Nuclear verdicts and the importance of E&S insurance
The current legal environment and social inflation converge to highlight the essential role of the right insurance.
A July 9, 2024, Wall Street Journal article examined so-called “nuclear” jury verdicts and how this is fueled, in part, by juries’ perception of plaintiffs as the little guys, or the 99% and corporations and insurance companies as the 1% who can and should pay the hefty settlements awarded by the jury.
A “nuclear” verdict is a jury award of $10 million or more. According to the Wall Street Journal, the number of cases that resulted in such a verdict grew by more than 27% in 2023. The rapid increase of these verdicts has made some insurance policies more expensive for companies and more difficult for them to find a carrier with the necessary appetite for risk.
This means that as certain policies become more expensive and harder to find, insurance agents must consider E&S solutions not only for their large insureds but also for their small, more main street businesses.
Understanding the U.S. legal environment and social inflation highlights the importance of E&S insurance in our current business climate.
Legal environment
The U.S. has always had a robust legal environment and it has become increasingly more litigious than in decades past. The result is that for businesses, getting sued isn’t just possible, it’s likely.
Litigation financing has opened the door for more lawsuits as it has reduced financial exposure for lawyers and incentivized attorneys to drive larger settlements. When someone else is funding the case, lawyers don’t have to worry as much about efficiency and ensuring cases are strong; they are playing with someone else’s money.
What this means is that insurance policies need to have broad coverage that anticipates more exposure. It also means that as the legal landscape changes, insurers’ costs are going up. The time it takes to file rate changes on admitted business can far outpace the speed at which carriers need new rates. When those two don’t align, standard market carriers are more likely to exit markets leaving fewer options available to insureds.
Cultural expectations create social inflation
Simply put, a million dollars isn’t what it used to be, and people expect juries to grant judgments that far exceed what they used to. When people don’t view a million dollars as much money, that creates a bad situation for businesses trying to defend themselves.
In the insurance industry, this phenomenon is known as social inflation, or the rising costs of insurance claims due to socioeconomic, legal, and behavioral trends that change over time to drive more and bigger lawsuits.
A few causes of social inflation include the perception that the value of money has changed, public distrust of corporations, and plaintiff-friendly legal decisions.
Media also affects public opinion making large payout verdicts appear to be more common and So juries are more likely to believe that defendants, especially large corporations can pay out much larger sums of money to plaintiffs. The public is desensitized to big numbers.
Similarly, aggressive plaintiff attorneys are savvier and better able to play to jurors’ emotions to make them more likely to rule in favor of the plaintiff, regardless of the facts surrounding the case. Plaintiff attorneys also know the public distrusts larger businesses and corporations, making it easier for them to create sympathy for the plaintiff, regardless of the level of fault on the defendant.
Public opinion has turned on large corporations but it does not mean that small and medium businesses are immune to social inflation. The “nuclear” verdict trend shows no signs of slowing down. Agents must consider E&S products for their traditional and small business clients, lest they be caught in harmful and expensive litigation.
Erich Bublitz is head of excess & surplus at AmTrust Financial. Opinions are the author’s own.
This article originally appeared on AmTrust Financial’s blog, and has been reprinted here with permission.