Insurers and Consumers Face Growing Legal Costs Amid Social Inflation

The insurance industry is grappling with a significant challenge due to a phenomenon known as social inflation, where legal advancements, including sophisticated technology and new funding methods, are leading to increased legal costs and higher awards from lawsuits. This trend, impacting both commercial and personal insurance sectors, is causing insurers to struggle with accurately pricing the risks associated with these changes in legal tactics. Consequently, U.S. casualty insurers have had to allocate over $1 billion to address the rising claims costs from the previous quarter. The broader impact of these escalating legal costs extends beyond the insurance industry, affecting the average American household to the tune of $3,621 annually, attributed to what’s been termed the ’tort tax.’ This tax affects prices across a broad spectrum of goods and services, from groceries to gas.

The legal landscape is further complicated by COVID-19 related court delays, prolonging litigation and potentially increasing settlement costs or jury awards. Juries in civil court cases have issued verdicts with damages reaching astronomical sums, exerting pressure on businesses and prompting spikes in insurance premiums. The trend of ’nuclear verdicts,’ or jury awards of $10 million or more, has notably increased, with significant cases reported in 2023 and 2024 that have led to multi-million-dollar awards against companies.

Amidst these challenges, there is a growing call for transparency and reform, particularly regarding the role of third-party litigation funding, which has been criticized for lacking transparency and potentially inflating claims costs. This issue has sparked debate among legal, insurance, and business communities, with some states taking legislative action to address these concerns.

Ultimately, the ongoing legal advancements and the phenomenon of social inflation present a complex challenge for insurers, potentially leading to higher premiums for consumers and businesses alike. As the legal landscape continues to evolve, there is a pressing need for a balanced approach that ensures access to justice while mitigating the financial impact on insurers and, by extension, the American public.