The legal system is a fluid entity. Standards, norms, and precedents are constantly in flux to keep pace with changes in social standards. Since legal and regulatory structures overshadow the operations of the business world, it is only natural that changes in the law have a major impact on all industries.
The results of this impact created the latest buzzword in insurance: social inflation.
What is social inflation?
Social Inflation refers to the trend of rising legal costs for insurers as litigation has become more common with increased plaintiff-friendly decisions. In recent years, the insurance industry has seen a 7% annual increase in personal umbrella loss expenses alone, leading to rate hikes. There are also fewer insurers in the market today, which limits options.
We see three key factors that are driving up insurance claim costs:
1 – Liability is more broadly defined. The definitions of liability have expanded as courts and juries find more parties at fault for less direct negligence. For example, environmental negligence claims are seeing increased sympathy in court, due in part to changing social attitudes on environmentalism and better data to establish a plausible “trail of blame” to the defendant.
This has created opportunities for damages claims that are far more abstract. Companies are facing damages claims where liability has been stretched significantly beyond the norm.
2 – Plaintiff-friendly legal decisions are more common. Companies are increasingly on the losing end of legal battles as defendants against individual plaintiffs, especially when it comes to damage claims.
This can be attributed in part to the “David vs Goliath” impression that juries get in cases of a corporate entity against an individual. Damages are awarded to the plaintiff purely out of perceived economic need, while the corporation is inaccurately viewed as a faceless entity with limitless resources.
The result of this attitude is broad applications of liability and inflated fees and damages.
3 – Nuclear verdicts represent an existential threat to businesses. Nuclear verdicts are jury awards with a penalty fee greater than $10 million. These verdicts can put a company out of business and are becoming much more common. Nuclear verdicts are rising even for industries that have seen falling rates of injury in recent years, such as the trucking industry.
This is causing two major effects on businesses.
- They are facing a risk of nuclear verdicts even in instances where their connection to the blame is tenuous at best.
- The threat of expensive litigation and penalties is driving up insurance premiums in all areas as the risk for the business rises.
What do these rising costs mean for my clients?
Your commercial clients are exposed to catastrophic losses of both time and money without adequate liability coverage. In order to properly mitigate risks, companies need an umbrella insurance policy. Social inflation and new marketplace trends have created a need for even higher liability limits to adequately cover their exposures. The stats speak for themselves:
- The average jury award for general liability premises operations has risen by 10.5% each year since 1994.
- The average jury award for automobile liability has risen by 27% each year since 1994.
- The average claim takes seven years to go through investigation, discovery, trial and jury decision.
- A $250,000 loss today will be worth $1.2 million in seven years; a $1 million primary liability policy will not be sufficient to protect your business.
MJ Kelly specializes in primary and excess umbrella products. We have the underwriting expertise and market access to accommodate your clients’ unique needs. Connect with a local MJ Kelly branch to learn more: http://mjkelly.com/contact-us/.