase the costs and time to settle insurance claims.
- Filing frivolous lawsuits and litigation tactics
- Inflating claims – whether done by a policyholder, attorney, or third party (e.g., contractors, service providers)
- Ubiquitous attorney advertising that glorifies lawsuits and dangles big windfalls in front of consumers
- Third-party litigation funding (TPLF) — a multi-billion-dollar global industry in which hedge funds and other financiers invest in lawsuits in exchange for a percentage of any settlement or judgment. These percentages can increase the risk of plaintiffs or attorneys holding out for a bigger payout, drawing out litigation and overall claims costs
These activities are problematic because they increase claims costs while being nearly impossible to forecast and thus challenging to mitigate. Legal system abuse may compound with other elements, such as economic inflation, to further shift loss ratios and disrupt forecasts, rendering cost management even more difficult.
How does legal system abuse affect independent agents?
Outcomes from excessive claims costs impact all links in the insurance value chain, including independent agents. In addition to increasing challenges for agents to sell coverage as premiums rise, legal system abuse can diminish coverage availability. As Triple-I remains committed to advancing the conversation and exploring actionable strategies with all stakeholders, we sat down for a chat with Luke Bills, president of independent agent distribution at Liberty Mutual and Safeco Insurance.
Before starting his current role in mid-2023, Bills was the Chief Product Officer for Liberty Mutual’s US retail business, which encompasses personal lines and small commercial. He has seen legal system abuse through a product lens and, more recently, through a distribution lens. And he says no product area seems immune to increased claims and litigation.
“It is one driver of the market that we see right now,” he says. “Carriers start to withdraw. That’s a huge impact for independent agencies. We’re starting to see this across all lines of business.”
How can independent agents help deter legal system abuse?
Of course, policyholders have the right to engage an attorney if they feel their insurer isn’t honoring its promise of coverage. However, Bills advocates for the agent to be the policyholder’s first call after an insurable event.
“We are seeing a significant increase in attorney-represented claims coming in at first notice of loss,” Bills says. He has observed this trend even in personal lines. “It’s becoming more and more common for customers to call an attorney even before filing a claim.”
He also noted that third parties are getting involved early to steer policyholders toward litigation. “You go to a medical office and say, ‘Hey, I’m injured because I’ve had an accident,’ and they’re [the medical providers] referring you to attorneys that they have in their network.”
Third parties use such tactics to take command of the claim, amplifying costs. They may pressure claimants to sign documents, such as an assignment of benefits (AOBs) agreement, which enable the third party to bill or even sue the insurer without further input from the policyholder.
“Policyholders lose the ability to even work through and settle the claim quickly or for less costs or whatever the right solution may be for them,” Bills says.
Bills believes that independent agents have a crucial role in mitigating legal system abuse. At the point of sale, agents can discuss best practices for managing risks as part of the conversation on coverage options. Agents can also guide clients through the claims process when an insurable event arises.
Here are some broad guidelines agents may want to consider integrating into agency operations to help curtail legal system abuse:
Know your customers (KYC)
Access to sufficient emergency capital after a loss can make policyholders less vulnerable to exploitative third parties. Fortunately, listening for information about the client’s lifestyle, goals, and finances to see how insurable events might impact them is already part of a savvy agent’s business strategy. Remind clients that adequate coverage is just one integral component of a strong financial management plan and be ready to point them to pertinent resources.
Be proactive in the conversation about rising rates
To learn more about how agents and customers are experiencing the hard market, read our new report: The Agent-Customer Connection: Gaps and Opportunities in the Hard Market
Clients may struggle to see value in coverage when rates go up, especially if they have yet to experience a claim. Reaching out early allows more time for agents to help clients explore coverage options that work with their budget. However, results from Liberty Mutual 2024 Agent-Customer Connections Study suggest a disconnect between agents and customers when talking about current market conditions. About 70% of agents said they are proactively communicating with clients about market conditions, but only 20% of customers said they first heard about their rate increase from their agent.
Explain that insurance rates rise for everyone because of more frequent claims and higher claims costs. Let clients know that while the insurance industry is intensifying its efforts to predict and prevent future losses, policyholders can do their part by being aware of the risks specific to their property and region and taking preventive measures. Triple-I’s resources for renewal shopping can be an excellent independent resource for clients looking to manage their coverage and premiums better.
Stay engaged with your base even when all seems quiet
Use communication channels, such as your e-newsletters, to increase your client’s awareness of their responsibilities under their policy and frequently share tips to avoid pitfalls of legal system abuse.
- Under-insurance can lead to claims inflation as clients grappling with an unexpected financial strain may attempt to recoup losses through excessive litigation or fraud. Send regular reminders to periodically review coverage needs and reach out to you with any questions or updates.
- Summarize how AOBs work. Let them know these agreements aren’t necessary to get repairs done but may still leave the client on the hook for costs or cause other problems in the long run.
- Increase awareness about common scams that fly under the radar. One example is the “good Samaritan” that pops up from nowhere after a disaster or accident to direct the policyholder to a “cheap” and often potentially fraudulent service provider.
Reach out when you realize a client may have experienced an insurable event
Navigating matters after a loss or disaster can be stressful, so your clients may want your guidance with even the simplest of claims. Offer to answer any questions, and if they decide to file a claim, walk them through the process. Remind clients that attorneys and other third-party involvement come with costs that can significantly reduce their portion of any payout they might receive.
Reinforce the importance of avoiding contractors who aggressively coerce policyholders to sign documents or offer to make first contact with the insurer about the claim on the client’s behalf. Also, consider helping clients identify options beyond their coverage that could bolster resilience, such as tools and support available from government or community-based organizations.
Legal system abuse threatens insurance coverage availability and affordability for all. Fortunately, data shows that the independent agent system is strong despite adverse market conditions. About 65% of agents say their retention rates are the same or better than a year ago and 69% say they are acquiring new clients at about the same rate or better. Agents have plenty of opportunities to hold the front line in the battle against abuse in the legal system and remain a trusted advisor for the customers and clients that need it most.
Great articles and updates………..all issues we are facing in Florida. AOB has been a problem for over 14 years in Florida and legislation finally addressed in last May (2023) and now are realizing that the legal fees for Florida are 4x that of any other US state.