In understanding and analyzing the “hard insurance market” – characterized by higher premiums, diminished capacity, new sub-limits, additional policy exclusions, changes to coverage forms, and tighter underwriting guidelines – you have to look at the impact that social inflation has had on our industry. Social inflation refers to recent growth over the last several years in liability risk and costs due to several trends and developments, including:
- Rollbacks of previously enacted tort reforms intended to control costs
- Legislative actions to retroactively extend or repeal statutes of limitations
- Emergence and growth of third-party litigation funding
- Increasing numbers of very large jury verdicts, reflecting an increase in juries’ pro-plaintiff stance and the willingness to punish those who cause injury to others
- Proliferation of class-action lawsuits
Tort Reform Changes
Key tort reforms that put caps on non-economic damages have been rolled back in recent years which, according to the Insurance Research Council (IRC), has reintroduced the same cost-inflating trends that were the impetus for enacting the reforms in the first place. In increasing the potential damages in the claims and lawsuits involved, additional incentive is created for more lawsuits to be filed and for claimants and plaintiffs to seek higher settlements from insurers and defendants, notes the IRC.
Legislative Action Expanding Liability
Several state legislatures have extended or attempted to extend statutes of limitations and retroactively apply a new time limit to claims whose statute of limitations has expired. Retroactive extensions of statutes of limitations create additional liability and costs that were not accounted for when an insurance policy was originally issued and rated. One example of this is retroactively changing the statutes of limitations involving allegations of sexual abuse made by victims who did not come forward to press their claims until much later in life.
Litigation Funding
Third-party litigation funding involves an outside entity that provides funds to a plaintiff in exchange for a percentage of the amount ultimately received, whether a settlement or jury award. It’s a multi-billion-dollar industry and is reshaping litigation on a global scale. According to proponents of this practice, litigation funding provides capital for plaintiffs and their counsel to compete against deep-pocketed defendants. It enables law firms to prosecute additional cases by sharing litigation risks with the funder. However, opponents of litigation funding believe the practice promotes the filing of frivolous lawsuits, increases litigation costs, and empowers funders to exert influence over litigation strategy and settlements.
Attitudinal Changes Among the Public, Nuclear Verdicts
According to the Pew Research Center, 61% of adults surveyed in 2019 said there’s “too much” economic inequality in the United States. Among those who said there was too much inequality, 67% said that “major changes” were needed to address the issue. Fourteen percent said that addressing economic inequality would require the “complete rebuilding” of the economic system, and 62% said that large businesses and corporations had “a lot of responsibility” in reducing inequality. This attitudinal shift can be seen, in part, in juries attempting to hold businesses responsible for perceived wrongs through nuclear verdicts ($10 million and up).
The Rise in Class-Action Lawsuits
Companies spent nearly $2.5 billion defending class action lawsuits in 2018, according to the American Bar Association, and this amount has only increased. A class-action lawsuit is one in which one of the parties is a group of people represented collectively by a member of that group. Expectations are that an untold number of pandemic-related class action lawsuits lie in wait. According to the National Law Review (NLR), an uptick in wage-and-hour class and collective action lawsuits arising in part from the dramatic spike in remote work in 2020 due to COVID are expected. In an article earlier this year, the NLR wrote, “We expect an increase in ‘off-the-clock’ claims by nonexempt employees, as well as class-action suits seeking expense reimbursements for employees’ home office costs.”
Social Inflation’s Impact on Insurance
These trends and developments have impacted several insurance lines including Commercial Auto insurance in which mega jury verdicts have been du jour over the last several years. For example, in 2020 the jury in a Zoom trial for a case involving a trucking company in Florida awarded a motorcyclist $411 million-plus for injuries he received in a 45-vehicle pileup in 2018.
Product Liability, Directors & Officers Liability, and Excess Liability insurance lines have also been impacted by social inflation. According to a 2019 report by Chubb, “significant regulatory reform, the growing willingness of courts and regulators to hold individuals accountable, an increasingly active and engaged shareholder pool, and a heightened compensation culture, have all led to directors and officers facing a constantly evolving set of exposures—including regulatory fines, criminal sanctions, civil liabilities, and shareholder claims.”
In the Excess market, capacity is increasingly difficult to find, with terms and conditions becoming more restrictive. Insurers are also amending underwriting requirements and are seeking higher attachment points, and towers are requiring more carriers to build.
Social inflation affects insurers and reinsurers and, ultimately, the insurance buyer with higher premiums, with higher prices for goods and services then being passed through to consumers. Stemming the litigation frenzy and mega-verdicts is in everyone’s interest. Some insurers are taking action as we previously discussed, including mediation and arbitration and the use of analytics to understand how insurance cases are actually decided, how long cases last, and what litigation strategies have been successful.
