Contested claims: To settle or not to settle?

The increasing number of claims against public liability and professional indemnity policies is causing capacity to shrink and premiums to rise to unreasonable heights in some markets. Contesting claims also add to the financial pressures by generating spiraling legal costs.

Insurers, brokers, claimants, and insureds struggle with whether to settle a contested claim or battle against it in court.

“It can be quite complicated,” said Eric Lowenstein (pictured above), CEO of Tego Insurance, a specialist healthcare underwriting agency. The medical indemnity space provides an example of the issues at stake in any settling versus not-settling debate over a claim.

“If you think about the individual medical practitioner, their name is their brand. That means adverse claims, particularly those that become a source of media interest, can seriously impact their reputation,” said Lowenstein.

He said adverse claims could often be “a double-edged sword” because settling the matter becomes personal for the doctor, who may feel that defending the case is necessary to clear their name.

“Equally, running a matter to trial and having the doctor give evidence puts them under the public eye, and bad publicity could end their career regardless of the outcome,” he said.

Lowenstein said whatever happens in a claim situation in the medical indemnity space. There are unavoidable drains on resources for clients as they prepare documents and provide evidence to investigating regulators.

There’s also the possibility of multiple plaintiffs and defendants.

“You may have the hospital administration, medical staff, contracted specialists, and sometimes device manufacturers. In some scenarios, you may also have multiple hospitals and clinics, which can get even more complicated where there is an arrangement between public and private hospitals,” said Lowenstein.

“It’s becoming more and more complex, and so the days of simply handing over a cheque are long gone,” he added.

Read next: IAG right to reject a $6 million bedding factory fire claim.

Lowenstein said the increasing litigation costs are just one pressure acting on the medical indemnity space.

“It is a multi-pronged effect caused by increasing litigation and other medical inflation, social inflation, and reinsurance factors. We are seeing an escalation in medical indemnity claims in both frequency and costs,” he said.

The CEO said this trend impacts medical indemnity providers in Australia and globally.

“Medical inflation is caused by higher costs associated with long-term care, which increases claims settlement costs,” he said.

Social inflation, said Lowenstein, results from the medical profession becoming more of a focus for an increasingly litigious society.

There are also increasing reinsurance costs driven by COVID-19, adverse weather events, and other global catastrophic losses playing in, too, he said.

Lowenstein said there’s “a range of different levers that might be pulled” to help ease the problem.

“Legislative reform, increased focus on clinical risk governance, and funding to the healthcare sector would all play an important part,” he said.

Other industries and insurers face a different balancing act between settling claims or contesting them in court.

Read next: Do insurers need to change their litigation models?

Class actions in the directors and officers (D&O) space are still a significant concern for companies and insurers. However, COVID-19 impacts and changes to the continuous disclosure laws may have slowed the class action numbers. Some brokerages are now encouraging their clients to defend these actions in court.

“2017 and 2018 were probably two of the peak years in Australia’s volume of securities class actions. In both of those years, there were 24 class actions,” Henry Clark, head of professional and executive risks for Honan Insurance, told Insurance Business recently. However, Clark said in 2021, there would be only six class actions.

“With the changes to the legislation requiring a higher threshold to bring a class action, we hope that will then encourage defendants, like ASX companies, to defend matters,” he said.

However, Martin Jones, Australia client executive for Xceedance, argues that early settlement is usually the better option across claims, not just for shareholder class action claims.

In February, he told IB that claims costs are still escalating, and insurers must develop new strategies to facilitate early settlement. “Extensive use of external law firms,” he said, can contribute, together with other factors, to “major claims inflation.”