The cost of liability insurance claims in the US has been increasing for a number of years, at a rate exceeding economic growth and inflation, primarily due to what the insurance industry has dubbed "social inflation."
While economic inflation has slowed down, the pace of social inflation has continued, driven by what the Swiss Re Institute describes as "societal trends and behavioral norms, leading to greater use of the legal system and rapid growth in settlement awards."1
To date, social inflation has mostly been an issue for US insurers and reinsurers, with juries awarding ever-larger payouts to claimants. But it's now impacting claims in other jurisdictions with common-law legal systems, such as the UK, Australia and Canada, according to Swiss Re.
In Europe, where judicial systems are typically based on civil law, social inflation has had less of an impact, with judges deciding tort cases, rather than juries. However, European Union (EU) member states could see growth in substantial court awards due to legislative changes related to product liability and representative actions.
Social inflation in the US
US casualty insurers have been concerned for several years about the growing prevalence of large court awards for contested liability claims.
So-called "nuclear verdicts" — where court awards exceed USD10 million — have been increasing in both size and frequency since 2009, rising by 27% year-on-year in 2023.2 Meanwhile, "thermonuclear" verdicts — those over USD100 million and up to USD1 billion — also have increased.
The Swiss Re Institute says large court awards were behind the 57% increase in the cost of US liability claims in the past decade. According to its proprietary index, social inflation in the US rose by an average of 5.4% annually from 2017 to 2022 (compared with average economic inflation of 3.7%), reaching an annual peak of 7% in 2023.
The growth of third-party litigation funding has been a significant factor in this trend, with hedge funds and other institutional investors backing high-risk cases with a view to profiting from larger awards in successful court outcomes.
As Gallagher explores in Navigating Nuclear Verdicts, litigation funding is big business in the US, with the key states of California, Florida, New York and Texas collectively responsible for half of all US nuclear verdicts in 2023.3
Charting the rise of social inflation
Businesses from about 50 different industries experienced nuclear verdicts in 2023, according to Marathon Strategies. Around two-fifths of these involved product liability cases, largely driven by claims involving a chemical firm's weedkiller and against two tobacco giants. Verdicts against car manufacturers whose vehicles were involved in accidents also figured strongly.
Intellectual property claims contributed the second-highest share of nuclear verdicts (23%), followed by wrongful death cases (13%) and antitrust cases (12%).
Changing societal attitudes are also feeding into the mix, against a backdrop of growing political polarization, disinformation, rising anger about social injustice and a growing mistrust of corporate business.
A report from global law firm Orrick notes that juries today tend to have a younger demographic, with a higher proportion of Gen Z jurors.4
Not only are a smaller proportion of jurors surveyed likely to trust courts — 48%, compared with 67% pre-pandemic — but they're also more likely to have an anti-corporate mindset. Nearly two-thirds believe it's an "important function" of juries to "send messages to corporations to improve their behavior," while 77% favor the use of punitive damages to punish corporations.
Today's jurors tend to overwhelmingly side with plaintiffs, and a rising perception that large businesses can afford the cost of damages means juries have fewer reservations about making substantial awards. Plaintiff attorneys are leveraging "reptile theory" — concerns about the possible impact of defendants' conduct on their family and community — to influence the size of jury awards.5
Forum shopping and regulatory drivers
This trend has led in recent years to lawyers "forum shopping" for jurisdictions where courts have a reputation for being more plaintiff friendly. This "litigation tourism" trend is prevalent in the US but is also a concern for non-US global businesses that are involved in multiple lawsuits in different jurisdictions, according to Zurich.6
The spillover from US cases contributed to 10% of the UK liability claims burden in 2023, according to the Swiss Re Institute, and there was a 7% increase in both Australia and Canada, driven by the expansion of mass tort claims.
Meanwhile, the transposition into national laws of EU legislative changes around product liability and representative actions could lead to an increase in mass tort claims seen in member states.
The EU Collective Redress Directive, which came into effect in June 2023, is widely expected to increase the number of collective actions in European countries. The EU Product Liability Directive, which came into force at the beginning of 2024, is expected to have a similar impact.
The Product Directive broadens the scope of products and organizations that fall under product liability law, to include new technologies such as artificial intelligence (AI) and global supply chains, while expanding consumer rights and access to collective action.
Third-party litigation funding and US plaintiff firms are both expanding into Europe and, according to Zurich, product liability litigation in the EU is "almost certain to increase" the number, value and cost of claims.7
Responding to social inflation
Insurers are increasingly pushing for settlement on claims, looking to avoid trial even with a good liability defense, because of the increasing likelihood of damages awards that could exceed total policy limits.
Defense attorneys are also finding ways to counter some of the tactics the plaintiffs' bar uses, including defensive anchoring, a strategy for more effectively challenging the size of awards suggested to juries by plaintiff lawyers.
Ultimately, if social inflation is to be kept in check, a joint effort is needed. A group of European insurance associations recently reiterated their joint statement urging the European Commission to regulate the use of third-party litigation funding within the EU.8
More directly, Swiss Re suggests that further reform of tort law to limit the scope of non-economic damages could be effective — a tactic some US state legislatures already are pursuing.
For their part, insurance carriers could look to develop more coordinated defense strategies against the plaintiffs' bar with co-defendants on umbrella panels, and leverage new technologies to support claims management and decisions on whether to litigate or settle claims.
