The rise of social inflation

‘Social inflation’ describes increased insurance losses resulting from the growing phenomena of for-profit litigation funders, higher jury awards, more generous workers’ compensation claims, legislated compensation increases and new tort and negligence concepts. It is especially established in the US, but is increasing globally. Driven by a generation-long decay in public trust of corporations, social inflation trends are challenging to predict, largely because they are driven by ‘soft’ social constructions, such as public perception of corporate behavior and changing demographics, especially with the increasing influence of social media. 

“Simply put, the US has developed a culture of fault which can be exceedingly dangerous to businesses,” says Larry Crotser, Regional Head of Key Case Management, North America, at AGCS. “The acute perception of economic disparity in the US, a deep-seated institutional distrust and the perception of the value of an injury, translates into larger than expected claim values. There’s a deep dissatisfaction and resentment – even anger – with the status quo.”

One way this plays out is larger jury awards, with a review by VerdictSearch showing a more than 300% increase in the frequency of verdicts of $20 million or more in 2019 when compared to the annual average from 2001 to 2010 [1].

In the US, there were 77 court-approved class action settlements totaling $4.2bn in 2020. Although the number of settlements increased only slightly compared to 2019 (74), the aggregate total doubled (2019: $2.1bn) largely as a result of several “mega” settlements over $100mn. The average settlement amount in 2020 was $54.5mn – a 15% increase over the prior nine-year average [2].

A significant contributing factor to the social inflation phenomenon in the US is the increasing sophistication of the plaintiffs’ bar, which has adopted tactics including the expanded use of jury consultants and psychologists specializing in group dynamics to influence the size of jury awards to plaintiffs. 

Another factor is the changing composition of jury pools which can influence how cases are viewed and verdicts awarded. So-called ‘millennials’ and ‘Gen Z’ age groups now participate as jurors and their world view may significantly differ from older groups. However, in many cases, they also tend to seek consensus and may agree with the majority of fellow jurors while deliberating a verdict to keep from “making a scene”, says Crotser. Jury composition impacts the outcomes of verdicts in a big way.

“In effect, the plaintiff uses psychological tactics to convince the finder-of-fact to more readily accept an inflated value of a case,” says Crotser. “This process, known as ‘anchoring,’ starts at the outset of the case, sometimes before the lawsuit is filed in court, and acts as a leitmotif during the duration of the litigation.”

With anchoring, people are influenced by information from their environment when making decisions without realizing they’re being influenced, potentially impacting the eventual settlement amount.

In the wake of the Covid-19 pandemic, court closures and the uncertainty around reopening impacted the legal environment, although the number of settlements in class action filings continued at about the same rate as before the pandemic – especially in line with historical trends before 2019 when medium settlement amounts were historically high due to reduced numbers of small settlements.

With attorneys working and conducting depositions remotely during the lockdown, the legal process may have slowed a bit, but any disruption – chiefly during April when the lockdowns began in earnest, when only 3.9% of cases were settled, compared with 7.4% in 2019 [6] – was temporary, after which there followed a return to normal pre- trial activities in May, and continuing through the rest of the year. The number of jury trials conducted continued to exhibit a slight delay in 2020, which should correct as 2021 progresses.

“We saw very limited blockbuster personal injury trials in early 2020, with one out of Washington with a verdict of $410mn for a Florida highway crash, and one for $125mn in New Jersey for a plaintiff severely injured by a falling telephone pole [7], but since then there seems to have been a return to historical trends, in which case there have been larger settlements,” says Crotser.