The Problem with your Local Ambulance Chaser
People across the country are feeling the effects of historic levels of inflation at the gas pump and grocery store as they struggle to make ends meet and put food on the table. While debates on rising costs generally focus on supply chain issues and labor shortages driving up wages, the growing scourge of social inflation flies under the radar.
Social inflation refers to rising courtroom awards—judgments and settlements—in civil litigation driven by factors unrelated to economic inflation. Economic inflation, driven primarily by supply and demand dynamics, is measured by the consumer price index. By contrast, social inflation is driven by societal attitudes on the value of a life, the value of pain and suffering, and changing views of negligence, injury causation and duty of care. Its effects are ultimately passed onto consumers as companies raise their prices to offset litigation and higher insurance premiums.
Eye-popping examples of this behavior include a “fender bender” between a tractor trailer and a pickup truck, resulting in a court-ordered payout of $101 million, later reduced to $32 million in remittitur. Other cases have resulted in similar sums of money, with payouts reaching as high as $1 billion.
Victims of negligence or malfeasance are justifiably owed compensation for injuries and losses they sustain, but the scale of the payouts is cause for concern. On its surface, this may sound like a niche issue, of interest only to personal injury attorneys and corporations, but the U.S. insurance market is a $1.28 trillion behemoth connected to virtually every industry since all require some form of insurance. Social inflation’s impact on such a massive industry can’t be dismissed, especially as Americans grapple with rising costs in other areas.
The trend for ever-larger jury verdicts and out-of-court settlements is driven in large part by novel plaintiff attorney courtroom techniques. Among these is the practice of anchoring. This entails plaintiff attorneys planting the notion of a large settlement, far in excess of what a reasonable person would consider appropriate, in the minds of jurors. Jurors, and prospective jurors in voir dire, repeatedly hear from the plaintiff attorney a large dollar amount such that the amount becomes anchored in their minds. Research has shown that anchors do work, and drive large awards.
Some may dismiss social inflation as a problem for insurance companies and other corporations with deep pockets. They have large balance sheets and victims deserve compensation. But the effects of social inflation are not restricted to corporate defendants and their insurers. The effects flow to individual customers and policyholders, leading to higher insurance premiums and other consumer costs.
In cases involving local municipalities and public entities that are largely self-insured, social inflation drains money directly from taxpayer-funded city, county and state general funds. This behavior, forcing disproportionately large payouts for damages, drives businesses to avoid risks, limiting opportunities for growth and innovation.
Unfortunately, focus on social inflation is generally limited to the affected stakeholders, despite its far-reaching impact. Insurance companies and their corporate clients should partner with local governments and tort reform organizations to step up their advocacy efforts to improve public understanding of social inflation. Defense attorneys need to insist upon legal recourse for excessive payouts.
On the policy level, lawmakers can take steps to limit anchoring so that juries decide awards related to actual damages rather than an artificially inflated amount suggested by plaintiff attorneys. What is more, lawmakers can restrict the scope and scale of risk a company is exposed to by enacting laws that take aim at limiting the number and magnitude of meritless litigation.
As Americans continue to struggle with the burden of inflation across markets, policymakers and insurance providers should recognize how social inflation can also ravage the economy, and engage in advocacy to curtail its growth.