As the legal landscape continues to evolve, waste and recycling companies will need to adapt their risk management strategies, seek expert legal and insurance advice, and prepare for a future where legal risks are more prominent than ever before.
By Nathan Brainard
In the evolving landscape of business operations, the waste and recycling industry plays a crucial role in promoting environmental sustainability and ensuring communities remain clean. However, companies in this sector are often vulnerable to risks stemming from litigation, an aspect that has become increasingly challenging in recent years. The rise of litigation funding, nuclear verdicts, and legal system abuse have had a profound impact on companies in all industries, but especially those operating heavy vehicles and equipment when it comes to their insurance needs and coverage.
Litigation funding, which is the practice of third-party financing of lawsuits, has garnered attention for its role in fueling an increase in lawsuits. Nuclear verdicts, or excessive jury awards, have become a particularly alarming issue, putting immense financial strain on businesses. Legal system abuse further compounds the issue, with some parties seeking to exploit the legal system for financial gain. This article will explore how these factors interconnect and affect insurance coverage for waste and recycling companies, as well as how they influence insurance premiums, coverage terms, and the overall viability of insurance policies for industry players.
What is Litigation Funding?
Litigation funding is the practice of external investors providing financial resources to cover the legal expenses of a party pursuing a lawsuit. In return, the investor receives a share of the settlement or judgment if the lawsuit is successful. This form of financing allows companies or individuals with limited financial resources to pursue legal claims they might otherwise not be able to afford. While this may sound beneficial in theory, the rise of litigation funding has led to unintended consequences that significantly impact businesses in various sectors, including waste and recycling.
Impact of Litigation Funding
Litigation funding can and is fueling an increase in lawsuits. The availability of third-party financing removes a significant financial barrier for plaintiffs, making it easier to file lawsuits, regardless of their merit. This results in more lawsuits being filed, many of which might be frivolous or exaggerated.
In particular, these companies are often targeted for class action lawsuits (such as pollution related to a migrating plume from landfills or transfer stations), workplace injuries (employed drivers who pursue their company鈥檚 Underinsured or Uninsured Motorist coverage after being involved in an auto accident), and allegations of unsafe collection or on the road driving practices. With litigation funding backing such lawsuits, plaintiffs are incentivized to pursue legal action without the immediate concern of bearing legal costs. The funding model also encourages more aggressive legal strategies, as the financing party鈥檚 return on investment is tied to the success of the case.
Nuclear Verdicts: A Growing Threat to Businesses
A nuclear verdict refers to an extraordinarily large jury award, typically in the tens or even hundreds of millions of dollars, going far beyond what would be considered reasonable compensation for the damages suffered. These verdicts are often seen as an outcome of a combination of emotional jury decisions, legal strategies designed to manipulate emotions (such as playing to the reptilian [fight or flight portion of the brain]), and an increasing trend of jurors being sympathetic to plaintiffs.
The Role of Nuclear Verdicts in the Waste and Recycling Industry
Nuclear verdicts have emerged as a significant concern for insurance carriers and policy holders alike. Hauling companies, often dealing with contaminated materials, heavy machinery, and complex regulatory requirements, face a higher risk of legal action from employees, contractors, and members of the public who may claim harm from exposure to unsafe conditions or a company鈥檚 operational procedures.
When nuclear verdicts occur, the financial repercussions can be devastating. A single large verdict could bankrupt a company, especially if the firm lacks the financial resources to cover such an overwhelming judgment. For the waste and recycling industry, the emotional nature of nuclear verdicts is especially dangerous. Jurors may feel sympathy for plaintiffs, leading to outsized damages awards that bear no relation to the actual harm suffered.
