Suing Over an Insurance Claim Often Leads to Smaller Payout, Experts Say

Most drivers and homeowners have probably seen advertisements from attorneys promising to get plaintiffs more claims money from insurance companies. But going through the courts — especially as a first resort — and involving third parties in insurance claims often doesn’t turn out the way policyholders hope.

“There’s a cost in a few different ways,” Sean Kevelighan, CEO of the Insurance Information Institute (Triple-I), recently told a webinar audience. “On average, it’s been studied that the claimant gets about 12% less when a third party is involved in litigation.”

Legal system abuse in insurance claims doesn’t just increase insurance costs for everyone in an area. It can also mean a policyholder actually gets a smaller payout than they would have if they hadn’t sued, industry experts say.

Triple-I defines legal system abuse as “policyholder or plaintiff attorney practices which increase costs and time to settle insurance claims.” It’s become such a prevalent problem that Liberty Mutual, the nation’s fifth-largest property and casualty insurer, recently hosted a webinar on the topic for agents and brokers.

How legal system abuse drives up costs

Multiple sources, including Insurify’s independent auto and home insurance reports, conclude inflation and severe weather catastrophes are among the most significant factors behind soaring premiums. The rising costs of materials, labor, vehicles, and repairs drive inflation, but so does legal system abuse.

“Policyholders … ultimately end up paying a hidden tax, and not a small tax, on the costs being driven into the system because of the legal system that is becoming more and more rampant,” said Luke Bills, Liberty Mutual’s president of independent agent distribution.

He emphasized the industry isn’t conflating any claim litigation with legal system abuse.

“We as Liberty Mutual, and I know all of our peer carriers, take our responsibility to pay what we owe very seriously,” Bills said.

Kevelighan said the “billboard effect” or the “billboard attorneys” across the country are pushing claimants to pursue litigation first instead of as a last resort, despite the industry’s commitment to paying claims quickly. That’s likely due to successful attorney advertising pushing a mistrust in insurers, Liberty Mutual’s Chief Claims Officer Amit Khanna commented.

“We’re seeing that claimants are getting less and prices are going up,” Kevelighan said. “Our research with … the Insurance Research Council shows that people see this everywhere, but what we’re not seeing is the connection of what it’s costing.”

The ‘dark money’ behind excessive litigation

“Dark money” is often thought of as being associated with politicians and governments, but several panelists shared concerns over its influence in insurance litigation, especially through third-party litigation funding (TPLF). According to Triple-I, TPLF is a growing phenomenon where institutional investors and even sovereign nations without direct ties to cases invest in litigation suits to make a profit.

“Third-party litigation funding … is now an asset class, and by 2028, it’s expected to be a $30 billion asset class,” said Kevelighan. “You can only characterize this as a global, multi-billion dollar asset class of dark money, because there’s zero transparency.”

Khanna said it’s simply not a level playing field anymore. He referenced a LexisNexis study that found a majority of people reporting injuries said they’d heard from an attorney post-loss, some within 24 hours of the incident, and many hired an attorney before filing a claim.

“The speed at which the advertising — or solicitation — is playing a role means a fairly significant increase in attorney-represented claims at the point of injury reporting,” said Khanna. “That is a huge shift.”

Charles Symington, CEO of the Independent Insurance Agents and Brokers of America (Big “I”), said his organization is trying to increase transparency and advocate for reform at federal and state levels. Kevelighan and Bills said Triple-I and Liberty Mutual are also working on engagement and advocacy around this issue.

What’s next: Following Florida’s example

While inflation and severe weather have affected Florida’s insurance costs, legal system abuse also significantly contributed to increased premium costs. Florida still has the most expensive average home insurance costs in the country, $11,759 per year, and above-average car insurance costs, according to Insurify data. But reform appears to be helping slow the pace of premium increases. Home insurance rates increased by 7% during 2024, after a 14% increase in 2023.

At the same time, legal defense costs have gone down in the Florida insurance market, amounting to $739 million in 2023. In 2022, costs were $1.6 billion.

Kevelighan said Triple-I is also seeing a lot of legal system abuse in Georgia and urged policymakers to take Florida’s example and make reforms. Triple-I even has a billboard near Atlanta now that says: “Legal system abuse increases your insurance costs” and encourages readers to visit StopLegalSystemAbuse.org to find information about its economic impact.

“We’re hoping that people will understand the connection and begin to get really upset about it and actually encourage reform,” said Kevelighan. “Reform like we did see recently in the state of Florida, and that does work. We’re already seeing rates in that state leveling off or decreasing.”

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