Tackling Lawsuit Abuse

Mitigating the impact of social inflation on construction companies requires teamwork among stakeholders, along with a risk management approach that can help prevent claims from reaching the courtroom.

Social inflation, refers to the disproportionate increase of loss costs on liability-based claims, generally driven by plaintiffs’ trial tactics aimed at playing on the emotions of jurors to achieve maximum result. Factors, such as Third-Party Litigation Funding (TPLF) arrangements, evolving jury demographics, and the increasing presence of legal advertising in all media are contributing to a changing legal landscape. In 2020, the effects of social inflation were seen in total tort costs of $443B, or 2.1% of national gross domestic product.1

The construction industry is not immune to the potential impact of this judicial environment. Companies with large auto fleets and heavy equipment could experience a significant impact from social inflation.

Auto liability cases accounted for 23.2% of nuclear verdicts from 2013 through 2022, according to the U.S. Chamber of Commerce’s Institute for Legal Reform. That’s nearly tied for first with product liability cases, which were 23.3% of the total.2

Insurance providers, their customers and intermediaries are addressing the increasing burden of nuclear verdicts, categorized as awards of $10 million and greater, driven by social inflation and the general misuse of tort law through multiple avenues, including a coalition approach at the legislative and judicial levels.

While these collaborative efforts at tort reform move forward, there is much businesses can do on their own to develop first lines of defense against the potential of nuclear verdicts. An important first step is understanding the risks present in states where the liability environment may be particularly challenging.

According to the U.S. Chamber of Commerce’s Institute for Legal Reform, four states host half of the nation’s nuclear verdicts – California, Florida, New York and Texas. However, since these states account for roughly one third of the U.S. population, their popularity for nuclear verdicts is not just a function of size. It is a reflection of the tendency of local jurisdictions to present a legal climate favorable to such jury awards. Given their respective sizes, both Georgia and Washington also tend to host more than their expected share of nuclear verdicts.3

Tort reform efforts by businesses in a number of industries, including construction firms and their insurers, are showing some promise in bringing about changes in states where nuclear verdicts have become increasingly common.

Construction companies are familiar with the New York Labor Law that establishes strict liability on contractors and other businesses. Such absolute liability means a plaintiff does not have to prove negligence on the part of the defendant.

While insurers and the business community have spent considerable effort in trying to change New York law, often viewed as a driver of high commercial insurance prices in the state, their efforts have been up against a well-funded plaintiffs’ bar.

There is hope, however, that litigation filed by Tradesman Program Managers, managing general agency, and parent company Roosevelt Road Re under the Racketeering Influenced and Corrupt Organizations (RICO) Act may have an impact on the behavior of segments of the plaintiff’s bar. The Tradesman litigation alleges that numerous participants were involved in widespread, coordinated efforts by workers, attorneys, doctors and others to defraud construction companies and their insurers by filing fake accident claims. After an initial filing in March 2024, and a second filing in August, Tradesman recently made a third filing in the case on Sept. 9. It is anticipated that the fraud allegations may result in criminal charges as well.

“Eliminating fraudulent claims could go towards moderating insurance costs, not to mention the expenses construction companies incur in investigating and defending the claims,” says Allen Kirsh, Head of Claims Judicial and Legislative Affairs.

In Florida, a state that saw 197 nuclear verdicts between 2013 and 2022, according to the Institute for Legal Reform’s report, Zurich and its coalition partners worked to get a major tort reform law passed last year. The bill, which was signed into law by Governor Ron DeSantis, specifies the admissibility of evidence in personal injury and wrongful death cases to provide juries with an accurate picture of medical damages. It also sets clear guidelines for insurers, claimants and insureds in third-party claims cases to reduce third-party “bad faith” incidences and lawsuits. The law also changed Florida from a “pure” to a “modified” comparative negligence standard in liability cases. A plaintiff found more than 50% at fault will no longer receive damages, and defendants found 49% or less responsible will pay nothing.4

Since the law took effect, the number of policies written by Citizens Property Insurance Corp., the state’s insurer of last resort, have dropped,” says Kirsh. “That’s an indicator of improvement in the insurance market.”

While positive steps have been taken in Florida, Kirsh notes that the state remains a challenging jurisdiction for contractors.

Another state that worries construction companies and their insurers is Pennsylvania, particularly in light of the U.S. Supreme Court’s decision earlier this year to allow a person injured outside of the state to file suit in Philadelphia, a jurisdiction known for high awards.

