The term “social inflation” describes the upward trend in lawsuit awards and claims costs. It’s a real phenomenon, and one of the key factors contributing to the hardening insurance market. Brokers need to prepare their clients for the impact.

Social inflation is often connected to the views of juries, and by extension, the views of society. When someone is injured – whether it’s in a collision with a big rig, a slip and fall in a grocery store or a shooting in a public venue – juries want to make someone pay. Companies are often perceived as having deep pockets, so juries may recommend large awards – both to compensate the victim and to send a message to corporate America.

The Insurance Information Institute identifies three major causes of social inflation:

• Class action lawsuits and litigation funding
• Tort reform rollbacks
• Nuclear verdicts, the term commonly used to refer to very large jury awards, especially those in excess of $10 million

The Big Business of Litigation Funding

What society and most jury members do not realize is that litigation funding companies fund legal action in return for a percentage of a successful claim sum. In 2020, more than $17 billion was invested in litigation funding globally, according to SwissRe, providing monetary incentive for the initiation and prolongment of lawsuits. Third-party litigation finance has become a lucrative business, generating a 25% rate of return in recent years. Juries intend for awards to benefit plaintiffs, but in fact, a big share is often diverted to investors and law firms.

Social Inflation’s Widening Impact on Insurance Markets

Insurance Business reports that the lines most impacted by social inflation include commercial trucking, medical malpractice, professional liability, D&O liability, and product liability. Not surprisingly, these lines are all experiencing a hard market. The upward trend in lawsuit awards and claims costs is also trickling down to premises liability and general liability claims where slip and fall cases and other awards are also getting larger. According to Chain Store Age, a jury in Orange County, Texas awarded a woman $1.325 million after she slipped and fell at a grocery store. The store allegedly had issues with leaking freezers, resulting in a puddle.

Some of the largest general liability awards have involved victims of shootings in public venues, such as 2017 Las Vegas Music Festival Shooting. Risk & Insurance reports that the owner of the hotel and concert venue, MGM, paid roughly $800 million in a settlement agreement, after first contending that it could not be held liable because the shooting fell under Homeland Security’s definition of a terrorist attack.

The American Bar Association explains that over the past several decades, there has been a societal shift. In the 1980s, businesses were not held responsible for the criminal acts of third parties on their premises. Now public opinion has turned and the exposure is much greater.

Preparing Your Clients for the Impact of Social Inflation

Any business insurance packages that include any type of liability coverage will likely be impacted by social inflation. Take the following steps to help your clients prepare:

• Educate property owners to pay close attention to premises and liability exposures, including their duty to warn, provide adequate security for patrons and emergency response training for employees. Help your clients understand policy exclusions, increase limits and obtain active assailant coverage if needed.
• Warn clients to budget for rising insurance rates. Social inflation isn’t the only factor, but it may be playing a role, especially in liability lines.
• Prepare for stricter underwriting. Insurers want to see that policyholders have strong loss control practices in place. Your clients can reduce their liability and improve their insurance application by assessing their risks and implementing appropriate safety policies, procedures and training to mitigate those risks. Robust recordkeeping is also essential to prove that safety policies are being followed consistently.
• Allow time to shop the market. Getting appropriate coverage may be more challenging. Some insurers are shying away from high limits or restricting coverage with limitations and exclusions. Finding the right coverage may take more time and effort so start the process early.
• Consider safety and security investments. New technologies can support safety, and this may help your clients avoid losses and increase their appeal to underwriters.

Do you need help finding insurance for your clients amid social inflation and rising rates? Deans & Homer helps independent insurance agents source coverage that works for their clients.