Risk & Business Magazine JGS Insurance Summer 2021 - Page 14




Nuclear ( crazy , as in “ go nuclear ”) verdict ( judgment ). These two words are seemingly innocent enough if they stand alone . But put them together — a nuclear verdict is defined as a jury award that exceeds $ 10 million in penalties — and you have a disastrous consequence on the pricing of insurance products .

Insurance premiums are predicated on identifying , analyzing , and predicting risks associated with the typical exposures of an insured client . Companies spend much time and resources developing algorithms to help them price their insurance products in a profitable way and to spread out the costs to protect the few amongst the many . They do this by reviewing trends and predicting losses in a pool of similar business exposures .
So what happens when the verdicts become intangible , meaning the actual economic damages have no bearing on the reality of the loss or exposures ? When

INSURANCE COMPANIES ARE LESS WILLING TO TAKE A MERITLESS CASE TO COURT FOR FEAR OF RECEIVING A NUCLEAR VERDICT somebody trips and falls and requires some sort of surgery to make them whole again , but a jury awards the plaintiff with economic damages that don ’ t actually equate to the medical costs , loss time of wages , and reasonable dollars for pain and suffering ? A claim that over a period of time may have settled for $ 1 million but now settles for $ 5 million or more ? What happens is you get runaway insurance inflation to help even out the “ new ” anticipated insurance costs .

The Wall Street Journal recently published an article analyzing data from VerdictSearch that reports a more than 300 % increase in the frequency of $ 20 million + verdicts in 2019 compared to the annual average from 2001 to 2009 .
As a direct result , insurance companies have been restricting capacity and raising rates . By restricting capacity , they are in effect stating they will only offer a significantly lower amount of liability than they would normally have offered . Perhaps in the past they would provide $ 10 million , $ 15 million , or even $ 25 million in limits ; today , they may only offer $ 5 million . While restricting their total exposure to loss , they are often times increasing premiums by 20 %– 60 % for that first $ 5 million limit .
As you can imagine , this is causing all types of pricing issues for our insureds , paying 40 %– 60 % more for lower limits than they were able to purchase in the prior year . Insurance companies are less willing to take a meritless case to court for fear of receiving a nuclear verdict , resulting in higher payouts for both underlying and excess layers of insurance . This , of course ,
makes these lines of business less profitable for insurance companies .
Unfortunately , there are no easy answers short of tort reform for these issues . As long as juries render “ lottery-like ” verdicts that aren ’ t commensurate with the actual damages or loss of income to a claimant , this will continue . Insurance companies , therefore , are correct in settling out of court even when the cause of liability isn ’ t a foregone conclusion . As the old saying goes , “ the devil you know is better than the devil you don ’ t .” Pain and suffering awards and punitive damages must be reined in , or we will continue to see less capacity and higher premiums . +
Ken Hager began his insurance career more than 34 years ago at JGS Insurance . Ken ’ s current role as Chief Operating Officer at JGS began in 1997 . Since that time he has been a guiding force in the direction and success of the JGS enterprise . Throughout the years , Ken has remained engaged with his customers and intently focused on their needs . He intently understands the risks associated with his clients ' operations and has been uniquely able to offer them superior solutions to their business needs .