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Insurers, Insureds Must Collaborate to Get Ahead of Social Inflation

Executive Summary: Setting up mock jury trials, taking cases to trial and refraining from issuing “hammer” letters to lower-layer insurers are just three of the strategies Aspen’s Chief Claims Officer Tony Rai suggests that insurers start undertaking—in concert with their insureds—to rein in social inflation. Although nuclear verdicts can’t be eliminated, they can be better managed, he writes, also advocating for appropriate claims handler caseloads that recognize the growing complexity of claims.

Insurers need to take a comprehensive and collaborative approach to stem the rising tide of social inflation.

This approach should be one that involves not only assessing corporate risk and developing and implementing strategies with their insureds and co-insurers but also, collectively, working with lawmakers to help eliminate its root causes.

However, insurers need to acknowledge that the risk of a nuclear verdict is one that needs to be better managed by the industry but can never be eliminated.

Aside from the financial and reputational damages for insurers and insureds, social inflation can lead to inadequate or unaffordable insurance for consumers, resulting in more expensive or unavailable services. More broadly speaking, its consequences can lead to a ripple effect that is beyond insurance—impacting societal, economic, legal and behavioral norms.

Nuclear Verdicts and Settlements

Social inflation is leading to so-called “nuclear verdicts” where plaintiffs are receiving awards in the tens of millions and, in some cases, hundreds of millions of dollars. In these cases, the non-economic damages of the case far outweigh its economic damages.

This has spawned “nuclear settlements,” which are driven by the fear that a nuclear verdict will be in excess of the defendant’s available insurance policy limit. With insureds increasing pressure on insurers to settle within the available limits, this has resulted in settlement values being driven up as insurers are rightly concerned with the potential risk of bad faith.

The insurance market’s understandable response to increasing verdicts and settlements has been to increase rates, reduce capacity, increase attachment points, and tighten terms and conditions. However, that only increases the pressure on carriers to settle within the tower of coverage as the insured’s primary focus is to avoid an excess exposure.

Drivers of Social Inflation

There are multiple factors driving social inflation and increasing claims costs in the U.S. For example, an increase in third-party funding enables cases to be run for longer and more aggressively. Additionally, there is what appears to be a jury’s desire to “punish” insureds for perceived bad practices, especially where it relates to safety issues that have led to entirely avoidable serious injury or death. We have seen extremely large jury awards and settlements in auto accident claims, particularly where an insured was aware of poor practices within its facilities (such as depots) but took no steps to stop such practices.

The composition of jury panels is tending to be younger citizens who can hold anti-corporate stances and unrealistic views of appropriate product and workplace safety standards, causing larger consumer/plaintiff verdicts. Therefore, it is critical that insureds understand the potential consequences of bad practices that could lead to injury or death, and insurers need to look to limit or restrict coverage in circumstances where an insured tacitly accepts such practices. In that event, if a jury believes that an insured should be punished for their behavior, the financial impact is materially impacting the entity that was at fault.

Social inflation not only adversely affects insurers and their liability accounts, but it also affects insureds more broadly. Social inflation is one of the leading factors in the deterioration of reserves on back years, as awards by juries in the U.S. continue to increase. Indeed, this is one of the main reasons insurers have looked to mitigate their risk by reinsuring their back years through loss portfolio transfers. So, what can insureds and their insurers do to stem the tide of increasing jury awards?

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Here are six tactics insureds and insurers can employ to help mitigate the impact of social inflation and, as a consequence, nuclear verdicts and settlements:

• Insureds and insurers should participate in mock jury trials to better understand how juries will react to a specific and factual scenario, and which types of arguments will likely resonate well in front of a jury. While claims handling costs will continue to increase, driving up the average value of claims, mock jury trials can help reduce the impact.

• “Anchoring” should be used to highlight the appropriate value of compensatory damages. Many individuals sitting on juries are desensitized to large sums, especially when they regularly see press coverage about large sums paid to sports and entertainment stars. The real focus should be on what that individual needs to support themself and to compensate them fairly for the loss that has been suffered, rather than making them extremely wealthy.

• It is important to help the jury understand the amount that plaintiff’s counsel will take from any award. This is almost always a material percentage of the ultimate jury award.

• It is critical to employ experienced and technically competent counsel. It is equally important to ensure that the claims handler caseloads are appropriate for the level of complexity of the claims under management. Given increasing awards and settlements, more claims are under active monitoring than previously, and appropriate caseloads will make sure cases are managed effectively.

• Be willing to take cases to trial and take a verdict rather than fearing a jury trial as it will be key to getting good case law on the books for the future, accepting that some cases will need to go to appeal. Yes, some cases ultimately may be lost, but it may be a price the insurance industry will need to pay to mitigate the impact of social inflation.

• Insurers should take lessons learned from verdicts and settlements driven by social inflation to partner with their insureds to assist with creating better practices to mitigate against the risks. This would be a value-add activity to look to reduce the litigation life cycle—looking to protect the insured, not just defend the insured. Insureds need to act when they are aware of possible poor practices, rather than ignoring the situation.

Insurance Industry Best Practices

Insurers and insureds in the coverage layers need to work together more closely to prevent fear from driving up nuclear verdicts and settlements. Here are five best practices the industry needs to consider, which involve a great deal of collaboration:

• Collaborate on excess placements, rather than taking an adversarial approach. This includes resisting issuing “hammer” letters to the layers below, where a settlement can be achieved in that layer but where the settlement value is not reflective of the injury or damage suffered. Those insurers that are prepared to reject a settlement in their layer subsequently carry the risk that they could be liable for in excess of their policy limit. This is a consequence that few insurers are prepared to take, and one critical factor that pushes up settlement value and drives social inflation.

• Avoid panicking when plaintiffs’ counsels demand tower limits before settlement demands are made. To mitigate such demands, the tower needs to work jointly with learned and experienced counsel to fully understand the settlement value of the claim. Together, they can resist pressure as a market to tender the limits of each layer, which historically has had a domino effect—as the layer below tenders, the next layer folds and so on until the whole tower has tendered their limits.

• Constantly review and reassess the value of those material cases that have volatility. This will ensure carriers stay on top of the right settlement value for a claim and are ready when settlement opportunities arise.

• Drive an early settlement, particularly where liability is unlikely to be in question. The old adage is true: The best claim is a closed claim.

• Ensure tort reform is on the agenda. The insurance industry should use lobbying firms to drive these issues onto the agenda of legislators in the various states.

This article first was published on Dec. 14, 2023 in Insurance Journal’s sister publication, Carrier Management.