Runaway Inflation

Adjusting for social inflation in litigation

December 22, 2020 Photo

Social inflation refers to social and political factors impacting access to insurance and insurance premiums, and lawsuit outcomes. Social inflation can cause an upward tick in the number of lawsuits filed and drive nuclear verdicts, which, in turn, can lead insurance companies to raise the cost of insurance and self-insured retentions, and potentially impact availability of insurance.

Drivers of social inflation include a variety of public, political, legal, and economic factors. Some examples are sensationalized jury awards; excessive publication by news and media outlets; dramatization of cases through documentaries, podcasts, and other forms of entertainment; legal funding; alterations and erosion of tort reform laws; and catastrophic events.

The range of factors makes it difficult to predict, and subsequently combat, social inflation, but as these factors continue to evolve, the insurance industry, and those who counsel the industry, must remain attuned to, and abreast of, societal changes.

Understanding Social Inflation

Juries today are influenced by a variety of social-inflation issues reported in the media relating to government stalemates, international relations, the regulatory climate, pandemics/epidemics, the performance of the stock market, riots, and natural disasters. At the heart of social inflation is the impact that bias—created by social media and various news agencies—can have against corporations and businesses. The idea that corporations are bad actors is a theme used by crafty plaintiff lawyers promoting the reptile theory. In general, this is done by representing and reinforcing the idea that corporations value profit over people.

Due to the major impact that social inflation has had on jury verdicts over the years, it is necessary to take certain steps to help combat these large verdicts. This can be technical, but can also involve implementing simple trial and litigation strategies that diffuse the impact of social inflation through carefully crafted voir dire, limiting instructions, appeals, and motions to dismiss based on procedural rules. In addition, it is also important to know your opponent, her experts, and whether opposing counsel typically uses the reptile theory.

In some instances, the risks of increasingly high awards may outweigh the possibility of succeeding at trial, and then settlement becomes the litigator’s best arrow in her quiver. Also, by agreeing to settle, a party can include confidentiality clauses and other restrictions in the settlement agreement that mitigate the negative press and stigma a company receives from heavily publicized trials.

 Recently, companies have found success appealing verdicts on a number of grounds, including limiting verdicts based on statutory caps, requests for remittitur, and even procedural and jurisdiction grounds. For example, in Bristol-Myers Squibb v. Superior Court, the Supreme Court overturned the California court’s initial ruling that California had jurisdiction over Bristol-Myers. In Bristol-Myers Squibb, a group of mostly non-resident plaintiffs brought claims in California state court against Bristol-Myers Squibb, a non-resident defendant. The court noted that the non-resident plaintiffs did not purchase or use the drug in question in California, and that Bristol-Myers Squibb’s only connection to the state was that it sold the drug in California. The Supreme Court held that continuous activity in a state, alone, does not create jurisdiction, but that there must be a link between the forum state and the individual lawsuit for a court to assert jurisdiction over a non-resident defendant.

Just as lawyers have tools to combat social inflation, insurers have turned to employing specialty underwriters who are uniquely trained on disruptive strategies, and who interpret how social and political trends impact losses. Due to recent laws being passed aimed at windfall awards—such as HB7065 in Florida, which, in addition to damage caps, requires insurers to submit annual reports for each property-insurance claim paid out and requires procedures aimed at encouraging pre-suit communications and negotiations—specialty underwriters are able to better observe social trends and aggregate data to better predict when, where, and how social inflation may impact verdicts and claims.

The impact of social inflation manifests primarily in the number and severity of jury verdicts that are imposed against large corporations and their insurers. Excessive jury verdicts are not just becoming more common, but also the amounts of non-economic and punitive damage awards assessed against defendants are increasingly record-breaking. In 1999, less than 10 percent of all medical malpractice insurance claims cost more than $500,000, according to The Institutes. By 2017, however, almost 20 percent of all medical malpractice claims reached that amount. In commercial auto insurance cases, the average jury verdict against trucking firms increased from $2.6 million in 2012 to $17 million in 2019.

Factors Affecting Social Inflation

Below, we have outlined the pertinent social inflation factors that are affecting lawsuits and causing excessive jury verdicts today and how to combat these factors.

Social media and news publications. Social media and news-reporting agencies contribute to the unfiltered publication and comments about “newsworthy” and hot-button topics, including medical-malpractice claims, civil suits against pharmaceutical companies, and the involvement of large corporations in suits brought by individuals and classes alleging some sort of harm or injury.

The prolific publication of these events and cases in the media—and in real time—all but guarantees the influence and manipulation of the general public. Potential jurors and judges, too, become predisposed to certain opinions and positions.

Importantly, public inundation of these stories results in what is referred to as the “availability heuristic,” which is a mental shortcut whereby a person will rely on recently learned examples when presented with a similar and specific topic or decision later. For example, if a judge must decide whether a significant and determinative piece of evidence should be admitted in a trial, the judge may consider a recent article she read about why that piece of evidence is so vital to the case. The higher the consequences of the decision, the more likely the judge or fact-finder is to rely on what she has previously been exposed to. When large verdicts are then frequently publicized, the public, and prospective jurors and judges, are further tainted and come to consider these large amounts and windfall verdicts to be the norm, rather than outliers.

