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Social inflation remains a top challenge facing insurers in the realm of claims. Social inflation is, at its core, a shift in societal mentality; and is often driven by generational perceptions of fairness, including how jurors view litigants and their ability to absorb the attendant risk and cost of litigation.

With a changing demographic (jurors) motivated and informed by new experiences, access to information, and evolving views on social and economic matters, the potential for nuclear verdicts driven by social inflation continues to impact the foundation of litigation and, consequently, claims. 

Generally, social inflation is explained as the rise in claim costs to an insurer above the typical economic inflation. Specifically, social inflation is comprised of changes in legal liabilities and claims costs, including new and expansive tort and negligence concepts, increased litigation frequency, and larger jury awards that appear to be driven by society’s increasing desensitization to large verdicts and settlements.

While understanding and trying to get ahead of these societal trends to curb rising insurance claims costs can be difficult, insurers can look to their claims and litigation partners to help navigate social inflation effects.

Typically, insurers have relied on defense counsel for assistance in combating most, if not all, of the potential issues arising during the life of a claim. This has often served insurers well, as defense counsel is ideally situated to evaluate and opine on the various aspects of a claim that may impact insurers. However, with the growing concern of social inflation, as well as the rise in time- and policy-limit demands spurring threats of extra-contractual exposure, insurers should also consider availing themselves of another resource: coverage counsel.

Where Coverage Counsel Fits in the New Landscape

Traditionally, coverage counsel was retained by the insurer to discern potential coverage issues associated with a claim and to assist in preparing any necessary coverage position letters to the insured and other involved parties. Coverage counsel would also engage in litigation on behalf of the insurer to advance any coverage arguments in the event a formal coverage dispute arises. However, coverage counsel’s role in the claims and litigation process is expanding.

Coverage counsel is well-suited to address the impact non-covered claims may have on the overall evaluation of exposure for a claim, as well as evolving societal views on responsibility, which may inform an insurer’s response to a time- or policy-limit demand. Coverage counsel can be the insurer’s “eyes and ears” as facts are developed during discovery, and thus take appropriate steps to further the insurer’s interests when evaluating a claim. Such steps could include seeking necessary information from defense counsel as well as memorializing the impacts of discovery on the insurer’s coverage position. This assistance will enable the insurer to better understand its covered and uncovered exposure and thereby facilitate a resolution that is sensitive to the insurer’s coverage defenses.

Coverage counsel may also be able to provide assistance in averting the devastating impact of nuclear verdicts. The rise in nuclear verdicts in casualty insurance is well documented. While the wave of large verdicts was briefly curtailed by COVID-19-related shutdowns, the surge has seemingly returned as jurors report to courtrooms throughout the country. And the results continue to speak for themselves.

Insurers are undoubtedly being confronted with the impacts of these nuclear verdicts, including:

•     The financial cost of challenging an adverse verdict, including pre/post-judgment interest, appellate counsel, and additional mediation sessions.

•     The financial burden of having to address the verdict in the event the challenge is unsuccessful.

•     Creating new case law.

•     Setting the bar for future verdicts.

•     Reputational impact to both the insured and insurer.

In addition, these verdicts have the potential to provoke animus between the insurer and its insured via an allegation of bad faith.

Typically, an insured’s claim of bad faith stems from its belief that the insurer failed to properly handle and/or settle the litigation, the absence of which would have arguably resulted in a more favorable outcome for the insured. However, nuclear verdicts are fundamentally unexpected and exorbitant, and will generally exceed the amount of coverage maintained by a typical insured. Thus, an insured, while potentially motivated by self-preservation, may pursue a bad faith claim against its insurer to divest itself of the financial burden of an excessive verdict.

Time- and Policy-Limit Demands

Plaintiffs, attempting to capitalize on the atmosphere of fear perpetuated by nuclear verdicts, are increasingly utilizing time- and policy-limit demands. Historically, time- and policy-limit demands were created to facilitate the reasonable resolution of an underlying litigation without the attendant risk to both parties of a trial. However, plaintiffs are demonstrably relying on this resolution tool with the aim of fostering a rift between the insurer and the insured, which, as a practical consequence, may aid the plaintiff in securing a settlement untethered to the realities of the case.

