Today, it’s severity, not frequency, that drives up the cost of claims. While the number of claims has generally declined, the average cost per claim has soared.
Claim frequency declined from 1994 to 2008, and litigation followed this trend, from approx. Between 5,800 and approximately 4,000 civil motor vehicle tort cases filed in federal courts (Figure 1). This is intuitive. Fewer accidents, fewer claims, fewer lawsuits. From 2008 to 2014, both the frequency of claims and the number of lawsuits were relatively stable. The relationship is maintained again.
But then things changed. From 2014 to 2023, the frequency of claims continued to decline – with the number of accidents still falling – but the number of lawsuits rose sharply, rising back to more than 6,000 by the end of the period.
The difference is significant. Why are lawsuits increasing even as the frequency of accidents and claims decreases? The data strongly suggests that the answer is abuse of the legal system—exploitative attorney advertising, litigation financing, and plaintiff attorney strategies that are generating lawsuits independent of underlying accident trends.
Research conducted by the Insurance Information Institute and the Casualty Actuarial Association found that abuse of the legal system and related litigation trends have led to estimated Liability insurance losses increased by $231.6 billion to $281.2 billion past ten years.
Litigation financing needs transparency
Third Party Litigation Financing (TPLF) is when a funder unrelated to the case, such as a hedge fund, provides funds to cover a plaintiff’s legal fees in exchange for a portion of any damages awarded through a judgment or settlement.
Thinking of insurance litigation as an asset class that can be packaged and sold to big-money investors is still unfamiliar to the public. Most people have no idea that litigation financing exists or how it works.
However, in recent years, the Insurance Research Council (IRC) has seen an increase in the proportion of respondents who say they know what insurance is. When TPLF explained it to them, there was consensus that litigants should be informed when outside investors have financial involvement in their cases. According to the agency, this level of transparency is something nearly everyone (seven out of 10) agrees with. IRC report.
Legal action against insurance companies has traditionally been viewed as lawsuits brought by individuals against large corporations with deep pockets. However, third-party funding in litigation increasingly puts significant financial resources into the hands of insurance companies struggling to keep premiums affordable.
This shift in perception could sway juries, who may have previously been inclined to rule “nuclear” against the insurance company.
The high cost of lawyer involvement
Importantly, representation rates are rising at all levels of claim size, not just the large, complex claims you might expect lawyers to be involved in. Even for smaller claims, attorney participation rates are higher than in previous years.
And there are significant geographic differences. Attorney involvement varies greatly from state to state and even from region to region within a state. This change itself is a signal: It tells us that the legal and regulatory environment, local advertising density, and plaintiff attorney marketing activity are all affecting these numbers, not just potential harm.
When comparing groups of similarly injured claimants, controlling for injury type and severity, meaningfully different patterns are still seen between claimants who are represented by attorneys and those who are not.
Claimants with attorneys exhibit different treatment patterns—the type of provider, sequence, and duration of treatment they see differ from unrepresented claimants with similar injuries.
Likewise, injury claimants who have attorneys also have higher medical utilization rates. More visits, more procedures, more diagnostic tests. In some IRC studies, claimants with attorneys were seven times more likely to have an MRI.
Claimants with attorneys will have to wait longer to receive their settlement payments. The process takes more time, which itself has cost implications.
Of course, these increased costs translate into higher premiums, so policyholders at large bear the costs of abusing the legal system.
The involvement of lawyers is not only a sign of complexity; It is a driver of behavior that changes nearly every aspect of claims development.
DDiagnose early, or pay later
Lawyers receive an average of 32% of legal fee settlements, reducing compensation to claimants. A significant portion of this comes directly from claimants’ recoveries before any other costs are deducted.
IRC research shows that, on average, claimants with attorneys do not receive higher net reimbursements (settlement after legal fees and medical expenses). The main beneficiaries of the current system are lawyers and, in funding cases, third-party investors.
When the IRC asks claimants why they consulted a lawyer, the most common answer is: “Someone told me I should consult.” It’s not because they feel the insurance company is treating them poorly, but because friends, family or advertising sparked the conversation.
This is the billboard effect in action, with many attorneys advertising huge payouts to the public so they can see them every time they drive by. U.S. attorney costs Investment in billboards, print advertising, local TV advertising and radio advertising will reach $2.5 billion by 2024According to the American Tort Reform Association. This is a significant increase compared to the previous five years.
Instead, the most common reason people give to the IRC for not consulting an attorney is that the insurance company handled the claim promptly and fairly. This is a powerful operational insight—fast, fair claims processing is one of the most effective tools an insurance company has to reduce unnecessary attorney involvement.
One in 10 accident victims said they were contacted by an attorney proactively after the accident, meaning the attorney contacted them proactively and not the other way around. This is solicitation and a key driver of attorney participation rates.
Most claimants consult a lawyer within a week of the accident. This window (the first week) is critical. Insurers that can contact claimants quickly and set the right tone during that window will have a better chance of managing claims effectively. If claims departments don’t take early and decisive action, lawyers will fill the void.
Strive for excellence and leverage artificial intelligence
Maintaining the status quo is clearly not an option for the insurance industry. Instead, insurance companies must adapt faster if they want to keep up with this changing environment. Insurers need to find new, innovative solutions to the growing problem of abuse of the legal system. This includes leveraging AI technology to analyze claims at an early stage, improving efficiencies, expanding expertise and working more broadly across the industry to educate consumers about the risks of abuse of the legal system.
Kharkavets is North America Head of Claims, Insurance Consulting and Technology, and Porfilio is WTW North America Head of Personal and Commercial Business Development.
