Liability insurance defense costs are significantly higher in states like New York, California, and Washington, but while this spending has begun to decrease nationwide, rising social inflation is driving up losses and increasing pressure on insurers.
Liability insurance firms’ direct defense spending and defense-to-loss ratio – both measure how much insurance providers spend on legal and claims investigations – are significantly higher than those of other insurance types, including crop or property coverage.
This is according to Insurance Business’ recently released insights Data Hub, where the definition of “liability insurance” covers surety, credit, fidelity, and financial guarantee, protection against theft, regular and excess workers’ compensation, medical malpractice, medical professional liability (both claims-made and occurrence-based), product liability (both claims-made and occurrence-based), and other forms of liability insurance structured similarly.
Direct defense spending for insurance coverage refers to the total amount spent on legal and claims investigations, while the defense-to-loss ratio represents direct defense spending as a percentage of total losses incurred.
Liability coverage defense costs dwarf those of individual insurance coverages, such as automobiles or property claims, due to the scale of liability insurance’s coverage and its potential consequences.
Philip Matthews, a coverage lawyer and special counsel for civil litigation and insurance at Duane Morris, explained that after over a century in the US insurance market, auto and property insurance claims have become relatively automated, inexpensive to defend, and quickly resolved.
“Things like product liability, professional liability, or pollution claims are more unique and haven’t been around for 100 years,” which contributes to higher litigation costs, said Matthews.
Liability claim defense costs are of particular concern to insurers in California. In 2024, insurers in this state paid the third-highest proportion of liability defense costs relative to losses, at 18.3 percent.
“The courts here are more sophisticated, the litigation is more developed, and people tend to bring the bigger, more complex claims in California than in other states,” said Matthews, who is based in San Francisco.
Additionally, CA’s Cumis statute (1984) often requires insurers to provide independent legal counsel to client plaintiffs, raising legal costs and influencing settlements in favor of plaintiffs. Similar legal doctrines exist in FL, IL, NV, AK, TX, and MT.
Christopher Nicoll, based in Seattle, WA – the state that in 2024 paid the fifth-highest proportion of liability defense costs relative to losses at 18 percent – highlighted a similar doctrine. Like CA’s Cumis statute, WA’s “conceivably covered” legal doctrine requires insurers of certain policies to provide defense if allegations in a coverage lawsuit could be interpreted as potentially falling within the policy’s coverage. “The bar is quite low” for this costly defense inclusion, particularly in marine insurance, said Nicoll.
Other states with similar doctrines – described as “possibly covered,” “potentially covered” or similar terms – include CA, FL, MO, TX, IL, NJ, and NY.
Chaffetz Lindsey, an arbitration boutique specializing in disputes over policy scope, is based in New York City. NY state had the second-highest liability claim defense-to-loss ratio in 2024, at 18.4 percent.
In an email to Insurance Business, founding partner Peter Chaffetz identified seven features of the US legal system that contribute to high liability claim defense costs. They include: jury trials in all civil cases (often resulting in higher rewards), the power of the plaintiffs’ bar (pooling resources and exerting judicial influence), contingency fee representation (lowering plaintiffs’ financial risk), punitive damages (stacking defense and reparation costs), the “American Rule” (which requires only the losing party to pay its own defense costs, empowering weak claims), extensive pre-trial discovery (increasing defense costs), and overlapping jurisdictions (allowing charges to be filed in plaintiff-friendly states).
“These factors, in combination, set US litigation apart and drive the constant escalation of jury verdicts,” Chaffetz wrote.
Since 2014, direct defense spending on liability claims has averaged $12.2 billion. In contrast, automobile and property insurance defense costs averaged less by $5.3 billion and $7.2 billion, only $6.9 billion and $5 billion, respectively.
In the same decade, liability claims’ legal defense costs, as a percentage of total claims paid, averaged 17.7 percent. The defense-to-loss ratio for automobile and property claims averaged only 4 percent and 4.4 percent, respectively.
With all these findings on liability insurance’s staggering defense costs and their percentage of losses, trends are shifting: both measures of liability insurance defense costs have shown remarkable changes in recent years.
In 2019, liability claims’ defense spending plateaued, peaking at $13.1 billion, before declining spontaneously to $10 billion by 2022, where it has remained. Similarly, since 2014, liability claims’ defense-to-loss ratio has steadily declined to 15.2 percent from 20.3 percent.
In parallel with the downward trend in liability defense spending, liability claims losses have risen remarkably. Between 2014 and 2024, liability claims paid as a percentage of premiums earned – liability insurance’s loss ratio – rose to 60.6 percent from 49.8 percent.
This 10.8-percentage point increase was the largest loss ratio increase across insurance categories compared to a decade ago, closely followed by property insurance’s 10.5-point increase. Last year, the largest annual jump for liability insurance’s loss ratio was reported from 54.6 percent in 2023 to 60.6 percent in 2024.
From Nicoll’s perspective, the significant drop in liability claim defense spending in 2019, and the loss ratio’s decade long uptick, are not coincidental to shifting civil norms epitomized during the COVID-19 pandemic.
“Society felt a certain way about life and its prospects in the throes of and the aftermath of a worldwide pandemic. There was a feeling for a while that we had to be taken care of, and if somebody wasn’t taken care of, they had to be paid,” said Nicoll.
As a result of “social inflation” exacerbated by pandemic-era social spending, Washington state and other jurisdictions across the US saw an increase in liability defense verdict amounts. This, in turn, caused a rise in settlement amounts; the sum companies are willing to pay to avoid going to trial or receiving what Nicoll described as a “nuclear verdict.”
In addition to insurers’ preference for out-of-court settlements amid rising loss verdicts, Matthews noted that liability defense costs are likely falling due to more effective litigation management.
Over the past two decades, large insurers have entered into “alternative fee deals” with defense firms to represent them against all claims from large individual policyholders for a fixed annual amount, as opposed to paying per case.
“[Insurers] will give [defense firms] a flat million dollars a year, or $85,000 a month... whether you work five hours or 1,000 hours. That’s all you’re going to get,” Matthews said.
He pointed to the Wellington Agreement (1985) as an example of smarter litigation. In that case, a national liability suit involving asbestos saw 20 insurance companies defend their claims through a single defense lawyer. He said, “Obviously, that’s going to drive costs down.”
From 2014 to the present, “there has been some effort to organize in terms of cross-complaints, inter-defendant fighting, or consolidating representation,” which could be one reason for the lower liability defense costs.
It’s difficult to claim a direct correlation between rising liability claim losses and falling defense costs. From 2023 to 2024, the six-percentage-point increase in liability coverage’s loss ratio was likely the result of West Coast wildfires and billions of dollars in damages – independent of the declining defense costs, said Nicoll. Similarly, the generational decline in asbestos-related or other increasingly outdated health hazard claims likely contributed to the decrease in annual defense costs, Matthews said.
Nevertheless, Matthews offered advice on avoiding the worst of liability defense costs.
“If someone puts 10 lawyers on a file that needs two, that’s unreasonable,” he said. By streamlining documents to a single court reporter or setting up shared systems (such as a website), all parties, including defense teams and insurance companies, can access the same information, preventing multiple law firms and insurance offices from creating separate systems.
Nicoll agreed with Matthews’ reasoning on efficient litigation: “I can tell you, lawyers’ fees have not gone down.”
