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Legal System Changes Helping Insurers Better Meet Challenging General Liability Environment, Casualty Actuaries Told

06/30/2010 — Coronado, CA – Substantial changes in the U.S. legal system over the past decade should make the country’s tort system more manageable and predictable, and insurance companies are improving their ability to meet the challenges of a changing general liability environment, participants on a panel session on litigation changes told attendees at the Casualty Actuarial Society’s Spring Meeting.

Patrick Hanlon, lecturer in residence at the University of California-Berkeley School of Law, explained, “Comparing where we are in 2010 to where we were in 2000, litigation has become less intense, with some of the abuses diminishing and critical tort reform enacted in states that were on the cutting edge of what businesses considered to be unfair legal procedures.”

Just the same, recent developments have made it more likely that people will sue. “The organization of the plaintiffs’ bar and its allies is critical in mobilizing claims and a lot of things that have happened recently have made it easier on them,” he said. The many lawsuits already filed concerning the recent BP oil spill show how good plaintiffs’ lawyers are in stimulating claims. One important tool is the Internet, which has made it a lot easier “to chase the ambulances.” People injured by products such as asbestos, Vioxx, Phen-Fen and others go to the Internet, which in turn leads them to the lawyers.

Hanlon said plaintiffs and their lawyers are still able to pick the best forum for favorable judges and juries sympathetic to their cases and more inclined to side with them in their tort actions. “Surprisingly, overall, judges seem to have had a much greater impact than the juries have in creating anti-business litigation environments,” he pointed out.

He also mentioned that the relationship of the tort system to the political system is important. He listed Mississippi and Texas as examples where there has been a linking of a fairly liberal tort system with a fairly conservative political system. But in West Virginia, he said, it’s exactly the other way, so it’s harder to get tort reform there than it is in some other states.

“According to the U.S. Chamber of Commerce, big business has become more positive on the fairness of state courts,” Professor Hanlon pointed out. “In 2002, the average score given by big business on fairness of state courts was 52.7 and that has improved to 57.9 this year. Those scores are never going to get much above 60 percent because the tort system is never going to be perceived as favorable to big business. The only tort system they like is Delaware, which may be why they go incorporate there all the time,” he said.

The signs of change include that it has become more difficult to mobilize larges masses of trivial and often fraudulent claims; legislation has tamed some notorious traditional judicial “hell-holes,” such as Texas and Mississippi; and mass torts have become more manageable from the business perspective.

On the less optimistic side, Hanlon noted that the momentum of business-friendly reform has slowed since 2006 generally caused by the 2006 elections favoring Democrats in the states as well as in Washington and because the rate of change earlier in the decade wasn’t sustainable.

And for the near future, Hanlon explained, no breakout seems likely on either side. “But the areas to watch,” he said, “are trial lawyer involvement in financial services litigation as well as the Toyota recall lawsuits. Also, the popular mood is now hostile to business which could make claims mobilization easier.”

Speaking from the insurer perspective, Damon Lay, actuary and product manger for Farmers’ Insurance Group, suggested ways companies can meet the challenges of a changing general liability environment.

“You have to look at your coverages, your underwriting standards, your claims practices, and also your pricing,” he explained. “In the underwriting area, you should inspect your risks to make sure you know the exposures you are taking on in your portfolio. Sometimes you will be pleasantly surprised and sometimes not so pleasantly surprised.”

To protect your book of business against a changing legal environment, Lay recommended understanding the exposures in your portfolio, knowing your forms, and regularly meeting with your claims personnel to understand what coverage issues they're encountering.

Terri Kremenski, Consulting Actuary, Towers Watson, moderated the panel session, which was held at the CAS Spring Meeting in Coronado, California on May 25, 2010.

The Casualty Actuarial Society fulfills its mission to advance actuarial science through a focus on research and education. Among its 5,100 members are experts in property-casualty insurance, reinsurance, finance, risk management, and enterprise risk management.

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Mike Boa, Director of Communications and Marketing

703-276-3100, mboa@casact.org

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