8-minute read
Inflation of the sort that causes the price of milk and bread to go up is finally easing. But another crippling form — what’s known as social inflation — isn’t going anywhere.
At its most basic level, social inflation describes the external pressures pushing up the cost of insurance claims. These pressures come from shifting jury behaviors, a rising eagerness to file lawsuits, and new interpretations of liability that seem to evolve with each passing day.
Navigating the rising costs of liability insurance — and the coverage headaches that come with it — requires a solid understanding of this growing trend.
While the massive, so-called nuclear verdicts we’ve seen are the result of social inflation, the real drivers are changes in litigation financing and in attitudes, both of which have led to more claims and longer, more complex and costly litigation.
Factor 1: The Rise of Litigation Financing
Litigation financing has fundamentally changed the playing field when it comes to lawsuits. In the past, plaintiffs had to either pay out-of-pocket for their legal battles or work with attorneys on a contingency basis. But now, third-party financiers are stepping in, covering legal costs in exchange for a cut of any financial award.
What makes litigation financing such a game-changer?
It extends lawsuits: With financing, plaintiffs can afford to pursue longer, more complex litigation that they might have otherwise settled quickly. This increases defense costs for businesses and their insurers, as drawn-out legal battles require more time, resources, and expert testimony.
It encourages higher settlements: Investors backing these lawsuits are incentivized to push for the highest possible payouts, which can drive up settlement demands beyond what might have been reasonable in the past.
It’s fueling more lawsuits: The availability of litigation financing means more people are willing to sue, even in cases where the outcome may be uncertain. Without having to worry about legal fees, plaintiffs — and their attorneys — are more likely to pursue claims, creating a surge in litigation.
This trend has increased both the volume and cost of claims, making it harder for insurers to predict risks accurately. For businesses, it means facing higher premiums as insurers adjust to the reality of these longer, more expensive lawsuits.
Factor 2: Changing Public Attitudes Toward Lawsuits
The cultural environment surrounding lawsuits has shifted dramatically over the past decade. In the past, lawsuits were seen as a last resort, often pursued only when no other option was available. Today, however, litigation is increasingly seen as a viable, even desirable, path to resolution, particularly when it comes to disputes with businesses or corporations.
So, what’s behind this shift in how the public views lawsuits? Three items:
Sympathy for plaintiffs: Jurors, in particular, have grown more sympathetic to plaintiffs, especially when facing off against corporations. There's a growing sentiment that large businesses, especially those perceived as wealthy or powerful, can afford to compensate claimants. This mindset has led to more plaintiff-friendly verdicts, with juries awarding higher damages.
Broader definitions of liability: Courts are also expanding their interpretations of what constitutes negligence or liability. This means that businesses may find themselves being held responsible for damages in cases where, years ago, they might not have been. From product liability to employment practices, the legal net of accountability has been cast much wider.
Emphasis on social justice: We’re also seeing an increased desire among jurors and the public to “right wrongs” through legal means. With social justice movements at the forefront of public consciousness, litigation is sometimes seen as a way to hold businesses accountable, particularly in high-profile cases involving consumer harm or employee treatment.
These shifts are creating an unpredictable minefield for businesses. Even in cases where the claims seem frivolous, juries can be swayed by emotions or broader social issues, which means costly surprises.
The Impact on Liability Insurance Premiums
As social inflation drives up litigation costs, insurers are forced to respond. Liability insurance premiums are rising across the board, with some industries feeling the pinch more than others. Companies operating in sectors that are especially prone to litigation — such as healthcare, transportation, or construction — are seeing the steepest premium hikes.
What’s driving these increases? In a word: uncertainty. With social inflation introducing new, unpredictable risks, insurers must build in a buffer to account for the possibility of higher-than-expected claims. This, in turn, translates into higher premiums for businesses. For many companies, these increases come at a time when margins are already thin, making it harder to budget for the coverage they need.
The Shrinking Availability of Coverage
In addition to rising premiums, social inflation is also causing insurers to re-evaluate the limits they’re willing to offer. In some cases, insurers are lowering the amount of coverage they provide or requiring businesses to purchase excess layers of coverage to get the protection they need.
This trend is particularly concerning for companies that need high levels of liability coverage — whether due to regulatory requirements or contractual obligations. As insurers scale back on coverage, businesses may be forced to turn to alternative solutions like excess insurance or self-insurance, both of which can increase costs further.
Mitigating the Risks
While businesses can’t stop societal trends, there are steps they can take to protect themselves from the impact of social inflation:
Invest in risk management: Proactive risk management can help reduce the likelihood of claims. Regular safety reviews, compliance training, and strong internal policies can go a long way in preventing incidents that lead to costly lawsuits.
Consider alternative insurance solutions: Some companies are turning to self-insurance or captive insurance as a way to take control of their liability exposure. These solutions offer more flexibility but require a commitment to risk management and legal defense.
Work with experienced brokers: An experienced insurance broker can help businesses navigate these challenges by finding creative ways to structure coverage, layering policies, or negotiating with insurers to secure more favorable terms.
Social inflation is here to stay, and its impact on liability insurance is only becoming more obvious. With rising premiums, shrinking coverage limits, and a more unpredictable legal environment, you’ll need to stay vigilant. But by working with the right partners, companies can mitigate the risks and ensure they’re adequately protected.
The Mahoney Group, based in Mesa, Ariz., is one of the largest independent insurance and employee benefits brokerages in the U.S. For more information, visit our website or call 877-440-3304.
This article is not intended to be exhaustive, nor should any discussion or opinions be construed as legal advice. Readers should contact legal counsel or an insurance professional for appropriate advice.