Settling Into Defeat

Irwin R. Krumer and David A. Pisunic | The CLM Magazine | March 2017

Is an Unhealthy Aversion to Risk Keeping Insurers from Punching Back in Court

Civil trials have become a rarity in recent years. The perception that defense costs have increased has placed a premium on settling cases that insurers previously used to defend. Rather than measure the impact of defense efforts on the value of a case, many claims professionals are evaluated on the speed with which they resolve cases and on the size of their “legal spend.”

By placing a premium on fast settlements, however, the insurance industry may unwittingly be settling into defeat. Without taking cases to trial, we have undermined the value of verdict research that mines an insufficient sampling of claims. Left to speculate on the true value of a case, we focus only on that which we can control—legal expenses—and guess about the rest.

We may be avoiding catastrophic losses at trial, but our aversion to litigation also eliminates the benefits of a trial process that may favor carriers in the aggregate. Lacking a sufficient number of verdicts, we also deprive ourselves of the data needed to evaluate these claims on the basis of reliable information. For an industry that relies heavily on actuarial analyses, statistical trends, and projections, the speculation that surrounds claims evaluation and a myopic focus on the expense of defense may pose the biggest risk of all.


Although it is difficult to find credible data on the litigation “explosion,” it isn’t hard to find staggering statistics being cited without attribution. According to one blogger, “50,000 lawsuits are filed in this country every day.” Another laments that “legal woes cost small businesses more than $100 billion a year.”

These observations often end with scathing indictments of the legal profession as an unscrupulous enterprise founded on greed. “Contingency-fee law has made more overnight millionaires than just about any business one could name,” wrote Walter K. Olson in his book The Litigation Explosion: What Happened When America Unleashed the Lawsuit.

A casual observer would read these headlines as a sign that jurors have gotten too generous with their verdicts, awarding millions of dollars in marginal cases. But most of these astounding contingency fees were paid out of cases that insurance carriers and other large corporations chose to settle.

In truth, the litigation explosion seems to have missed the courtroom. Less than five percent of all cases go to trial; far fewer are resolved by juries. When cases do reach a verdict, the awards often are below pretrial offers.

Does this trend confirm the industry’s wisdom in deciding which cases to defend? Or does it challenge us to take more risks by taking more cases to trial?


Although insurers complain of rising litigation costs, the percentage of cases going to trial has sharply declined in recent years. Nationally, studies from sources like the U.S. Department of Justice’s Bureau of Justice Statistics show that more than 90 percent of all civil cases are settled, less than five percent are resolved at trial, and even fewer are decided by juries. When jurors do return verdicts, they rarely reward plaintiffs with more money than they could have settled for. So if fewer cases are going the distance, are litigation costs really rising? If they are not, then how can we explain what many trial lawyers believe is a greater reluctance to take defensible cases to trial? Let’s take a look at three possibilities.

Changing Perspectives. Once part of a hawkish industry undeterred by the inflated demands of their adversaries, insurance carriers often took hard-line stances to develop tough reputations among plaintiffs’ counsel. Such positions were thought to discourage litigation, increase the carrier’s bargaining power, and reduce overall costs.

Exclaiming that “the best defense is a good offense,” claims managers were more apt to take defensible claims to trial. Understanding the risks, litigation managers would tell their counsel that “if you aren’t losing any cases, you aren’t trying enough of them.”

Times have changed. As their front-line soldiers prepare for battle, the generals in the home office now question the cost of ammunition. Where they once refused to pay “a penny for tribute,” claims managers and their counsel must now pinch pennies on legal expenses.

Now that every case has a value, claims professionals are more inclined to pay a tribute on claims that their predecessors would have denied. Increasingly evaluated on the speed with which they resolve their cases, claims professionals may find little reason to celebrate a winning verdict that is the cause of a spike in legal spend.