Despite the negative impact that social media and news reporting agencies have on creating excessive jury verdicts, there are ways to combat this factor. As previously stated, this includes agreeing to settle a case, since a party can include confidentiality clauses and other restrictions in the settlement agreement that mitigate the negative press and stigmas a company receives from heavily publicized trials. Extensive voir dire on juror’s most watched new outlets, most used websites, social media preferences, and other questions that seek to determine sources of information where the corporate defendant may have been mentioned in the news can help weed out juror biases. This requires litigators to be vigilant online for any news coverage regarding the corporate defendant.

Third-party litigation funding and the expense of legal services. Civil lawsuits are not only time-intensive, but also relatively expensive, often costing millions of dollars for each party to allege and defend the various claims being asserted. Due to the substantial investment that comes with filing a civil lawsuit, there also comes a significant risk of loss. In order to minimize these potential personal losses, plaintiffs and plaintiff lawyers will often employ the resources of third-party funders.

In fact, a litigation finance survey shows that, in 2017, 36 percent of U.S. law firms reported using litigation funding. This was a 414 percent increase in use from 2013, when only seven percent of law firms reported using this type of financing.

These third-party funders are individuals and entities that will extend loans to plaintiffs and plaintiff firms to pursue litigation, and in return receive a percentage of the overall award if the case results in settlement or a favorable award at trial. Third-party funding is not subject to usury regulations, which limit the percentage a party can charge or receive if a favorable award is obtained. This results in third-party lenders charging and receiving a significant percentage payout, often 40 percent or higher. The potentially high return on investment allows third-party litigation funders to be more flexible and experimental with their plaintiffs’ cases, particularly in class and mass action suits.

With the increased exposure of aggregate litigation, it is plaintiffs’ hope that defendants will feel more pressure to settle, essentially encouraging plaintiffs to test frivolous and abusive claims while spreading out the risk across cases. Further, with this guarantee of funding, plaintiff lawyers are able to utilize highly skilled and convincing plaintiff experts, investigators, and witnesses to develop a convincing and effective litigation strategy.

In order to help combat this trend, states such as Maine, Nebraska, and Ohio have passed laws that attempt to regulate third-party litigation funders. These include requirements that contracts with third-party funders contain clauses stating the annual percentage rate of return that the funder will receive on the investment, and the total dollar amount to be repaid by the plaintiff to the funder after the conclusion of the litigation. Further, Wisconsin and West Virginia have also recently passed legislation mandating disclosure of third-party litigation funding arrangements. By knowing whether the plaintiff’s case is being funded by a third party, defendants can better evaluate and value the case at all stages of the litigation and potentially thwart a nuclear verdict.

Tort reform laws. Tort reforms that provide caps on non-economic and punitive damages help prevent social inflation. Recently, however, many of these state tort reforms have been challenged by plaintiff lawyers on constitutional grounds. In fact, in 2017, the Oregon Court of Appeals held, in Vasquez v. Double Press Mfg., that Oregon’s $500,000 non-economic damages cap on a personal injury award in a product liability case was unconstitutional as applied to the plaintiff. (See also Rains v. Stayton Builders Mart Inc., where the court held in 2018 that Oregon’s $500,000 statutory cap on noneconomic damages was unconstitutional).

Despite some state supreme courts recently ruling that non-economic damages caps are unconstitutional, the past 10 years saw a number of states enact laws that limit the amount of non-economic and punitive damages, including laws in North Carolina, Oklahoma, Tennessee, Wisconsin, Kansas, Missouri, Utah, and West Virginia.

Catastrophic events and COVID-19. Extreme events, including hurricanes, fires, mass shootings, as well as virus outbreaks such as COVID-19, also lead to social inflation because they can influence the social impact on insurance losses. Many experts believe that, since COVID-19 is personally affecting a vast majority of individuals in either a financial or physical manner, this virus in particular may impact (in a positive way) how individuals view corporations and thus impact verdicts.

Companies have stepped up in order to help individuals with the negative effects of COVID-19 and humanized themselves by donating hotel rooms, supplies to front-line workers, paying employees even though they are not working, forgiving mortgage payments, and covering co-pays for coronavirus-related tests and treatments. All of these generous acts have the ability to boost the public’s perception of corporations in jurors’ minds and thus neutralize other social-inflation factors driving up verdicts.

Over the years, social inflation has had a major impact on insurance losses. This has caused the number of lawsuits to increase and has also led to an uptick in nuclear verdicts. Therefore, it is necessary for lawyers, insurers, and companies to stay on top of societal and political changes that feed social inflation. 

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About The Authors
Multiple Contributors
Marisa A. Trasatti

Marisa A. Trasatti is general counsel at Sciton, Inc. and a partner at Wilson Elser. marisa.trasatti@wilsonelser.com

Zachary A. Miller

Zachary A. Miller is an associate litigation attorney at Wilson Elser.  zachary.miller@wilsonelser.com

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