Trends Driving Social Inflation and How to Respond
As an insurance buyer, you may have heard the term “social inflation” used by your insurer to explain the factors driving up the cost of coverage in today’s market. In general, social inflation refers to the rising costs of insurance claims that are a result of societal trends. Trends such as increased litigation, broad insurance policy interpretation, plaintiff-friendly legal decisions and larger jury awards all drive social inflation in the insurance space.
As the insurance market changes, it’s important for businesses to understand what’s currently driving social inflation. Doing so not only provides you with a better understanding of the issues that affect your insurance costs, but it can also help you take proactive steps to protect your business in the face of litigation.
Increased Litigation
One of the factors driving social inflation has to do with increased litigation or, more specifically, litigation funding. Litigation funding is when a third party provides resources to attorneys to finance a lawsuit. In exchange, the third party receives a portion of the settlement.
In the past, the steep cost of attorney fees would often scare plaintiffs away from taking a claim to trial. But, through litigation funding, most or all of the costs associated with litigation are covered by a third party, which has increased the volume of cases being pursued.
Not only is litigation funding becoming more common, but it also increases the cost of litigation, sometimes to seven figures. This is because plaintiffs are able to take cases further and pursue larger settlements.
Tort Reform
Tort reform refers to laws that are designed to reduce litigation. Specifically, tort reforms are used to prevent frivolous lawsuits and preserve laws that prevent abusive practices against businesses.
Many states have enacted tort reforms over the last several decades, leading to fewer claims and caps on punitive damages. However, in recent years, states have modified tort reforms or challenged them as unconstitutional. Opponents believe tort reforms lower settlements to the point where attorneys are less likely to take on new cases and help victims get justice for their injuries or other damages.
Further complicating matters, tort reform is subject to uncertainty, as it is largely tied to political leanings and the interests of individual states. Should tort reform continue to erode, there could be fewer restrictions on punitive and noneconomic damages, statutes of limitations and contingency fees—all of which can drive up the cost of claims and exacerbate social inflation.
Plaintiff-friendly Legal Decisions and Large Jury Rewards
The overall public sentiment toward large businesses and corporations is deteriorating, and anti-corporate culture is more prevalent than ever. A number of factors are contributing to this increasing distrust, including highly publicized issues related to the mishandling of personal data and social campaigns like the #MeToo and Occupy Wall Street movements.
This has had a considerable impact on how businesses are perceived by a jury in court, and organizations are held to a high standard for issues related to the way they conduct their business. In fact, juries are increasingly likely to sympathize with plaintiffs, especially if a business’s reputation has been tarnished in some way in the past. As a result, plaintiff attorneys are likely to play to a jury’s emotions rather than the facts of the case.
Compounding this issue, there’s an increasing public perception that businesses—particularly large, well-funded ones—can afford the cost of any damages. This means juries are likely to have fewer reservations when it comes to prosecuting companies to the fullest extent of the law. And given the way that nuclear verdicts (e.g., multimillion- and multibillion-dollar settlements) have become the new norm, juries are often desensitized to plaintiff awards, making trail defense both costlier and risker.
Responding to Social Inflation
While it’s impossible to completely eliminate the threat of litigation, it’s important to take the proper steps to ensure your business is prepared for a lawsuit. This is increasingly crucial as social inflation continues to drive up the cost of claims.
The following are some ways your organization can protect itself:
- Consider purchasing an umbrella policy— Commercial umbrella insurance provides financial protection above the limits of your organization’s other liability policies. It enhances existing liability coverages, helping you respond to gaps in insurance and substantial claims. These policies offer additional protection for a variety of concerns, including libel, vehicle accidents, third-party property damage, product liability, and customer and employee injuries.
- Protect yourself from employment practices claims—Employment practices claims are common and can be particularly devastating given social inflation trends. To protect your business, review your employee handbook regularly and ensure policies related to sexual harassment, workplace violence and similar issues are communicated effectively. Doing so can help your defense should a claim be brought against you. For additional protection, you may want to consider purchasing standalone employment practices liability insurance.
- Work with experienced insurance professionals—The insurance market is constantly evolving, and in the face of social inflation, it’s vital to have a competent insurance professional advising your business. Be sure to partner with a broker who has strong carrier relationships and knowledge of your industry.
Social inflation can introduce a level of uncertainty when it comes to your risk management and claims prevention practices. To ensure your business is ready for any issue that may arise, contact Arthur Hall Insurance today.
This Coverage Insights is not intended to be exhaustive nor should any discussion or opinions be construed as legal advice. Readers should contact legal counsel or an insurance professional for appropriate advice. © 2020 Zywave, Inc. All rights reserved.