New Strategies for Property & Casualty Claims Litigation Management
As litigation expenses continue to rise in the Property & Casualty (P&C) insurance industry, carriers are finding it increasingly necessary to rethink their approaches to claims litigation management. According to AM Best Financial reports, between 2018 and 2023, litigation management costs in the P&C sector surged by 19%, equating to an additional $4-5 billion. This brings the total litigation expenses to around $24 billion, a significant portion of which is allocated to Loss Adjustment Expenses (LAE). With growing financial pressures and the ever-present impact of social inflation, insurers are seeking to implement more modern, data-driven strategies to control costs and improve outcomes in both personal and commercial lines.
The Rising Costs of Litigation in the Insurance Industry
Litigation costs have become a critical issue for P&C insurers, particularly in certain states and underwriting markets like California and Florida, which have become notorious for high claim frequency and severity due to social inflation. Social inflation refers to the rising costs of insurance claims due to factors such as increased litigation, broader definitions of liability, and a more litigious environment. As plaintiffs’ attorneys adopt more aggressive tactics and target insurers with “nuclear verdicts” — unusually large jury awards that far exceed what would be considered reasonable compensation — the costs of defending and settling these cases continue to climb.
These nuclear verdicts have shifted the risk landscape for carriers, driving up the cost of risk for both businesses and consumers. Many plaintiffs’ attorneys now treat litigation as an asset class, with private equity and hedge funds backing large-scale lawsuits to secure high-value settlements and verdicts. This trend has added a new layer of complexity to litigation management for insurers, as it increases the stakes for each case, forcing carriers to rethink their claims strategies.
The Insurance Industry’s Response to Rising Litigation Costs
In response to these challenges, the insurance industry is undergoing a transformation in how it manages litigated claims. Rather than relying solely on traditional claims processing methods, many leading insurers are turning to advanced legal management systems, improved data hygiene practices, and the application of artificial intelligence (AI) and advanced analytics to support better decision-making.
One of the most promising developments in this area is the creation of the Litigation Analytic Record (LAR). This tool provides a consolidated view of all relevant data related to litigation, including both internal data on claims, defense counsel, and plaintiff counsel, as well as external data from third-party sources. By integrating these data sets, the LAR allows insurers to break down silos and gain a more comprehensive view of the factors that influence litigation outcomes.
For example, using the LAR, insurers can analyze historical data to identify patterns in the behavior of specific plaintiff attorneys, pinpointing those who are most likely to pursue aggressive litigation strategies. This enables carriers to develop more informed defense strategies and better anticipate the costs and outcomes of specific cases. The LAR also enables insurers to assess the performance of their defense counsel, ensuring that they are selecting the right legal teams for each case based on data-driven insights rather than anecdotal evidence.
Litigation Strategy Advanced Analytics and AI-Led Decision Support
The availability of vast amounts of data, coupled with the migration of this data to the cloud, has allowed insurers to modernize their approach to litigation management. Advanced analytics and AI are now playing a central role in helping P&C carriers make more informed decisions about how to handle litigated claims.
AI-powered tools can process large volumes of structured and unstructured data, enabling insurers to understand the expected cost, complexity, and likely outcome of each case. By analyzing factors such as the jurisdiction, the presiding judge, the plaintiff attorney’s track record, and the specifics of the insurance policy in question, these tools can generate optimized litigation plans and budgets tailored to each case. This leads to more accurate claim reserves and better budget management for litigation expenses.
AI-driven decision support also allows claims adjusters to assess the strength of a claim from a legal perspective. This can influence the decision to settle early or to continue litigating, as AI can predict which cases are more likely to result in unfavorable outcomes for the insurer. By having this information upfront, carriers can avoid drawn-out litigation and reduce overall costs, leading to faster, more efficient claims settlements.
A key use case for AI in litigation management is the creation of plaintiff attorney profiles. By analyzing historical data, insurers can identify patterns in the behavior of specific plaintiff attorneys who frequently file lawsuits against policyholders. These insights allow carriers to anticipate the strategies and tactics that these attorneys are likely to use and to build defense strategies accordingly. Additionally, carriers can use AI to assess the potential severity of a case based on the plaintiff attorney’s history of securing large verdicts.
The combination of AI and advanced analytics allows insurers to take a more proactive approach to litigation management. Instead of reacting to developments as they occur, carriers can predict the likely trajectory of a case and make strategic decisions to optimize outcomes.
Enhanced Counsel Selection Criteria
Another critical area where P&C insurers are improving their litigation management strategies is in the selection of defense counsel. Historically, the assignment of defense attorneys was often based on the claims adjuster’s personal relationships with attorneys or on recommendations from management. However, this approach can lead to inconsistent outcomes and suboptimal claims handling.
With the advent of the Litigation Analytic Record (LAR) and other data-driven tools, insurers can now take a more strategic approach to selecting defense counsel. By analyzing the performance of individual attorneys and law firms across similar cases, carriers can identify which legal teams are most likely to deliver favorable outcomes for specific types of claims. This data-driven approach ensures that insurers are assigning the right attorney to the right case, improving the overall efficiency of the litigation process.
In addition to analyzing the performance of individual attorneys, carriers can use data to evaluate the relative size and scope of their legal panels. By assessing the volume of cases assigned to each law firm, insurers can ensure that they are distributing cases in a way that optimizes the performance of their panel firms. For example, carriers can assign more complex cases to law firms with a proven track record of success in handling similar matters, while directing lower-complexity cases to firms that specialize in more routine claims defense.
This strategic approach to counsel selection not only improves litigation outcomes but also helps insurers manage their legal expenses more effectively. By ensuring that they are working with the best-performing law firms, carriers can reduce the likelihood of adverse judgments and keep their litigation costs under control.
Performance Management of Panel and In-House Counsel
With litigation costs continuing to rise, C-suite executives in the insurance industry are increasingly focused on understanding how their legal expenditures align with broader strategic goals. For most P&C carriers, outside defense counsel fees make up a significant portion of their litigation management costs, often accounting for 80-90% of total legal expenses.
Despite this, many Chief Claims Officers lack visibility into the total outcomes associated with these expenditures. While it is common for carriers to track litigation expenses, there is often less clarity on the indemnity payments associated with each case and whether the legal defense provided by outside counsel is delivering optimal results.
Leading insurers are addressing this issue by adopting data-driven solutions to assess the performance of both panel firms and in-house counsel. By combining metadata from claims records with information from legal management and billing systems, carriers can develop a comprehensive view of their legal team’s performance. This enables insurers to identify top-performing attorneys, ensure compliance with claims handling guidelines, and rationalize their legal panels to focus on high-performing resources.
To facilitate this process, many carriers are implementing blended scorecards that aggregate data from multiple sources to create a single view of attorney performance. These scorecards allow insurers to track key metrics such as case outcomes, compliance with budget targets, and adherence to litigation plans. By using this data to score and tier their legal teams, carriers can ensure that they are directing the most complex and high-value cases to their top-performing attorneys, while optimizing resource allocation for lower-priority cases.
This focus on performance management not only improves the efficiency of litigated claims handling but also enhances the overall effectiveness of litigation management strategies. By leveraging data to monitor attorney performance and ensure alignment with broader business goals, insurers can deliver better outcomes for both their policyholders and their bottom lines.
