For many reasons, 2021 was an abnormal year -perhaps best illustrated by changes within the insurance industry, which shouldered an unprecedented burden. There were unusually-high loss trends across both years, with the property and casualty industry serving as a “first responder” to an economy in freefall, still reeling from the onset of the COVID-19 pandemic. I’m trying to answer this question: what can we, as individuals, learn from these extreme loss patterns of the last two years? And how should we set our expectations for insurers’ behavior in 2022?
The change in the industry boils down to two significant trends:
1.) A sharp uptick in weather-related natural disasters
2.) A growing number of impossibly-large civil liability settlements.
In this article, I’ll discuss the impact of the latter.
Nuclear Verdicts
There’s a recent court case I’d like to point to, in particular: Dzion v. AJD Business Services – a deadly truck accident lawsuit in which the jury handed down a judgment of $1 Billion to the plaintiffs.
The loss of life at the center of these court cases is tragic, no doubt. And it highlights a dire need for improved working conditions for commercial drivers. At the time of the accident, the driver working for AJD Business Services was distracted by a cell phone, far over the legal limit of drivable hours, not in possession of a commercial driver’s license, and unable to read English. He was driving 70 on cruise control, and the data recorder showed he did not attempt to brake until one second before crashing into a line of stopped cars.
Before I continue: I don’t want you to think that I am defending the corporation responsible in any way, shape, or form. This is shockingly negligent. And any business with such reckless practices does deserve to be punished for the resulting loss of life.
But these judgments have exploded in size and frequency since 2018, and the companies involved are not billion-dollar companies. In many cases, significant civil judgments exceed a company’s annual revenue ten times over. It’s simply too massive a sum to pay, even in installments. In the context of an average working career: you’d have to make $25 million every year to reach a billion in lifetime earnings. The settlement, which was awarded in Nassau County, FL, equals almost half the GDP of the county.
It’s not so much an issue of the punishment not fitting the crime. It’s more of a “cruel and unusual” problem – not for the negligent companies responsible, but the thousands of individuals living in the municipalities affected by these cases.
Because when these settlements occur – the company almost always goes bankrupt, and most of the sum ends up being paid out by public funds, private insurance, and public, state-sponsored insurers. It’s a massive drain on the already-tight operating budgets of municipal governments and a shock to the insurance industry – which simply wasn’t designed to pay out 10-figure claims on a regular basis. Insurers respond with proportional rate hikes, making it unaffordable for companies to purchase the insurance policies needed to cover liabilities of this size in the first place! And because they can’t afford the insurance, it ultimately increases the number of cases that end up being paid out of public funds.
There is some justice. A billion dollars means something. That you’re set for life, that you beat a deeply broken system. But if most of the money came directly out of public funds and into the pockets of attorneys… If people lost their jobs because the liable company went under: that’s a massive amount of collateral damage.
Bear in mind: in these cases, the prosecuting attorneys take home, on average, 30% of the judgments they request from juries in these cases.
This ongoing exploitation of the legal system for profit is a grave warning. People need to understand that the losses experienced in 2021 have pressured the insurance industry to change significantly or risk facing never-before-seen consequences. Unfortunately, the ultimate result of these “nuclear verdicts” are higher insurance premiums for everyone, increased financial strain on insurers leading to fewer claims paid across the board, and depletion of municipal resources and public funds.
