Systemic, tech-driven lawsuit practices are destabilising insurance markets in the United States, recent research by rating agency and financial analyst Demotech has revealed.
This practice, active since around 2017, uses modern technology to push ordinary insurance claims into costly and long lawsuits, creating a trail of financial destruction and negatively impacting the insurance industry.
“In addition to deceptive phishing and misdirection practices, third-party litigation funding has emerged as a business model – a practice which has essentially jumped the normal insurance claims process, and dumps policyholders directly into a “litigation” track – often without an understanding that they had bypassed their insurance company’s normal claims process,” Demotech noted.
Adding: “Not only has this process penalized property and homeowners by misdirecting them to a settlement process that includes large payouts to law firms, the large volume of “nuclear verdicts” have resulted in the collapse of insurance companies willing to insurance properties in risk-prone areas.”
According to the report, the scheme uses sophisticated online tactics like search engine optimisation (SEO) and pay-per-click ads to transition claims into contested or litigated status.
This practice has also led to insurer insolvencies and altered industry claim settlement patterns. The transition slows claim settlements and increases unpaid closures, due to the economic scaling of multiple litigation platforms.
“The current and future financial implications associated with these practices and this business model are substantial, as the success of this business model has attracted billions in third-party litigation funding and influenced the legal profession to implement and consider changes to professional conduct rule regarding non-lawyer involvement in law firms,” analysts stated.
The success of the business model has led the Association of Professional Responsibility Lawyers (APRL) to call for rule changes regarding non-lawyer involvement in legal delivery systems, a practice now permitted in jurisdictions like Utah, Arizona, and the District of Columbia, which allow non-lawyers to own interests in law firms or hold positions of responsibility.
US Senator Thom Tillis and US Representative Kevin Hern have proposed protections, including potential federal tax on profits from third-party litigation funding to reduce incentives for predatory litigation.
Joe Petrelli, President of Demotech, Inc., first developed the research on this business model and his most recent analysis summarised its industry impact. Executed by Todd Kozikowski, President and CEO of 4WARN, Inc., Demotech’s project revealed widespread cyber-enabled attacks targeting insurance companies.
According to Petrelli, “These coordinated, high-tech scam and email attacks exploit post-storm confusion, capitalize on consumer crises, and accelerate carrier litigation to unsustainable levels.
“Alarmingly, it is not just homeowners who are being victimized – it is the entire insurance industry and the US transportation economy – industries which serve as a critical safety net for property owners and business stability nationwide – that are subjected to an online, covert business model built on systematic online instigation to secure contested or litigated claims.”
Petrelli continued: “In one recent time period in Florida, a group of carriers that failed had a 3% market share of premiums, yet saw their market share of new, annual litigated claims grow to nearly 20%. I knew that this phenomenon of meteoric growth in new, annual litigated claims was caused by ‘something new,’ a realization that led to this groundbreaking research project, and Todd’s discoveries.”
Key research findings include:
- Tech-Enabled Litigation Instigation: This business model can destroy carriers through industrial scale litigation by exploiting weaknesses in coverage or policy provisions at an unprecedented technological level. It has led to several insurer insolvencies, particularly for Florida-focused property insurance writers.
- Claim Transitioning and Settlement Patterns: The business model has transformed claim settlement patterns. Litigation platforms have lowered filing costs, leading to longer settlement times and more unpaid claims. This suggests claim departments are wasting resources on easily-filed, unmeritorious claims, delaying legitimate, complex resolutions.
- Attraction of Investment Community: The lucrative nature of this model has attracted tens of billions of dollars in third party litigation funding – and has become a popular and high-yield asset class. It has also gained significant attention from the investment community, due to its disruptive impact on the insurance and transportation industries.
- Transformation of the Legal Profession: The emergence of online technology as a driver of an inflated number of litigated claims has encouraged some within the legal profession to seek changes in professional conduct rules to allow non-lawyers to invest in, own, or coordinate law firm marketing activities.
Demotech concluded: “To control the ultimate cost of coverage for consumers, while ensuring insurer stability, litigation reform is a necessity – addressing opportunistic litigation practices by enacting the legislation proposed by Sen. Tillis and Rep. Hern is vital, however, it is urgent that consumers, agents, storm recovery leaders, and regulators work together to unmask, identify, and address these practices.
“Above all, policyholders experiencing damage should be urged to contact their agent or carrier directly to discuss or report a claim, rather than “clicking a link” in a popup ad or unsolicited email.”
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