The size of jury awards has been exploding in the last few years, and they are often exceeding the limits that businesses have on their liability policies, which could leave them paying out of pocket. Besides creating problems for those businesses, it could also be problematic for their insurance brokers if they are accused of providing poor advice on coverage limits, according to a recent blog on MarshBerry.
These excessively large awards are known as “nuclear” verdicts, which are defined as those with damages of $10 million or more. In 2023, such verdicts totaled $14.5 billion, according to one analysis. In 2020, half of them were greater than $21 million; that number jumped to $44 million last year. There were 89 nuclear verdicts in 2023, and 27 of them were for more than $100 million.
This is happening at the same time that corporations in general are purchasing smaller amounts of liability insurance, according to a report by Chubb. The median limits of insurance purchased have shrunk over the last 10 years. They are 44% less today in the construction industry than they were in 2014, 31% less in health care and 28% lower in consumer products.
This has created a large and growing gap between the amounts of insurance businesses are buying to protect themselves and the jury verdicts they may face. When a jury award surpasses a policy’s limit, the insured has to cover the rest out of pocket.
What’s driving nuclear verdicts
Analysts have pointed to several reasons for the increase in these verdicts. People today are pessimistic, they have lost trust in corporations, they have become desensitized to large numbers, and they are more pro-plaintiff, according to these explanations.
However, another major factor is how these suits are financed. Lawsuits have become an investment vehicle for hedge funds and other large investors through a concept known as third party litigation funding.
In a TPLF arrangement, investors fund plaintiffs or law firms for the costs of these lawsuits. The benefit they receive is contingent on the suit’s outcome. If the plaintiff wins, the investors receive a share of the awarded damages. If the plaintiff loses, they get nothing.
Given that they invested $15.2 billion in TPLF arrangements in the U.S. in 2023, they appear to be optimistic about their chances.
The effects on broker-client relationship
If an insurance brokerage client ends up having to pay out of pocket for a large judgment that exceeds their liability and umbrella coverage, they could be sued by the client for negligence. It’s important that brokers understand the need for additional attention when discussing liability coverage with business clients. The MarshBerry blog recommended:
Educating your customers — It’s vitally important that you take the time to explain the market dynamics that have started pushing up the price of liability and umbrella insurance coverage, and that they may want to consider boosting their coverage in light of these nuclear verdicts.
There are a number of ways you can do this, including:
- Newsletters,
- E-mail blasts,
- Webinars or seminars, and
- One-on-one meetings.
Improving risk management — One way to avoid a nuclear verdict is prevention through better risk management, particularly in safety issues that could result in damage or injuries to third parties. To reduce the chances of being sued in the first place, you can guide clients on safety (such as driver training), compliance training and the importance of regularly reassessing risks the company faces.
This could include:
- Hiring vendors that specialize in safety training.
- Installing cameras and telematics devices on commercial vehicles.
- Taking steps to reduce the chances of slip and falls and other incidents in facilities that are open to the public.
Protecting your errors and omissions exposure
As mentioned above, it’s important that brokers have an honest conversation with clients about the need for additional liability protection as lawsuit awards skyrocket. The worst situation for a broker is if a client runs through their liability protection and has to pay out of pocket for the rest. That’s fodder for an errors and omissions lawsuit.
Considering the stakes, you should also document the discussion in writing if a client declines to increase their liability coverage. This way, you have a paper trail showing that you advised them, but they declined additional coverage.