Legal Costs or Case Investments. As industry attitudes toward litigation shift, the metrics by which carriers measure success have changed, as well. Using a microscope wielded by third-party auditors, the industry focuses intently on legal invoices, the duration of a given case, and other costs incurred in the litigation process. Unlike the savings realized through effective defense strategies, these “objective” factors are much easier to measure. Perhaps for that reason alone, they often command greater attention as a yardstick of a claims department’s performance than the ultimate result achieved.

But viewing legal spend as a line item that ought be slashed may be shortsighted. If, as defense counsel often argue, an effective litigation strategy may eliminate or mitigate the liability of an insured, these same costs may be viewed as an investment in overall savings.

To measure the return on investment, carriers must crunch more numbers than litigation costs alone. They must look at the numbers on the indemnification side of the equation, attempting to correlate legal expenses with litigation outcomes. This requires a data dive to see if there is, in fact, an inverse correlation; whether there is a significant ROI; and, if not, what variables may be adjusted to change the equation in the carrier’s favor.

Impact on Litigation Management Decisions. Figures don’t lie, but they can be deceptive. To determine the true costs and benefits of litigation, we must crunch the numbers with care.

Many carriers fail to do this when reviewing litigation outcomes. Measuring their ROI with defensecost-to-indemnity ratios, some carriers compare their total defense costs with the overall value of a case. That seems sensible if one values the case appropriately. But many carriers take a flawed approach to measuring a case’s value by assuming that the ultimate indemnification cost is the case value.

Take a catastrophic loss for which ABC Insurance set reserves at $250,000. After 10 months of litigation at a cost of $50,000, the case settled on the eve of trial for $75,000. In total, ABC Insurance disposed of this case for a total expenditure of $125,000, or half of the projected exposure.

An outstanding result? Not under a defense-cost-to-indemnity analysis. Legal expenses constituted a whopping 67 percent of the $75,000 “value” of the case. Although the payout was only 30 percent of potential exposure, claims professionals who reserved $250,000 on this claim are more likely to be chastised for reserving too much than they are to be hailed a hero for saving that much.

In this example, comparing legal spend with the ultimate cost of indemnification would make sense only if ABC Insurance could have settled early for less than $125,000. But the real world is not that simple. In most cases, one must invest in litigation and case investigation to obtain the leverage required for outstanding results.

When carriers attend to the wrong metrics or crunch numbers without understanding the litigation process, they undervalue the work of claims professionals and their counsel. Ignoring their impact on the value of claims that would cost significantly more without them, these carriers second-guess the litigation management decisions of their staff and foster an unhealthy aversion to risk.


In an industry that is built on the calculus of risk, are we calculating risk correctly?

The trial process puts our risk tolerance to the test. The only certainty in taking a case to trial lies in the legal fees and costs incurred to get there. Few cases may be characterized as “slam dunks,” and those that are often may be dismissed on preliminary or pretrial motions.

By avoiding protracted litigation, carriers may spare expenses and avoid unpleasant surprises. Their claims managers will not be taken to task for exercising the courage to litigate cases that ultimately fail to produce the desired outcome.

That’s a safe approach to litigation and claims management. But is it a wise approach? Are we tolerating enough risks to achieve optimal results for policyholders and for shareholders?

If carriers engage in a trend of overpaying claims, then using settlement costs as a measure of value will only perpetuate a flawed formula. Yet if we are not sending a sufficient sampling of cases to trial, verdict research will not accurately reflect the value of these cases, either.

To be sure, trying more cases will create a statistical increase in awards at trial. But it may be the only way to gain a true measure of value. The problem now is that we have insufficient trial data on which to do any more than speculate as to the real value of cases.

The lack of reliable data contrasts sharply with the approach of an industry that relies so heavily on statistical analyses and actuarial studies. With all the industry discussion about the importance of big data, where are the statistics to confirm the litigation explosion, the runaway verdicts, or the increase in litigation expense? If we only measure defense costs and do nothing to obtain an accurate evaluation of claims exposure, then do we continue to assume that defense costs are the crux of the problem?

