Social Inflation, a buzzword used in the insurance industry, describes a phenomenon that has a negative impact on insurance premiums. It describes how liability claim costs have risen exponentially because of societal trends. Through the past decade, insurance carriers have seen courts award massive damages in lawsuits, like they have never seen before.
Take the case of Beer Belly’s Sports Bar in Corpus Christi, Texas. On November 12, 2017 the bar allegedly served too much alcohol to 29-year-old Joshua Delbosque. Mr. Delbosque left the bar with a blood alcohol level three times the Texas legal limit for driving. According to the court case, his level of alcohol was high enough to render an average individual unconscious.
Mr. Delbosque got behind the wheel of his 2014 Dodge Charger. He sped over 90 miles per hours through a red light, crashing into a car driven by 59-year-old Tamar Kindred. Both Ms. Kindred and her 16-year-old granddaughter, a passenger in the car, died. Mr. Delbosque also died.
In December 2021, the court considered a $300 million settlement. But the jury awarded $301 billion! This award included $1.04 billion in actual damages and $300 billion in exemplary damages. Exemplary damages are used by courts to serve as a warning to other businesses not to behave in the same manner. The award was provided to Ms. Kindred’s two surviving daughters, Jennifer and Elizabeth.
Compare that case to the largest class action lawsuit ever recorded in US history. That award was for a lawsuit against the tobacco industry. That case settled in 1998 with more than $206 billion paid to various states over 25 years.
Some think large corporations have deep pockets, and thus can afford to pay a large verdict. In the case of Beer Belly’s Sports Bar, they appear to be a small dive bar located in a strip mall. If Beer Belly’s Sports Bar purchased Liquor Liability insurance, most certainly they did not maintain over a billion dollars of liability coverage limits. Most small business owners buy very low insurance limits. In most cases, the limits are inadequate to protect them.
Not surprisingly, the bar went out of business in 2019.
Business owners who buy insurance often wonder why large verdicts impact insurance premiums.
Insurance carriers have vast amounts of data gathered from US court decisions. Actuaries review this data to seek insight to trends in lawsuits. Rates, coverages, and marketing of products are all determined from this data.
Insurance carriers have been increasing premium rates on liability policies of all types. Every insurance company that offers liability coverage is dealing with social inflation.
Cases like Beer Belly’s Sports Bar’s, while extreme in monetary amounts, are not isolated incidents. Courts are awarding large settlements on a routine basis.
In December 2021, Swiss Re issued a report titled “US Litigation Funding and Social Inflation”. Court awards exceeding $5 million rose from 29% to 37% for general lability lawsuits, and 22% to 29% for vehicle negligence cases.
This report goes on to say part of this trend in higher lawsuit costs is due to litigation funding. In simplest terms, litigation funding is where a plaintiff seeks an external financial investment resource to help pay for costs of a lawsuit. The most famous litigation funding case is Terry Bonilla (also known as Hulk Hogan) vs. Gawker Media. Because of financial support from billionaire Peter Theil, Mr. Bonilla had a successful lawsuit against Gawker.
While more funding to help drive lawsuits is a factor, the issue remains that courts are still awarding higher verdicts now than in the past. Juries appear to be more sympathetic to plaintiffs, and feel that these large court awards bring a sense of justice and equity. These cases impact those who do buy insurance policies.
Insurance companies are businesses. When they incur higher costs, they pass those costs through to policyholders in the form of higher premiums. This is one of the reasons why policyholders are experiencing increased premiums at their policy renewals.
For the time being, social inflation is here to stay, and its impact on the insurance industry will be long felt for years to come.
