Construction firms are facing growing pressure from rising liability insurance costs, andone major factor behind the trend is the rapid growth of third-party litigation funding and so-called “nuclear verdicts.”
Third-party litigation funding involves outside investors financing lawsuits in exchange for a share of any settlement or court award. According to a recent report, litigation funders invested $15.2 billion in the U.S. in 2023, and that figure could double by 2028.
At the same time, nuclear verdicts — jury awards exceeding $10 million — have become more common in liability litigation. The U.S. Chamber of Commerce Institute for Legal Reform identified third-party litigation funding as one ofthe key drivers behind the size and frequency of these massive verdicts.
The consequences of growing awards can be severe for builders. Higher claims costs are driving up premiums for general liability, commercial auto, umbrella and excess liability coverage. Insurers are also tightening underwriting standards and, in some cases, reducing available limits.
How litigation funding works
Litigation funding allows plaintiffs to pursue lawsuits without paying all legal costs themselves. Investors provide capital to litigation funders, who then finance the plaintiff’s legal expenses in exchange for a portion of any success fulsettlement or verdict.
Ininjury lawsuits, third-party funders may back claims involving:
- Construction vehicle accidents
- Pedestrian injuries near jobsites
- Falls or equipment accidents
- Unsafe site conditions
- Negligence claims against contractors or subcontractors
Construction contract disputes are also increasingly financed through third-party funding, particularly against lead contractors, which have the deepest pockets. Contractors, subcontractors and project owners may use outside funding to pursue claims involving delays, change orders, defective work, cost overruns orcontract termination disputes.
Recentnuclear verdicts
- In New Hampshire, a jury awarded roughly $9 million after pedestrians were struck near a seawall construction project. The construction company and the state were assigned most of the liability.
- In California, a construction company was hit with a verdict exceeding $27 million after a collision involving a motorcyclist. The verdict far exceeded settlement offers made before trial.
- A New York construction-related vehicle crash case resulted in a $17 million settlement after a tractor-trailer allegedly made an improper turn into a distribution center, causing catastrophic injuries.
The dangers
One concern raised by insurers and defense attorneys is that third-party funding can discourage settlements. Funders may push plaintiffs to reject settlement offers in hopes of securing a much larger verdict at trial.
The financial exposure can be devastating if a jury award exceeds a company’spolicy limits. For example, if a contractor carries $2 million in liability coverage but loses a lawsuit resulting in an $8 million verdict, the company could be responsible for the remaining $6 million out of pocket.
What construction firms can do
Construction executives should work closely with us, legal counsel and risk management teams to reduce their exposure to litigation risks and strengthen their defense if claims occur. Internally, your firm can reduce its risk by:
- Maintaining adequate general liability, professional liability, commercial auto and umbrella coverage limits. Umbrella is an important additional layer of protection on top of primary policies.
- Carefully reviewing contracts with subcontractors, suppliers and project owners and using strong risk-transfer language and indemnification provisions.
- Implementing comprehensive safety training and operational procedures.
- Documenting jobsite conditions, incidents and communications thoroughly.
- Actively enforcing commercial driver and fleet safety standards.
- Promptly reporting accidents and potential claims to insurers.
- Vetting subcontractors carefully before bringing them onto projects.
Strong documentation and safety practices are especially important because plaintiffs’attorneys can argue that lax standards played a role in any claim they arepursuing to influence juries toward larger awards.
Firms that focus on safety, documentation, contract management and adequate insurance protection can reduce their exposure and place themselves in a stronger position if disputes arise.
