Agents urged to prepare clients for increased liability claims amid ‘wave’ of social inflation

With a dramatic increase in social inflation – the rising costs of insurance claims when those costs can’t be accounted for by overall inflation rates – industry experts are encouraging agents and advisors to educate their clients about the risks.

“Social inflation is a very big thing that is impacting multiple industries and…driving up insurance costs,” Diane Delaney, executive director of Private Risk Management Association (PRMA) said. “Litigation, higher jury awards, especially in favor of the plaintiff, is now causing a lot of the struggle in our spaces…and many clients don’t understand that.”

“Frankly, it’s naive to think social inflation isn’t significantly impacting the industry. We’re absolutely seeing a perfect storm of social inflation factors colliding with traditional insurance realities,” Dori Einhorn, owner of San Diego-based Einhorn Insurance Agency and a 16-year veteran in the industry added.

Both Delaney and Einhorn said advisors must help make clients aware of these trends and how they can protect themselves against it.

Social inflation ‘save’ of liability claims

Research from Swiss Re Institute found that general liability claims in the U.S. have risen by an annual average of 16% for the last five to six years.

In a report on its findings, the Institute said the U.S. is “in the middle of a wave of social inflation, which is likely to continue unabated.” Additionally, it said the rate of liability claims inflation is “unsustainable” as is.

Delaney said that, in her experience, since the pandemic, not only are Americans quicker to sue companies and each other over simple things, but they’re also suing for far larger amounts than before.

“What we’re finding is that people are winning, and the lawsuits that they’re winning are paying out in ways we’ve never seen it paid before,” she said. “It’s not somebody winning a lawsuit for a million dollars — it’s $22 million, it’s $48 million, and when those lawsuits happen, it is coming from the client’s pocket.”

Michael Ashley Schulman, partner and CIO, Running Point Capital Advisors, said a similar trend is also happening for corporations and professionals across multiple industries. He attributed rollbacks of tort reforms intended to control awards, and the extension or repeal of statutes of limitation, to an increase in class action lawsuits that have “taken the lid off of social inflation” in the country.

“We are seeing this in personal and commercial auto liability, medical malpractice, general business insurance, errors & omissions coverage, cybersecurity insurance and other protections,” he said.

Most clients unaware

Industry professionals who spoke with InsuranceNewsNet said that social inflation is part of the reason for a noticeable increase in insurance premiums, particularly in property and casualty, over the past few years.

However, they said, a major challenge is that many Americans are not aware of the imminent risks they can face on a personal level.

For instance, Delaney discussed the increased risk for younger clients, whom she said are more likely to have to face a lawsuit that could leave them financially devastated for years.

“Today, what we’re finding is it doesn’t matter what you’re worth. That lawsuit jury verdict could be $22 million. So, now this individual has to garnish their future wages because they’ll never be able to afford to pay that [even when] the insurance company is paying the max limits,” she said.

The trouble, Delaney noted, is most people have a mentality of “it will never happen to me.”

“I think that’s what’s really hard to get through for people,” she said. “But if we read and follow what’s happening in the courts across the U.S., it’s happening. Things you don’t ever think you could get sued for are happening, especially when it comes to personal injury.”

Proactive risk management

This is where Einhorn and Delaney said advisors must help clients understand what’s happening and how they can mitigate that risk, such as by renewing their coverages annually, keeping records or even simply being more mindful about the information they put online that could potentially lead to being sued.

“We must help clients understand these complexities,” Einhorn said. “Don’t underestimate the power of straightforward explanations on topics like litigation trends, insurance company financials and the indirect impact of seemingly unrelated incidents… Knowledge is power, and an informed client is less likely to be blindsided.”

She also urged American consumers to be proactive about risk mitigation, adding that even simple steps like installing a home security system can help to add protection.

“A little proactive diligence can make a huge difference should you need to file a claim. Don’t simply assume coverage is absolute. These decisions add up to empowerment against trends outside our control,” Einhorn said.

PRMA is a nonprofit membership organization of more than 3,000 high-level risk
management professionals in the United States. Einhorn Insurance Agency, founded in 2008, is a California-based insurance firm founded in 2008 that specializes in home insurance and dog liability insurance. Swiss Re Institute is the research arm of Swiss Re, a major global insurance and reinsurance company founded in 1863. Running Point Capital Advisors, founded in 2020, is a California-based financial services and estate planning firm.

Rayne Morgan is a content marketing manager with PolicyAdvisor.com and a freelance journalist and copywriter.

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Rayne Morgan is a journalist, copywriter, and editor with over 10 years' combined experience in digital content and print media. You can reach her at [email protected].