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Nuclear verdicts are on the rise: How can you minimise your risks?

Nuclear verdicts often exceeding what many would consider to be reasonable damages can threaten a company’s viability, severely impact its reputation, and contribute to a loss of consumer confidence.

27/09/2024 · 10 minute read

The incidence of so-called “nuclear verdicts” — jury awards above US$10 million — continues to rise. Recent data shows that US juries awarded more than US$14.5 billion in nuclear verdicts in 2023 — a 15-year high.

Verdicts in excess of US$100 million — referred to by some as “thermonuclear” — are also increasing in frequency, with 27 such verdicts handed down by juries in 2023.

These verdicts — often exceeding what many would consider to be reasonable damages — can threaten a company’s viability, severely impact its reputation, and contribute to a loss of consumer confidence.

The potential for high claim payouts presents a concern for insurers, and as nuclear verdicts continue to increase in both frequency and severity, many insurers are reviewing their risk portfolios and adjusting pricing to reflect the potential of higher awards. As a result, many organisations are unable to purchase sufficient limits to fully transfer the risk of social inflation — when insured claims costs rise above general economic inflation — underscoring the importance of implementing the necessary risk mitigation measures.

In 2023, there were 27 cases against corporate defendants that resulted in verdicts of more than US$100 million.

Source: Corporate verdicts go thermonuclear, Marathon Strategies

Outsized jury award risks transcend boundaries, industries

The increased prevalence of nuclear verdicts across the US requires organisations to prepare for the potential impact of high jury verdicts on their business. It’s also important to note that certain states are more prone to outsized jury verdicts; between 2013 and 2022 California, Georgia, Florida, Illinois, New York, and Texas accounted for 61% of such verdicts in the country.

Although some industries are at a higher risk of outsized jury awards, companies in virtually any industry could be impacted. This means that organisations with interests across the globe should consider the potential impact of a nuclear verdict on their operations and be prepared to take appropriate action to minimise their exposures. 

The increase in outsized jury verdicts have led to legislative efforts. For example, in 2021, Texas enacted a law, known as House Bill 19, aimed at restricting plaintiff’s counsel in certain cases involving commercial motor vehicles from using the so-called “reptile” theory, a strategy that the plaintiffs’ bar may use to appeal to a jury’s basic instincts of fear and survival. A group of states, such as Maine, have proposed or adopted measures to expand liability in wrongful death cases. Other tort reforms that have been considered or adopted include increased transparency about third-party litigation financing and caps on liability damages.

 

Nuclear verdict concerns extending beyond the US

Outsized jury verdicts are currently most prevalent in the US, where there is a constitutional right to a trial by jury in both criminal and civil cases. While the right to a trial by jury exists in several other countries, it is often a judge who determines the final award.

A specific concern relates to the increase in class actions in both Europe and the UK, which rose from 55 in 2018 to 133 in 2023. In 2023, the total “opt-out” class actions outnumbered “opt-in” ones. The EU’s Representative Actions Directive could increase the frequency of collective actions.

There are also concerns that legislative changes in Europe could lead to an increase in “forum shopping” — the practice of choosing a court or jurisdiction that appears to have the most favourable rules or laws. 

At the same time, third-party litigation funding — a practice that could increase the likelihood of a trial — is also growing in other countries, with Europe and the UK expected to account for 16% of the US$18 billion global litigation funding market by 2025.

These trends and their potential impact on social inflation outside the US are keeping insurers on alert, with concerns focused mainly on:

  • Reserve adequacy: To ensure solvency and meet their financial obligations, insurers must set aside substantial reserves to cover the potential costs of nuclear verdicts, potentially tying up capital that could otherwise be invested or used for business expansion.
  • Reinsurance costs: The elevated risk posed by nuclear verdicts could lead to higher reinsurance pricing, potentially increasing the financial costs to insurance companies.

As a result of these concerns, insurers might feel pressure to increase premiums to allow for the potential of substantial payouts. Further, the unpredictability of nuclear verdicts requires a more conservative approach to underwriting, which can limit the availability of coverage for certain risks.

At the same time, some global organisations are experiencing challenging insurance renewals due to exposure to social inflation in their US operations.

What is contributing to social inflation?

From a US$340 million award in compensatory damages against a large corporation to a nearly US$301 billion verdict against a bar in Texas, social inflation has contributed to an increasing number of large verdicts.