In some cases, the scale of nuclear verdicts has led to a heightened sense of fear within the insurance industry, prompting higher premiums, lower coverage limits, and stricter terms of coverage for businesses in the business sector. Simply put, insurance actuaries no longer have a way to accurately predict outcomes forcing them to take these measures. This, in turn, can create a vicious cycle where companies are forced to pay more for less coverage, making it harder for them to recover from potential legal issues. Couple this with a decreasing carrier interest in the industry and we have the makings of a hard market for the waste and recycling industry, particularly for the auto liability and umbrella lines of coverage.
Legal System Abuse and its Impacts
Legal system abuse refers to the exploitation of the legal system for personal or financial gain, often by using frivolous or exaggerated lawsuits. This can take the form of fraudulent claims, misrepresentation of injuries or damages, or the pursuit of lawsuits with little merit, designed solely to generate quick settlements.
Impact of Legal System Abuse
In industries such as waste and recycling, where regulatory compliance is often complex, legal system abuse is a common tactic. Plaintiffs may file lawsuits against companies for alleged environmental violations or accidents they may not be responsible for, using the fear of lengthy litigation to force settlements. These types of lawsuits contribute to the rising cost of legal defense for companies in the industry, even when they are innocent or have adhered to all regulatory requirements. In many instances even if a hauling company has in cab video footage, it does not fully absolve a company from paying some amount of damages even though the video evidence substantiates their defense.
The prevalence of legal system abuse further exacerbates the issue of rising insurance premiums. Insurers often find it challenging to assess the true risk posed by a particular company when they are confronted with numerous frivolous lawsuits. As a result, insurers may classify waste and recycling companies as high-risk clients, leading to increased premiums or reduced coverage options.
The Impact on Insurance Coverage for the Industry
One of the most significant consequences of litigation funding, nuclear verdicts, and legal system abuse is the increase in insurance premiums for companies in the waste and recycling sector. Insurers adjust their pricing based on risk, and when risks related to legal claims increase, so do the costs of coverage. Add in the recent movement of the industry from the 6th to the 4th most hazardous industry (according to the Bureau of Labor Statistics) and it only adds to the decreasing interest on behalf of carriers and further increases premiums.
For waste and recycling companies, this can be financially crippling. Companies that once paid modest premiums for insurance are now faced with exponentially higher costs, driven by the increasing frequency of litigation, the potential for large jury awards, and the uncertain legal environment. These higher premiums can significantly strain the financial resources of waste management companies, particularly smaller firms that may not have the capital reserves to absorb such costs.
Reduced Coverage and Tightened Terms
In addition to rising premiums, insurers are also limiting the scope of coverage and introducing more stringent terms and conditions. An example of this would be some carriers are now excluding bodily injury as it relates to 鈥淐are, Custody, and Control鈥� endorsements. Under no circumstances should a policy holder agree to that language even if you have to pay a slightly higher premium to have it removed. Waste and recycling companies are finding it more difficult to secure broad coverage, with some policies excluding certain types of claims, such as those related to environmental hazards (such as PFAS and PFOS) or workplace injuries, such as those related to third party contractors working at an insured location.
Moreover, the fine print of policies is becoming more detailed, with stricter clauses that limit the insurer鈥檚 liability. These restrictions are often designed to protect insurers from the financial risks associated with massive claims, but they can leave policy holders vulnerable in the event of a catastrophic loss. For many family-owned businesses, this leads to a sentiment of, 鈥渨e are basically working to pay for insurance as opposed to turning a reasonable profit.鈥�
Impact on Claims Handling and Litigation Strategy
Another consequence of the growing legal challenges is the way insurance claims are handled. With the rise in nuclear verdicts and the increasing number of lawsuits backed by litigation funding, insurers have had to adopt more aggressive litigation strategies. Insurance carriers are more likely to settle claims quickly and less inclined to fight lawsuits in court, even if the case has little merit. This leads to policyholder frustration as they get stuck paying for the 鈥渃laim鈥� at each renewal for the next three to five years.
