October 18th, 2008

American Justice in Europe? The Rise of Class Actions

Posted at 6:03 PM ET

Thomas Herde, Senior Vice President, Casualty
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Justice may be assuming a new visage in Continental Europe. American-style class action litigation is on the horizon. Judges and juries still have their respective roles to play, but the nature of the plaintiff is evolving. The “class action” concept is crossing the Atlantic, bringing with it the potential for longer and costlier litigation and the risk of higher claims. While ambulances are not yet being chased across the continent, (re)insurers are beginning to wonder if they will be stuck with the bill for this emerging trend.

Europeans are not strangers to class actions. In fact, many have been party to—and enjoyed the largesse of—such lawsuits in the United States. Yet, the European legal culture has prevented this form of litigation from taking root locally. Among the salient barriers has involved the decision of award amounts. In the United States, jurors bear the responsibility for selecting a final number. Conversely, most European systems place this burden with judges. A change in the dynamic, many believe, could cause European tort costs to rise at the accelerated pace of their U.S. counterparts.

Of course, juries are not solely to blame for class action prevalence and escalating payouts in the United States. Other structural factors contribute to the U.S. class action climate. An “opt-out” system in the United States automatically includes all possible participants, unless they withdraw from the class intentionally. Meanwhile, European collective redress practices tend to require that potential plaintiffs opt into the action. As a result, larger plaintiff pools under the U.S. system tend to lead to larger settlements and jury awards—not to mention higher defense costs.

Further, European collective redress schemes adhere to the “loser pays” notion, which appears to limit frivolous lawsuits. Not only is this concept not present in the U.S. system, but contingency programs make costly litigation accessible to class members lacking deep pockets. Under these types of arrangement, the plaintiff attorney keeps a share of the “winnings” in lieu of a fee and is also able to recoup expenses related to the action (in addition to the fee for services).

In theory, this approach should offer an inherent limit on abuse of the system, as higher likelihoods of loss would prevent attorneys from taking dubious cases. But, it seems as though a large enough class is always able to find an ambitious advocate.

If the U.S. flavor of class action litigation does take hold in Europe, the greatest implication for (re)insurers is likely to be an increase in defense costs. Many have an obligation to defend insureds on claims-related matters. This “defense provision” could add to already growing legal defense expenses for carriers. The threat could have broader implications, as well, from requiring (re)insurers to select more carefully the risks they will cover to the need for refined portfolio and capital management strategies.

Fortunately for (re)insurers, the status quo probably will not change drastically in the near term. Centuries-old legal systems evolve; they do not turn overnight. And, differences exist among the various national systems on the continent, naturally impeding any new approach from rapid diffusion. But, change is undoubtedly afoot, and risk-bearers would be prudent to watch developments carefully.

 

Guy Carpenter & Company, LLC provides this text for general information only. The information contained herein is based on sources we believe reliable, but we do not guarantee its accuracy, and it should be understood to be general insurance/reinsurance information only. Statements concerning, tax, accounting, legal or regulatory matters should be understood to be general observations based solely on our experience as reinsurance brokers and risk consultants, and may not be relied upon as tax, accounting, legal or regulatory advice which we are not authorized to provide.  All such matters should be reviewed with your own qualified advisors in these areas.

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