Litigation surge and insurer strain: Navigating the social inflation crisis

Social inflation is the trend of significant increases in verdicts and costs associated with civil litigation – increases that exceed general economic inflation without a demonstrable change in legal or factual bases to substantiate it. Often, these increases are best characterized by large jury awards of $10 million or more, which have become known as “nuclear verdicts.” These rising litigation costs and unpredictable verdicts can have an enormous impact on businesses and industries, including higher insurance premiums.

Rising verdicts

Between 2016 and 2022, United States tort costs grew at an average annual rate of 7.1%. This far exceeded the average annual inflation rate of 3.4% and the average annual GDP growth of 5.4% over the same time period.[1]

According to a study published in May 2024 by the U.S. Chamber of Commerce Institute for Legal Reform, approximately half of the nuclear verdicts reached in the United States between January 1, 2013, and December 31, 2022, were between $10 million and $20 million; over one-third were between $20 million and $50 million, and the remaining 19 percent exceeded $50 million. 115 of these verdicts were for $100 million or more. Nuclear verdicts in product liability cases are increasing in size far more quickly than in other cases. The median value of nuclear verdicts in product liability cases increased by 50% between 2013 and 2022. Four states accounted for half of the United States’ nuclear verdicts: Florida, California, Texas, and New York.[2] 

The impact on liability lines

This has a direct impact on insurers, who have experienced a notable uptick in claims costs across various lines of business, including automotive and trucking liability, product liability, commercial liability, and professional liability. For example, a 2022 study attributed $20.7 billion in commercial auto losses from 2010 to 2019 (14% of the total claims paid during that period) to loss development factors unexplainable by regular increases in economic inflation.[3] Social inflation has also contributed to a decline in underwriting profitability, as higher claim payouts outpace revenue growth. Casualty underwriters, in particular, have had to balance the long tail of claims that have been developing for a number of years (such as asbestos or opioid claims) against claims occurring in the present.[4]

Social inflation is typically blamed on three main factors: (1) increased involvement of third-party litigation funding, especially in personal injury and wrongful death claims; (2) shifts in the societal perception of litigation, including negative public sentiment regarding corporations; and (3) the use of psychological tactics by plaintiffs’ attorneys to influence jury decisions by playing to their emotions and pre-existing biases.

Increasing Third-Party Litigation Funding

The United States is the largest third-party litigation funding (“TPLF”) market, accounting for a 52% share of this global, multi-billion-dollar industry.  A December 2021 publication by the Swiss Re Institute identified TPLF as a contributing factor to the trend of social inflation in the United States, noting that it increased the frequency of large claims, reduced insurability, contributed to the surge in plaintiffs’ attorney advertising, and increased litigation costs by extending the timeline of cases before resolution could be reached.[5]

Shifts in the Societal Perception of Litigation

While the tactic of pitting the “greedy corporation” defendant against the “sympathetic individual” plaintiff is hardly a new tactic for plaintiffs’ attorneys, recent changes in societal perception have made this strategy even more effective.

First, the public is shifting towards a more negative view of corporations. A recent Pew Research survey showed that 71% of United States adults feel that corporations are negatively affecting the country’s trajectory.[6]  It is anticipated that this trend will only continue as the composition of jury pools shift to Millennial and Gen Z age groups.

Second, the public is becoming desensitized to large amounts of money. From the claims of plaintiffs’ firms about settlement amounts, to lottery jackpots, to the sale of Twitter (now X) to Elon Musk, the public is inundated with large numbers in the media. That has an effect on how the public quantifies and perceives money. In a recent YouGov survey, respondents believed that 10% of households have an annual income of $1 million or more, and that 20% of households earn $500,000 or more. However, the U.S. Census Bureau has reported that less than 0.5% of households earn $1 million or more, and 1% of households earn $500,000 or more.[7]

Use of Psychological Tactics

Similar to their use of “small individual” plaintiff pitted against “big greedy corporation” defendant arguments (above), plaintiffs’ attorneys have increasingly engaged in further psychological tactics to appeal to jurors’ emotions.

One common example that has seen increased use in litigation is the “reptile theory,” wherein plaintiffs’ attorneys rely on Golden Rule arguments (e.g., asking the jurors to put themselves in the shoes of a plaintiff, and make decisions based on what they would want to occur, were they the individual requesting relief) to encourage jury decisions based on personal interest and bias rather than the presented evidence. In essence, plaintiffs’ attorneys will attempt to convince jurors to react emotionally, with sympathy and empathy, regardless of the factual evidence presented in a given case. Another common example is “anchoring,” where plaintiffs’ attorneys request an exorbitantly high and arbitrary damage award to manipulate the jury’s sense of expected fair compensation. While the use of “reptile theory” tactics are generally disfavored by Courts, a defense attorney must actively object to their use before the Court can act (through motions in limine and/or oral objections during trial). Most jurisdictions, however, do not have any rules against anchoring unless the number given is truly arbitrary, and strategies to deal with this tactic must be planned by defense attorneys based on the rules of the jurisdiction.[8]

Conclusion

While the above may paint a grim picture of the escalating trends of social inflation and nuclear verdicts, there is no denying that businesses, insurance professionals, and defense attorneys are aware of the issues at this point. Defense attorneys have strategies in place to combat both social inflation and nuclear verdicts, including looking at early claims resolution, defining clear litigation strategies at the start of litigation, and developing strong trial themes to convince juries to follow the facts rather than their emotions.  Additionally, while the supreme courts of many states have recently rolled-back prior legislation limiting or capping noneconomic damages, others, such as Florida and Texas, have recently enacted tort reform measures specifically aimed at insurance markets in an effort to alleviate their status as “judicial hellholes.”