Zurich keeping ‘close eye’ on potential US-style social inflation in Europe

Zurich is keeping a “close eye” on the litigation landscape in Europe as we head towards the introduction of the EU’s Collective Redress Directive in June 2023 and the updated Product Liability Directive.

During a media briefing, Sierra Signorelli, CEO of commercial insurance at Zurich, and Penny Seach, who becomes CUO of commercial business next month, also said that industry must brace for the impact of escalating claims and litigation inflation in the US as damage awards continue their upwards trend.

The Zurich commercial insurance leadership team said that the insurance sector must continue efforts to push for tort reform in the US to tackle a coordinated effort by the highly professional and organised US plaintiff lobby that is driving awards higher.

The European insurance sector and wider business lobby has worked hard to try to ensure that the Collective Redress Directive does not usher in a US-style mass tort environment in Europe, leading to the kind of rampant social inflation seen after US courts returned to business as usual post Covid-19.

On paper these efforts seem to have paid off, as the directive limits the source of actions that can be brought to formally recognised representative groups. But US plaintiff firms have been expanding in Europe as national laws evolve and claims are rising, not least in the Netherlands.

The Zurich commercial insurance leadership team is well aware of the investment made in Europe by these plaintiff law firms and third-party litigation (TPL) funders. It believes that European companies and insurers must prepare for a potential escalation in cases and awards.

Signorelli said that Zurich is working hard in the US to support the push for more transparency about the way in which TPL funders are remunerated. “We want to make sure that people actually have their claims paid and not just the law firms,” she said during the briefing in Zurich.

Seach, who is currently chief underwriting officer for Europe, Middle East and Africa at Zurich, added: “We are starting to see this coming to Europe ahead of the Collective Redress Directive and we have a close eye on this. The broad principles [of the directive] are fair; it does try to limit litigation funding but it allows it. This is not regulated in Europe and could lead to the same forum-shopping within the EU that we are seeing in the US.”

She identified the Netherlands as a likely destination for litigants seeking an “easier” jurisdiction for claimants.

As Seach noted, TPL funding is not regulated in Europe currently, but there is some movement on this front at EU level.

In January of this year the European Justice Forum –  a group that describes itself as a coalition of businesses, individuals and organisations working to promote fair, balanced, transparent and efficient civil justice laws and systems in Europe – published a position paper that directs policy-makers on the importance of TPL funding regulation in order to prevent abuse.

It stated: “For society as a whole, TPL funding – if not properly regulated – could also lead to excessive costs (social inflation), in particular for consumers, be it in the guise of increased prices for future customers of companies successfully targetted, or be it in higher premia, for example for general liability and commercial auto insurance, up to and including opportunistic or ‘frivolous’ claims affecting innovation as well as the competitiveness of business.”

This supported a statement made at the end of 2021 by MEP Axel Voss, who also called for TPL regulation. He warned that EU consumers could become “pawns in profit seeking”.

“There is a growing financial practice in Europe, which involves investing in lawsuits and arbitration proceedings in the hope of collecting a hefty share of the winnings. It is happening largely in the shadows. The practice is known as third-party litigation funding. Litigation funders identify cases with potentially large returns and typically pay the legal fees and other costs for the claimant, in return for a percentage of any award or judgement,” said Voss.

“Third-party litigation funding is largely unregulated in Europe, and most agreements are made in secret – rendering them ripe for abuse. Judges and defendants are often unaware that a claim involves a funder, what fees have been agreed, and what influence or conflicts of interest they may be,” added the MEP.