Several factors have been pointed to as contributing to social inflation and nuclear/thermonuclear verdicts, including:

  • Change in public sentiment: There is increased public mistrust of corporations, and a perception that decisions are made only with profit in mind. The internet and social media have made it easier to access information, such as CEO salaries, bonuses, celebrity earnings, and endorsement values, further desensitising jurors to the dollar values awarded and allowing emotions to play a prominent part in jury verdicts.
  • Litigation tactics: Litigation tactics have evolved, with many plaintiffs’ lawyers developing strategies to maximise settlements in jury trials. The plaintiffs’ bar is well-versed in public sentiment and prejudices and often portrays defendants as serial offenders that pose a direct threat, not just to the party bringing the claim, but to the wider community (the “reptile” theory). This is designed to shift the jury’s focus to penalising the corporate defendant rather than compensating the plaintiff. 
  • Continued use of class actions: It is common that tort claims are brought on behalf of large groups or classes of individuals, with advertising and solicitations for class members permissible in some jurisdictions. Bringing claims on behalf of a putative class can potentially lead to a greater number of claims and claimants, an increase in demand amounts, and additional options for funding the case. Depending on the jurisdiction, claimants often need to either opt in or opt out of a class, which can influence the class size, any settlement amount, or any final award.
  • Litigation funding: Litigation is sometimes funded by experienced investors that are better positioned to withstand the economic hardship that many plaintiffs face during a prolonged trial. Litigation funders may use data and algorithms to select the most profitable claims to pursue and the most favourable jurisdiction in which to file suit. Data is also used in jury selection and to understand other variables that may influence the outcome of the trial, such as the attorneys most likely to be successful. Litigation funding can enable plaintiffs and their lawyers to resist potential financial pressure to agree to an early settlement, thereby increasing the odds of proceeding to a trial that could lead to a big verdict or of obtaining a larger settlement.
  • Emerging risks: A focus on new and growing concerns, and public interest in these challenges, may influence the type of cases that are at risk of outsized jury awards. Due to the role of public perception, these risks often vary from one jurisdiction to another.

US$21 million — the median nuclear verdict between 2013 and 2022.

Source: US Chamber of Commerce Institute for Legal Reform

How social inflation impacts insurance coverage

The effect of social inflation goes beyond the defendants who are on the receiving end of the verdicts and can have insurance implications on other buyers.

As these verdicts become more frequent, and jury awards climb significantly higher, some insurers are exercising more caution and increasing premiums for certain lines of coverage, including commercial auto, medical malpractice, directors and officers liability, umbrella, and excess layers. Insurers may also consider narrowing cover or increasing retention levels, especially in jurisdictions where outsized jury verdicts appear to be on the rise.

Nuclear/thermonuclear verdicts also can impact the availability of higher limits or coverage in general, either because insurers are reluctant to offer these limits or because they become financially prohibitive for policyholders. This typically has a greater impact on industries susceptible to such verdicts, such as trucking, healthcare, and senior care.

What can companies do to mitigate nuclear verdicts and social inflation risk?

Employing good risk management practices can help organisations reduce the risk and potential impact of social inflation and nuclear verdicts on their business. This can entail:

  • Strengthening your risk management and corporate governance: A significant proportion of nuclear/thermonuclear verdicts arise from issues of safety and corporate responsibility. Having well-established and well-documented risk management and safety procedures can help you demonstrate that safety procedures were rigorously applied and followed, and that safety is a top priority for your organisation.
  • Regularly reviewing your open claim inventory: During your claim reviews, keep an eye on outliers to help you identify potentially volatile claims. Regularly reassess open claims and consider the emerging and evolving risks that could lead to outsized jury verdicts. Take time to review your existing insurance limits and retentions to assess whether they are sufficient to cover both current and future risks.
  • Engaging in regular communications with your insurer: Establish a schedule to discuss open claims with your insurer and broker, paying particular attention to the ones that look most problematic. Timely communication will help promote an understanding of the claims process, which is critical in nuclear/thermonuclear cases. Insurers and brokers have experience in understanding and addressing these claims and can help you navigate these issues more effectively.
  • Deploying early intervention strategies: Speak with your counsel to identify areas where early intervention strategies and proactive action plans can help you resolve claims expediently. Seek the advice of your legal counsel in determining whether a claim can be settled before trial. Collaborate with stakeholders to identify the appropriate defence counsel, one with experience in the relevant industry, area of law, and, importantly, jurisdiction.  
  • Vigorously preparing for and defending claims that cannot be settled early: Explore alternative dispute resolution mechanisms that have historically led to less volatile outcomes than a trial by jury. Note that a bench trial or mediation/arbitration can often lead to lower verdicts.
  • Alerting all participating insurers: Once you become aware of a claim or an incident that could result in a nuclear verdict, notify all insurers with relevant policies so that they can be part of the process from the start.

It is also important for corporations to invest in fostering good relationships within their community and demonstrate they are good corporate citizens. Companies that invest in their social and governance posture and support the communities in which they operate may be less likely to be viewed as bad actors, which in turn could reduce the risk of an outsized verdict.

The knowledge and expertise of your broker, your insurer, and your legal counsel can help you develop risk mitigation and transfer approaches designed to deliver on your business resilience goals in a highly litigious environment.

For more information on actions you can take to proactively reduce your risk exposure, contact your Marsh representative.

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