What does social inflation mean for manufacturers?
Shalin Johnson
The increased cost of nuclear verdicts and litigation disputes have become more than hot-button topics. They are some of the greatest drivers in the increase of general liability, umbrella, and excess coverage pricing. Since the average costs of a jury award have nearly tripled in recent years, from $64 million to $214 million, it’s posing a threat of liability insurance being out of reach for most manufacturing companies. This trend of rising insurance costs due to increased litigation, plaintiff-friendly judgments, and skyrocketing jury awards is what’s now known as “social inflation.”
Unprecedented settlement costs
There are many reasons for these sky-high settlement costs. One key reason for this was that during the pandemic, the judicial system was put on pause. Now that courts are back in session and jurors are meeting in person again, many claims are coming out of that holding pattern and onto the courtroom floor. This caused a spike in nuclear verdicts since these claims aren’t typically settled during litigation.
Plaintiff attorneys are also using a strategy known as "Reptile Theory” to elicit a desired response from jurors. The tactic comes from the book “Reptile: The 2009 Manual of the Plaintiff’s Revolution,” in which authors Don C. Keenan and David Ball advocate appealing to jurors’ “reptile brains.” This is believed to be the part of our brain that governs our survival instincts. The tactic involves depicting the defendant as “scary” to elicit a primal defense response from the jury. The goal is to steer the jury toward a verdict with minimal scrutiny of the facts of the case.
How does this strategy potentially lead to nuclear verdicts? Writing for The National Law Review, Christina Marinakis, JD, PsyD, sums it up. “In essence, the Reptile Approach subtly suggests to jurors that they should award compensatory damages to punish the defendant and deter others,” she explains. “Attorneys using this strategy may even suggest that without a ‘proper’ verdict and an ‘appropriate’ punishment, the danger to the community will be increased.” In other words, nuclear verdicts could be used, justified or not, to “make an example” of an organization to keep the same thing from happening again.
Increasing the scrutiny of insurance contracts
Because of the inflation in settlement costs and nuclear verdicts, underwriters and manufacturing companies are reviewing contracts more thoroughly. Underwriters want to see that you have risk mitigation, risk transfer, and hold harmless agreements in your insurance contracts. For manufacturing companies, they want to see supply agreements with all businesses involved in the production of products. Most importantly, they want to see agreements with subcontractors. They want to be sure there is a “wall” protecting you from all outside partners if a subcontracted item or business service is at fault for something going wrong and calls for a lawsuit.
Reassessing business partnerships
Like the underwriters, manufacturing companies across all industries are scrutinizing and reassessing their business relationships with customers and other parties involved. Because of the litigious nature of today’s world and the astronomical settlements companies must pay, you must carry more insurance than before. This means companies are looking at everyone involved in producing their products and deciding if they are worth the increase in coverage costs to meet the contractual obligations of insurance contracts.
Preparing your business for the continuation of litigation seasons
It can be daunting to think about the “what ifs,” but having a trusted broker behind your company can make a world of difference. Marsh McLennan Agency (MMA) has access to solutions and tools to support your business through the unexpected. MMA’s risk mapping and benchmarking solutions give you a bird's eye view of where you land on the scale and help you adjust accordingly. Liability does not end at the policy limit, so planning for unexpected losses and lawsuits is important.
With strong carrier partnerships, we place you with insurance companies that know and, more importantly, want your business.
Download the MMA Business Insurance Trends Report to learn more and contact MMA representative today.
