Insurers need stronger response to stem social inflation: R Street
From Inside P&C:
Social inflation has led to an explosion of court awards “out of proportion to actual damages sustained,” and insurers’ attorneys need to “step up” their efforts to combat the tactics of plaintiffs’ lawyers , a new white paper states.
The paper, from think tank R Street, details rising costs of awards handed down by juries. Citing Swiss Re statistics, for example, it notes the median cost of the top 50 bodily injury claims rose to $54mn in 2018, from $28mn in 2014.
The same spike is seen in medical malpractice, truck and auto accidents, as well as in suits against public entities like New York’s Metropolitan Transportation Authority, which saw personal injury payouts skyrocket to $150mn in 2019 from $43mn in 2007, the report noted.
Jerry Theodorou, director of the finance, insurance, and trade policy program at R Street Institute, wrote that data provider Advisen found the median cost of a single-fatality award reached $3.85mn in 2016, from $1.45mn in 2001, nearly twice the rate of inflation.
Theodorou said in the report that insurers need to understand the drivers and potential impact of social inflation on future financial results.
In addition to factors such as economic inflation and supply chain constraints, he pointed to non-economic factors, from anti-corporate societal attitudes to increasingly aggressive tactics, which are also being used by plaintiff’s attorneys.
“Failure to do so will result in impaired insurer balance sheets and higher insurance premiums for all, amounting to a ‘hidden tax’ burdening individuals and making businesses less competitive,” he wrote.
Among the strategies plaintiff attorneys use are efforts to incite juror anger at companies, casting them as villains, and using psychodramatic techniques to stoke the tension in courtrooms and get jurors involved emotionally.
They also use “anchoring” – the practice of asking for awards above and beyond historically reasonable amounts.
These moves, backed by rising litigation financing, have left the defense bar on the “back foot,” Theodorou said. He noted that defense attorneys tend to be “more conservative and less willing to take risks” for fear of losing verdicts.
While Theodorou pointed to some public policy measures that can help rein in rising verdicts, he also faulted insurance companies for worrying about how much they’re spending on legal representation.
“To the extent that insurance company claims departments devote more attention to controlling defense expenditures with cost containment measures than to pushing back against swelling indemnity numbers, they may be penny wise and pound foolish,” Theodorou wrote.
If left unchecked, Theodorou warned, social inflation “will become a self-perpetuating phenomenon that sends improper signals regarding the value of damages to jurors, judges and defendants. This will lead to higher insurance premiums, financial strain on insurers, depletion of municipal resources and disincentives for businesses to take risks.”
“This hidden ‘tort tax’ benefits no one except plaintiff attorneys and their clients who engage in practices that lead to social inflation,” he concluded.