A rush to build at a time when the U.S. housing supply continues to fall short may come with a cost to the construction industry.
Particularly in hot markets—Sun Belt states and the Mountain West—the drive to finish fast, if not big, can lead to construction and design-defect litigation. Last fall, for example, $22 million in damages were awarded to 220 unhappy homeowners in a South Carolina subdivision northwest of Charleston, four years after their claim for defective work was filed against a major U.S. homebuilder and its subcontractors.
Defective work is one of three areas where the construction industry is particularly vulnerable as class-action litigation and thermonuclear verdicts surge.
Another is the risk of loss of life or permanent disability on a site, and not solely involving workers: Over $860 million was awarded in 2023 to the family of a woman who was killed in a 2019 crane collapse at a Dallas construction site.
Fleet-related judgments are also an issue, given the number of trucks and heavy equipment owned and hired by some firms. In some states, they have been a target for aggressive litigation. A study of truck-related litigation by the U.S. Chamber of Commercce found that between June 2020 and April 2023, for plaintiffs’ verdicts, the mean award was ,862,776; the median, 4,217.
WHAT’S BEHIND THE SURGE
The surge in class-action litigation and outsized verdicts is having a profound effect on every business segment. In 2023, according to a Marathon Strategies analysis, 89 lawsuits resulted in “nuclear” verdicts over $10 million; 27 were “thermonuclear,” or over $100 million. In total, they reached a record-breaking $14.5 billion.
It’s a function of three solidifying trends:
- Social inflation, even more than economic inflation, is exacting a cost. It reflects changing attitudes about who’s responsible for absorbing risk, combined with the echo effect of social media and the influence of legal marketing. The general distrust of big business also is a factor.
- Plaintiff’s lawsuits also have been driven by the speculative allure of third-party litigation funding. Here, healthy returns can be earned by investors like hedge funds or private equity law firms that underwrite the legal costs like attorney fees and court expenses in return for a share of the plaintiff’s award.
- A legal strategy known as the “reptile theory”—tying into juror’s “primal” instincts—is also increasingly coming into play. Attorneys push the idea that defendants are a public threat because they seek profits over safety. The only fix? A costly punitive verdict.
IT’S A CONCERN
The trends are worrisome across the board. They have prompted legislatures in at least nine states to tackle new regulations over litigation funding, with measures ranging from funding disclosure and contract requirements.
And the pressure on the insurance industry is also intensifying. Underwriting and risk assessments are more conservative with the potential of unpredictable verdicts. Coverage can be limited and the potential of covering substantial payouts raises premiums across the board.
It’s likely that nuclear verdicts will continue to explode on the legal landscape. A SwissRe report said TPLF is contributing to growing loss ratios for excess liability, commercial auto, medical malpractice and general liability. And, accordingly, the construction industry will continue to see pressure on costs of its relevant lines of coverage.
There’s no crystal ball for determining the appropriate liability limits an organization should have, but several steps will be helpful to contain the size of a potential nuclear verdict.
Most important is to conduct an internal audit, with claims history and finances scrutinized. This provides the data needed to generate risk scenarios and provide a clear picture of the most likely exposures. Analytic modeling tools can help quantify the projected loss frequency and severity of those events, providing a window into the future of risk.
Although the fallout from an unfavorable verdict can’t be avoided, this sort of analysis can support the optimal insurance structure to ensure construction firms are protected against unscrupulous legal profiteers.
