The Causes and Consequences of Social Inflation
WASHINGTON (December 6, 2021)—In September, a jury in Florida handed down a nearly $1 billion verdict following a truck accident that took the life of 18-year-old Connor Dzion a few years earlier. The extreme damages in the case are the latest example of “nuclear verdicts” where the court awards are unnecessarily excessive and powered, in part, by a trend known as “social inflation.” First popularized by Warren Buffett in the 1970s, this term refers to factors unrelated to general inflation in the economy that underlie rising court awards. In other words, verdicts are often driven by factors such as public sentiment toward sectors of the economy regarding responsibility and blame at the time, leading to awards so high that they bear no relation to the actual damages sustained.
In a new policy study, R Street Institute Director of Finance, Insurance and Trade Jerry Theodorou, explores social inflation, explains factors underlying its perpetuation in courtrooms, proposes solutions for combating it and details the potential consequences for leaving the trend unchecked.
While social inflation is not universally agreed upon, it is not a myth or insurance industry buzzword. Rather, the paper argues, it is a durable trend driven by factors that have not been encountered in prior iterations of the insurance market cycle. For that reason, insurers must understand both the drivers and impacts of social inflation on future financial awards.
Among the various drivers of this phenomena include new strategies employed by the plaintiff bar to raise damages and “punish” defendants, increased attorney advertising, third party litigation financing, and phantom damages related to medical bills and payments, to name a few. Meanwhile, in contrast to an aggressive and organized plaintiff bar, the defense bar has been relatively slow to respond effectively to new legal theories advanced by plaintiff trial lawyers.
“Just as the plaintiff bar has deployed creative new courtroom strategies to push awards ever higher, the defense bar should respond with strategies of its own to arrest the continued inflation of awards,” said Theodorou. “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.”
If left unchecked, the paper warns, social inflation will become self-perpetuating and send improper signals regarding the value of damages to jurors, judges and defendants. This, in turn, will lead to higher insurance premiums, increased financial stress on insurers and disincentives for businesses to task risks as they become unable to fully calculate the risks in the market.
Read the full study, “The Scourge of Social Inflation.”