Europe braces for rise in liability costs

European companies should prepare to face a rise in litigation costs thanks to social inflation around liability claims.

This was the warning issued to risk managers at the annual conference held by Swedish risk management association Swerma in Stockholm.

Social inflation has long been an issue in the US, with ‘nuclear’ sums awarded to plaintiffs in liability cases, especially when it comes to punitive damages.

The most eye-watering example involved a Texas-based cable company, Charter Communications, that was ordered to pay $375m in compensatory costs and $7bn in punitive damages for a single fatality caused by one of its field technicians.

But just as insurance trends tend to emanate in the US before spreading elsewhere, rising litigation costs look set to come to Europe, according to Lisa Willenegger, head of casualty, commercial insurance at Zurich.

This is especially true for GDPR breaches, said Willenegger. The market has been relatively benign in terms of GDPR claims thus far but Willenegger is “not optimistic” of this remaining the case.

She cited the lowering barriers to litigation and the rise in claims as well as the greater involvement of governments, as demonstrated by the 2022 settlement of a PFAS case between 3M and the Belgian government in which 3M agreed to pay $581m in remediation costs, compensation and fines for the historical contamination of the ground around Zwijndrecht due to the manufacture of the forever chemical PFAS.

And there are also more US law firms coming to Europe and bringing their aggressive litigation strategies with them as well as litigation funding that can make trials unavoidable.

There are also some regulatory drivers, such as the EU’s Product Liability Directive, as well as proposed laws on the use of artificial intelligence and algorithms, and the Corporate Sustainability Due Diligence Directive, which will impose monitoring of global supply chains on companies.

Meanwhile, class actions will become a reality in the EU when the Collective Redress Directive comes into force in June.

And this all comes at a time when insurers have been struggling to find capacity for product liability coverage, a point that was made at the 2022 Swerma conference amid a general call from risk managers for more engagement from their insurers.

“Social inflation is not just a US thing, it also affects us in Europe,” said Willenegger. “The last five years have not been easy on the liability side. Our models did not fit any more.”

To counter this development, both insurers and risk managers need to step up, said Willenegger. “What we need to do better as insurers is to share our learnings, while risk managers have never been more important.”

These learnings cover a number of areas, including the need for improved risk management and training for employees on social inflation issues, document management and external communications.

Willenegger also called for companies to detect early warnings in terms of cases that could result in mass litigation, and to educate their employees in terms of litigation tactics and how to communicate with juries. For example, mock trails can be a useful exercise for employees, as can maxims such as ‘displaying empathy is not an admission of liability’.

There are also steps the risk and insurance market should be taking on an industry-wide basis such as lobbying for more transparency and governance of the legal industry when it comes to litigation funding and any possible conflicts of interest, the use of ‘reptile theory’ by prosecution lawyers and advocating for tort reform.