If there is a trend toward defense friendly verdicts, then perhaps we should try more cases. Others may disagree and argue that this “trend” reflects the wisdom of claims managers in determining with which cases to go the distance. With less than five percent of civil cases going to verdict, we lack a sufficient sample size to resolve this debate.

Devoid of data, a statistics-oriented industry must set reserves and settle cases on the basis of fear rather than fact. Are we evaluating cases as jurors would? Or are we settling cases and setting reserves based on a fear of what they might do?

Unless we try, we may never know.

Mudslide Did Not Cause Building to Explode

Charles Mathis | Property Insurance Coverage Law Blog | September 28, 2016

Back in May of 2014, I wrote a blog post entitled: Stranger Than Fiction: Property Insurance Policies Do Not Cover…Exploding Corpses!!?! Today, I write on a more recent case out of Colorado.1 What do they have in common, you ask? Both cases deal with creative ways lawyers try to argue the losses at issue were explosions.

On September 12, 2013, after torrential rain hit Boulder, Colorado, “a violent flow of water, mud, and debris thundered down a hillside and into the [commercial] Building, causing extensive damage.”2 The property owner, Paros Properties, LLC, submitted a claim to their commercial insurance carrier, Colorado Casualty Insurance Company. The carrier briefly inspected the property and denied the claim stating, “[t]he inspection revealed that there was a Mudslide that caused the damage to your buildings. Damages caused by Mudslides or Mudflows are specifically excluded under your policy.”

Following the denial, Paro hired counsel to challenge the denial:

Counsel hired an engineer, who inspected the Building on October 15, 2013, and (after a site inspection a year later) issued a report on his findings on November 3, 2014. According to the report, “The debris laden flow impacted the south elevation of the structure, causing a sudden reaction of the wall structure.” [] The impact caused the property to “split into two separate structures along a north-south wall line. The eastern portion laterally displaced to the northeast, while the western portion laterally displaced to the northwest. The roof structure collapsed where the building separation occurred due to the sudden loss of the bearing walls.” [] …

On October 24, 2013, counsel for the Owner sent a letter to the Insurer claiming wrongful denial of coverage. It stated that the “force of the mudslide caused [the Owner’s] building, literally, to explode,” [] and that the resultant damage was therefore compensable under the explosion exception to the mudslide exclusion in the Policy.3

The policy at issue contained the following “Water Exclusion Endorsement, which exclud[ed] from coverage any damage caused by the following water-based sources:

1. Flood, surface water, waves (including tidal wave and tsunami), tides, tidal water, overflow of any body of water, or spray from any of these, all whether or not driven by wind (including storm surge);

2. Mudslide or mudflow;

3. Water that backs up or overflows or is otherwise discharged from a sewer, drain, sump, sump pump or related equipment;

4. Water under the ground surface pressing on, or flowing or seeping through:
a. Foundations, walls, floors or paved surfaces;
b. Basements, whether paved or not; or
c. Doors, windows or other openings; or

5. Waterborne material carried or otherwise moved by any of the water referred to in Paragraph 1., 3., or 4., or material carried or otherwise moved by mudslide or mudflow.

This exclusion applies regardless of whether any of the above, in Paragraphs 1. through 5., is caused by an act of nature or is otherwise caused.

There is, however, an exception to this exclusion for damage from explosions:

But if any of the above, in Paragraphs 1. through 5., results in fire, explosion or sprinkler leakage, we will pay for the loss or damage caused by that fire, explosion or sprinkler leakage (if sprinkler leakage is a Covered Cause of Loss).

In short, the Policy does not cover damage caused by water, but does cover damage caused by an explosion caused by water.”

The Carrier, after removing the matter to federal court, moved for summary judgment. The United States District Court for the District of Colorado granted the motion. The policyholder appealed to the Tenth Circuit Court of Appeals.

