Given the number of civil filings made in 2022, personal injury awards are putting pressure on the product liability insurance market as nuclear verdicts become the norm.
In August 2022, a total of 29,635 new civil filings were recorded in the U.S., up 45.8% over the previous month when the number of civil filings totaled 20,319, according to the Transactional Records Access Clearinghouse (TRAC) at Syracuse University. Of those filings, the most frequent category was product liability claims for personal injury, accounting for 25.5% of the civil filings made.
Product liability losses relating to personal injury awards continue to increase, with the average jury verdict award totaling $7.1 million in 2020, according to data from the Insurance Information Institute (Triple I). Given the number of civil filings made last year, these awards are putting pressure on the product liability insurance market as nuclear verdicts become the norm.
“The rise in social inflation is not a new phenomenon, but it's increasingly become a factor in a significant number of jury cases," says Fred Fein, managing partner and U.S. head of product liability, Clyde & Co. “Nuclear verdicts—exceptionally high jury verdicts that exceed what most would consider reasonable—show no sign of slowing down in 2023, and large public companies are especially vulnerable."
The impact of nuclear verdicts is being felt throughout the product liability market in terms of product pricing “and when combined with an uncertain economic outlook, labor and skill shortages, technology advancements, and continued supply chain disruptions, this is creating a challenging market for clients, agents and insurers," says Peter Burns, head of large and complex casualty solutions, The Hartford.
As carriers experience losses, social inflation is exacerbating claim payouts and loss ratios and exhausting coverage limits. “We've seen several accounts with claims that were historically well within the primary limits stretching into the excess layers due to social inflation," says T. J. Collins, senior vice president, casualty broker, Amwins. “One of the results of these nuclear verdicts is the impact on future claims and how carriers might look at a settlement offer."
“For instance, prior to a $20 million claim, a carrier might decide to decline a $3 million settlement and take the claim to trial," Collins explains. “However, once a legal precedent has been made, a carrier might see that $3 million settlement as a safe play, taking the even larger verdict off the table."
While social inflation remains hard to predict and mitigate as societal preferences and the legal landscape change, a few existing trends are unlikely to disappear. “Nuclear verdicts will be driven by many factors in the coming year, including growing corporate mistrust, the growth in third-party litigation funding, social pessimism, savvy plaintiff's lawyers, reptile theory, lottery mentality, actual liability, bad faith and policy limits demand pressures, and fake advertising in the form of plaintiff's lawyers misrepresenting verdicts and settlements," Fein says.
In response, carriers are now charged with managing capacity for such risks, “particularly for risks with outsized exposure to social inflationary pressures," Burns says. “We see social inflation predominantly manifesting in two ways, the first being through incremental increases in the loss costs for 'normal' claims or attritional loss, and secondly through the frequency of severity losses, or, more specifically, nuclear verdicts."
As a result, “carriers are managing limits, re-underwriting their portfolio and requiring risk-adequate pricing in order to address the increasing claim costs associated with social inflation," Burns says.
In addition, “over the past couple years, social inflation has carriers more concerned about the umbrella line than they ever have in recent memory," says Hal Soden Jr., principal, Oliver L. E. Soden Agency. “Here is where we have seen both a big increase in rates and a tightening in excess capacity—umbrellas are simply being used more than they ever have been in the past."
Further, unsettled claims within the court system are creating concerns within the marketplace. “There is a big question of how many of these claims have been stuck in the court systems while the world came to a halt during the coronavirus pandemic," Collins says. “How many claims are out there that are sitting on loss runs with a $10,000 reserve that are going to blow up into limits losses once they get their day in court? I think this is providing some carriers with a 'false sense of profitability' in their rating models as the tails on these claims continues to lengthen."
While social inflation is affecting the product liability marketplace, litigation is expected to continue to grow even as “new technologies are presenting emerging risks in product liability cases," Burns says.
“While this technology offers expanded opportunities for communication, as well as for monitoring and controlling devices and systems remotely, the interconnectivity increases the potential risk of hacking and cyber-related incidents," Burns adds. “Ultimately, the new technology may lead to fewer losses if insureds are able to monitor appropriately in real time to mitigate or eliminate exposure to loss."
Olivia Overman is IA content editor.