Social inflation, also known as legal system abuse, refers to the rising costs of insurance claims due to various societal and legal factors where the focus moves away from making a claimant “whole” to a focus on punishing defendants. This phenomenon has significant implications for insurers, businesses, and consumers alike. Let’s delve into the causes, impacts, and strategies to help mitigate social inflation.
Causes of Social Inflation
The growth of a litigious culture, with higher expectations for settlements and verdict values, is a primary driver of social inflation. Increased media coverage of large verdicts, often termed “nuclear verdicts,” fuels public awareness and expectations. Negative perceptions of corporate entities and insurance companies can influence jury decisions, while the rise in plaintiff attorney advertising across various media platforms encourages more lawsuits. Additionally, the emergence and growth of third-party litigation funding and medical financing support more extensive legal battles. The rollback of previously enacted tort reforms in some states, the eroding of caps on damages and coordinated efforts by the plaintiff’s bar to implement strategies advantageous to plaintiffs, further amplify social inflation.
Areas Most Impacted
Social inflation has a particularly strong impact on insurance lines like Commercial General Liability, Commercial Automobile Liability, Professional Liability, Product Liability, as well as Excess and Umbrella insurance. Typically, social inflation manifests in various types of claims including those arising from motor vehicle accidents involving trucks, passenger vehicles, motorcycles, bicycles, and pedestrians. Jobsite accidents, liquor liability claims, and uninsured/underinsured motorists are also significantly impacted. In addition, trends in property claims (specifically involving public adjusters), and workers’ compensation claims evidence an increased emphasis on maximizing settlements.
Inflammatory Characteristics
Certain inflammatory characteristics can provoke emotional responses or reactions from jurors, furthering the impact of social inflation. Visual evidence, such as photos and videos with shock value, distracted driving and excessive speed, alcohol and drug use, and a history of prior incidents like auto accidents and OSHA violations can all contribute to social inflation. Cases involving large, well-known corporate entities can be provocative due to public perception that such entities can afford to pay large judgments. Furthermore, severe injuries like traumatic brain injury, spinal injuries, amputations, disfigurement, and complex regional pain syndrome can be a particularly inflammatory claim characteristic.
Mitigation Strategies
To help combat social inflation, insurers and businesses can adopt several strategies. From a risk management perspective, emphasizing the use of dash cameras in vehicles and video cameras in business areas can show what actually transpired in an accident when witness statements vary. Reviewing documentation such as contracts, lease agreements, and employee policies is crucial to ensure appropriate contractual risk transfer provisions and safety practices and procedures are in place. Ensuring thorough pre-trip inspections for trucking risks, evaluating the quality of subcontractors, and procuring umbrella policies are also important steps.
From an insurance claim standpoint, proactive claims handling, escalating red flags, and recognizing cases with potential inflammatory characteristics are essential. Continuously reviewing opportunities to resolve claims, being aware of plaintiff bar tactics, identifying third-party litigation funding and medical financing through discovery, understanding jurisdictional nuances, and providing ongoing training and education on legal trends can help manage risks and control costs.
By understanding and addressing the factors contributing to social inflation, insurers and businesses can better manage risks and control costs, ultimately benefiting all stakeholders involved.
