Cooling social inflation means defusing nuclear verdicts, taming reptilian tactics
Soaring jury awards in amounts considered shocking in the U.S. not long ago have become commonplace, driving up insurance claims costs and forcing underwriters to increase liability rates to keep pace with the phenomenon that has become known as social inflation.
Because no one expects the effects of social inflation to diminish anytime soon in the U.S., insurers, risk managers and defense attorneys are responding with tactics that include countering plaintiffs’ lawyers’ use of empathy to sway jurors and using what some might consider counterintuitive moves to settle cases early and at reasonable amounts. Mock trials and strategy forums are other ways insurers and attorneys can sharpen their defenses.
And, while outsized awards are generally a U.S. phenomenon, some U.S.-based plaintiffs’ attorneys have opened offices in Europe, leading some to believe they will try to use similar tactics there to pursue large awards.
In a session at Zurich’s Global Risk Management Summit in Switzerland, experts also urged risk managers and insurers to become active lobbyists for regulations that can address litigation funding by investors who have an interest in large awards. They are encouraged to make known to local business groups such as Chambers of Commerce the effect of large awards on social inflation and how companies that serve their communities are affected.
Sky-high verdicts drive inflation
Eric Dinallo, Partner and Chair of the Insurance Regulatory Practice at law firm Debevoise & Plimpton, summed up social inflation this way: “It describes the imputed inflation that insurers are paying, particularly on the general liability claims front, that is above economic inflation.”
Social inflation is driven primarily by what has become known as “nuclear verdicts” that are “hard to predict, humongously outsized verdicts,” Dinallo said.
“These are unpredictable,” agreed Paul Lavelle, Head of U.S. National Accounts at Zurich North America, with cases that should be six- or seven-figure awards ending up in “eight or nine figures...The unpredictable nature of it makes it a concern for all of us.”
While nuclear verdicts have generally been considered those above $10 million, the median of such verdicts is $20 million, Dinallo pointed out, and the average is $76 million. Ten years ago, there were multi-million-dollar verdicts across the U.S., but “now the top 10 are measuring in the billions of dollars,” he said.
Mr. Lavelle pointed out that because high awards have become commonplace, there is an effect on insurance pricing. “The actuaries tell me that if we continually have something unique happen, we have to consider it as a norm. Since it’s a norm, we have to start considering it in the pricing.”
While the cost of liability coverage, particularly in excess layers, is affected by the rise of social inflation, Mr. Dinallo stressed that risk managers won’t see an increase across all lines because of the phenomenon. The trend towards huge awards does not impact all classes of business, he added.
Plaintiffs’ attorneys share tactics to chase big awards
Ever-higher awards have spurred plaintiffs’ attorneys to collaborate on ways to convince juries to hand down the big verdicts, the session participants pointed out. That’s created a formidable challenge for defense lawyers, they agree, and as plaintiffs’ attorneys have honed their skills, social inflation has risen.
“Today, the plaintiffs’ bar is much more organized” and legal advertising has become “a lot more professional,” said Christine Prendergast, Global Head of Claims at Munich Re.
“They’ve gotten very, very good at sharing experts, sharing best arguments,” Dinallo agreed. “There’s almost a college of it.”
Insurers can counter that with strategy forums of their own that produce a unified message on how to avoid the potential for nuclear awards, he suggested. The forums can be made up of an insurer, legal counsel and a large customer, with the objective of settling on what might work in defending lawsuits and avoiding the “internecine arguments” that often erupt among stakeholders in excess liability towers, Dinallo explained.
Pick lawyers wisely
It takes an experienced and knowledgeable defense team to face off against such a well-organized opponent, Lavelle pointed out. Zurich is “raising the bar on the firms that it’s using,” he said. “We want the plaintiffs’ bar to realize they’re in for a fight because we’re going to spend the money necessary on the legal end to save on the defense end.”
Defense firms, even some regarded highly, have sometimes argued that there is no value to a case, a mistake that can put off a jury that sees an insurer denying liability and devaluing a defendant’s suffering, Lavelle said. “We need to give the counter number,” he added, and acknowledge when there is liability that a reasonable award would be adequate compensation.
In the courtroom, the so-called “reptile theory” used by plaintiffs’ attorneys can sway jurors to award extremely high amounts to claimants, the session participants noted.
The approach, said Dinallo, is “an attempt to get jurors to basically view the corporation as not just having liability for the compensatory damages of the individual, but somehow having fundamentally failed to keep us safe.”
The reptile approach taps into juror anger and empathy and is “meant to send a message” that a large compensatory award can also serve as punishment to the corporation, Dinallo said.
Mock trials can give the defense a good idea of the value of a case, Prendergast said. It means putting together a mock jury who will hear the case and decide on an appropriate award, she said. And, she adds, the process is a valuable tool for testing the defense’s strategy.
Addressing root causes
Litigation funding, whereby investors fund litigation in exchange for a portion of any award, is another big driver of large awards, Prendergast said. Resources from investors can fund cases for longer than might be possible without the funding and investors might be reluctant to settle for amounts they don’t feel are large enough. It is a “big part of what we have to deal with,” she said.
The experts suggested a collaborative approach is needed to address the root causes of social inflation, particularly litigation funding. This should involve risk managers, insurers and other stakeholders coming together to lobby for reforms that include, for example, the need for disclosure when litigation funders are involved in a case.
There are states that have taken notice of the tactic and addressed it, Prendergast said.
“There are a couple of states where litigation funding has to be disclosed to a certain extent, and I think that is a positive development,” she said. “The lobbying work that is going on has to be further intensified; we have to be really vocal and thought leaders in the industry in that regard to raise the topic again and again and again.”
The experts urged businesses to continue working towards leveling the litigation playing field. The plaintiff’s bar has shown that it will spend the funds necessary to make their business model profitable, and, unchallenged, the cost of business in the U.S. will continue to rise, the experts agreed.
