People in the United States have filed nearly 10,000 COVID-19-related lawsuits in state and federal courts since the outbreak of the virus. The litigation wave, likely to swell this year as courts reopen and pent-up demand is released, is fueling a rising trend in civil litigation and adding a tax on businesses that is ultimately passed on to consumers.

Legislation at the state and federal levels needs to keep this adverse tort trend, called “social inflation,” in check.

Warren Buffett was the first to introduce the term social inflation. In his 1977 Berkshire Hathaway letter to shareholders, the sage of Omaha defined social inflation as “a broadening definition by society and juries of what is covered by insurance policies.”

By the 1980s, more expansive concepts of tort and negligence ushered in outsize judgments and settlements in tort litigation. The result was a liability crisis, with liability insurance costs tripling and coverage narrowing or unavailable. At the height of the crisis in 1986, Time magazine cover depicted businesses closing — with the ominous title, “Sorry, America, Your Insurance Has Been Canceled.”

Like the 1980s liability crisis, today’s social inflation leads to tort expansion. Current drivers of social inflation include an explosion in attorney advertising, litigation funding, reviver statutes, phantom medical billing, more populist jury pools, and the plaintiff bar making effective use of human psychology in the courtroom.

Since 2005, there has been a 77% increase in attorney advertising, according to Rustin Silverstein, CEO of attorney advertising data provider X Ante. Billboards, television, radio, and the internet scream with solicitations for would-be plaintiffs to sign on to class actions with local personal injury attorneys working as co-counsel, feeding upstream to the big guns of the plaintiff bar.

Litigation-funding firms that invest in lawsuits have sprung up and introduced a new asset class. The largest player in this field, Burford Capital, launched in 2009 and now traded on the New York Stock Exchange, reported 2020 revenues topping $500 million and business “snapping back” in 2020 after a slow first half.

Further, reviver statutes introduced in recent years in dozens of states have vastly extended the statute of limitations for introducing suits alleging abuse. An explosion in “phantom medical billing” involves artificial inflation of medical costs in settlements and judgments by claiming amount billed rather than costs actually paid.

Younger, populist, anti-corporate juries are more prone to make larger awards than baby boomer jury pools. Plaintiff attorneys making good use of the “reptile theory” to provoke jurors to punish defendants painted as dangerous to society have led to staggeringly large verdicts. The combined impact of these trends has led to more and larger lawsuits, as well as year-over-year increases in “nuclear verdicts” — verdicts in excess of $10 million.

Some elements of the COVID-19 litigation torrent fit squarely in Buffet’s meaning of social inflation: expansion of what insurance policies cover. To be sure, the plurality of the 10,000 coronavirus suits filed involve insurance coverage litigation, with plaintiffs seeking coverage for business losses in policies where insurers maintain coverage does not exist.

COVID-19 litigation contributes to social inflation and increases the chances of another 1980s-style liability crisis, with rising insurance rates and policy cancellations amid the proliferation of frivolous lawsuits.

What can America do to avert another liability crisis from today’s social inflation?

State and federal governments should pursue tort reform actions on multiple fronts to slow the momentum of social inflation and generate pressure to swing the pendulum away from what has become “tort deform.”

States that allow phantom damages should introduce laws to prohibit this problematic, unfair practice. Also, the 13 states where COVID-19 liability immunity laws are neither passed nor pending, except for healthcare workers and first responders, should follow the example of the 38 where broad immunity laws have been passed, enacted, or are pending.

And most importantly, it must be recognized that insurance policies cannot be interpreted opportunistically, notwithstanding noble intentions to help suffering businesses. Article 1, Section 10 of the Constitution, the contracts clause, prohibits states “impairing the obligation of contracts.”

The country has suffered enough from a health and an economic crisis. The last thing we need as we return to normalcy is a crippling liability crisis.

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