As an insurance carrier, it's crucial to keep our clients informed about the factors influencing their coverage costs. One such factor is "social inflation," a term that refers to the rising costs of insurance claims due to societal trends. These trends include increased litigation, broad insurance policy interpretation, plaintiff-friendly legal decisions, and larger jury awards, all of which contribute to social inflation in the insurance industry.
Understanding the drivers of social inflation is essential for businesses, as it not only provides insight into the factors affecting insurance costs but also helps in taking proactive steps to protect against litigation.
Increased Litigation
One significant driver of social inflation is increased litigation, particularly litigation funding. This occurs when a third party provides resources to attorneys to finance a lawsuit in exchange for a portion of the settlement. Previously, the high cost of attorney fees often deterred plaintiffs from pursuing claims. However, with litigation funding covering most or all litigation costs, the volume of cases has increased. This trend not only makes litigation more common but also drives up costs, sometimes reaching seven figures, as plaintiffs pursue larger settlements.
Tort Reform
Tort reform laws are designed to reduce litigation by preventing frivolous lawsuits and preserving laws that protect businesses from abusive practices. Over the past few decades, many states have enacted tort reforms, leading to fewer claims and caps on punitive damages. However, recent years have seen modifications or challenges to these reforms, with opponents arguing that they lower settlements to the point where attorneys are less likely to take on new cases. The uncertainty surrounding tort reform, influenced by political leanings and state interests, could lead to fewer restrictions on punitive and non-economic damages, statutes of limitations, and contingency fees, further driving up claim costs and exacerbating social inflation.
Plaintiff-friendly Legal Decisions and Large Jury Awards
Public sentiment toward large businesses and corporations is deteriorating, with anti-corporate culture becoming more prevalent. Factors such as highly publicized data mishandling issues and social campaigns like Occupy Wall Street contribute to this distrust. This shift in perception impacts how businesses are viewed by juries, who are increasingly likely to sympathize with plaintiffs, especially if a business's reputation has been tarnished. Plaintiff attorneys often play to a jury's emotions rather than the facts, and the perception that well-funded businesses can afford damages leads to fewer reservations about prosecuting companies to the fullest extent. The rise of nuclear verdicts (multimillion- and multibillion-dollar settlements) has desensitized juries to plaintiff awards, making trial defense costlier and riskier.
Responding to Social Inflation
While it's impossible to eliminate the threat of litigation entirely, businesses can take steps to prepare for lawsuits, especially as social inflation continues to drive up claim costs. Here are some ways to protect your organization:
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Consider purchasing an umbrella policy: Commercial umbrella insurance provides financial protection above the limits of your other liability policies, enhancing existing coverages and helping you respond to substantial claims. These policies offer additional protection for concerns such as libel, vehicle accidents, third-party property damage, product liability, and customer and employee injuries.
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Protect yourself from employment practices claims: Employment practices claims are common and can be particularly devastating given social inflation trends. Regularly review your employee handbook and ensure policies related to sexual harassment, workplace violence, and similar issues are communicated effectively. This can help your defense if a claim is brought against you. Consider purchasing standalone employment practices liability insurance for additional protection.
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Work with experienced insurance professionals: The insurance market is constantly evolving, and in the face of social inflation, it's vital to have a competent insurance professional advising your business. Partner with a broker who has strong carrier relationships and industry knowledge.
Social inflation introduces uncertainty in risk management and claims prevention practices. To ensure your business is prepared for any issue that may arise, contact VGM Insurance today.
VGM Insurance
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