What is Social Inflation and Why Does it Affect my Business?

Commercial liability insurance costs are outpacing nominal inflation, but why?

In December 2021 a jury in Corpus Christi Texas found the owner of Beer Belly’s Sports Bar in violation of Texas Dram Shop laws and liable for a historic $301 billion in mostly punitive damages.

The bar owners crime was a patron of Beer Belly’s consumed 11 drinks pushing his blood alcohol level up to at least .263. The patron drove home, ran a red light and tragically hit an innocent family killing three people.

Without defending the bar owner, we can still put this large jury award in context. The largest environmental disaster in US history was the Deep Water Horizon oil spill, which BP spent an estimated $71 billion over 10 years in clean up costs and and restitution. The total expenditure of the Texas state government in fiscal year 2021 was $143.2 billion. A jury verdict such as this is an example of a term used in the insurance industry Social Inflation.

Social inflation describes the rising cost of insuring against certain types of risks, such as those related to employment practices, civil rights, and mass tort claims. This increase in costs is driven by a variety of factors, including changes in social attitudes, the increasing prevalence of class-action lawsuits, and the increasing willingness of plaintiffs to seek large settlements such as the Beer Belly’s Sports Bar example.

One of the main drivers of social inflation is the changing social landscape in the United States. Over the past several decades, there has been a shift in public attitudes towards issues such as discrimination, harassment, and civil rights. As a result, plaintiffs are increasingly willing to pursue legal action in cases where they believe their rights have been violated. This has led to an increase in the number of class-action lawsuits, which can be incredibly costly for companies to defend.

Another factor contributing to social inflation is the increased use of technology in the legal process. The availability of online legal research tools, combined with the proliferation of social media and other online platforms, has made it easier for plaintiffs to gather evidence and build their cases. This has led to a significant increase in the number of mass tort claims, which can be extremely expensive for companies to defend.

The rise in social inflation has significant implications for companies and insurers. As the cost of insuring against certain types of risks continues to rise, companies may be forced to pass these costs on to consumers in the form of higher prices for goods and services. This can lead to increased costs for businesses, as well as for consumers, who may be forced to pay more for the products and services they rely on.

Insurances companies also could respond to social inflation by raising premiums and tightening underwriting standards, which would make it more difficult for some companies to obtain insurance coverage. This could lead to fewer businesses entering the market, which would ultimately have a negative impact on the economy as a whole.

To mitigate the effects of social inflation, companies can take a proactive approach to managing their risks. This may involve implementing risk management programs, investing in training and education for employees, and working with insurers to develop tailored insurance products that better meet the needs of the business.

Overall, social inflation is a complex and multi-faceted issue that has significant implications for companies, insurers, and consumers. As the cost of insuring against certain types of risks continues to rise, it is important for businesses to take a proactive approach to managing their risks, and for insurers to develop innovative products that can help manage these costs.