Rising jury verdicts began as a ripple, but today nuclear verdicts shatter through the ceiling of insurance policies, affecting a wide array of industries and, consequently, the insurance companies that cover those risks. One of the main culprits contributing to this trend of massive jury awards: third-party litigation financing (TPLF).

The explosion of high-dollar insurance policy settlements and mushroom cloud-size jury awards — a trend also known as social inflation — have put businesses, insurers and legislators on notice. In fact, Florida lawmakers recently introduced two bills aimed at TPLFs that would require full disclosure of the funding arrangements in the court of law.

With outside entities keen to fund big lawsuits, and sympathetic juries willing to award nuclear verdicts (those in excess of $10 million), carriers are raising rates and limiting coverage to cope with the increased risk.1 These atomic suits can also trigger increases in healthcare expenditures, forcing companies to make difficult choices to contain costs.

These third-party financiers — typically comprised of hedge funds, private equity firms and individual investors — fund legal costs for suits with the potential for substantial insurance settlements. Sometimes investors offer as much as $100 million to a single law firm for a major stake (often 20%) in the award.2 And there's this bombshell: Investors are projected to fund TPLFs to the tune of $30 billion by 2028.3

The rise of TPLF presents a conundrum for companies and individuals looking to procure adequate policy limits. While failing to secure adequate coverage can result in financially disastrous consequences, litigators often target entities with high levels of liability protection.

For instance, a driver injured in an accident with a big rig may go after the trucking firm's general liability policy, or a class-action lawsuit may target a product liability policy for a known consumer goods defect. Even sizable personal umbrella policies could become a future target for litigation funders.

The HUB EDGE

There’s no crystal ball for determining the appropriate liability limits for your organization, but you can take several steps to contain the size of a potential nuclear verdict.

Conducting an internal audit and scrutinizing your own claims history and finances will give you data to generate risk scenarios and provide a clear picture of the exposures you're likely to face. Analytic modeling tools can help quantify the projected loss frequency and severity of those events, providing a window into the future of risk.

Although you can't control the fallout of an unfavorable verdict, you will be able to find the optimal insurance structure to protect your organization from being a target of unscrupulous legal profiteers.