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Social Inflation: What is it? What causes it? Why should you care?

Definition: Social Inflation is a term that was coined by the insurance industry. Basically, it means that juries are handing down much larger awards to plaintiffs, which causes insurance companies to pay significantly more money for claims. From 2014 to 2018, United States verdicts have almost doubled in total dollar amounts with a few verdicts in excess of $1 Billion. Although these “nuclear verdicts” have occurred in all types of liability insurance, Auto Liability, Products Liability and Medical Malpractice have suffered the largest losses.

Causation: There are many reasons that social inflation exists. The main drivers of social inflation are:

  1. How Juries View Corporations: Many individuals may not trust corporations and could see them as greedy and caring only about profits. Therefore, they may not trust the corporations to do what is right. This leads individuals to hire attorneys and file lawsuits when losses occur. Also, individuals that are serving on juries tend to believe the individual plaintiff over the corporation even if the facts of the case favor the corporation.
  2. Attorney Practices & Strategies: Attorney advertising methods are much more sophisticated than in the past, which provides more awareness to individuals to hire an attorney and file a lawsuit. These methods include analytics and social media to reach a larger number of potential plaintiffs. Analytics and social media are also utilized in choosing jury members, which provide very pro-plaintiff juries that increase verdicts.

    Attorneys and plaintiffs are using litigation funding which provides money to plaintiffs so that they have funds to support themselves while going through the litigation process. Using litigation funding means that plaintiffs do not need to settle for a lesser amount because they cannot support themselves during the lawsuit process. Attorneys are also utilizing “venue shopping” to find courts that will provide the largest settlements.

  3. Emotional Juries: Plaintiff attorneys have made a science of using jurors’ emotions to attain large verdicts. Attorneys have created a way to psychologically place the juror and his/her family members in the place of the plaintiff. This causes the juror to concentrate more on what the defendant could have done to prevent the incident, as opposed to any actual wrongdoing on the defendant’s part.
  4.  Legal Environment: Legislators have enacted statutes that make it easier to file lawsuits. For instance, several states have enacted laws that eliminate or extend the time in which you can file a lawsuit, meaning they extend the statute of limitation.

Why It Matters: Social inflation causes insurance companies to pay out large amounts of money when “nuclear verdicts” take place. To remain solvent, insurers are then forced to increase premiums to policy holders. If you are a business owner, it affects you directly as your annual cost of insurance can go up significantly. This reduces your profitability and could bring you to the point of bankruptcy if you are unable to pass a sufficient amount of the increased costs onto your customers. If you do not own a business, it will affect virutally everything you purchase, as business owners seek to pass the costs onto customers. Unfortunately, most jurors are not able to visualize how these large settlements actually hurt society as a whole and benefit very few people.

Tod Bergen, CPCU, CIC, CRM

Author Tod Bergen, CPCU, CIC, CRM

Business Insurance Executive
tbergen@ekmcconkey.com
717-505-3165

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