While the availability and specifics of time- and policy-limit demands vary by jurisdiction, they largely contain similar general requirements. First, the demand must be within the available limit(s) of the applicable insurance policy(ies) and should identify the impacted policies and their respective limits. Second, the demand must contain a thorough explanation of the plaintiff’s position on liability and damages that justify the demand. Third, the demand must provide an unconditional release of the insured in exchange for an acceptance of the demand. Finally, the demand must contain a reasonable period to allow the insurer to evaluate and respond to the demand.

Once the demand is issued, in addition to considering the reasonable settlement value of the case, an insurer may also need to evaluate the potential exposure associated with a bad faith claim if the demand is deemed “wrongfully” rejected. This evaluation of the potential bad faith claim is complicated by the effects of social inflation, including the rise in nuclear verdicts. While insurers may want to discount these larger verdicts as outliers, they continue to persist. Thus, it is increasingly difficult for an insurer to ignore the influence these verdicts may have when evaluating the appropriateness of a time- or policy-limit demand. 

While defense counsel is generally viewed as having a tripartite relationship with both the insured and the insurer, defense counsel’s focus is on the appropriate representation and protection of the insured. Thus, in addition to the assistance and information available to an insurer through defense counsel, insurers can rely on coverage counsel as a resource available to assist with the protection of the insurers’ interests.

Upon initial receipt of a time- or policy-limit demand, coverage counsel can evaluate whether the demand complies with the legal requirements set out by the governing jurisdiction. If the demand is deficient on its face, coverage counsel may be able to highlight the areas of non-compliance to facilitate the carrier’s evaluation and eventual response to the demand. Understanding the jurisdictional rules on the propriety of a demand and the corresponding response is the fundamental the first step for an insurer, and it may be aided by the presence and utilization of coverage counsel.

In addition to evaluating the demand itself, coverage counsel can offer insights into the governing standard of bad faith. This insight serves to advise the insurer of the boundaries within which its decision should rest, which may potentially insulate the insurer from a potential bad faith claim. Coverage counsel can also provide an additional opinion on the potential value of a claim and advocate on behalf of the insurer to ensure it has all pertinent information available to properly evaluate the demand. Once a decision is made concerning the insurer’s response to a time- or policy-limits demand, coverage counsel can offer guidance as to how to appropriately document the insurer’s evaluation of the demand in the event the decision is subsequently challenged in a bad faith action, including preparing the necessary response to the demand.

Following an insurer response to a time- or policy-limit demand, opportunities for allegations of bad faith can continue to arise during the life of the litigation. Increasingly, plaintiffs are serving multiple time- and policy-limit demands at various stages of the litigation. Thus, an insurer’s engagement of coverage counsel during the entirety of litigation can help facilitate the ongoing monitoring of developments that may alter an insurer’s evaluation of the claim, including how it responds to subsequent time- and policy-limit demands. Coverage counsel can be more adept at providing time-sensitive evaluations for the insurer as new demands are made. This could be particularly advantageous for excess insurers that may not have an active role in the defense of the claim but nonetheless have a financial interest in its outcome.

The retention of coverage counsel can serve to safeguard the interests of the insurer throughout the pendency of the litigation, including trial, and can aide the insurer’s handling and, ultimately, resolution of a claim. Time- and policy-limit demands, which routinely utilize references to “bad faith” and “excess exposure,” are pervasive tools being utilized by plaintiffs to generate significant settlements by exploiting the sometimes differing views between the insurer and its insured. Thus, during these increasingly treacherous legal times, it is helpful to remember that coverage counsel can offer invaluable assistance to the insurer while it navigates the various implications of the litigation process, including threats of bad faith and the appropriateness of the insurer’s conduct.