Insights

North American legal doctrines: Creativity and collusion

Insight Article 06 May 2025 06 May 2025
North America
Regulatory movement
Insurance

Policyholder collusion and the creative use of North American legal doctrines. Trends and strategies for insurers facing policyholder-claimant collusion.

Social inflation has lit a fuse. In response to alarming levels of exposure, policyholders are devising ever more creative strategies for colluding with claimants to maximize insurance recoveries at the expense of their carriers.

Strategies include overreach in formulation of bankruptcy plans, bad faith setups, and exploitation of conflict rules to exclude carriers from the claim resolution process and compel them to accept inflated settlement amounts. The creative use of legal doctrine can create real difficulties for insurers working to manage their exposure.

Nuclear verdicts and social inflation, increased legal costs and rising jury awards in injury litigation have caused a shift in expectations among claimants, attorneys and corporate policyholders. Some policyholders have questioned the premise of social inflation [1] and challenged insurers’ efforts to control it [2].

Yet when confronted with the threat of an inflated verdict, certain policyholders have demonstrated a willingness to help claimants to secure a recovery rather than face the threat of a verdict in excess of their insurance limits. Such cooperation has included overreaching efforts to bind insurers to inflated claim values and procedural maneuvers that prejudice an insurer’s ability to participate in the claim’s defense.

Three areas of legal creativity among policyholders in recent years include: misuse of the bankruptcy process to bind insurers to inflated tort awards; use of so-called “consent judgments” or “covenant judgments” to force insurers to cover inflated settlement amounts; and the strict application of conflicts rules to limit an insurer’s participation and monitoring of claim defenses and settlement.

Bankruptcy & Consent Judgments

Although bankruptcy courts lack jurisdiction to adjudicate personal injury claims, the typical mass-tort bankruptcy involves a claims valuation process, which relies upon a methodology created by claimants and corporate policyholders and assigns the role of assessing a final value to a trustee.

As part of this process, policyholder defendants often contribute little or nothing to the resolution of claims, leaving the insurer as the only party with an interest in limiting claim values. Policyholders and claimants have attempted to exclude insurers from the process of valuing claims by designing bankruptcy that seek to exclude insurers from challenging claim awards. These plans may also seek to bind insurers to such awards through doctrines of issue preclusion.

Consent judgments are similarly structured and carry similar risks. Claimants may enter into settlements with policyholders to resolve tort claims for a limited or fixed contribution, paired with an assignment of rights to collect a judgment from the insurer and a covenant not to execute against the policyholder. There is often little control over the judgment amount, and the burden may be on the insurer to prove (often in an expedited proceeding) that the judgment is collusive or unreasonable.

Conflicts & Independent Counsel

Conflicts are a significant issue in the US and Canada. February 2025 marks the one-year anniversary of the landmark Loblaw decision. The much-anticipated ruling, taken in the context of billion-dollar opioid claims, requires insurers to take a careful, coordinated approach to: (1) maintain control over defense strategy and (2) preserve access to critical reporting and settlement information.

Information silos, split file protocols and the balancing of strategic challenges when defending under a reservation of rights are all critical components in addressing this emerging common law risk.

Policyholders often defend such tactics as an effort to protect themselves against the perils of nuclear verdicts or coverage conflicts. Insurers’ toolbox to challenge such behaviour is slowly expanding. But opportunities remain to challenge the misuse of these strategies and defend insurers’ policy conditions.