Social inflation: strategies to dampen

May 13, 2024

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By Max Koonce, Chief Claims Officer

Social inflation is a term that has been used to describe the increasing frequency and severity of litigated claims beyond the influences of pure economic inflation. There is a growing sense that social inflation is derived from changes in societal beliefs and expectations of increasingly higher compensation for injuries in liability litigation. 

Juries continue to dictate that when someone is injured, “someone” must pay. And the “someone” is inevitably a person perceived to have deep pockets. A corporate tortfeasor who has or who can be painted to have acted with disregard can be a target for inflated awards. Corporate mistrust compounds these tendencies. 

The driving cost and frequency of litigated liability claims 

Social inflation is just one of many factors driving the cost of litigated liability claims. Growing third party litigation financing, nuclear verdicts and class action lawsuits are also bolstering increased costs. 

While relatively limited, the frequency of litigation in liability insurance claims continue to increase. Claimants are engaging counsel earlier and more often. Despite the deceptively small percentage of claims that are litigated, the relative costs of litigated claims are disproportionately large and may account for more than half of all claim costs.

A strategic approach

The good news is there are proven strategies and techniques to dampen the impact of social inflation and other cost contributing factors. Companies should begin by employing effective avoidance and mitigation strategies. This can be achieved by cultivating an enterprise risk management culture that sets high expectations for safe and responsible practices and processes throughout the organization. Loss control consultation and assessments, using data and predictive analytics, and leveraging emerging technologies like telematics can all be useful in developing overall avoidance and mitigation plans. Adopting a cadence of regular reassessment of risks, adequacy of limits and retentions is crucial to understanding exposures and taking adequate preparation. Corporate environmental, social, and governance (ESG) programs that illustrate a commitment to safe and responsible conduct of operations and bolster sustainability can help lessen others’ ability to paint a corporation as an indifferent, profit-focused institution.

Advocacy principles can also help reduce claims litigation. Timely communications that promote an understanding of the claim process are invaluable. Additionally, utilization of predictive modeling to identify claims likely to become litigated can help streamline workflow and foster appropriate and timely resolution. 

Once a suit is at hand, employers should seek to reach an amicable pretrial settlement. Identifying counsel with the specific knowledge and expertise of the relevant area of law, the jurisdiction, and current plaintiff strategies is foundational to favorable outcomes. Companies and their counsel should attempt to settle all appropriate cases expediently. 

Alternative dispute resolution mechanisms generally present fewer volatile forums to reach settlements. Generally, bench trials are preferable to jury trials. 

Time for trial

In some cases, plaintiffs and their counsel will not be dissuaded from a trial, and specific trial tactics must be undertaken. In those instances, it is beneficial to identify an empathetic physical presence to represent the organization and make sure they are present and attentive throughout the trial. Defense witnesses should be prepared to provide unfettered testimony and not fall victim to opposing counsel tactics. A trial theme should be developed that seeks to “humanize” the company and demonstrates the competence and relatability of individuals as well as the commitment of the organization to responsible conduct and moral citizenship. 

Defense counsel should also develop strategies to counter fear tactics through an understanding of the psychology behind them in the context of today’s social climate. Astute defense counsel often references the strategy and devices of “reptile theory” and then reverse engineers defenses in preparing opening arguments, closing arguments and witness testimony.

Another mechanism that has been used successfully by plaintiffs’ counsel is a tactic called “anchoring.” Anchoring is a cognitive bias to rely on a reference point for making later decisions or evaluations. Defense counsel can and should begin shaping the narrative and setting anchored expectations early in interactions. Competent, affable experts and explanations that can be understood and resonate with jurors are imperative.

Next steps 

Looking ahead, the forecast is not all continued escalation and gloom. Some states are considering comprehensive tort reform, while U.S. Congress and the courts are showing signs of bringing more transparency and scrutiny to third party litigation financing.. 

In partnership with risk and claims specialists, insurers and the businesses they insure can leverage emerging technologies, data, expert knowledge and proficiencies to reduce the frequency and severity of litigation and its associated costs from the risks they face. Now is the time to set course for dampening social inflation and other cost increasing factors.

Learn more > contact [email protected] for more takeaways from RIMS 2024. 

Tags: advocacy, Advocate, Claims, Decision, decision making, Decision optimization, empowering performance, inflation, Insurers, litigation, litigation trends, Preserving brands, Risk