Social inflation is one of the latest buzzwords in the insurance industry. It is a term that has been used to describe social and behavioral trends that are said to expand the liability of parties allegedly responsible for harms and their insurers. Insurers and others have argued that social inflation creates a feedback loop in which rising levels of tort compensation fuel expectations of financial windfalls among potential claimants and the attorneys who represent them, which in turn stimulates the filing of new claims and associated lawsuits.
It is used by insurance companies to describe the rising costs of insurance claims resulting from factors such as increasing litigation, broader definitions of liability, more plaintiff-friendly legal decisions, and larger compensatory jury awards. While the core components driving social inflation have been evident for some time, their impact on the insurance industry has only recently begun to come to a head.
Excessive awards and settlements are becoming less shocking to the public, due in part to highly publicized “nuclear verdicts.” At the same time, most jurors believe companies should always have to do more than meet government safety standards. Furthermore, many jurors think that companies should take all precautions, no matter how impractical or costly, to ensure the safety of their services and products.
One of the primary drivers of social inflation is the widespread anti-corporate sentiment that has persisted since the 2007-08 financial crisis. That time seems like a long time ago, but it really created an environment that continues to gain momentum today. Since that time, there’s been a greater division or separation of wealth, and there’s generally a feeling that someone needs to pay when there’s some kind of damage or injury sustained, regardless of negligence.
Social inflation stems from several factors, including the composition of juries today. The jury composition significantly impacts the outcomes of verdicts. The byproduct of this has always existed but seems magnified now, which is the targeting of large corporate risks. They have always been in the crosshairs of the plaintiff’s bar, but they are an even bigger target these days. That comes from the investment in advertising and other actions by the plaintiff’s bar, and it also includes things like litigation funding. There is just a more pronounced movement towards this type of targeting as a result.
Juries today tend to have a younger demographic, with a higher proportion of Gen Z jurors. Not only are a smaller proportion of jurors surveyed likely to trust courts – 48%, compared with 67% pre-COVID, but they’re also more likely to have an anti-corporate mindset. Nearly two-thirds believe it’s an “important function” of juries to “send messages to corporations to improve their behavior,” while 77% favor the use of punitive damages to punish corporations. Today’s jurors tend to overwhelmingly side with plaintiffs, and a rising perception that large businesses can afford the cost of damages means juries have fewer reservations about making substantial awards. Plaintiff attorneys are leveraging “reptile theory” – concerns about the possible impact of defendants’ conduct on their family and community – to influence the size of jury awards.
Insurers are increasingly pushing for settlement on claims, looking to avoid trial even with a good liability defense, because of the increasing likelihood of damage awards that could exceed total policy limits. Defense attorneys are also finding ways to counter some of the tactics the plaintiffs’ bar uses, including defensive anchoring and a strategy for more effectively challenging the size of awards suggested to juries by plaintiff lawyers.
Over 40 million lawsuits are filed every year in the U.S., making it the country with the largest number recorded each year. Over the last few years, businesses have been hit with numerous nuclear verdicts (verdicts that surpass $10 million) and have faced increasing costs in defending claims. In one respect, the excessive focus by some claim departments on legal spending combined with a “dose of complacency” have helped the plaintiff’s bar forge ahead and left defense counsels scrambling to play catch-up.
Political discourse infiltrates the jurors’ mindsets. In a world of “identity politics,” politics play an increasingly pervasive role in how individuals define themselves, function, and view the world. Notions of socialism, social justice, wealth and income disparities, and wealth re-distribution that abound on the airwaves and in social media and other political discourse foster an environment that plays into the hands of plaintiffs.
Jurors are more inclined to render awards with less emphasis on fault, greater emphasis on company reputation and safety practices, and based upon the perceived ability of corporate defendants and their insurers to absorb losses. Millennials and Generation Z jurors appear to be more inclined in this direction. A national survey conducted by Sound Jury Consulting in 2019 found that three-quarters of respondents eligible for jury service stated they would decide a case based on their personal beliefs of right or wrong, if those beliefs conflicted with the law as instructed by the judge.
The civil justice system places great importance on jury instructions, and the rule of law depends, in large part, upon jurors following the judge’s instructions. Although “limiting instructions” have been known to be of questionable utility, the inclination to ignore court instructions on the law is very troubling and threatens the fair administration of justice.
Fortunately, insurers endeavor to employ bright and talented people who have always found ways to meet the challenges presented. Insurers have several tools to address social inflation. Insurers are recognizing that social inflation is a multifaceted problem that requires the expertise of claims, legal, underwriting, actuarial, data analytics, loss control, and marketing to understand and formulate appropriate responses. Social inflation is dynamic and requires continual attention.
Corporate policyholders, insurers, and their counsel – at least to some extent – hold the ability to limit nuclear verdicts and reduce social inflation in their own hands. Fundamentally, ensuring that a stable of highly qualified counsel and firms are engaged to protect and promote their interests through reasonable, competitive compensation and devoting the resources needed to adequately evaluate and defend cases – including providing for reasonable budgets, jury research and scientific studies – are fundamental requirements.
Insurers and their policyholders are well-served by developing and maintaining a culture of excellence, hiring, retaining, training, and promoting outstanding talent, and insisting upon excellence in underwriting, claims, and other functions.
