Commentary: Why Do People Keep Suing Property Insurance Companies?

The question of why people continually sue property insurance companies is a perplexing one. The simple answer to this question which keeps claims and litigation managers at property insurance companies awake at night staring at the ceiling is that it’s usually their own fault!

It seems counter-intuitive. Insurance companies should want to limit lawsuits. However, they will often settle most first-party lawsuits at the outset rather than litigate aggressively. Thus, there is an increase in claims.

From the plaintiff attorney’s side, there is an incentive to filing claims. In some states, such as Florida, which has a statute providing attorney’s fees for first-party property lawsuits, plaintiff attorneys file as many lawsuits as they can, knowing that insurance companies will almost always pay to settle the lawsuits in the early going rather than risk taking cases to trial. In turn, this leads to more lawsuits.

This self-perpetuating cycle is based upon a fundamental truth in the legal world, which many non-lawyers ignore: less than one percent of all filed lawsuits go to trial, so if you are a plaintiff’s attorney, you can be virtually certain that at some point, the case will result in settlement. Settlement from a plaintiff’s attorney’s perspective is a better outcome than risking trial, and if the plaintiff’s firm can mitigate risk by settling, it will do so. If the plaintiff’s attorney has a sufficient volume of lawsuits – and make no mistake that all successful plaintiff’s property law firms operate a volume based business – the firm can afford to float the costs of litigating for a while until one side or another decides that it is time to settle. In other words, settlement is the default, so why wouldn’t a plaintiff’s property law firm sue, sue, and just keep suing.

There is another way for insurers to reduce lawsuits. If they take a different approach beginning on the front end, and stop giving away money to plaintiff’s attorneys, unless they really deserve it, and can prove it, lawsuits will decrease in volume. To be certain, there are numerous calculations at work for any insurer which looks at the bottom line and wonders how to limit lawsuits. You need your combined ratios to remain solidly below 100 percent. To that end, resources may shift among and between Average Net Claim Payment (ANCP) and Loss Adjustment Expense (LAE). If your LAE soars to excessive amounts, which results in successfully driving down the ANCP – and thus favorable combined ratios – then someone will soon be pressing for major changes to balance the numbers. So what does an insurer do?

Ultimately, while it may demand a strong stomach to discern where the problem lies if an insurer is paying too much of LAE to litigation expenses, the problem may be less complex than it seems. Is the problem on the front end? Or do your litigation managers have too cozy of a relationship with defense counsel? Or is it something else? When a lawsuit comes in, and it should have been paid on the front end or it looks clearly underpaid, aggressive litigation is not the answer – settle it immediately before the defense lawyer incurs any fees at all. Similarly, if certain claims decisions were made that could be misconstrued as bad faith by a talented plaintiff’s lawyer, again settle it right away. The key is that there must be a system to carefully and methodically evaluate each case from the beginning, rather than make assumptions that the cases should always be settled. The idea of blindly allowing insurance defense lawyers to litigate freely, and then maybe settle on the figurative courthouse steps without a coherent and comprehensive strategy for dealing with lawsuits is not a sound business model. Similarly, ignoring the problem by deciding that virtually all claims decisions were made properly, isn’t an answer either.

Plaintiff lawyers chose this field to earn a profitable living. If the free ride stopped, they would move on to a different practice area. What, precisely, is profitable for these attorneys? It’s profitable to continually file lawsuits, regardless of the facts and merit, knowing with near certainty that the insurance company will pay to settle them. It’s profitable to exploit insurance companies which lack a sound strategy to reduce lawsuits, so instead the company simply settles suits at the outset and rewards these plaintiff’s firms. It may be time for this to change.

(Full disclosure: I am a defense attorney, so aggressive defense litigation is good for business, but I have always wondered why so many insurance carriers tell me they hate lawsuits; but their litigation budget is too high; and they still continually settle every claim that comes in front of them instead of stepping up and challenging the plaintiff’s side.)

Jason Wolf is a shareholder at the firm of Koch Parafinczuk & Wolf. His practice focuses on first-party property insurance defense, and he is the firm’s partner overseeing all lawsuits filed against property insurers.