Tackling social inflation head on

The trend towards outsized jury awards is a big concern for US companies, as well as international companies doing business there. Social inflation drives higher insurer claim payouts and loss ratios, which ultimately affects coverage and the cost of insurance.

So, what can be done? What are the risk management and insurance solutions?

Trend towards nuclear verdicts

Nuclear verdicts, defined as awards in excess of $10m, continue to increase in frequency and severity. We see the effects of social inflation in industry claims data, where increases in liability loss costs fall outside the historical trend and far outpace economic inflation. The average cost of single fatality claims in the US has doubled since 2015, while the average cost of US harassment and discrimination claims almost tripled.

Large awards are to be expected from class action and multi-claimant litigation, but increasingly we see extremely large verdicts in single claimant cases. A recent single-fatality claim in Texas resulted in damages of $375m while a California court awarded a plaintiff $2bn in a case that alleged a weed-killer product caused cancer. Such headline awards are typically reduced by judges or on appeal, but the overall cost of litigation remains extremely high.

Drivers for social inflation

The trend toward nuclear verdicts is being driven by changes in jury demographics and social attitudes, which have resulted in an expanded view of liability and damages. Many jurors have higher expectations of corporate responsibility and safety than past generations, and perceive dollar values differently in an age of high-earning celebrities, social media influencers and sports stars. Younger jurors, in particular, often see themselves as community protectors, have a mistrust of corporations, and believe that if a person is injured, someone has to pay.

Plaintiff attorney tactics also play an important role in driving social inflation. In particular, plaintiff attorneys have been successful in employing the so-called “reptile theory” as a trial strategy, playing on juries’ fear and anger to encourage large awards. They have also made progress in their efforts to erode tort reform, enacted in the past to curb excessive jury awards.

Third-party litigation funding is also contributing to social inflation, as high interest charged by funders hamper defence attorneys’ ability to resolve cases. High fees and interest act as a disincentive to settle, as costs can easily outweigh settlements, leaving plaintiffs with little choice than to litigate. To make matters worse, third-party litigation funding is largely unregulated in most states, and funding agreements are confidential and lack transparency.

Push back

Plaintiff attorneys are well funded and organized, and often have a head start on the defence. However, insurers, including Zurich, are pushing back. The industry is becoming more active in its lobbying and representation and collaborating with various stakeholders to level the playing field. These include lobbying against the erosion of tort reform, and pushing for consumer protections and transparency regarding third-party litigation funding. Education is also important, and insurers are working to raise awareness of plaintiff attorney tactics among businesses and defence attorneys.

Mitigation actions

In addition to individual industry efforts, businesses can also take action. Mitigating the potential for a large verdict calls for an understanding of what leads to those awards and implementing best-in-class risk management and safety.

Typically, large single claimant verdicts are associated with severe personal injury claims that involve claims for pain and suffering or where there has been loss of life. Nuclear verdicts are also more likely to result from product liability cases, which account for almost 25% of such verdicts, although commercial auto and trucking, medical liability and premises liability follow close behind. They also tend to be litigated in a relatively small number of states, led by Florida, California, New York and Texas.

Because many nuclear verdicts focus on issues of safety and corporate responsibility, safety plans should be implemented appropriately and documented thoroughly, so when the time comes, the defence attorney can demonstrate steps were taken to keep the operation safe and prove that the company takes safety seriously. Should companies find themselves in court, they will need a strategy to avoid a large verdict. In much the same way as plaintiff attorneys, defendants need to tell a compelling story, humanising the business, and countering anti-corporate feelings with empathy and accountability.

It is also important to notify your insurer of a claim as soon as possible, as pro-active investigation and preservation of evidence is critical. Even small, seemingly insignificant, cases can get out of control if not paid attention to, while plaintiff attorneys will exploit inconsistencies or missing evidence to portray defendants in a bad light to the jury. Preparation and training on reptile theory and litigation management plans can, however, help combat aggressive litigation tactics.

Insurance solutions

Risk selection is an important tool for insurers, and underwriters will want to gain a deep understanding of how social inflation affects a business, its safety management and processes, and how it approaches litigation. Risk managers can also demonstrate that their organization is a good corporate citizen with safeguards that are above and beyond those required by law.

Businesses can work with their insurers and brokers to structure sustainable tailored solutions that reflect the effects of inflation and social inflation. For example, insureds can consider dedicated towers for US liability, and the allocation of capacity to large specific exposures, such as US auto, can avoid eroding coverage under the master policy. Retentions and the potential use of captives and self-insurance are also options open to buyers.

The rise of nuclear verdicts in the US has resulted in insurers reducing the capacity they are willing to extend to a single programme. Where insurers may have deployed capacity of over $100 million on a liability programme a decade ago, a more likely figure today is $10-$15 million. Insurers are more willing to support large towers in Europe, where the risk of mega-verdicts is much lower, but the industry is keeping a close watch on developments with collective actions in the region.

Collective effort

Insurers are committed to the promise to pay, and to make an injured party whole again. However, that should not mean the insurance industry and policyholders are there to hand out windfalls, which would lead to high costs of insurance for all businesses.

Social inflation is not just an insurance problem, it is also a business problem which results in higher costs for consumers. Thankfully there are steps which insurers can take, in collaboration with our customers, to mitigate the risks of nuclear verdicts and create sustainable insurance solutions.

This topic was recently discussed in a Zurich Commercial Insurance webinar. Read the webinar summary here.

Originally published on Commercial Risk on March 7th, 2023