Rising Expectations

As inflation continues to run rampant throughout the United States economy, we have all experienced the effects of supply chain impediments, labor shortages, and increased costs in our daily personal lives.  From higher prices at the pump to the cost of milk and eggs, everything is more expensive. As of March 2023, the United States annual inflation rate is 6%, after having reached a high of 9.1% in June 2022.

Inflation is generally considered to be an increase in the prices of goods and services in the economy over a given period of time. When prices rise, in general terms, purchases fall. Inflation happens when prices increase due to higher production costs or, alternatively, when the demand for a product exceeds it supply.

Property damage claims are subject to the effects of inflation. The cost of building materials for restoration, appliances, and even personal property are all on the rise. A claim that might have been valued at $1,200 just two years ago, can easily have a value two or three times that today. The cost of construction materials, building supplies, machinery, lumber, and even labor have all drastically increased.

Inflation can have a chilling effect on settlements within the context of lawsuits, as well. The same parties who would have settled on one number before the present rise in inflation are now seeking more. This is not because the facts or the laws related to their cases have changed, but rather it is being done to account for high inflation. These circumstances warrant our attention in the form of two questions for insurers and defense counsel: What adverse effects will recent economic inflation have on claims and litigation, and what can insurers and defense counsel do to mitigate these risks?

Inflation and Settlements in Lawsuits

Due to the closure and subsequent slow openings in courthouses across the United States since 2020, there are now case backlogs the likes of which we have never seen. Personal injury cases that could see a trial in 18-24 months are not being tried for three or four years. As one jurist explained to a group of attorneys in a construction litigation case, the priority is family, landlord tenant, and criminal cases. After all of those cases are heard, then civil cases will move to the forefront. What this means is that people are waiting 50% longer than they used to and, in addition to the excess wait for resolution, people are getting less than they used to for their money.

We all know that 98% of cases settle before or during trial. One of the biggest questions now with the backlog of cases and high inflation is: How does this affect settlements? A personal injury that could have been settled in the five figures may now have a settlement value in the six figures. This is not because the jury verdict analysis calls for this, but rather because plaintiffs are looking at all the costs they have incurred. It is simply what plaintiffs do when they see how much it costs to fill their cars with gas and buy basic goods. In the commercial litigation context, it is the same.

Role of Attorneys and Adjusters

While plaintiffs may be feeling the numbers crunch in basics like costs of fuel and food and translating that into an anticipated increase in their claims settlements, claims adjusters and attorneys need to stay even keeled.

For adjusters, the effects of inflation are prevalent throughout the average day-to-day experience, stretching through a multitude of industries. Whether focusing on commercial, auto, homeowners, or even pet insurance, the rising cost of goods due to inflation is impacting current claims. The value of personal injury lawsuit does not simply increase by 85% due to high inflation. Similarly, the value of a commercial litigation dispute does increase solely due to inflation, and neither does a dispute in the context of construction litigation.

Rising inflation also affects the calculation when estimating a property damage claim. Some insurers use Xactimate or other estimating software tools. After the software tool comes up with a damage calculation, some claimants complain about the figure, saying that it is much less than what their contractors approved.

The dispute between insurers and claimants sometimes leads insurers to double back and see if the estimating software tool is outdated and if so by how much. These types of software estimating tools take into account a standard increase in cost, but they don’t always adapt quickly to rising inflation costs. Attorneys and claims adjusters can use high inflation to help show their insureds and clients the value of receiving settlement dollars today instead of waiting several years as their respective cases are litigated in courts.

Attorneys and claims adjusters also need to be prepared to fend off the plaintiff’s bar’s attempts to create psychological advantages via tactics like the “reptile theory.” For instance, plaintiff’s counsel may argue for money so the “innocent plaintiffs” can feed their families. By linking each argument to a juror’s sense of personal or community safety, the plaintiff’s attorney manipulates jurors into using emotion or a sense of danger rather than the facts and legal standards to decide cases. It further focuses the damages not on the specific plaintiff, but rather on the larger potential harm to the community.

Insurers, defense counsel, and insured’s face an uphill battle with plaintiff’s counsel who focus on societal needs as opposed to the facts and laws of the case. High inflation makes it easier for plaintiff’s counsel to sell the “pot of gold” theory and appeal to jurors by saying settlements will simply be used to satisfy the basic needs of plaintiffs. Large payouts affect insurance companies, but it’s important to remember that they also affect insureds, whose premiums can skyrocket. Business decisions, from the insurers, attorneys, and insureds need to be made on how to combat inflation, review current underwriting measures, and how to keep the same level of service for everyone’s respective clients.