The Tenth Circuit ultimately found Paro’s argument unconvincing, “[t]he Owner contends that the mudslide ‘caus[ed] the Building to violently and suddenly burst apart with a loud boom,’ that is to say, caused the building to explode, thus bringing the damage within the explosion exception to the water exclusion. [] We disagree that demolition by an external cascade of water, mud, and debris is an explosion under the Policy.” As the policy at issue did not define the term, “explosion,” the court had to interpret the contract and assign the term is “plain and ordinary meaning.”

Rather than attempt to paraphrase, I’ll provide you with the court’s entire breakdown:

The Policy itself does not define the term explosion. But that does not mean that the term must be construed to encompass all possible meanings, even if found in the dictionary. Context matters. We would be reluctant, for example, to construe policy language to include figurative meanings. See Rhinelander v. Ins. Co. of Pennsylvania, 8 U.S. (4 Cranch) 29, 44, 2 L.Ed. 540 (1807) (“Commercial contracts have but little connection with figurative language.”). Although a football player may “explode” off the line of scrimmage, we would not construe the exception to the exclusion to include damage to a wall from someone (even someone who is 6′6″ tall and weighs 330 pounds) fleeing a flash flood. Nor does it make sense to construe the term explosion in a way that would undermine the exclusion to which it is an exception. The Owner urges us to find an explosion any time an external impact transfers sufficient kinetic energy to a structure to destroy it. But the exclusion includes tidal waves, tsunamis, and mudslides, which all typically produce extreme forces that can smash anything in their paths; to adopt the Owner’s conception would be to read those exclusions out of the Policy.

What makes most sense in the present context is the classical notion of an explosion, as from a bomb or leaking gas. Such an explosion involves a buildup of internal pressure and a sudden bursting outward in all available directions. The exception would apply, for example, if a mudslide damaged a gas pipe, creating a leak of gas that was ignited and exploded. Our understanding of the term is consistent with that of other courts construing “explosion” in an insurance policy. See Pre–Cast Concrete Prods., Inc. v. Home Ins. Co., 417 F.2d 1323, 1328 (7th Cir. 1969) (“[A]n explosion occurs when the pressure inside the container exceeds the strength of the container and results in a sudden release of the pressure.”); Jersey Ins. Co. of N.Y. v. Heffron, 242 F.2d 136, 139 (4th Cir. 1957) (finding an explosion where “the roof, falling intact like a huge piston … gradually built a compression of air … great enough to burst the first story windows”);Commercial Union Fire Ins. Co. v. Bank of Ga., 197 F.2d 455, 457 (5th Cir. 1952) (In a bursting-fire-hydrant case, “the bursting [was] caused by excessive pressure, and the pressure [was] caused by pent-up energy.”); Bower v. Aetna Ins. Co., 54 F.Supp. 897, 898 (N.D. Tex. 1944) (“The application of a force from within the radiators which the radiators, or the pipes, could not resist, and burst, or exploded is apparently what happened.”); Sperling v. Allstate Indemnity Company, 182 Vt. 521, 944 A.2d 210, 217 (2007) (“In the absence of the release of energy through an ignitable substance, decisions require a buildup of internal pressure preceding the rupture in order to define the event as an explosion.”).

To convince us that the term explosion includes causes not driven by internal pressure, the Owner points to Stone Container Corp. v. Hartford Steam Boiler Inspection & Ins. Co., 165 F.3d 1157, 1160 (7th Cir. 1999), which states in dictum that a watermelon explodes when shot through with a bullet. But that statement does not help the Owner. The court was asked to limit the term explosion to an event caused by “combustion or some other chemical reaction.” Id. at 1159. It declined, explaining that to limit explosion in that way would improperly exclude from the term’s scope an atomic bomb or “volcanic explosions, as well as the ‘explosion’ of a tire caused by a blowout, the explosion of a melon caused by a bullet….” Id. at 1160. This comment reflects a (seemingly correct) belief that the melon explodes due to some source other than combustion or chemical reaction. It does not suggest that the source is something other than a buildup of internal pressure. And that is, in fact, the case, as far as we can discern: a bullet entering a watermelon compresses the fluid within it and creates a hydrostatic shock wave through the fluid that presses in all directions against the rind until it bursts. See “Hydrostatic shock,” available at (last visited August 2, 2016); “Why do watermelons explode,” available at (last visited August 2, 2016).

