#United States #Columbus #Insurance #Litigation #Demotech

Tech-Driven Litigation: A Major Challenge for U.S. Insurance Markets

In a groundbreaking report released by Demotech, it was revealed that a systemic issue surrounding tech-driven lawsuits is destabilizing the U.S. insurance market. The rise of artificial intelligence and various online tactics has given birth to what is now referred to as "tech-enabled litigation instigation"—a covert model that has ballooned in prevalence since 2017. The implications for property owners, especially in storm-prone areas, are severe, often leading to confusion and financial distress as they face a second wave of impacts following natural disasters.

The Mechanism of Tech-Enabled Litigation

The report elaborates on how advanced technologies, like AI and online search engines, are being utilized to bypass traditional insurance claim processes. Rather than dealing directly with their insurers, property owners are often drawn into litigation tracks instantiated by third-party funders who see profit in facilitating these claims. Deceptive tactics such as phishing schemes and enticing online advertisements have proliferated, misleading homeowners who are already grappling with significant losses due to disasters. The result is a surge in litigation that has significant negative ramifications for both insurers and policyholders.

Demotech's research outlines the alarming trend of increased "nuclear verdicts" and the phenomenon known as "social inflation"—terms used to describe significant, often excessive, jury awards that have become commonplace in certain disputes. These developments contribute to an environment in which insurance companies find it harder to operate sustainably, especially under the strain of rising litigated claims.

The Financial Fallout

The financial consequences of this new business model are staggering. According to findings presented in the research, the costs for litigated claims can be up to 360% higher than those for non-litigated claims covering similar issues. This has prompted many insurers, particularly those focusing on Florida’s property market, to reconsider their participation in high-risk areas, leading to a troubling cycle of insurer insolvencies fueled by increased volumes of litigated claims.

Much of this growth is attributed to billions of dollars in third-party litigation funding, which has attracted the attention of the legal and investment communities alike. This influx of funding alters the traditional dynamics within the legal profession, prompting discussions about the involvement of non-lawyers in law firm management, especially in jurisdictions like Utah and Arizona where new rules have been introduced to allow such practices.

Seeking Solutions

In response to these escalating issues, U.S. Senator Thom Tillis and U.S. Representative Kevin Hern are proposing legislation to impose a federal tax on profits derived from third-party litigation funding. The goal of this proposal is to diminish the appeal of extensive legal battles by levying taxes on profits instead of simply exempting some gains from taxation. The implications of this legislation are meant to combat not only frivolous litigation but also predatory practices that undermine the insurance industry’s ability to operate effectively.

Joe Petrelli, President of Demotech, articulated the urgency of addressing this issue, stating, "The insurance industry and the entire value chain supporting property owners are at risk due to a business model that promotes abuse and exploitation in the wake of disasters." He emphasized the need for policyholders to engage directly with their insurers rather than falling prey to misleading online prompts that can lead them astray.

Final Thoughts

The challenges posed by tech-enabled litigation are not only confined to the insurance sector but extend to the broader economy, including the transportation industry, as evidenced by the recent failures of several prominent companies. As discussions about litigation reform continue, stakeholders across the board—from consumers to regulators—must remain vigilant and proactive in countering these emerging threats.

Demotech's findings serve as a wake-up call, urging all parties involved to work toward meaningful solutions that can mitigate these risks and restore stability to the insurance market. Insurance being a pillar of economic support for homeowners and businesses alike, addressing these evolving challenges will be crucial for recovery and sustainability in the years to come.

About Demotech, Inc.

Founded in 1985 and headquartered in Columbus, Ohio, Demotech, Inc. specializes in financial analysis and has provided financial stability ratings for various insurance entities. The organization aims to empower consumers by offering transparency in the insurance market, promoting equitable practices across the financial landscape.