Social inflation in the U.S. and globally
Nuclear verdicts are rare in Canada but growing in Australia and other countries, partly due to litigation funding.
The term “social inflation” describes rising insurance losses due to the growing emergence of litigation funders, higher jury awards, more liberal workers’ compensation claims, legislated compensation increases and new tort and negligence concepts — a phenomenon especially prevalent in the U.S. but which is now growing globally.
According to Cornerstone Research, in the U.S., alone, in 2019, there were 74 class action settlements totaling $2 billion and four mega-settlements greater than $100 million, representing 45% of all settlement dollars (but only 5% of all cases).
Consumer-facing industries, such as retail, healthcare, automotive, insurance, pharmaceutical and financial services, are often the most impacted by this trend, although many other industries are increasingly susceptible. Examples within the liability arena include truck accidents, sexual assaults, opioids, product liability, umbrella and excess liability, especially for large corporate risks where the largest limits are offered.
For instance, over the past few years, trucking firms involved in an accident with little apparent negligence have suffered hefty verdicts of $30 million to $100 million because of injuries sustained by other parties. Such an amount burns through the primary liability layer (typically $10 million or less) and bleeds into the umbrella and excess liability towers as well.
Likewise, the median settlement amount of the top 50 U.S. verdicts from 2014 to 2018 nearly doubled from $28 million to $54 million, although a few verdicts topped $1 billion. For example, the $2 billion verdict (later reduced to $87 million) against Monsanto’s Roundup product for alleged exposure to carcinogens leading to Non-Hodgkins lymphoma, and the $8 billion settlement (later reduced to $6.8 million) against the Johnson & Johnson’s (J&J) antipsychotic drug, Risperdal, for unwanted side effects like breast growth in adolescent males.
Although these award settlements were slashed on appeal, Monsanto’s parent company, Bayer, as reported in the press, is attempting to resolve all Glysophate cases via a global settlement; J&J has also been involved in other billion-dollar settlements.
Class actions outside the U.S.
Social inflation is a jury-driven phenomenon primarily in the U.S. As noted in the July 2020 Allianz Global Corporate & Specialty report, “Collective actions and litigation funding and the impact on securities claims: A global snapshot,” it is rare in Canada because civil trials of personal injury actions seldom proceed to a jury. Canadian companies may be impacted by social inflation in cross-border claims from the U.S., in which a company targeted in the U.S. sees its Canadian affiliate also named in the lawsuit, an activity that is increasing. For example, 2019 saw 14 cases (four more than 2018) and just one less than the top year of 2011.
At the same time, there has been a steep change in Europe’s litigation industry. Litigation funders, who first rose to prominence in Australia and who are already prevalent in North America, are combining with new collective action options and forming a growing trend of collective redress. The net result is increased liability exposure for companies as the hurdles for European consumers to embark on this type of action are lowered.
There has also been notable litigation funding growth elsewhere, such as in Saudi Arabia and South Africa. Growth has also been experienced in other EU countries like the Netherlands and Germany.
Impact on claims
Social inflation factors exacerbate all sorts of shareholder actions. For casualty underwriters, keeping on top of social inflation due to the long-tail nature of claims is challenging. Claims are occurring in the present, as well as lingering or long-developing issues that demand consideration.
AGCS has seen an uptick in the value of product liability claims that can result in payments that are astronomical compared to what they were before litigation funding was widespread.
The increasing sophistication of the plaintiffs’ bar, including expanded use of jury consultants and psychologists specializing in group dynamics, has influenced the size of the settlements that juries are willing to award.
Impact of coronavirus on court dockets
In the wake of the coronavirus pandemic, court closures and the lack of a “date certain” reopening is impacting the legal environment. With attorneys working and conducting depositions remotely, the legal process has become more complex and slower.
Plaintiffs realize that, even if their case makes it to court, it could be two years or more before it is tried before a jury. Others worry that jury trials won’t be feasible as long as social-distancing rules apply. Although some jurisdictions have recently begun trying cases, it looks as though there will be a significant delay before court business is “back to normal.”
As of the date of publication, we have seen no blockbuster personal injury trials since the beginning of March, and firm trial dates have been pushed out to 2021 in many cases, so we don’t yet know whether coronavirus will stem the tide of social inflation.
It could be that plaintiffs realize that when courts reconvene, and some jurors are out of work or have been laid-off, they won’t be as prone to return outlandish awards. As a result, plaintiffs might be much more willing than before to settle out of court because of impatience or cash-flow issues. We do see the beginnings of a trend in that direction.
Larry Crotser (lcrotser@aic-allianz.com) is the regional head of key case management, North America at Allianz Global Corporate & Specialty (AGCS). Based in Chicago, Crotser has trial experience as a liability defense litigation attorney. He has been admitted to practice law in Illinois, New York and New Jersey, and is a fully qualified solicitor in England and Wales.
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