Given our understanding of the policy language, we must affirm the district court. The Owner does argue briefly that a buildup of internal pressure did damage the building. Drawing an analogy to the popping of an overfilled balloon, the Owner suggests “that mud, water, and debris may have filled up the Building to the point of failure, at which time the walls burst outward in a catastrophic and sudden explosion.” [] The problem for the Owner is that there is no evidence to support this argument. The Owner’s own engineer found that the north-traveling mudslide displaced the building’s walls upon impact, not after filling the building with mud. [] Report [] at 65 (“The debris laden flow impacted the south elevation of the structure, causing a sudden reaction of the wall structure….”). The walls moved laterally to the north, not outward in all directions. And the roof did not burst outward as from an explosion, but rather “collapsed.” []

While an interesting and certainly creative argument, much like the matter of the exploding corpse, the court ultimately found for the carrier and summary judgment was granted.


Causes of Insurance Disputes

Advise & Consult, Inc. | November 9, 2015

The details and specifications of insurance disputes can be never ending, with a number of permutations and specifications possible for each insurance dispute. Yet when you look down to the core of the issue, the primary causes for the insurance disputes boil down to a few similar ones.

Some of the most common causes of insurance disputes are highlighted below.

Exclusions and Limits of Coverage

When you draw up a contract of insurance with the insurance company, most people may read it before they accept it but they are never quite ready to talk about the wordings of the contract with the insurance agency. That is where the first cause of disputes lies. Both the insurance company and the part insured take different interpretations of the wordings of the contract and will more often than not be expecting something the other party never intended to abide by in the first place.

Lack of Communication

Another cause at the core of insurance disputes is lack of effective and timely communication between the two parties. The insurance company and the person insured need to stay in continued communication to make sure the insurance holder is made aware of the policy’s risk profile and whether any claim adjustment needs a renewal. Unless these issues are sorted out via effective communication, there is always the threat of an insurance dispute looming large.

The Duty to be Defended in Court

The insurer’s lack of legal defense for the insurance holder is one reason that can lead to a number of insurance disputes. These issues will typically arise when there is a claim against the policy holder that includes damages that are covered and uncovered, the insurance company will be reluctant to defend the client and the client will expect them to defend him/her.

These are some of the common reason for insurance disputes that can be handled well and avoided altogether.

Construction Defect and Dispute Conference Comes to Portland

Advise & Consult, Inc. | September 14, 2015

Construction defect suits have been on the decline recently as many of the construction issues from the last building wave have been litigated or otherwise addressed. Portland, among many other cities across the US, finds itself in yet another building boom cycle which is certain to result in yet another round of defects.  Anticipating the inevitable, local professionals are gearing up to help building owners, property managers, condo associations and home owners deal with construction defects and insurance disputes that proliferate when contractors and designers get busy and cut corners, or just make a mistake.

On Friday, construction attorneys, building experts and insurance adjusters attended the Northwest’s Premier Construction Defect and Dispute Conference (CDDC) in downtown Portland.  The conference, sponsored by Advise and Consult Inc., was geared toward bringing the Northwest’s construction claim professionals up to speed on current industry trends, recent case law developments and to provide insight as to what can be expected after this next round of construction mayhem.  Advise and Consult has 27 independent construction experts around the country including local Portland expert Caleb Beaudin and Seattle expert James Platt.  Fourteen keynote speakers from Oregon, Washington, Idaho and Utah made the trip to Portland, each contributing unique insight to round out the full day session.

