Insurers Facing More Frequent, More Expensive Lawsuits

The legal landscape may generally be changing for the better — but not necessarily for insurers, according to a recent survey by Fulbright & Jaworski. In its survey based on interviews with in-house counsel at 250 major U.S. corporations including insurance companies, Fulbright & Jaworski found that 93 percent of insurance companies faced at least one new lawsuit in the past year, with a third (33 percent) facing more than 20 new actions.

In contrast, 17 percent of all survey respondents, not just insurance companies, said their companies had escaped the past year without having to defend a single new lawsuit. That figure was up sharply form 11 percent in 2005 to 2006.

“American corporations appear to have backed off, as plaintiffs — 65 percent of respondents — said their company had initiated at least one lawsuit in the past year, down from more than 70 percent a year ago and an even steeper drop from 2004, when 88 percent of U.S. companies said they had initiated litigation,” the firm said. Nevertheless, “litigation has obviously become a major line item in insurance company budgets,” the firm noted.

Nearly one-third of insurance firms that responded to the study said they spent at least $5 million on litigation, excluding costs of settlements and judgments. Fifty-four percent reported spending more than $1 million per year on business disputes.

Insurance company in-house law departments reported that insurance matters (43 percent) were their number one concern, followed by contracts (27 percent) and then class actions and labor/employment matters (20 percent each).

The survey indicated that recent regulatory investigations and scandals such as the stock options backdating have affected insurance companies. Half of insurance companies reported an increase in external regulatory inquiries and investigations. Furthermore 27 percent said they expected the number of inquiries to increase in the future.

In the past three years, 75 percent of insurers reported having faced inquiries from the Securities Exchange Commission, and 33 percent from State Attorney General’s offices. Additionally, 29 percent of insurance companies reported having considered conducting an internal investigation into stock options backdating issues.

In hopes of avoiding more severe action by government enforcement agencies, 15 percent of insurers said they have waived attorney-client privilege.

Other significant findings affecting insurance companies included:

• More than a quarter (27 percent) of insurance firms expected their case load to increase next year;
• 50 percent have class actions pending against them, and 16 percent have more than six class actions pending;
• 79 percent of insurance companies filed at least one suit themselves in the past year, acting as the plaintiff;
• 28 percent commenced one suit seeking more than $20 million;
• Two-thirds of insurance companies allow their employees to use outside e-mail accounts on company computers. Forty-three percent allow employees to use instant messages; and
• 43 percent have been forced to institute an internal investigation requiring the assistance of outside counsel within the past year.
• Seven percent face six or more internal investigations.

The dismal news did not just extend to insurers, however. Despite the slowdown in new legal filings for all U.S. companies, survey respondents reported facing lawsuits with higher economic stakes. Forty percent of U.S. companies said they were hit with at least one suit in the past year with more than $20 million at issue. Among billion-dollar businesses, 62 percent were served with at least one $20 million lawsuit.

“Companies confront a host of actions — and adversaries — in so many areas impacted by credit market jolts, government regulations, media investigations of corporate misbehavior, stepped-up enforcement activity, and one-time events like a recall or environmental accident,” said Stephen C. Dillard, chair of the firm’s global litigation practices. “Any and all of these occurrences tend to provoke a litigation response in many segments, including consumers, employees, investors, enforcement agencies and competitors. The lesson in our trends survey is that litigation can come from any direction and companies need full peripheral vision.”

The Fulbright survey takes a macro look at landscape for U.S. and U.K. litigation and arbitration issues, and reports on findings from multiple regions. For more information, visit www.fulbright.com/litigationtrends.