Nuclear Verdicts' Can Drive Up Cost of Doing Business

The cases are growing in number, and the verdicts are getting bigger, insurer Allianz said in a recent analysis. A Philadelphia jury this year, for example, ordered Exxon Mobil to pay $725 million to a service station mechanic who developed leukemia. In another case, a California jury said an entertainment billionaire should pay $900 million to a former employee who brought sexual battery claims.

For victims' advocates, the large verdicts hold corporations accountable, but businesses have argued they lead to increased insurance costs that are ultimately passed on to consumers. The Wall Street Journal spoke with David Arick, the president of the risk management society RIMS, for his views on the trend, and whether 2025 and Republican control of the White House and Congress could bring changes.

WSJ: Could you talk about the trend toward ever-larger jury verdicts against businesses?

ARICK: The plaintiffs' bar has done a really good job of making it seem like a victimless crime when they get a business to pay for an event that occurred, whether they were legally responsible or if the amount that's paid equals the amount of damages or an appropriate amount of compensation for that injured party.

It's a big concern for insurers, and [especially] insurers that cover certain industries like trucking [and] retail. Insurers are paying for these [verdicts], which drives up the cost of insurance, which drives up the cost of goods and services. It's effectively becoming a tax. It's a winning lottery ticket for that plaintiff to make them feel compensated for something bad that happened.

WSJ: When you have a large verdict, are others benefiting apart from the alleged victim?

ARICK: That winner of that lottery ticket, many times, is a firm that's financing that litigation as an investment, and they're looking for the potential for some kind of windfall investment return. That's not really what most people would consider to be justice.

I think it's reasonable to ask for litigation funding to be disclosed in litigation, so that the actual parties to a given court case are known to everyone involved, including a potential jury that's being asked to make a vote as to who should pay for what.

WSJ: Is industry hopeful that there is going to be any kind of movement? What could change in the coming year?

ARICK: I've seen a couple different proposals at the U.S. legislative level, in the U.S. House [of Representatives]. Darrell Issa, [R., Calif.] had proposed a model bill that would require disclosure and it was supported by a fair number of people. But whether it gets traction or not in Congress remains to be seen. There were some big companies that all signed a letter that was directed to the U.S. Judicial Conference. They've got an advisory committee that's doing a study that's looking at to what extent [disclosing] litigation funding should be required, at least in federal court cases.

A few states have done their own version of requirements for either disclosure or certain controls on when and how litigation funding can be used. But certainly the best solution would be a federal solution that makes it uniform across states, especially when so many large corporates and large businesses operate across multiple states.

WSJ: The election means in 2025, the House of Representatives, the U.S. Senate and the presidency will be controlled by Republicans. Do you think that could produce some reforms?

ARICK: Historically speaking, the Republicans have tended to be more pro-business, less [in favor] of regulation over aspects of the economy. Certainly you would hope that that is a possibility for next year or in year two of the administration, but it's obviously still early days. Generally speaking, I think that there should be reason for optimism.

The only real beneficiaries of all this expense that's coming out of the economy are the firms that are funding and financing litigation...We think disclosure is at least a great first step. But if we could get to a place of having some kind of tort reform, that would be fantastic.

WSJ: One criticism of the points you're making is that juries know what they're doing, and if they decide a big company should pay all this money, we aren't entitled to second guess them.

ARICK: You have to give the plaintiffs' bar credit for having very adept marketing and for having their sound bites and positions very well formulated. The bottom line is, a lot of times juries are formed of people that couldn't get out of jury duty. We all complain about doing jury duty. So, it's not like every case is heard in front of the Supreme Court, where everyone would have a vast amount of legal experience. People are increasingly fed by reality TV and things that play to emotions, and the plaintiffs' bar plays to emotion.

Where it gets to be unfair is when you feel like you have to add zeros to it just to punish somebody, when there is no apparent intent to do something wrong. Accidents happen.

WSJ: You mentioned trucking earlier. What's happening to that industry and other sectors?

ARICK: You see trucking firms struggling to have insurance that allows them to go on the roads because of the cost of that insurance being driven up by the way the legal system reacts to even minor accidents.

In general, I would say any business that's public facing and has employees has the exposure. Sexual harassment and those kinds of things can happen in almost any context, even in higher education. A lot of industries face the public.

WSJ: What is the worst-case scenario in your view if no reform happens?

ARICK: There's a possibility that insurance becomes unavailable in some areas, or if it is available, it's at a very high cost. And then it's a matter of, "Can that business afford it?"

I'm not speaking for the insurance industry. I'm speaking as an executive that's representing risk managers. We're seeing our budgets go up, and our businesses are already under pressure in other areas that are squeezing margins. This is another negative headwind that we have to deal with. We sometimes don't agree with our insurance companies as well, but we have to buy the insurance because we have so much exposure out there.