News & Commentary

11:57 AM
Fred Blumer, Vehcon
Fred Blumer, Vehcon
Commentary
50%
50%

Telematics Nightmare Scenario: Litigation

The cost to the telematics industry of handling subpoenas and related requests could be more than half a billion dollars. Part 1 of 2.

As is often the case with new technologies, vehicle telematics presents unintended consequences for insurers. Current vehicle telematics systems collect and transmit information such as vehicle condition, trips, time of day, mileage and even privacy-sensitive data like location, speed and aggressive driving behavior.

While created with good intentions, such as helping consumers with navigation, roadside emergencies, and obtaining usage-based insurance discounts, the application of this detailed data in legal proceedings combined with consumers' lack of awareness about the type of data collected represent two looming legal challenges for the telematics industry.

The information gathered by Original Equipment Manufacturer (OEM) systems like OnStar and Usage-Based Insurance (UBI) plug-ins can be used as prime evidence in a number of litigation scenarios ranging from vehicle accidents to divorce proceedings, and even in contested child custody issues. For the purposes of this article, the potential costs solely of collecting this data and answering subpoenas for these three areas of legal exposure alone are taken into account. However, other potentially costly types of cases with significant litigation risk also exist.

Fred Blumer, Vehcon
Fred Blumer, Vehcon

[How Mobile Reduces Telematics Barriers]

Based solely on the limited categories of legal cases referenced above and the percentage of cars with telematics systems today, the cost to the telematics industry of handling subpoenas and related information requests will quickly approach $700 million annually. Within the next five years, the costs rapidly escalate as additional vehicles with telematics systems are manufactured and as more aftermarket systems are deployed. By 2019, the projected legal costs just for these limited instances of legal exposure and litigation compliance will eclipse $2.1 billion.

We derived the $2.1 billion price tag by calculating the need to employ internal legal staffing or hire outside law firms to handle the upcoming information mandates for the telematics industry. IT personnel will also be required to support the specific data pulls. Likewise, systems will need to be put in place for the secure handling and transmission of the information subject to subpoenas. All these cost elements are factored into the above calculations.

Why will such expensive staffing and infrastructure be needed? An avalanche of requests is headed toward telematics service providers, OEMs and other users of telematics data. Each year in the United States there are more than 5.6 million vehicle accidents, nearly 877,000 divorce proceedings and 263,100 contested child custody battles. Even if only 6% are related to a telematics-equipped vehicle today, that is an industry-wide burden of almost 409,000 cases per year.

Based on average caseloads and processing times, it will require over 22,000 attorneys, over 67,000 paralegals, and over 27,000 IT people a year just to process the ensuing subpoenas. Add in technology costs and salaries, and the expenditures result in an outlay of approximately $685 million – and that's just for the cars that have telematics systems today.

How does the cost balloon from almost $700 million to over $2 billion? The telematics industry is booming. Today, there are around 15 million cars on the road equipped with some sort of telematics capability. In the next five years, however, that number will more than quadruple to over 62 million, and the percentage of connected cars on the road will sharply increase from the current 6% to over 18%. The more connected cars on the road, the greater likelihood of legal proceedings demanding detailed telematics data, with all the associated costs and distractions.

This exposure is only the tip of the iceberg. These calculations only contemplate accidents, divorces and contested child custody battles. Not factored in are the costs of answering subpoenas in workers compensation litigation, drug cases, solicitation charges, and numerous other cases in which creative attorneys will want to discover people's locations and behaviors.

[Tech strategy for unclaimed property compliance]

In the case of vehicle accidents, telematics systems can give accurate readings of speed at the time of the crash, location of the accident, and other pertinent details. Telematics systems should not be confused with the "black boxes" – the "event data recorders" – in over 96% of new cars marketed today. Those systems collect and store a few seconds of data immediately before and after an accident. Instead, most telematics systems are continuously recording all types of second-by-second data about vehicles and drivers, sometimes for years at a time. Moreover, such telematics data can be utilized to establish both prior and concurrent reckless behavior, such as regular speeding or aggressive stops-and-starts. And, plaintiffs' attorneys who specialize in vehicle accidents are growing increasingly aware of the importance and expanding availability of this data. As Rob Register, an attorney with the Atlanta-based personal injury firm Malone Law, states, "If the data exists, there would be no defense to producing it during litigation."

This legal goldmine (or minefield, depending upon your perspective) is just beginning to be used. OEMs, usage-based insurers and aftermarket telematics systems providers need to be prepared for the inevitable wave of subpoenas and accompanying legal costs. Concludes Register, "We are always looking for data sources to prove our case. Telematics provides a powerful new storehouse of data and information that could lay the foundation for additional theories of liability."

A former in-house counsel with over 20 years in the industry working at a leading commercial vehicle telematics company says that companies using telematics -- like insurers – should not collect information they don't need. Why? Because the more than $2 billion calculation above does not even include the costs of dealing with potential class action lawsuits based on privacy laws.

"There's easily a potential class action lawsuit here," he adds. "Each of the 50 states has privacy laws. These laws don't just impact consumers who live in those states and the companies that serve them. If a consumer drives through a state, then the laws of that state regarding privacy might apply to the telematics data collection going on in that vehicle. There is no way that current OEM and aftermarket systems comply with every states' privacy laws – not with the level of data they're collecting."

So how can insurers avoid incurring these costs? We'll talk about that in our next installment.

About the author: Fred Blumer is co-founder of Vehcon, a provider of smartphone-based insurance telematics technology. He also co-founded Hughes Telematics and before that practiced international corporate law.

Comment  | 
Print  | 
More Insights
Comments
Newest First  |  Oldest First  |  Threaded View
MichaelE078
50%
50%
MichaelE078,
User Rank: Apprentice
6/9/2014 | 9:29:52 AM
re: Telematics Nightmare Scenario: Litigation
Thanks, Fred. Should insurers go back to what UBI was intended for and have consumers pay for car usage rather than driver behavior? The issue of incriminating data has been in the background since day one of UBI. As the article indicates, most consumers are not aware of the legal ramifications of their driving behavior data being collected by their insurer. Consumers surveyed, even without being aware of these incriminating ramifications, were overwhelmingly against having their driving behavior data collected by their insurer
(see PAYD/UBI Consumer Preference Survey,http://web.paygo-systems.com/w....
Register for Insurance & Technology Newsletters
White Papers
Current Issue
Slideshows
Video