Tech-enabled litigation and AI threaten to destabilize insurance industry

Tech-driven search engines, scam emails and data scraping are threatening to destabilize the property insurance marketplace nationwide if left unchecked, a new report finds.

The research project, by Ohio-based financial analysis firm Demotech, finds that “tech-enabled litigation instigation” is growing into a predatory, covert business model that pushes insured property owners into the litigation process often before a claim has even been filed.

In existence since 2017, the practice is growing again thanks to artificial intelligence capabilities, which can harm property owners by forcing them into a pricey lawsuit process that requires big payouts to law firms and threatens the collapse of insurance companies operating in risk-prone areas, such as Florida.

Tactics under the practice include search engine optimization and pay-per-click advertising that pushes property owners to litigants rather than to insurance companies where the insured person can file a claim. The report found the practice increases the time it takes for property owners to receive a claim and the number of claims closed without payment.

The threat has drawn the attention of U.S. Sen. Thom Tillis of North Carolina, where Hurricane Helene battered mountainous regions in the western part of the state last year, and U.S. Rep. Kevin Hern of Oklahoma, which also faces inland hurricane threats. The lawmakers have developed a proposal to impose a federal tax on the third-party litigation funding profits, which seeks to make litigation financing less attractive and therefore mitigate the growing trend.

“These coordinated, high-tech scam and email attacks exploit post-storm confusion, capitalize on consumer crises, and accelerate carrier litigation to unsustainable levels. Alarmingly, it is not just homeowners who are being victimized. It is the entire insurance industry and the U.S. transportation economy — industries which serve as a critical safety net for property owners and business stability nationwide — that are subjected to an online, covert business model built on systematic online instigation to secure contested or litigated claims,” Demotech President Joe Petrelli said.

“In one recent time period in Florida, a group of carriers that failed had a 3% market share of premiums, yet saw their market share of new, annual litigated claims grow to nearly 20%. I knew that this phenomenon of meteoric growth in new, annual litigated claims was caused by ‘something new,’ a realization that led to this groundbreaking research project, and Todd’s discoveries.”

The report highlights threats that had already existed, including “nuclear verdicts” — awards exceeding $10 million that drive insurance premiums — and “social inflation,” with a rise in insurance costs that outpaces real inflation.

But it points out the threats are mounting with the insurgence of “tech-enabled litigation instigation,” a practice that targets insured property owners seeking a claim through various business tactics and often through third-party non-lawyers. The cost to settle a claim through the litigation process can be up to 360% higher than a non-litigated claim, according to an Office of Insurance Regulation study.

Already, this litigation practice has attracted tens of billions of dollars in third-party litigation funding, the Demotech study found.

Petrelli developed the study, which was then conducted by Todd Kozikowski, a digital risk intelligence consultant and CEO of 4Warn.

The study calls for litigation reform and its authors describe the proposal from Tillis and Hern viral in addressing current litigation practices. In the meantime, the report also calls for consumer vigilance, by contacting an insurance provider directly about a claim rather than clicking a link in a pop-up or unsolicited email.