What is Social Inflation?
Social inflation generally refers to the rising costs of insurance claims that are a result of societal trends and views toward increased litigation, broader contract interpretations, plaintiff friendly legal decisions, and larger jury awards.
What is causing social inflation?
There are four major factors that are driving social
inflation in the United States today. They
litigation funding, the erosion of tort reform, negative public
sentiment toward larger businesses and corporations, and desensitization to
large jury awards.
Plaintiff Risk Mitigation through Litigation Funding
Lawsuits are expensive. Whether you are pursuing or defending a case, attorney’s fees are often substantial, particularly if a case goes to trial. In the past, attorney’s fees would be a significant factor in a plaintiff’s decision or the attorney’s recommendation of whether or not to pursue a case to trial weighted against the potential for a larger award by a jury. Now, the scales are being tipped with the increased presence of a third party – Litigation Financiers.
Litigation financiers are companies who agree to cover all or part of the costs to pursue litigation or arbitration. In return, the plaintiff agrees to share a percentage of the proceeds of the verdict with the financier. If the case is lost, the plaintiff may owe the financier nothing. The litigation financier often has no direct interest in the proceedings, except for the financial outcome of the case. While litigation financing is not new, the industry has grown by more than 200% between 2012 and 2018, and is now considered a mainstream method to fund litigation.
Why does litigation financing matter? Litigation financing is having a significant impact on not only the increased volume of cases that are being pursued, but also how many are ultimately pursued to full litigation or arbitration. This is because the financier is able to apply leverage on the plaintiff to pursue a case to trial and to not accept a settlement below a certain amount in order to seek an acceptable rate of return. From the defendant and insurance perspective, this puts pressure on loss costs due to increased litigation cycle time, defense costs, and potentially larger jury verdict awards.
The Erosion of Tort Reform
State regulations designed to limit the length of time during which a lawsuit can be filed, as well as set monetary caps on punitive and noneconomic damages that can be awarded, are being modified legislatively or challenged on constitutional grounds in several states.
Public Sentiment + the Diminished Value of Money = Big Verdicts
Public sentiment today indicates a high level of distrust for larger businesses and corporations. This sentiment, not surprisingly, has an effect on juries’ perceptions of civil cases put forth against business entities, making trial defense more challenging and risky. Juries are increasingly likely to sympathize with the plaintiff when awarding damages, regardless of the level of fault assigned to the defendant in order to help make that person whole, in part, because it is perceived that the business or their insurance company can ‘afford it[HKA1] ’. This can be exacerbated by aggressive plaintiff attorneys using psychological techniques that activate jurors’ survival instincts and thereby make them more likely to rule in favor of the plaintiff based on emotional triggers, rather than based on the facts of the case. This technique is often referred to as “Reptilian Strategy”.
Jury members for large cases also sometimes express wanting to ‘punish’ the corporation and may assign blame not just on the facts of the specific case, but also based on the reputation of the brand or the industry as a whole. Add to this stew society’s diminished value of money when assessing damages and you have a recipe for big verdicts – some that make eye-popping national headlines. While many of the headline verdicts are reduced by the presiding judge, even the reduced verdicts can be in the tens if not hundreds of millions of dollars[HKA2] . 
What can you do to help protect your business against this increased risk?
While no business owner expects to be sued, it is critical to have risk management controls in place to adequately protect your business should a lawsuit occur. Here are a few things you can do to help protect your business:
- Buy an umbrella policy to add extra financial protection against catastrophic loss or judgments. Your insurance agent can help advise you as to the recommended policy limits to purchase for your business. Limits typically start at $1 million and can be increased from there depending on your insurance needs. If you have an umbrella policy already – great job! Now is a good time to check with your agent to ensure your limits are adequate, given the increased social inflationary pressures.
- Protect your business against employment practices related risks. Review and update your employee handbook, including employment practices and sexual harassment policies. In the event of an employment practices claim, having these policies updated, communicated and enforced can greatly assist in your defense. In addition to updating policies, make sure you have employment practices liability insurance (EPLI) coverage included as part of your business policy or as a standalone coverage. EPLI is the type of claim many business owners don’t anticipate, but which can be extremely expensive.
- Leverage your insurance partners. This means working with an independent insurance agent to make sure he or she understands your business and associated risks, and assists you in updating your insurance coverages and limits accordingly. Need to find an independent agent? Click here It also means knowing more about your insurance carrier and learning what resources they have available to help you mitigate your risks. Are there risk management resources you can leverage? Are there training tools that can help you onboard or offer additional training to employees? Some carriers have dedicated loss control personnel available to help you identify risk management and loss prevention resources. The world is rapidly changing around us, and it’s important that you work closely with your independent insurance agency partners to ensure that your business is adequately protected from ever evolving and emerging risks.
About Acadia Insurance
Acadia Insurance is a regional insurance carrier that offers targeted insurance solutions through independent insurance agents to businesses located in the Northeast. We are known for superior risk expertise and hands-on, responsive service with insurance experts located in seven offices throughout Connecticut, Maine, Massachusetts, New Hampshire, New York and Vermont. Rated A+ (Superior) by A.M. Best, Acadia Insurance Company is a member company of W. R. Berkley Corporation, one of the nation’s premier commercial lines property casualty insurance providers.
Acadia Insurance is pleased to share this material with its customers. Please
note, however, that nothing in this document should be construed as legal
advice or the provision of professional consulting services. This material
is for general informational purposes only, and while reasonable care has been
utilized in compiling this information, no warranty or representation is made
as to accuracy or completeness.
 “Litigation Funding Comes of Age: Trends and Ethics” Above the Law. March 29, 2019 https://abovethelaw.com/2019/03/litigation-funding-comes-of-age-trends-and-ethics/
 “’Jurors Want to Punish’: Why a Jury Verdict Goes ‘Nuclear’” Law.com October 17, 2019 https://www.law.com/2019/10/17/jurors-want-to-punish-why-a-jury-verdict-goes-nuclear/?slreturn=20190930151104