Tort Lawyers, Bane of Insurers, Are Being Starved by the Courts

As Shakespeare said in Henry VI, "The first thing we do, let's kill all the lawyers."

Death might be more merciful if you believe what Chubb Corp. said at its earnings call yesterday: tort lawyers, the kind that file suits against companies recently blamed for the recession, are being starved out of business. And that's good news for insurers like Chubb, who provide companies and their bosses with insurance against lawsuits like these.

You could almost hear the satisfaction in Chubb Chief Operating Officer John Degnan's voice when he toldJohn Degnan analysts yesterday that "the predicted wave of litigation is not playing out. There's no rush to the courthouse." In fact, class action suits, the kind that used to be filed regularly by law firms like Milberg Weiss, are down in the first half of 2009. "We've seen the lowest number of (suits) since 1997," said Degnan.

At first blush (not that lawyers blush) that's surprising. With a full-blown recession, 10 percent unemployment, and plenty of targets such as mortgage-lender Countrywide, which sold the bad stuff, and American International Group, which closed its eyes and bought the bad stuff, you would think shareholders would be mad as hell and not want to take it anymore. So according to Degnan, more than two-thirds of the suits filed have been against financial institutions.

But during the past five years, a Republican Congress has rewritten the legal standards for these lawsuits against companies, and courts themselves have gotten some backbone. "There are now higher pleading standards (to bring a case before a court)," said Degnan, "and less likelihood of a payday."

He could have added, but didn't, that one of the leading practitioners of the class-action suit, Mel Weiss of Milberg Weiss, has been sentenced to more than two years in jail.

As for the legal problems facing financial firms, Degnan said Chubb had ceased writing insurance for most of the U.S. investment banks now facing these suits.

Will the good times continue to roll for insurers? Democrats control both the presidency and Congress, and tort lawyers tend to befriend Democrats financially. But even if the laws swing back in their favor, Degnan predicts it will take several years as current legal standards are now "baked in."