Navigating the Impacts of Legal System Abuse on Insurance Customers: The Critical Role of Agents

Understanding and Defining Legal System Abuse

Legal system abuse, encompassing frivolous lawsuits and exaggerated claims, is pushing insurance claim costs to unprecedented levels, especially in liability lines, affecting policyholders, insurers, and independent agents, according to Triple-I. This abuse involves actions that unnecessarily escalate the costs and time required to settle insurance claims. Examples include filing frivolous lawsuits, inflating claims, pervasive attorney advertising that glorifies lawsuits and promises substantial payouts, and third-party litigation funding (TPLF). In TPLF, hedge funds and other financiers invest in lawsuits in exchange for a percentage of any settlement or judgment, which can incentivize holding out for larger payouts and prolonging litigation.

The Ripple Effects of Legal System Abuse

These abusive practices increase claim costs while being nearly impossible for insurers to forecast and mitigate. Legal system abuse often compounds with other elements like economic inflation to further shift loss ratios and disrupt cost forecasts, making claims management even more challenging. "It is one driver of the market that we see right now," noted Luke Bills, president of independent agent distribution at Liberty Mutual and Safeco Insurance. "Carriers start to withdraw. That's a huge impact for independent agencies. We're starting to see this across all lines of business." The effects of excessive claim costs due to legal system abuse ripple through the entire insurance industry, impacting policyholders, insurers, and agents alike.

The Crucial Role of Agents in Mitigating Abuse

As legal system abuse threatens insurance coverage availability and affordability, agents play a crucial role in mitigating its effects on customers. By being proactive in client conversations, staying engaged with their customer base, and offering guidance throughout the claims process, agents can help their clients navigate the challenges posed by legal system abuse and remain a trusted advisor in an increasingly complex insurance landscape. According to Bills, agents should be the policyholder's first call after an insurable event. "We are seeing a significant increase in attorney-represented claims coming in at first notice of loss," he said, noting that this trend is becoming more common even in personal lines.