An increase in litigation forum shopping would pose a risk to insurers and corporate customers, according to Penny Seach, group chief underwriting officer at Zurich Insurance Company.
Different legal jurisdictions often have different legal standards, interpretations and precedents, which can lead to significant variations in outcomes for similar cases. Claimant attorneys will exploit these differences and seek out jurisdictions that are likely to result in the most favourable litigation outcome and the largest awards for damages against multinational corporations.
Recent years have witnessed a trend towards forum shopping in jurisdictions where courts have a reputation for being more plaintiff friendly. Forum shopping is particularly prevalent in the US, where plaintiff attorneys target states that welcome litigation tourism and are known for allowing more innovative lawsuits, expanding liability and awarding so-called nuclear verdicts (verdicts or settlements in excess of $10m).
Though some jurisdictions are better than others, there is no safe haven for companies and their insurers. For every sensible change we see, like the Florida tort reform change, we are also seeing court decisions and legislation moving in the other direction – such as the proposal in New York on the amendment of the Wrongful Death bill, or the US Supreme Court ruling on subject matter jurisdiction matters.
Growing litigation abuse
Forum shopping is not just a problem for US companies. The increasing globalisation of business makes it more difficult for companies to predict where they may face legal action, while engaging in multiple legal proceedings in different jurisdictions inevitably results in increased costs from legal fees and potential delays in claim settlements. Insurers also need to account for the potential risks associated with different jurisdictions when underwriting policies, potentially impacting the affordability and suitability of coverage for policyholders.
Forum shopping is also helping fuel social inflation – or litigation abuse – in the US. A combination of forum shopping, third-party litigation funding, outsized jury awards, anti-corporate sentiment and aggressive plaintiff attorney tactics are helping drive up the cost of casualty claims in the US. According to the Swiss Re Institute, the impact of social inflation for US commercial auto was over $4bn in 2021.
Litigation funding, for example, makes it easier for plaintiffs to finance lawsuits, and can prolong lawsuits. The growing litigation industry is predicted to expand to $30bn by 2028, up from $17bn in 2020, according to Swiss Re. The number and size of nuclear verdicts continues to climb. Analysis from Marathon Strategies found the total sum of nuclear verdicts reached a staggering $18.3bn between 2020 and 2022, while the number of verdicts doubled.
Europe in transition
Europe is on the cusp of a significant shift in its litigation landscape. Several legislative changes are in the pipeline that could drive stronger consumer awareness and protection, and could lead to forum shopping across the EU. In addition, third-party litigation funders and US plaintiffs firms have been expanding into Europe – there are more than 100 litigation funders operating in Europe, according to Insurance Europe – which is likely to support growth in class actions.
Over the years, many jurisdictions in Europe have adopted forms of collective litigation models in a range of areas, including securities to consumer and environmental litigation. However, EU-wide collective redress is now coming online with the EU Collective Redress Directive, which took effect in June 2023. Member states are now in the process of transposing the Directive into domestic legislation.
The Collective Redress Directive is expected to increase the frequency of collective actions in Europe, although we would not expect the level of outsized awards currently seen in the US. However, there is flexibility for member states when implementing the Directive, which paves the way for forum shopping within the EU going forward. Germany, for example, which approved its representative actions law in October, intends to go beyond the minimum standard required by the Directive.
The proposed revision of EU product liability legislation will also broaden liability and increase the scope for litigation. The current proposal would apply to a wider range of products – including software and artificial intelligence – with a broader concept of ‘defect’. The revisions to the Directive would also make it easier for consumers to bring product liability claims and expand the scope of damages to include data loss and certain psychological harm.
Keeping a watchful eye
Forum shopping in the US is widespread, and a key driver for litigation abuse. While Europe is not about to follow the worst excesses of the US legal system, growth in litigation funding, combined with the introduction of collective actions and expanding liability, will materially alter the litigation landscape in coming years, and could lay the foundations for abusive forum shopping in the EU.
Insurers are keeping a watchful eye on developments in Europe. We would urge risk managers to work with legal teams to keep abreast of legislative changes and understand what they will mean for their businesses, especially from a risk and insurance perspective. Through awareness and understanding, companies and their representative bodies, as well as insurers and risk management associations, can avoid adverse impacts from new legislation.
We can also draw on the experience and lessons from the US market. Insurers and insureds are working to tackle litigation abuse head on, raising awareness and lobbying each in their respective industries and markets, implementing best-in-class risk management and safety, and more sophisticated litigation defence strategies.
Contributed by Penny Seach, group chief underwriting officer at Zurich Insurance Company