Discover how social inflation, rising jury awards, and increasing lawsuit costs are affecting commercial insurance premiums and businesses.
When we hear the word inflation, most of us first think of day-to-day cost. Groceries, gas, building materials, vehicle repairs, and just about everything else. There is another type of inflation affecting businesses and the insurance industry. It does not appear on a grocery receipt, yet it is affecting our insurance premiums.
It’s called Social Inflation, and it is having a growing impact on the cost of liability claim. It is seen particularly in commercial auto insurance.
What Is Social Inflation?
Social inflation refers to the rising costs of insurance claims and lawsuits that go beyond what we would typically expect from standard economic inflation.
Social inflation is influenced by factors such as larger jury awards, changing public attitudes toward businesses and corporations, and the increasing willingness of juries to hold companies financially responsible for accidents and injuries.
In simple terms, claims are becoming more expensive not just because medical bills, vehicle repairs, and other costs are increasing, but because the amounts awarded in lawsuits are increasing.
And some of those numbers are staggering.
When Jury Awards Become Nuclear
A nuclear verdict generally refers to a jury award of $10 million or more. When awards reach $100 million or higher, they are often referred to as mega-nuclear verdicts.
These aren’t simply larger settlements to cover medical expenses, lost wages, or property damage. They can include substantial amounts for pain and suffering, emotional distress, and punitive damages intended to punish a defendant for its conduct.
For businesses, particularly those operating commercial vehicles, the financial consequences can be enormous.
Consider a commercial truck involved in an accident. Beyond the actual damages and medical expenses, a lawsuit may focus on the company’s hiring practices, driver training, vehicle maintenance records, safety policies, and what the company could or should have done differently.
The conversation can quickly shift from the accident itself to the company’s overall responsibility.
Why Are Jury Awards Getting Larger?
There isn’t one single reason for the increase in social inflation. Several factors are contributing, including changing attitudes toward large corporations and how juries view corporate responsibility when there are claims.
Over the years, public perception of large businesses has evolved. Some jurors may enter a courtroom with the belief that large corporations have significant financial resources and should be held to a higher standard of accountability.
In some cases, the focus shifts beyond what a company actually did or didn’t do at the time of an accident. Instead, jurors may begin considering what the company should have done to prevent the situation from happening in the first place.
Was the driver properly trained? Were safety procedures followed? Were maintenance concerns addressed? Could the company have done more?
These questions can influence how jurors assign responsibility and determine the financial consequences.
And when a jury believes a company failed to take reasonable precautions, the resulting award can extend far beyond the original cost of the accident.
The Power of Anchoring: Putting a Number in the Jury’s Mind
Another factor receiving attention in discussions about social inflation is a legal strategy known as anchoring.
Anchoring occurs when an initial number is introduced during a discussion or negotiation, influencing how people perceive the value of everything that follows.In a courtroom, plaintiff attorneys may present a very large dollar amount early in a trial when explaining the damages they believe their client deserves.
Even if that number seems extraordinarily high, it can become a reference point in the minds of jurors. As they begin discussing the case and considering damages, that initial figure may influence what they consider a reasonable award.
For example, if an attorney suggests that a case is worth $50 million, jurors may begin evaluating the damages with that number in mind rather than starting from zero.This doesn’t mean juries automatically award the amount requested. However, the initial figure can influence their perception of what an appropriate award might look like.
When combined with emotional testimony, the severity of an injury, and questions about corporate responsibility, anchoring can contribute to increasingly large jury awards.
What Does This Mean for Businesses?
Social inflation is changing the liability landscape. Businesses are facing exposure that goes beyond the traditional costs associated with accidents and injuries.
For companies with commercial vehicles on the road, this is particularly important. A single accident can potentially result in a lawsuit involving not only the driver but also the business that owns or operates the vehicle.
And as jury awards continue to grow, the insurance industry must account for the potential cost of these claims when evaluating risk, setting premiums, and determining coverage limits.
The bottom line? Standard inflation isn’t the only thing driving up the cost of doing business. Social inflation is adding another layer of financial exposure, and understanding it is an important part of protecting your business.
Stay tuned for Part 2, where we’ll look at how social inflation is affecting commercial auto insurance, why liability limits matter more than ever, and what business owners can do to help protect themselves.
Source: Insurance Information Institute
Heather McKenna
Commercial Producer / Marketing
heathermckenna@cheneycompanies.com
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