Growth in supersized court awards significant factor in spiraling cost of liability claims.

Pharma class actions, growth of collective redress outside of the US, and mounting litigation around ‘forever chemicals’ among the other trends creating a challenging market for liability insurers.

Allianz Commercial analysis shows defective products have been the most expensive cause of liability claims over the past five years, accounting for more than 40% in value.

Munich, November 20, 2024 – US juries have ordered a record number of supersized verdicts against companies in recent years. So-called “nuclear” verdicts have almost trebled since 2020, while the median verdict value has more than doubled. In 2023 alone, the number of nuclear verdicts (>US$10mn) grew by more than 27%, while the number of “thermonuclear” verdicts (>$100mn) increased by 35%, according to Marathon Strategies, impacting industries ranging from automotive to entertainment to chemicals.Such verdicts are not just a problem for US companies as they also impact international firms doing business in the US, according to Allianz Commercial, which highlights five liability loss trends firms need to watch in a new report.

“As technology and the world evolve, the insurance market faces a number of new challenges which are leading to increasing liability loss trends,” says Alfredo Alonso, Global Head of Liability Insurance at Allianz Commercial. “These increasing loss trends are influencing insurers’ perspectives on issues such as capacity deployment, especially in the US, and the profitability of both older and future underwriting years. Collaboration among stakeholders is crucial to managing these changes and controlling liability claims costs.”

The rise in nuclear verdicts

Growth in the number and size of these verdicts is down to multiple drivers, including growing mistrust of corporates, the changing tactics of plaintiff attorneys, the erosion of tort reform, changes in jury pool demographics, and the normalization of such verdicts, including the rise of billion-dollar awards for personal injury. Awards can be driven by a combination of punitive, compensatory and non-economic damages, such as pain and suffering, all of which are increasing.

“Such upwards trends in social inflation are not sustainable for the long term, as the increasing costs from nuclear verdicts ultimately fall back on businesses, consumers, and insurers,” says Joerg Ahrens, Global Head of Key Case Management, Long Tail Claims, Allianz Commercial.

“Attempts at tort reform, such as caps on non-economic damages, have met with varying levels of success. In the absence of more effective reform, greater cooperation between insureds and insurers, and adopting a tougher stance to settlements are needed to mitigate the spiraling cost of liability claims.”

Pharma class actions grow more complex and volatile

Recent years have also seen a growing list of pharma, food, and chemical products become the target of billion-dollar class action litigation, including opioids, talcum powder, indigestion remedies, and herbicide. Cancer is increasingly a feature of such litigation. Scientific research, regulatory orders or voluntary withdrawal of products that may be carcinogenic can trigger litigation. Such claims create volatility for liability insurance due to the long latency of cancer symptoms, with risks only understood many years after a product was sold, and the insurance underwritten.

“Product liability claims in the pharmaceutical sector are typically costly and complex, with multiple parties, higher defense costs and higher awards. Due to the nature of this industry, a harmful product or ingredient can spark multiple actions spanning many producers, resulting in a large accumulation of losses from multiple insureds from one event,” says Arne Holzheuer, a Global Practice Group Head for Liability in the Chief Claims Office at Allianz Commercial.

PFAS litigation mountsA class of synthetic chemical used widely in industrial and consumer products such as food packaging, cosmetics and household goods and even firefighting foams since the 1940s, PFAS, also known as forever chemicals because of their resistance to degradation, have been the subject of mounting litigation in recent years. This has largely been focused on three main areas: environmental pollution; water and waste treatment/contamination; and personal injury, such as people working directly with products, like firefighters.

While litigation has so far concentrated on the US – environmental contamination-related PFAS settlements are already in the double-digit billions of dollars – there have also been cases elsewhere, for example in Europe. The extent of future litigation is uncertain, although further regulatory measures may play a part in shaping this.

Collective actions set to rise outside of the US

Social inflation is predominantly a US phenomenon but moves to increase access to justice in Europe could result in a rise in collective actions in future, the report notes.

Collective actions are already becoming more prevalent in some European countries, as consumer groups start making use of collective redress frameworks and legislative change to chastise companies and fund remedial work, while consumer protection agencies have already brought claims in areas like water quality and pharma. A record number of class actions were filed in Europe in 2023 (133), up 10% on 2022, according to law firm CMS, with the UK, Netherlands, Germany, and Portugal accounting for over three quarters of these. Product liability, consumer, and personal injury were the largest sources of litigation.

Major causes of liability claims

The report also analyzes some of the major causes of insurance industry liability claims over the past five years – defective product incidents account for more than 40% of the value of all claims, with the other most expensive causes of claims including collision /crash incidents, faulty workmanship/maintenance, and bodily injury.