Something in the water? Changing patterns in casualty litigation

There’s something in the water, but it’s not social inflation. Unravelling the rising cost of casualty claims in recent years is less complicated than it appears, according to Robert Reville, chief executive officer and co-founder of Praedicat.

“Everybody has been talking in the last few years about social inflation, but it’s a poorly defined concept. It seems to me that there’s something in the air or the water that’s causing juries to bring higher awards and more people to want to bring claims,” he said.

Instead, he suggests a different type of liquidity is responsible. “Ultimately, we think the driver of all this is litigation finance. During the 2010s, increasing capital wanted to find new diversified high returns, and they discovered investing in litigation.”

As Reville told the 1.1 Club, Intelligent Insurer’s online platform for one-on-one interviews with industry leaders, this started to gain traction in the latter half of the decade.

“We saw waves of new litigation that started to make US liabilities look more like they did in the 1980s and 1990s,” he said. It not only explains why cases are more common; it’s also behind the increased awards.

“With the money that goes into it, there’s more time they can spend trying to get to a good result and more that can be invested in discovery to make the defendants look bad. All that results in higher jury awards,” he explained.

“It comes from the money that’s flowing into the business of liability. In our view, that’s caused a permanent change in the landscape that the industry has to think about and respond to.”

The next asbestos

Knowing how to respond depends on predicting where that money will flow next, and this is a large part of what Praedicat was created to do. The company emerged from a research and development project in 2009/2010, applying new data science methods to identify “the next asbestos”.

The challenge for insurers and Praedicat is that there’s no shortage of candidates. Some of these—particularly the nearer-term risks—are easier to discern, not least because there are already cases warning of what may be to come.

Per- and polyfluoroalkyl substances (PFAS), the so-called “forever chemicals” associated with products such as Teflon and Scotchgard, are one of the more obvious risks. Cases of water contamination have already been brought against manufacturers 3M and Dupont and there has been litigation associated with the use of the chemicals in firefighting foam, again with the runoff contaminating local water supplies.

As well as increasing attempts to get companies to pay for cleaning up, litigation has spread to bodily injury, with the chemicals associated with several health conditions.

“We see it potentially spreading in lots of different ways,” said Reville.

“To us, it looks more like a potential next asbestos than anything we’ve seen since we started.”

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A climate of litigation

The other prominent area of emerging liabilities is climate change, but determining how these claims might evolve is even more complex.

“The first wave of litigation from 2004 primarily involved plaintiffs trying to hold the greenhouse gas emitters, mainly oil and gas businesses, liable for contributing to climate change,” Reville explained.

These mostly failed on procedural grounds, with the US Supreme Court deciding that federal law on the issue was governed by the Clean Air Act and the purview of the Environmental Protection Agency.

A second wave of cases that started in 2016 and brought in state courts is ongoing. Even if they fail, it illustrates there’s likely to be a third wave, Reville argues.

“There is almost certainly going to be a breakthrough liability at some point,” he said.

The way it comes might be unexpected, however. Two trends are apparent. The first is the rise of “indirect litigation”—actions against businesses associated with carbon emissions, but not for the direct effects: litigation for the health impacts of diesel fumes, for example. In some cases, that again will target oil and gas companies, but it also “spreads the industrial footprint”, as Reville puts it.

“Engine manufacturers, transportation and ports get pulled in,” he explained.

The second thread is the rise of “secondary effects” litigation. Again, this expands the scope beyond traditional targets, for example utility companies involved in wildfire litigation and, more recent still, potentially baby food manufacturers—research has shown that droughts are causing naturally occurring arsenic in the soil to become concentrated and elevated temperatures cause rice to take up more of the poisonous chemical.

“All that’s at an early stage see, but it’s another example of downstream, unexpected secondary effects of climate change,” he said. For re/insurers, it means a “new landscape of liability risk” where past claims experiences are an increasingly poor guide to the future.

“It’s always been the case that casualty has a piece that is backwards-looking and a piece that’s forward-looking. The actuarial information is what drives the backwards-looking piece, and models are used to understand the forward-looking part.”

Increasingly, the relative importance of the two is shifting, Reville concluded.

“The extent to which you need to think about risks that haven’t emerged yet is becoming a larger fraction of casualty, and that trend is only going to continue,” he said.

To view the full 1.1 Club session click here