According to Beaudin, a physicist, contractor and local building consultant, many construction defects come and go with the new building products flavor of the month.  “Historically and categorically, I put defects into three buckets,” says Beaudin.    “First off there are defects that cause damage from the inside out,  such as the aluminum wiring substitution of the 1960’s that caused many structure fires and polybutylene piping prominent in the 1970’ that often deteriorated within a decade resulting in the re-plumbing of over 330,000 homes.  Then of course you have the pollutant products that cause illness or worse to humans, such as lead based paint and asbestos containing materials.  These products were prominent up through the early 1980‘s.  Finally in bucket three, what we’ve seen consistently these past twenty five years are cladding and envelope assemblies that allow building damage from the outside in.”  Commenting on the local defect trends, Beaudin continued “Due to our climate and the tightening of building envelopes, the Northwest has seen ongoing water damage, from vapor barriers trapping moisture in wall assemblies to the EIFS stucco and LP siding debacles of recent years.”  Beaudin’s company provides inspection and consulting services to home and building owners who suspect faulty construction, moisture intrusion or other damages related to their homes or buildings.

Highlighting Friday’s conference was the Northwest’s Young Attorney of the Year award presented to construction attorney Adele Ridenour of the Portland based firm Ball Janik, LLP.  The award was the first of its kind and was awarded based on peer nomination.  Ridenour, a former Green Building adjunct professor for the University of Oregon School of Law, primarily represents owners in construction defect and insurance recovery related claims.  While Ridenour could be considered young on the attorney career timescale, she is no spring chicken when it comes to awards.  In 2014 and 2015 she was selected as one of the ‘Top 40 Under 40 Litigation Lawyers’ by American Society of Legal Advocates.  She was also recognized by her peers as an Oregon Super Lawyer from 2013 – 2015 in the area of Construction Litigation.  “The number of parties involved and overall complexity of construction defect lawsuits requires constant innovation to find the approach which best serves our client’s individual and unique interests.” said Ridenour.  Outside of work, Ridenour is heavily involved in the community participating in outreach events by non-profit organizations such as Bienstar and Habitat for Humanity.

Event founder Eugene Peterson, aided by Beaudin, presented ‘10 Insider Secrets to Better Expert Witness Testimony’ to the group during the afternoon session.  Peterson is a nationally renowned Expert Witness, who formerly served as president of the Utah Home Builder’s Association.  “Many of us have attended West Coast Casualty, an annual construction defect conference in Anaheim that boasts several thousand attendees,” said Peterson.  “We wanted to create something that was more local and less disconnected, so we put together 5 geographic seminars throughout the year where each region can focus on the issues relevant to them.  This premier Northwest conference is a huge milestone for construction defect professionals on a local level.  We’re already being asked about next year’s conference, which is planned for Seattle next November.”  Beaudin commented “We may currently be between flavors of the month, but there is so much construction going on right now and so many new products being hastily thrown into the mix, it’s only a short matter of time before the deficiencies of this building wave surface and building owners suffer damages as a result.”

Additional Construction Defect & Dispute Conferences Announced!

Today is the Premier Intermountain Construction Defect & Dispute Conference in Sandy, UT and in conjunction with this event we are excited to announce these 5 future Construction Defect & Dispute Conferences!  Coming up next will be our Premier Northwest Construction Defect & Dispute Conference on September 11, 2015 in Portland, OR.CDDC-Logo

We will then continue with Premier Construction Defect & Dispute Conferences with the Midwest in Minneapolis, MN on October 16, 2015, and Southeast in New Orleans, LA on January 15, 2016.

February 5, 2016 will then be the 2nd Annual Construction Defect & Dispute Conference in Salt Lake City, UT and then follow that up with a Premier Southwest Construction Defect & Dispute Conference in Las Vegas, NV April 15, 2016.

Please look these dates and cities over and mark your calendars and keep an eye out for upcoming call for presentations as well as details on times, locations and topics.  Visit for all of the latest details and to register!