Social inflation, the phenomenon of rising civil litigation verdicts and costs that outpace general economic inflation, is exerting increasing pressure on businesses and insurers. This trend is particularly evident in the growth of so-called “nuclear verdicts” – jury awards of US$10 million or more.
According to Neil Beresford and Jestina Mascaro, both partners at Clyde & Co., these developments are reshaping risk and insurance strategies across multiple sectors.
“Often, these increases are best characterized by large jury awards of US$10 million or more, which have become known as ‘nuclear verdicts.’ These rising litigation costs and unpredictable verdicts can have an enormous impact on businesses and industries, including higher insurance premiums,” Beresford and Mascaro said.
Beresford and Mascaro highlighted figures indicating that from 2016 to 2022, tort expenses in the United States increased at an average yearly rate of 7.1%. This, they noted, was well above the average annual inflation rate of 3.4% and the average GDP growth rate of 5.4% during the same period.
“Approximately half of the nuclear verdicts reached in the United States between January 1, 2013, and December 31, 2022, were between US$10 million and US$20 million; over one-third were between US$20 million and US$50 million, and the remaining 19 percent exceeded US$50 million. 115 of these verdicts were for US$100 million or more,” they said.
Nuclear verdicts in product liability cases are rising in value much faster than in other areas. The median size of such verdicts grew by 50% between 2013 and 2022, with four states – Florida, California, Texas, and New York – responsible for half of all nuclear verdicts in the United States, according to Beresford and Mascaro.
“This has a direct impact on insurers, who have experienced a notable uptick in claims costs across various lines of business, including automotive and trucking liability, product liability, commercial liability, and professional liability,” Beresford and Mascaro said.
They referenced a 2022 study, which reported that US$20.7 billion in commercial auto losses between 2010 and 2019. That figure represented 14% of total claims paid and were linked to loss development factors that could not be explained by normal inflationary trends.
“Social inflation has also contributed to a decline in underwriting profitability, as higher claim payouts outpace revenue growth. Casualty underwriters, in particular, have had to balance the long tail of claims that have been developing for a number of years (such as asbestos or opioid claims) against claims occurring in the present,” they said.
Beresford and Mascaro outlined three key factors driving social inflation: greater use of third-party litigation funding, particularly in personal injury and wrongful death cases; changing public attitudes towards litigation, including growing scepticism of corporations; and the application of psychological strategies by plaintiffs’ lawyers aimed at swaying juries through emotional appeals and existing biases.
“The United States is the largest third-party litigation funding (TPLF) market, accounting for a 52% share of this global, multi-billion-dollar industry,” they said. “TPLF [has] increased the frequency of large claims, reduced insurability, contributed to the surge in plaintiffs’ attorney advertising, and increased litigation costs by extending the timeline of cases before resolution could be reached.”
They also observed that the public is growing desensitised to large sums of money. From the settlement figures promoted by plaintiffs’ firms to lottery jackpots and the sale of Twitter (now X) to Elon Musk, people are constantly exposed to substantial numbers in the media, which in turn influences how they value and interpret money.
“Respondents believed that 10% of households have an annual income of US$1 million or more, and that 20% of households earn US$500,000 or more. However, the U.S. Census Bureau has reported that less than 0.5% of households earn US$1 million or more, and 1% of households earn US$500,000 or more,” Beresford and Mascaro said
Beresford and Mascaro said that although the situation may seem bleak given the rising trends in social inflation and nuclear verdicts, it is clear that businesses, insurers, and defence lawyers are now fully aware of the challenges.
“Defence attorneys have strategies in place to combat both social inflation and nuclear verdicts, including looking at early claims resolution, defining clear litigation strategies at the start of litigation, and developing strong trial themes to convince juries to follow the facts rather than their emotions,” they said.
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