European legal and litigation landscape set for ‘greatest systemic shift’, warns Zurich

Liability market expected to go through ‘fundamental’ change as early signs litigation abuse coming to Europe

Zurich has warned that the European legal landscape is set to see the “greatest systemic shift” over the next few years as a raft of new regulations collide with litigation funders and US law firms to drive risk.

The insurer told media that risk managers and their insurers need to keep a close eye on whether new European rules, particularly through the EU’s Collective Redress Directive (CRD), pave the way for US-style “litigation abuse” to spread to this side of the Atlantic. However, the company was keen to stress that it doesn’t expect some of the worst excesses of the US market to hit Europe.

Any major changes in the risk landscape will, of course, have knock-on impacts for the cost and breadth of insurance cover provided by liability insurers in Europe. And Zurich said that the European liability space could well see “fundamental changes” and follow the path taken in the US by developing into a coinsurance market, with insurers not keen to take on entire risks.

CUO Penny Seach said that the European legal landscape is the big risk area where Zurich expects to see the greatest systemic shift. This could potentially lead to litigation abuse and heavily impact both companies and insurance portfolios, she said.

Zurich expects this development to take place over the next few years rather than overnight, but is already starting to see class actions in new European jurisdictions.

New EU regulations have come into force, or are coming down the line, that will spark more liability and litigation for European firms, not least the CRD and forthcoming revised Product Liability Directive (LPD). In addition, a raft of ESG rules are creating new exposures.

Meanwhile, the presence of litigation funders is growing in Europe, with more than 100 firms already set up on the continent, said Seach. She said Europe is expected to be the fastest-growing region for litigation funding over the next couple of years. Her colleague Tom Thornberry, global head of financial lines claims at Zurich, said litigation funders still see Europe as an untapped market.

In addition, there are mounting numbers of US plaintiff law firms shifting across the pond and setting up shop in Europe in anticipation of new rules, said Seach.

“So if we think about a changing regulatory environment and what third-party litigation funders are doing and US law firms are seeing, that really is supporting our view of a systemic shift across the legal landscape. It is not going to happen immediately, but we do expect to see this play out over the next couple of years,” she warned.

Legal expert Thornberry said that while things are at a “very, very early stage”, he thinks we are “beginning to see the first signs that litigation abuse may come to Europe in the future”.

“We know there are small elements of forum shopping already. And it is something I think is going to become more and more prevalent. What will be interesting to see as the years go by is whether those frameworks that were put [in the CRD] to prevent US-style litigation will wear away slightly and we start to see that cultural change,” he added.

Seach explained that the CRD, which introduced a level playing field for collective redress across Europe but attempted to put in measures to stop mass US-style litigation, has come into force at EU level and is now being enacted by member states.

She agreed with Thornberry that forum shopping, whereby some countries become more attractive for legal action than others, is something to keep a close eye on as European countries transpose the rules into national law.

“We are watching closely to see what the differences in each member state will be. There is the phenomenon around forum shopping in the US, and we are looking to understand whether we start to see the same type of nuances, or slight difference by jurisdiction, that would make it far more attractive for a plaintiff to bring an action in, say, the Netherlands or Germany, which may be a far more favourable member state within the EU,” she said.

Seach also explained that the revised PLD, which has been slightly delayed but is now expected in early 2024, will also bring much tougher liability.

“The revised product liability directive applies strict liability across the EU. There is an expanded damages definition, with claimants able to claim for things like mental anguish or suffering. That is new to Europe. The directive also assumes any part of AI as being part of the product. Again, that is new for Europe. So these are two really big drivers of risk,” she said.

And Thornberry added that there are a whole host of EU ESG rules, regulations and other issues that look set to lead to litigation and potential class actions in Europe. “A key area where we are already seeing noise is ESG litigation,” he said.

Thornberry said there are three key areas to watch. The first is the focus by various stakeholders on what companies are saying on ESG and what they are actually doing. This is leading to accusations of greenwashing and social washing.

Secondly, regulators are heavily focusing on ESG-related issues with regimes in place, or being implemented, governing ESG disclosure standards.

The third area of concern, said Thornberry, is around fitness for the future and understanding how litigation is evolving. “We are seeing litigation in Europe in relation to allegations that organisations aren’t changing quick enough or not doing what they said they would do,” he explained.

So what impact will this have, or is it already having, on the European liability insurance market? Seach said insurers will react to higher risk and therefore losses, but stressed that this is expected to happen down the road rather than the immediate future.

“We are planning to see shifts around some of our loss estimates and we would make sure that we factor that in accordingly. But this a forward-looking view. It is not necessarily a today view,” she said.

And she predicts that heavier losses in Europe could lead to a major change in the way the European liability market operates.

“As we see in the US, when you have a systemic shift your reinsurance structures change, which means that companies are absorbing more of the primary net. So we do expect to see, over time, a fundamental shift in how programmes are structured. So potentially in the liability space, we will move more to a slip type of market and exactly what we see in the US where you don’t have big stretches of capacity deployed by a single carrier,” said Seach.

Zurich believes that one benefit from what has happened in the US is European firms are now more ready to listen to warnings about rising litigation.

“Companies are a bit more cautious to blow off the changes coming through in Europe, having experienced, or had colleagues in other companies experience, some of the US litigation… So I think they are cautiously curious to understand, and often ask questions about our perspective and what we see coming,” said Sierra Signorelli, CEO of commercial insurance at Zurich.

“When we spoke about this previously over some of the changes in the US, they thought it didn’t apply to them. So I think there is a different mindset at this point in time,” she added.

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