How Is Social Inflation Affecting Insurance Litigation and Consumers?

New Jersey Insurance Coverage Lawyers at Herold Law Help Clients with Insurance Policy Disputes.

At its core, social inflation starts with overall changes in attitudes regarding entitlement to compensation for injury or loss, and the willingness to file insurance claims or pursue litigation against individuals or businesses in order to obtain that compensation. Recent data shows that social inflation has been challenging for insurance carriers, as litigation claims, costs, and higher consumer prices continue to rise. According to experts, this challenging inflation environment may continue to make insurance claims more costly to pay out. Though certain industries, such as construction, are prepared to sustain losses from catastrophic events, social inflation has proved to significantly impact insurance litigation costs nationwide.

Social inflation specifically refers to the influence of increasing litigation costs on insurers’ claim payouts, loss ratios, and how much policyholders ultimately pay for insurance coverage. Commonly discussed aspects of social inflation include:

  • Runaway litigation: This refers to the proliferation of class action suits and other legal actions driven by lawyers and government. Our country’s public confidence in big businesses is at an all-time low. Consistent with consumer’s low opinions of corporate America is a recent wave of class action lawsuits. Class action lawsuits may involve a range of issues, the most common being labor and employment matters followed by consumer fraud.
  • Nuclear verdicts: ‘Nuclear verdicts’ relate to the growing awards from sympathetic juries that cost carriers millions of dollars each year and aim to punish those who injure others. While most lawsuits settle before trial, the cases that do go to trial and result in large jury awards have a strong signaling effect on future negotiations that ultimately result in higher average settlements as well. Enormous verdicts and settlements are becoming much more common.
  • Third-party litigation funding: Litigation funding involves investors financing lawsuits again large companies in return for a share in the settlement. This is believed to remove a large part of plaintiffs’ incentive to settle lawsuits in a timely manner, resulting in hold outs for larger awards.
  • Tort reform rollbacks: Many states enacted tort reforms that were intended to control litigation costs, and enhance the predictability and affordability of state civil justice systems. Many tort reform efforts have limited compensation for non-economic damages, such as pain and suffering. Caps on these damages have been strongly opposed by personal injury trial attorneys. The Supreme Courts of several states with caps on non-economic damages have overturned the reforms, reintroducing the cost-inflating trends.     
  • Legislative actions: Some legislative actions are looking to retroactively extend or repeal statues of limitations. Retroactive extensions of statutes of limitations create greater liability and costs that were not considered at the time an insurance policy was originally issued and priced. Expansive court interpretations and legislation have also eroded many of the judicial system’s procedural and substantive rules and requirements. This has encouraged an increase in lawsuits that may not have otherwise been filed.       
  • Increased attorney involvement: There has been a noticeable increase in attorney advertising and attorney involvement in insurance liability claims. The success of personal injury lawsuits depends on the motivation and ability of plaintiffs to initiate the formal litigation process, which typically involves the services of skilled attorneys. A direct result of increased attorney advertising is more frequent attorney involvement in widely used insurance programs. This includes programs initially designed to reduce, if not eliminate, attorney involvement.
  • Changes in general beliefs: There has been an overall shift in society’s underlying beliefs about the appropriateness of filing lawsuits and expectations of higher compensation. Income inequality is widely-acknowledged and well-documented in the United States. A majority of Americans feel that large businesses and corporations have a responsibility in reducing economic inequality.

Financial services analysts explain that social inflation is only observable after the fact, and not as a precursor to claims. Though some have questioned its existence, research found that social inflation increased commercial liability claims alone by more than $20 billion between 2010 and 2019. The research also noted evidence of similar trends in other areas, such as medical malpractice claims and other liability occurrences.

Data also shows how losses across several insurance lines have accelerated in recent years faster than economic inflation alone would typically reflect. It is not unusual to hear about healthcare inflation in today’s news, but many people may not realize that other areas of inflation are even more out of control.

Which Industries Most Seriously Affected by Social Inflation?

Commercial trucking is one of the industries most severely impacted by more frequent lawsuits that generate higher penalties. A study conducted by the American Transportation Research Institute revealed that from 2010 to 2018, the size of verdict awards grew by 33 percent each year, while healthcare costs grew 2.9 percent and overall inflation only 1.7 percent. It is not uncommon for premiums for smaller trucking fleets to increase between 50 and 100 percent or more, in any given year.

Automobile, medical malpractice, products liability, and general liability are other commercial liability insurances lines that are widely affected by social inflation. However, a growing concern is that the same social inflation trends are starting to impact liability coverages in personal lines as well. Data indicates that personal auto liability could be affected by social inflation in the same way as commercial liability insurance business. Private passenger auto liability claim loss trends have followed a similar pattern as commercial auto and medical malpractice. Liability insurance costs for police officers, fire brigades, teachers, and numerous other professions have skyrocketed as well.

The property-casualty industry has experienced deteriorating results in several liability-related lines. Incurred claims losses have increased more rapidly in recent years than economic inflation would predict. Some insurance trade groups have made it a priority to tamper down litigation in certain states. Data shows that homeowner insurance case filings have risen steadily over the last 15 years, and more than doubled from 2020 to 2021, largely due to hurricanes.

Experts have cited workers’ compensation lines as being among the kinds of business most affected by longer-term inflation. However, property insurers operating in high inflation environments continue to take consistent steps to adjust policy terms during renewal, including premiums and deductibles, to help mitigate the risk of inflation.

How Does Social Inflation Affect Consumers?

According to the Bureau of Labor Statistics, consumer prices have recently increased by the highest inflation rate in close to 20 years. A greater number of lawsuits and larger awards can lead to increased insurance costs as rates are adjusted to reflect the changing risk profile and insurers ceasing to write certain types of coverage. Higher premiums are often passed along to consumers in the form of higher prices. This has potential for a dangerous rippling effect through the entire economy. There ultimately exists the risk of creating conditions that can make the United States vulnerable to a liability crisis.

Our New Jersey insurance coverage lawyers at Herold Law have in-depth knowledge of the state’s statutes and regulations relating to claims handling, duty to defend, claims discovery, policy form approval, and other coverage issues. Our firm has extensive experience litigating coverage disputes involving a variety of insurance matters, including casualty, property, fiduciary liability, public officials and employment liability, premises liability, and travel theft. Whether your matter involves commercial property insurance claims, errors and omissions, or bad faith practices, our goal is always to ensure that our clients receive the coverage they need.

New Jersey Insurance Coverage Lawyers at Herold Law Help Clients with Insurance Policy Disputes

Dealing with insurance companies, insurance claims, and insurance disputes can be confusing and legally complex. Our knowledgeable New Jersey insurance lawyers at Herold Law, P.A. are here to help when an insurance dispute arises. We advocate for our clients to secure the benefits they deserve. Call us today at 908-679-5011 or contact us online for an initial consultation. Located in Warren, New Jersey, we serve clients throughout the state.