Insurance Companies develop their pricing by estimating future losses and adding a cushion on top of that to cover their expenses and, hopefully, their profit. If losses go up, pricing will go up. Recent data show that liability losses are increasing, and this is affecting both primary and excess liability loss ratios.
While loss frequency (the number of claims filed) has remained fairly consistent, loss severity has increased. This is attributable to what is being referred to as Social Inflation. Social Inflation reflects the trend of juries awarding increasingly larger verdicts. It is caused by several factors, among these are corporate mistrust, erosion of tort reform, and a desensitization to large numbers. Jury pools that are comprised of increasing numbers of Millennial and Gen Xer’s has also been a factor, as well as third-party litigation funding. The latter involves investors funding a plaintiff’s costs in exchange for a percentage of the award…yes, it is legal to invest in litigation.
Social Inflation has created an increase in Nuclear Verdicts. A Nuclear Verdict is an award of $10,000,000 or more. Nuclear Verdicts increased by 27% in 2023. Thermonuclear Verdicts (above $100,000,000) increased as well. Uncertainty of what can happen in the Jury Room is causing many insurance companies to settle claims prior to adjudication by a jury. They’d rather pay a substantial amount of money to avoid the uncertainty of what the jury may come up with.
A recent example involved a case in San Diego. A construction worker was killed on a jobsite. This was a tragic loss, the worker was married and had two kids. He earned about $60,000 a year. The decedent was paid the death benefit under the employer’s workers’ compensation policy. The decedent’s estate also brought a lawsuit against the General Contractor, the owner of the project, and the property manager on the project alleging an unsafe worksite (there was no evidence that the jobsite was unsafe). In this instance, the General Contractor carried $50,000,000 in liability limits. If you were to average out the decedent’s income over the balance of his life if he had lived, and factor in pain and suffering, this case likely should have settled for well under $5,000,000. The insurance company for the General Contractor paid $20,000,000. They were not willing to risk the $50,000,000 in limits they could potentially lose to a sympathetic jury.
Claims like the one described above are driving up loss ratios and premiums on primary and excess liability policies. This applies not only to general liability but also to professional liability, Directors and Officers, and other liability coverages as well.
Absent some sort of tort reform, including making it illegal to invest in lawsuits or a change in thinking among jurors, this trend will likely continue. Is there a solution? Sound risk management with a strong emphasis on safety is the only way to lower claims frequency. Fewer claims means that it is less likely you will become the victim of a nuclear verdict.
