Key drivers of social inflation and mitigating the risk

The escalating effects of “social inflation” – a phenomenon where societal and legal trends are helping to drive more, and bigger, lawsuits – continue to be a top concern for risk managers and insurers alike. While the true impact may be difficult to quantify, it’s important to understand the factors driving social inflation and ways your insurance provider can help mitigate this risk. And with civil courts working through 24 months’ worth of cases postponed by COVID-19 lockdowns, now is a good time to reassess your risk strategy.   

Several key factors help drive social inflation, including:

Nearly half (48 percent) of Americans have a negative view of big business, according to a recent Gallup poll. What’s more, 75 percent say they have some, very little, or no confidence in corporate America. These adverse views may be leading more juries to favor claimants versus companies as a way to seek social justice. “Social inflation is generally driven by the need to ‘do the right thing,’” says David Perez, chief underwriting officer, Global Risk Solutions (GRS), Liberty Mutual Insurance. “Juries today want to send a message through their verdict.” Businesses need to be aware of the potentially polarized climate in the jury box — particularly if their case touches on hot-button social and political issues. 

The COVID-19 pandemic has reshaped courtroom operations, introducing “Zoom” court and virtual mediations. It has also delayed court cases across the nation, with a 30 percent increase in the backlog in civil courts alone. While this delay doesn’t directly contribute to social inflation, many cases may see much larger payouts than they would have two years ago because of this growing trend. “We’re looking at a civil court system that is about 24 months in arrears because of the COVID-19 lockdown,” says Perez. “So already, when we look at this repricing of case value, we’ve got millions of cases out there that have been stagnant for 24 months and sitting on a loss trend that’s been compounding for two years.”

The bar is well-organized, sophisticated, and has the resources to invest in advertising, social media, technology, and expert resources to drive up damage awards. In addition, it has a strong track record of appealing to jurors’ emotions and can be very persuasive, says David Perez, chief underwriting officer, Global Risk Solutions (GRS), Liberty Mutual Insurance. “As a result, juries can have extraordinary levels of empathy for plaintiffs and may set the facts of cases aside to do what they feel is right. This often translates into larger verdicts.”

The practice of third-party investors providing funds to plaintiffs to pursue lawsuits against companies – and their insurers – in return for a share of the potential proceeds also continues to expand. In fact, according to a 2019 survey of 330 lawyers who have previously used litigation funding, 98 percent of them say they’d do so again. As a result of this external funding, claimants may be more likely to pursue litigation where they may otherwise have settled, and attorneys may request higher amounts in monetary damages.

In these situations, a plaintiff’s lawyer enters into a fiduciary agreement with a physician that guarantees payment for medical expenses from the final lawsuit settlement amount or verdict award. In many jurisdictions, an injured plaintiff can only recover the expenses paid at a discount by their private health insurer to the medical provider — not the much higher amount originally billed.

But, if the plaintiff is treated by a physician outside their health insurer’s network under a letter of protection, the plaintiff can claim higher damages based on medical expenses billed, because there is no health insurer payment involved, says Meg Sutton, senior vice president, U.S. Casualty GRS North America, Liberty Mutual Insurance. “This trend gives treating physicians an interest in the litigation – and may inflate the value in a plaintiff’s requested damages and related claim.”  

Cumulatively, all these issues contribute to social inflation’s impact. And that continues to put pressure on businesses’ liability risk and costs, as well as insurers’ loss and expense ratios.

While no entity expects to get sued, one of the best ways to prepare and protect your business from the costly effects of social inflation is to ensure a strong partnership with an insurer that has deep experience in mitigating the impact from multiple angles. Here are three important strategies that can help deliver better outcomes:

Keeping pace with evolving societal and legal trends plays a key role in an insurer’s ability to manage risks and the potential impacts on businesses’ exposures and claims.

“There are developments that go against the best interest of our customers – such as adverse interpretations of contract language, new legal approaches, potential legislative changes – that our public affairs and claims groups stay on top of constantly,” explains Perez. “Their work, in turn, helps us keep our customers informed.”

The way an insurer applies its expertise and engages experienced specialists – especially in high-risk cases – can make a huge difference in claims outcomes.

Liberty Mutual collects data on severity indicators – such as the presence of a third-party interest – and additional claim characteristics like client industry and injury type, says Sutton. “When you have rich data,” she says, “you’re able to incorporate that into a model which helps us select the claim specialists and counsel who would be most effective on the particular type of case.”

Having the right lawyer and the right adjuster on the case from the start can help move claims quickly to resolution.

Through joint efforts of the legal team and claims professionals, being prepared for a variety of resolution strategies is the goal. The legal team at Liberty Mutual, for instance, conducts mock trials to test out and tweak diverse approaches in order to gain meaningful insight into how a jury may view a case. 

“It lets us test out different themes and find out what a jury might be thinking,” says Sutton. “And then we can adjust our defense accordingly for the best possible outcome.”

The scope and severity of social inflation’s reach is expanding, and the pandemic disruptions threaten to magnify its effects. “There’s an expectation that [social inflation] might actually get worse before it gets better,” Perez cautions.

And while businesses may not be able to control the course of claims once they get into litigators’ hands, they can minimize the risk of loss events by reinforcing a culture of safety and continuing to work with their insurance partners to understand and help reduce their exposures. “It’s important to remember that flawed business practices are one of the key drivers in a large verdict,” Perez notes. “Unsafe working conditions, lax manufacturing standards, or lack of awareness of the social impact of your operations can be very inflammatory to a jury’s perception of a particular claim.

Your insurance carriers and brokers know best what exposures impact your industry, and how to develop mitigation plans to limit those exposures. Ultimately,” Perez adds, “the best mitigation plan is not to have a loss in the first place.”

Learn more about interconnected risk trends, including labor shortages and environmental, social, and governance issues, and what your business can do about them.