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December 7, 2023

What's causing rising litigation costs in the construction industry?

Sharen Groppell

Various litigation trends influence the legal environment, especially within the construction industry. One noticeable trend is the rise of "nuclear verdicts" in civil litigation, especially in personal injury liability cases. Impacting various industries but finding significant gains in the insurance space, nuclear verdicts give outsized financial awards to plaintiffs. Elements leading to nuclear verdicts include a legal strategy called "reptile theory," the pandemic-induced concept of "social inflation," and "litigation funding." These concepts create pricy court judgments, leading to higher business insurance rates for construction businesses.

What is a nuclear verdict?

Nuclear verdicts are a relatively new trend in the litigation arena. As the name suggests, these verdicts refer to legal judgments that award plaintiffs substantial sums of money. The term "nuclear" highlights that such verdicts can create devastating financial impacts on businesses and the insurance industry. A nuclear verdict has a payout costing over $10 million. Of course, some larger payouts can grow into the billions. These costly rulings raise the argument on whether the payouts are proportionate compensation for the damages suffered.

While nuclear verdicts impact all industries, your business should also keep an eye on the other trends in litigation. Read about other litigation challenges in our Business Insurance Trends Report.

What is the reptile theory?

A legal strategy that helps raise the chances of a nuclear verdict is known as the reptile theory. Plaintiff attorneys tap into the primal instincts of jurors by appealing to their safety and security. The theory aims to make jurors feel that construction companies intentionally seek profits over safety, threatening the jury's community and loved ones. Only through a costly punitive verdict can jurors help stop the supposed threat of these businesses.

What is social inflation?

The concept of social inflation also plays a part in the rise of nuclear verdicts for construction companies. During the pandemic, the fears of financial hardship, unemployment, and a lack of community connection were on many people's minds. These feelings played a role in the uptick in lawsuits and jury awards. The actual cost of accidents or injuries is now often disregarded as plaintiffs and jurors feel the need to lash out and punish others in response to their feelings of unease and victimhood. At the same time, increasing health care costs, litigation expenses, and tangible property drive up the prices plaintiffs are looking to benefit from when taking businesses to court.

What is litigation funding?

This practice has law firms, hedge funds, or private equity firms fund the legal costs associated with litigation in exchange for a set amount or percentage of an ultimate verdict. Legal costs include attorney fees, court expenses, and sometimes, cost of living expenses. The plaintiff only needs to reimburse the funder if their case is successful. However, the plaintiff must share a set amount or percentage of a settlement or judgment. Access to funding leads individuals who would otherwise not sue or settle quickly, if indemnified, to pursue litigation in hopes of a big payday. It is in the funding company's best interest to hire industry and trial experts to press for nuclear verdicts against construction companies.

How do nuclear verdicts affect the construction industry?

The construction industry is at the center of these nuclear verdicts. One large settlement of $74 million resulted from an improperly paved road. Due to the faulty conditions of the road, a truck overturned, striking another vehicle that had a mother and her 12-year-old twins inside. When a tower crane collapsed and killed a woman in an adjacent building, a jury awarded $860 million to her family. The judgment of this case is an example of a "thermal-nuclear verdict" (exceeding $100 million). In another case, a jury awarded $1 billion to the family of an 18-year-old killed in an auto accident caused by the driver of a service company. Due to gross negligent hiring practices, the court awarded $900 million in punitive damages.

Construction companies often have fleets, and, according to the American Transportation Research Institute, pricy rulings involving heavy trucks are increasing in number and size. In the 600 cases between 2006 and 2019, there were 26 cases with verdicts over $1 million. In the last five years, there were nearly 300 cases with verdicts over $1 million. The number of verdicts over $10 million doubled during that time, and from 2010 to 2018, the size of verdict awards grew 51.7% annually.

How can you take on the challenges of construction litigation?

Insurance companies grappling with the financial burden of nuclear verdicts are reducing their capacity to underwrite policies, particularly in the excess liability space. Nuclear verdicts prompt insurers to push the costs of those cases to all their policyholders, regardless of actual loss experience. This strain on insurers makes it hard for businesses to secure adequate coverage.

Partnering with an insurance broker to manage casualty risks can help resolve litigation challenges. Local specialists at Marsh McLennan Agency can mitigate large verdicts, pre- and post-lawsuit, and help businesses reach their ideal insurance outcomes. Loss projection modeling for auto, general liability, and workers' compensation claims can give your business a more precise look at the potential risks. Our safety consultants and risk transfer specialists help you determine the best practices for managing everything from contracts to your job sites, fleets, and premises. Understand and take control of your claims process through personal coaching and guidance sessions.

Accidents happen every day. However, you can lower the risk of the potential for nuclear verdicts the more you prepare for them.

Reach out to one of our specialists today.

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