This is particularly concerning for smaller and mid-sized companies who rely on insurance to cover costs associated with claims, including legal fees, settlement amounts, and damage control efforts as they now bare the financial burden of a quick settlement and may be forced to work with secondary carriers because of 鈥渃laims activity.鈥�
Influence on Premiums
Insurance premiums in the waste and recycling industry are influenced by several factors, with litigation risk being one of the most significant. The more legal challenges a company faces (allegations, claims, poor cab report, etc.), the higher the premiums. Litigation funding makes it easier for plaintiffs to pursue lawsuits, leading to more claims being filed, including those that may be considered frivolous or exaggerated. This drives up the cost of insurance as insurers account for the potential risk of covering such claims. The actuarial philosophy is, 鈥淔requency breeds severity鈥� and they price terms and conditions accordingly.
Similarly, nuclear verdicts contribute to the increasing cost of insurance. The sheer size of these awards creates uncertainty for insurers, and, in response, they raise premiums to mitigate their exposure to such catastrophic losses. For businesses in the waste and recycling sector, this translates to a direct financial impact in the form of higher premiums, requirement of larger deductibles, and reduced or sub limited policy language.
Reduced Coverage Terms
In addition to higher premiums, insurers are tightening coverage terms. This means policies may exclude certain risks, such as those related to environmental damage or workplace safety, which are particularly prevalent in the industry. Insurers are also placing caps on payouts (sub limits), which can leave businesses with insufficient coverage in the event of a large claim. This is being done as a response to the unbalanced legal environment we currently find ourselves in.
Companies who once had broad general policies may find themselves with reduced coverage options. They may be required to purchase additional policies to cover specific risks, which are no longer included in standard coverage. For example, New Jersey now requires an Auto Liability limit of $1,500,000. If the carrier is not able to provide the additional $500,000, a hauler who previously did not carry an umbrella policy may now be faced with the financial burden of this additional coverage (for the record, all companies in the industry should have some form or excess or umbrella coverage). Even if the carrier can provide the new required limit there will absolutely be an increased charge for providing it. Either way, the policy holder has an additional financial burden to address.
Increased Deductibles and Retention Requirements
Insurers are also increasing deductibles and retention requirements fueling the perceived push to alternative risk management strategies such as large deductible, retro, and captive program structures. This means companies must pay a larger portion of the claim out of pocket before the insurance coverage kicks in as well as secure the policy deductible with a letter of credit or other financial instrument putting additional financial pressure on the company. In some cases, this can create significant financial strain on businesses, especially smaller companies with limited capital reserves. Under this premise, insurance is becoming 鈥渃atastrophic鈥� coverage as opposed to 鈥渁ccident鈥� coverage forcing policy holders to pay out of pocket for smaller claims they had previously relied on insurance to address.
A Complex and Challenging Environment
The combined impact of litigation funding, nuclear verdicts, and legal system abuse has created a complex and challenging environment for the industry. These factors have led to a sharp rise in insurance premiums, the tightening of coverage terms, and an overall increase in the financial risks associated with legal claims. Waste and recycling companies must navigate these challenges carefully to ensure they maintain adequate coverage while managing the ever-increasing costs of insurance.
As the legal landscape continues to evolve, waste and recycling companies will need to adapt their risk management strategies, seek expert legal and insurance advice, and prepare for a future where legal risks are more prominent than ever before. Aside from a total overhaul of the legal system via tort reform, these issues will continue to plague not only commercial policy holders, but personal policy holders as well.
The need to engage your local, state and national political representatives has never been greater and as an industry we need to convey a united front on these issues. The key to success will be balancing the need for adequate insurance protection with the financial realities of an increasingly litigious world. | WA
Nathan Brainard, AAI, is Division President and head of the Environmental Segment at Insurance Office of America (IOA) (Longwood, FL), as well as a member of the NWRA Safety Committee. Nathan has been with IOA for 20 years and specializes in Environmental Insurance with an emphasis on insurance for the Waste, Recycling, Remediation and Demolition industries. He can be reached at (407) 998-5287 or at [email protected].