Liability landmarks: Turning points in insurance history

It has been my observation that, on average, a significant event or trend has arisen at least every 10 years that reshapes the insurance industry. When considering the emerging trends with the most potential to impact insurance in the future, it is helpful to review the past. There are three historical trends that significantly challenged the industry at the time that they occurred. Insurance experts adapted to these events and will continue to rise to the challenge of managing emerging risks, no matter how insurmountable they might appear at first.

Three past trends that shook the insurance world
1. Litigation Funding (1990s): In the early 1990s, when I was starting my career in insurance, Australia made legal changes that had a worldwide impact. They allowed insolvency practitioners to enter into contracts to finance litigation, including class-action lawsuits.

These changes influenced other countries, including the U.S. Before the mid-2000s, the U.S. litigation financing industry was limited to personal injury cases. The industry has grown significantly since the inception of specialized commercial litigation funding in 2006. Meanwhile, insurance affordability has come under threat from litigation and claim cost increases.

These drive ‘social inflation’ — the increased legal costs from outsized jury awards and legal proceedings that take longer to resolve.

2. Reptile Theory (2009): In 2009, a jury consultant, David Ball, and a plaintiff lawyer, Don Keenan, published Reptile: the 2009 Manual of the Plaintiff’s Revolution, which outlined how to influence jurors by appealing to the ‘Triune Brain,’ the primal part of our minds.

The plaintiff’s lawyer encourages jurors to instinctively perceive the defendant’s alleged conduct as a threat to their own personal safety rather than deciding the case based on factual information around the dispute between the plaintiff and the defendant.

Neuroscientists have pointed out that ‘reptile theory’ is based on a false scientific premise. However, the authors claim evidence of the success of their approach, citing over $7.7bn in verdicts and settlements are due to reptile theory.

Today, lawyers, plaintiffs, investors and even doctors work together on the litigation. They are able to sustain lawsuits for a long period of time, which has caused a seismic shift in the underwriting landscape. The payouts are substantial if the plaintiff lawyers successfully convince the jury that the action in question is so egregious that there has to be strong compensation. This, too, is supercharging social inflation.

3. Distracted Driving (mid- 2010s):
As mobile devices became ubiquitous in daily life over the past decade, distracted driving became a contributing cause of vehicular accidents. According to the National Highway Traffic Safety Administration (NHTSA), distracted driving claimed 3,308 lives in 2022 and close to 290,000 people were injured.

Laws regarding cell phone use while driving emerged in the mid-to-late 2010s. From a personal perspective, a conviction can lead to a loss of coverage or increased insurance premiums.

However, in cases where distracted driving results in severe injury or death, drivers may face lawsuits from victims or their families. This can lead to substantial financial losses, including the payment of damages, legal fees and other expenses associated with litigation. This is a significant factor driving up auto liability insurance in many regions of the U.S.

For commercial drivers, distracted driving incidents and accidents can have significant financial, legal, and reputational consequences for companies. The financial strain from crash-related costs can be substantial. On average, a distracted driving accident costs the employer $72,442.

Three current and future trends that could disrupt the liability landscape
1. Wildfires: On October 22, 2007, a small fire started at Witch Creek, California, whipped by Santa Ana winds, and merged with the Guejito Fire from San Pasqual Valley at the San Diego City limits. More than 197,990 acres of San Diego County burned, including 9,250 acres in the city of San Diego. Some 1,141 residences were destroyed.
California had wildfires in the past, but the intensity and widespread damage they caused, including in urban areas, was off the scale and signalled a shift in the frequency and severity of this emerging threat.

As the world heats up, so does the litigation. In California, and increasingly other states, utilities are being hit with significant payouts for their role in starting fires. While the legal victories assist victims to rebuild their homes and lives, the wave of litigation is making it difficult for the companies to fund grid upgrades to fireproof their infrastructure. As a result, they are more likely to pass costs on to consumers.

This is an immediate problem. It is getting to the point where wildfire is almost becoming an uninsurable risk. The 2023 fires in Maui, Hawaii, are an example of the devastating impact of wildfires in regions that have not experienced them in the past.

There are more wildfires of growing intensity. State and private organizations need wildfire insurance, but, increasingly, insurance companies cannot infinitely cover wildfire-prone regions.

2. Addictive software: Many apps tap into the human need for affirmation, approval and connection and dispense rewards on a variable schedule. Whenever we open a social app, we check if someone has liked our comment, sent a message, left a photo, or written a status update. So, we continue to scroll, swipe left and tap the red dot.

Software developers use the Hook Model to design products or services that customers engage with regularly and voluntarily. Its primary aim is to foster customer habits by frequently linking a customer’s need with the company’s solution, making the interaction a consistent and repeated behavior. By implementing the Hook Model, businesses effectively shape customer behavior by creating recurring actions centered around their products. To achieve this, companies guide customers through a series of experiences known as “hooks.” As customers encounter these hooks repeatedly, the likelihood increases that the hooks will become ingrained as habits.

It is a way of exploiting behavior that could be increasingly open to litigation, particularly if social media is shown to alter the brain anatomy and impact children’s mental health.

3. Virtual Reality: As a decades-long liability insurance professional, addictive software may be the most disturbing of the three trends on my radar, however, virtual reality is a close second.

If this technology develops as anticipated, it will involve collecting unprecedented amounts of user data on what users buy, view and discuss in this alternative world. Apart from current obligations to protect data, it could raise complex questions concerning privacy. For example, could a virtual reality user breach the privacy of another user, and could the platform be liable for failing to prevent the breach?

There will be questions about product liability as the omniverse develops into a vast market for virtual products and hardware like headsets and glasses. Product liability claims could result from people sustaining bodily injury in the real world.

Complicated and novel arguments could arise, including questions surrounding who is liable for virtual-related claims, choice of law and forum, and where a claim could be brought when loss or injury occurs while in the virtual realm. The coverage territory of umbrella policies is potentially limiting, and one can argue that the omniverse is not in the world, so bodily injury sustained there may not be covered.

Given the potential for a range of liability claims in connection with this technology, industry participants will want to obtain legal advice and consider how to limit their liability before they take the virtual plunge.

How to meet the challenges of emerging liabilities
There will always be new challenges facing insurers and their clients as technology advances and the world evolves. Finding solutions to mitigate the risks of these new threats is a key role that liability underwriters and their broker-partners play while moving the industry forward.

Collaboration is needed to manage the environmental, technological and social advances that lie ahead. The de-escalation of social inflation begins with partnerships. In a world where social media has led to a loss of individual control over communication, we need a clearer idea of where individual responsibility begins and ends in this area. We need a better consensus on the guidance we give about children’s use of social media. There will be a call for regulation in certain areas of the omniverse and artificial intelligence.

Businesses can play their part by responsibly managing emerging risk trends, ranging from wildfire to artificial intelligence. Governments could take responsibility with tort reform — accelerating legal changes that align plaintiff compensation with the needs of injured parties.

As insurers, we will play our role by leveraging new technology to improve corporate liability underwriting, resulting in improved data precision, interpretation and application to an ever-evolving world.

Reprinted with permission from Allianz Global Risks US Insurance Company.