Abuse of the legal system that contributes to the increase in the cost of car insurance

With US auto insurance rates up 11% on average over the past year, auto premiums have been a hot topic in the industry lately, especially in states like Florida, Louisiana and Texas, where high-risk weather events make it more expensive. for drivers to protect their vehicles.

Reflecting on the important role of weather disasters, Michel Martinez (pictured left), local vice president, automation at Gallagher said, “Whether it's floods, hurricanes, tornadoes, or downed trees from hurricanes, weather is definitely a big factor.”

Beyond these well-known factors, however, a less-discussed problem also affects auto insurance costs: abuse of the legal system.

What are 'billboard lawyers'? How do they affect auto insurance premiums?

Abuse of the legal system occurs when policyholders or plaintiffs' attorneys seek to increase the cost and time required to settle insurance claims.

According to a report from the Insurance Information Institute (III), tactics include effective legal systems such as Assignment of Benefits (AOB) to force unnecessary payments into the homeowner and auto insurance markets.

Reflecting on these scam-like tactics, Breanne Armstrong (pictured right), director of insurance intelligence at JD Power said, “This causes claims costs to increase, resulting in higher premiums for insurance customers.”

Tactics to abuse the legal system are often used by 'billboard lawyers'— plaintiffs' attorneys who use aggressive marketing tactics across highway billboards, TV ads, and social media, promising significant cash awards to clients.

In states like Louisiana, which has high levels of attorney involvement in personal insurance claims, the abuse of the legal system can cost residents more than $1,100 a year, making it the least expensive US state for both auto and homeowners insurance.

The dark side of the third party case

According to Armstrong, another factor contributing to high car insurance rates is the lack of regulation regarding third party liability financing (TPLF).

TPLF is a multi-billion dollar global industry in which hedge funds and other financiers invest in lawsuits in exchange for a percentage of any settlement or judgment. The problem? The industry is highly unregulated, increasing the opportunities for lawyers to finance lawsuits using potentially dark money.

Third-party liability increases the cost of auto insurance in two main ways:

• Financial pressure on insurers: As insurers face higher legal and settlement costs, they may raise premiums to cover these costs. This financial pressure translates directly into higher insurance costs for consumers.
• Top accommodations and awards: As third-party sponsors support lawsuits, plaintiffs may seek larger settlements or awards, knowing that their financial backers will cover the costs of the lawsuit. This often leads to higher premiums, which insurers then pass on to consumers through increased premiums.

With abuse of the legal system contributing to the rise in auto insurance rates, JD Power's 2024 US Auto Insurance Survey reveals a surprising result: more than half of consumers (51%) say they have little confidence in their auto insurance.

Another finding in the 2024 JD Power survey found that consumer confidence is lowest in states like Florida, which has the highest insurance default rates. Martinez suspects that this may be related not only to the country's changing weather conditions but also to no-fault insurance policies. In these states, “regardless of who is at fault in an accident, insurance companies are responsible for paying for damages.” This system can lead to higher premiums for customers, as insurers need to cover the increased risk, and costs associated with frequent claims.

“If someone gets into an accident, even if it's not their fault, they will call in that request and report, and they will come back with something,” added Martinez.

How can consumers promote consumer confidence?

Although only 15% of respondents to the JD Power Car Insurance Survey showed high levels of trust in insurers, there is light at the end of the tunnel.

Research has found that when customers have a high level of trust in their insurance, customer satisfaction and brand advocacy increases significantly, even if the rate increases.

According to Martinez and Armstrong, marketers can use the following strategies to strengthen consumer trust and increase brand loyalty even in the midst of an unstable auto insurance market:

• Obvious communication: Clearly explain policy details and premium changes. Update customers regularly throughout the renewal process to keep them informed and comfortable.

“What I've seen, and we've seen a lot during COVID, is that insurance customers want updates,” Martinez shared. “Even if it's not the best news, customers don't want to be surprised by their prices.”

• Educate customers: Provide resources and guidance to help customers understand their insurance policies and the factors that influence their premiums. Ensure that customers are aware of the benefits and limitations of the policies they have chosen.

Martinez said: “Helping customers understand their options and the reasons for different fees or rates builds their confidence. By explaining the costs associated with each option, you can help customers make informed decisions that fit their needs.”

• Encourage clients to explore utilization-based insurance (UBI) programs: According to JD Power's 2023 US Auto Insurance Study, 35% of customers enrolled in UBI saved more than 10% on their auto insurance premiums. Despite these benefits, UBI adoption has remained stable at 17% over the past two years.

“By quickly informing customers about UBI options and their potential savings, retailers can demonstrate their commitment to helping customers get the best value, building greater trust and loyalty,” Armstrong said.