Could a lawsuit against your business go nuclear? When jury awards reach $10 million, they’re called nuclear verdicts. With these oversized verdicts becoming increasingly common, Texas businesses and the carriers that insure them are feeling the impact.
An Introduction to Nuclear Verdicts
The U.S. Chamber of Commerce says nuclear verdicts increased in frequency between 2013 and 2022 – excluding the pandemic years, when many courthouses closed temporarily. During this period, the median nuclear verdict was $21 million. However, some extremely large outliers meant that the mean nuclear verdict was $89 million. The most common case types to receive nuclear verdicts were product liability (23.3%), auto accident (23.2%), medical liability (20.3%), and premises liability (14.3%).
Although nuclear verdicts can happen in any state, some states are more likely to experience them. The U.S. Chamber of Commerce says nearly half of all nuclear verdicts occur in just four states: California, Florida, New York, and Texas.
As an example of a nuclear verdict in Texas, FreightWaves says Werner Enterprises received a $100 million verdict over a fatal crash that occurred on icy roads near Odessa, Texas. Although the other vehicle crossed to the other side of the highway before colliding with the truck, the truck driver has been accused of driving too fast for the conditions. Werner is appealing the verdict.
As another example of a nuclear verdict, Engineer News-Record says a Dallas jury awarded $860 million to the family of a woman who died when a tower crane collapsed. There were two defendants – the crane owner and the developer – but only the developer was found guilty of negligence.
Although a nuclear verdict is usually defined as any jury verdict of at least $10 million, some are for much more than $10 million. You may see the term “thermonuclear verdict” used to describe larger jury awards.
The Impact on Texas Insurance Premiums
Nuclear verdicts are closely tied to social inflation: the increase in litigation costs over time, often at a pace too fast to be explained purely by economic inflation. According to the Insurance Information Institute, social inflation added $30 billion to commercial auto liability costs between 2012 and 2021.
Although social inflation and nuclear verdicts are not the only causes behind rising commercial auto insurance claims, they may be significant contributing factors. According to Business Insurance, the commercial auto insurance sector has only achieved profitability once in the past 10 years, period despite repeated rate hikes. Liability loss drivers – including nuclear verdicts – have been an even bigger problem than rising repair and replacement costs.
As commercial auto insurance is just one line of coverage, the impact of social inflation across all liability lines may be much greater.
When insurance companies see their claims costs increase, they have to adjust their underwriting and rates to compensate. This results in higher insurance premiums for policyholders. According to CIAB, commercial property and casualty premiums have increased for 26 consecutive quarters.
For Texas businesses, rising insurance rates cut into profits and add to overall operating costs. This may make it more difficult for businesses to survive, especially during times of economic inflation and rising labor costs.
Business Insurance Industry Response and Future Outlook
With insurance litigation costs increasing, some people have been looking for ways to rein in nuclear verdicts.
Caps on jury awards may help ease the problem of nuclear verdicts. In Texas, non-economic damages in medical malpractice cases are capped at $250,000 or $500,000, depending on the defendants involved. Texas also caps punitive damages in personal injury cases.
According to the NAIC, other measures to reduce nuclear verdicts have included increasing the standard of proof required to receive awards and allowing the use of bifurcated trials, which handle determination of liability and determination of penalties in separate stages.
The rise of third-party litigation funding has also been linked to nuclear verdicts and social inflation, meaning efforts to regulate third-party litigation funding may also help. The U.S. Chamber of Commerce says litigation funding is often secret. Mandatory disclosure may help by encouraging ethical practices.
Risk Management Strategies
Nuclear verdicts are a growing problem, but businesses can take the following steps to reduce the threat.
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Implement a comprehensive risk reduction program. For example, if your company has a fleet, implement a driver safety program that includes telematics to ensure drivers are practicing good habits behind the wheel. If your company manufactures goods, implement quality control practices to prevent defects that could lead to lawsuits.
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Maintain thorough documentation. If your company is sued, thorough documentation of your safety measures may be critical to your defense. Be prepared to show that you are meeting your duty of care to keep workers, customers, and other people on the road safe.
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Assess your liability insurance. Review your insurance policies for any coverage gaps that may leave your company exposed and determine whether you need additional coverage. Also consider raising your liability coverage limits or adding an umbrella or excess liability insurance policy for additional coverage.
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Notify your insurance company of any potential claims. Even if your company isn’t being sued, you should discuss any incidents or complaints that could lead to a lawsuit with your insurer. Good management from the beginning may prevent claims from going nuclear.
Do you have the insurance you need to protect your business from the rising costs of litigation and liability? We can help you review your coverage needs.
