Social inflation, as defined by the National Association of Insurance Commissioners (NAIC), is the rise in insurers’ costs to cover claims above general economic inflation. It continues to be a growing threat to insurance affordability. The lines most impacted by social inflation are Commercial General Liability, Commercial Automobile Liability, Professional Liability, Product Liability, and Excess and Umbrella insurance.
Several factors are driving social inflation, including third-party litigation funding (TPLF), aggressive attorney advertising, public mistrust of corporations, and normalization of “nuclear verdicts” ($10 million and more) and eroding caps on damages.
- Third-Party Litigation Funding: Investors such as private equity firms fund lawsuits in exchange for a portion of the settlement or judgment. This enables plaintiffs to pursue cases they would not have been able to pay otherwise. With financial backing, attorneys can engage in protracted litigation, increasing legal costs and settlement demands, leading to an increase in the number and size of litigation. According to Swiss Re, TPLF investments could reach $31 billion by 2028.
- Aggressive Attorney Advertising: Known as the “Billboard Effect,” plaintiff attorneys spend billions of dollars annually on advertising, suggesting that a financial windfall is possible for policyholders who retain their services. According to Marathon Strategies, attorney advertising now exceeds $1 billion yearly.
- Public Mistrust of Corporations: Juries are increasing skeptical of large corporations as result of corporate scandals and profit-driven perceptions, which lead to higher punitive damages being awarded. Additionally, cases involving social justice issues attract media attention, amplifying public pressure for higher awards. The public also increasingly sees monetary compensation as a means of addressing emotional distress, punishment, and moral accountability, leading to larger settlements and verdicts.
- Nuclear Verdicts and Eroding Caps on Damages: According to a Verisk report, median verdicts against corporate defendants rose 95% from 2020 to 2022, from $21.5 million to $41.1 million, while nuclear verdicts doubled in that period. In 2023, verdicts exceeding $10 million increased by 27%, and those over $100 million reached record highs, marking a 400% rise since 2013, according to the U.S. Chamber of Commerce. A Swiss Re Sigma report further confirms this trend, noting that 27 cases in 2023 awarded over $100 million, setting new records for nuclear verdicts in the U.S.
What Does This Mean for Insurers and Insureds?
Nuclear verdicts have wide-ranging adverse effects on society. The fear of excessive awards complicates fair claim resolution, often resulting in prolonged litigation and appeals. These verdicts can jeopardize business viability and create insurability challenges across entire industries.
What Is Being Done to Combat Social Inflation?
A paper from the Insurance Information Institution (I.I.I.) outlined the following suggestions to help address social inflation.
A key strategy in combating social inflation is reframing the discussion to highlight shared responsibilities and opportunities, says the I.I.I. Regulators can craft policies that balance corporate accountability and reasonable liability expectations, while agents and brokers can educate clients on risk assessment and mitigation. Businesses, particularly small and mid-sized enterprises, can leverage technology such as AI and data analytics to reduce exposure to liability risks.
In addition, reforming attorney advertising is critical, as sensationalized legal marketing can encourage excessive litigation. Greater transparency in third-party litigation funding (TPLF) is also needed to prevent prolonged, high-cost lawsuits driven by external investors. Lastly, corporate social responsibility (CSR) initiatives can help businesses counteract anti-corporate bias, which has been linked to higher jury awards.
Tort Reform
Insurers have also pushed for states to change their legal systems to reduce costs. According to a U.S. Chamber of Commerce Institute for Legal Reform report, several states have passed or proposed legislation addressing litigation costs. These include:
- Texas (2021): Adopted bifurcated trials in commercial motor vehicle cases, separating liability and compensatory damages from punitive damages to prevent undue jury influence.
- Florida: A bill limits insurers’ liability, capped plaintiffs’ attorney fees, shortened the negligence lawsuit statute of limitations from four to two years, and reformed bad faith laws to require more than negligence for claims.
- Iowa: Implemented a $250,000 cap on noneconomic damages in medical liability cases, except in cases involving significant impairment, disfigurement, or death. Additionally, a separate law limits noneconomic damages to $5 million per plaintiff in commercial vehicle accidents.
- West Virginia: Passed similar legislation capping noneconomic damages at $5 million per plaintiff in commercial vehicle accidents.
- Ohio: Prohibits juries from considering evidence of misconduct or wrongdoing when determining noneconomic damages to prevent inflated compensatory awards.
- Seven states—Florida, Kansas, Louisiana, Indiana, Tennessee, Texas, and West Virginia—have passed laws targeting deceptive legal advertising. These laws require disclaimers to clarify product safety and prevent misleading claims that inflate litigation risks.
There is also growing support for requiring disclosure of third-party litigation funding, ensuring that outside investors profiting from lawsuits do not drive excessive litigation costs.
About Seneca
Seneca is a wholly owned subsidiary of Crum & Forster and part of the Fairfax Financial Holdings, Inc. family of companies, providing us with the strength and stability of a larger organization. We operate two legal entities that offer products on an admitted and non-admitted basis: Seneca Insurance Company and Seneca Specialty Insurance Company, both in all 50 states.