The Supreme Court decision in Mallory v. Norfolk Southern Railway Co. held that a railway worker who contracted cancer after handling asbestos and other carcinogens could sue the railroad in Pennsylvania where the company was registered even though he lived and worked outside the state.

The Supreme Court decision raises concern that forum shopping could land the defendant in an unfriendly jurisdiction if plaintiffs are able to pick and choose where to file suit. For contractors licensed in Pennsylvania, this is an immediate concern, and, if other states adopt similar statutes, the Mallory decision could apply to those jurisdictions as well.

On an encouraging note, Texas, another state high on the list of those where nuclear verdicts are common, has seen the state’s Supreme Court reverse large-damage verdicts in some recent cases.

In one opinion, the court reversed a $12 million verdict, determining that the plaintiff’s counsel’s suggestions that the defense was motivated by gender and racial bias was improper.5 In another, the court shot down the plaintiff’s attorney’s attempt at ‘unsubstantiated anchoring,’ – the practice of putting random large numbers in the jury’s mind simply to manufacture a large verdict.6

Construction companies also have concerns about the U.S. Supreme Court’s decision to overturn the so-called Chevron doctrine that allowed federal agencies deference to create their own rules and regulations in the absence of a specific statute that did so.

This is an important ruling for construction companies because it could mean that courts no longer have to give deference to the Occupational Safety and Health Administration’s (OSHA) creation of safety protocols and other guidelines.

The reversal of Chevron deference directly impacts the ability of OSHA to interpret and enforce workplace safety regulations. With the reversal of the doctrine, the enforcement of regulations under the Occupational Safety and Health Act (OSH Act) will now face increased judicial scrutiny. OSHA's ability to interpret and enforce sometimes ambiguous occupational safety provisions may be challenged more frequently in court, resulting in a more constrained regulatory environment. For example, rules and regulations that OSHA develops to address emerging workplace hazards under the OSH Act may now be more vulnerable to legal challenges. Businesses and other regulated entities might be more inclined to contest OSHA's interpretations of the law. This could lead to prolonged litigation and uncertainty in the enforcement of safety standards.7

“The potential impact from this decision is being widely discussed and closely monitored,” Kirsh says. “How it gets interpreted remains to be seen, but it is certainly one that causes concern for construction companies”.

While tort reform is an important effort, keeping construction companies safe and out of courtrooms begins well before any potential loss might occur.

“Developing a strong understanding of contractual obligations is the perfect place to start, including requirements for delivery timelines, payment terms, performance obligations, penalties and other factors that define written relationships with key stakeholders,” says Construction Technical Director Megan Jameson. “That seems like basic risk management, but it is critical to ensure that a company makes every attempt to be in compliance with the terms of their contracts at all times. So is having a clear understanding of regulatory obligations and code requirements. This is especially important when working in unfamiliar jurisdictions, constructing projects using emerging means, methods, or materials, and entering new contractual relationships such as joint ventures.”

Having a robust contract management process in place to monitor contract compliance as the project moves forward, and to make changes or corrections when necessary, can be a vital component in ensuring successful project completion and delivery.

“It is also important to have strong quality assurance/quality control (QA/QC) programs in place paired with safety protocols that focus on, for instance, loss mitigation and proper documentation,” notes Jameson. “Having a QA/QC program is important, but if you leave it in a binder on the shelf it’s not going to help you reduce losses. A program will be most effective when it is rigorously followed and can be of real value in helping to defend your arguments at trial.”

Concerns surrounding the legal system being exploited to deliver a growing number of nuclear verdicts, driven in part by social inflation and the evolving tactics of the plaintiffs’ bar, are unlikely to be resolved soon. However, affirmative efforts to seek positive change by businesses at risk of these unreasonable judgements are continuing, with the support and collaboration of their insurers. As lawmakers gain clearer perspectives on the impacts of the current legal environment on the economic vitality of their states, there is optimism that these efforts will ultimately bear fruit.

Insurers play a big role in supporting their customers throughout the risk management and litigation process. At Zurich, underwriting teams consult with risk engineers from Zurich Resilience Solutions to provide contractors with guidance to help tailor quality control programs and safety protocols to reduce the potential impacts of social inflation in problematic jurisdictions.

This close collaboration helps to ensure that construction sites are well-managed and customers are confident that they have a solid team behind them should legal action arise.