The implications of a $1 billion Florida jury verdict against two trucking companies may have greater staying power from a qualitative standpoint than the headline-making amount of the award, which the defendants have blasted as "grossly excessive, arbitrary and unjustifiable."
Representatives of the plaintiff, which include the estate of the 18-year-old victim of a 2017 crash on a stretch of Interstate 95 in northeast Florida, conceded recently that the jury's $900 million August punitive damage award far exceeds the state's statutory cap. But the parties involved remain far apart in their interpretations of the amount that should be awarded.
The $1 billion August verdict provided one of the most pertinent examples to date of the role social inflation has played in driving up commercial auto liability insurance losses, loss-adjustment expenses and, potentially, premium rates.
The case also highlights the opportunities in front of the commercial auto business over the longer term, including the potential for greater use of autonomous technologies to mitigate operator error and, in turn, reduce the frequency and severity of claims.
Although it appears that most, if not all, of insurers' direct exposure to the Florida crash likely had been addressed through years-earlier settlements, the indirect effects in terms of the industry's appetite to take on over-the-road trucking risks may linger.
A Nassau County, Fla., jury issued compensatory damage awards for negligent infliction of emotional distress in the amounts of $16 million and $86 million, respectively, from trucking companies AJD Business Services Inc. and Kahkashan Carrier Inc. The $900 million punitive damages award pertained solely to AJD Business Services.
The court found AJD Business Services to have been negligent in its employment of a driver with a history of traffic and criminal infractions and, as a result, legally responsible for a sequence of events that led to the victim's death. It also determined that Kahkashan Carrier was legally responsible for the negligent operation of an owner-operator's vehicle that rear-ended the victim's stopped car given that he had been allowed to operate in the U.S. under that company's Department of Transportation authority.
AJD Business Services did not have legal representation present during the trial as it had been declared in judicial default for a failure to respond to the plaintiffs' complaint. Post-trial motions allege that the motion for default had not been properly served, but the plaintiffs countered that AJD Business Services effectively elected to stop participating in the action after insurer Falls Lake National Insurance Co. directed the defense counsel it retained to withdraw.
The James River Group Holdings Ltd. subsidiary separately confirmed that direction in a related legal action, saying that it followed a wrongful death settlement with the plaintiffs in the Florida case in an amount equal to the $1 million per-occurrence limit of liability under AJD Business Services' business auto policy. The settlement notably included a carve-out for the negligent infliction of emotional distress.
Falls Lake is suing the Florida plaintiffs in federal court for declarations that the applicable policy has been exhausted and, based on a specific exclusion, that it offers no coverage for punitive damages. The Florida plaintiffs have countered that the policy provision that terminates the insurer's duty to defend upon exhaustion of the policy limits is unenforceable under the laws of New York, where the policy had been issued, and they are seeking to collect from the insurer an amount covering "all consequential damages and all unpaid and unsatisfied amounts of the final judgment."
The Florida plaintiffs are separately seeking to hold Falls Lake and Kahkashan's purported liability insurer Northbridge General Insurance Corp., a Fairfax Financial Holdings Limited subsidiary, jointly and severally liable with their insureds for certain costs related to the proceedings. Nassau County court records do not appear to include responses from Falls Lake or Northbridge to the pertinent motions.
Meanwhile, the trucking company defendants have moved for a new trial or other alternate forms of relief due to the allegedly "excessive" amount of the jury awards and alleged mistakes made by the court leading up to and during the trial. The plaintiffs rejected those calls but conceded that the award of punitive damages exceeds what they claim to be the relevant statutory cap of 4x (an amount that AJD Business Services has contested in arguing for remitting it to $75,000). Resolving the matter in the manner proposed by the plaintiffs would have the effect of reducing the combined amount of the compensatory and punitive damages to $166 million from $1 billion.
Don't sleep on social inflation
COVID-19-related delays in court calendars may continue to reduce the impact of social inflation on the industry relative to pre-pandemic levels at a time considerable attention has focused on financial inflation in the form of surging consumer and producer prices.
RLI Corp. President and COO Craig Kliethermes, speaking during an Oct. 21 conference call, cautioned that claims counts in the commercial transportation insurance business "continue to climb to previous levels, and more jury trials are being scheduled."
Commercial auto insureds need no reminder of the fallout from social inflation on their businesses. Executives at trucking companies such as Hub Group Inc., Patriot Transportation Holding Inc., Landstar System Inc. and C.H. Robinson Worldwide Inc. have all cited in public remarks during the past 12 months "nuclear verdicts" as a driver of higher insurance costs and reduced insurance capacity.
The American Transportation Research Institute said in its newly released "Critical Issues in the Trucking Industry – 2021" that the cost and availability of insurance ranked among the top 10 concerns identified by respondents to an annual survey for a second consecutive year. The report indicated that premium increases have been mitigated by the implementation of higher deductibles, greater use of self-insurance and captives, and lower levels of excess liability coverage. It further mentions the potential for trucking companies to institute customer surcharges to help manage volatility in insurance premiums.
S&P Global Market Intelligence has projected that commercial auto liability premiums will rise by a double-digit percentage in 2021 for the third time in the last four years. The business has ranked among the most consistently unprofitable U.S. property and casualty lines as evidenced by combined ratios in excess of 111% for five straight calendar years through 2019, though underwriting losses narrowed amid the pandemic in 2020.
It might take a range of actions by numerous constituencies to address the root causes of the verdicts and the magnitude of the awards themselves. These include, but may not be limited to, accelerated implementation of autonomous vehicle technologies, broader deployment of advanced driver assistance systems across commercial fleets, wider acceptance of usage-based insurance beyond electronic logging device data to allow carriers to proactively address unsafe and distracted driving, and a renewed push for tort reform legislation at the state level to further reign in award sizes.
In the meantime, outcomes like the Nassau County case give insurers cause to continue to tread carefully in underwriting and pricing commercial transportation risks.