Commercial Liability Insurance Costs Exceed 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 owner’s crime was a patron of Beer Belly’s consumed 11 drinks that pushed his blood alcohol level to at least 0.263. The cartridge drove home, ran a red light and tragically struck an innocent family and killed three people.
Without defending the bar owner, we can still put this grand jury award in context. The largest environmental disaster in US history was the Deep Water Horizon oil spill, for which BP spent an estimated $71 billion over 10 years in cleanup costs and reimbursement. Total Texas state government spending in fiscal year 2021 was $143.2 billion. A jury verdict like this is an example of a term used in the insurance industry Social inflation.
Social inflation describes the rising costs of insuring against certain types of risks, such as those related to employment practices, civil rights, and mass tort claims. This cost increase is being 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 Beer Belly’s Sports Bar.
One of the main drivers of social inflation is the changing social landscape in the United States. In recent decades, there has been a shift in public attitudes toward issues such as discrimination, harassment, and civil rights. As a result, plaintiffs are increasingly willing to take 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 extremely 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 increased social inflation has significant consequences for companies and insurance companies. As the costs of insuring against certain types of risk continue 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 depend on.
Insurance companies could also respond to social inflation by raising premiums and tightening insurance standards, which would make it harder for some businesses to get insurance coverage. This could lead to fewer firms 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 insurance companies to develop customized insurance products that better meet the needs of the business.
Overall, social inflation is a complex and multifaceted issue that has significant implications for businesses, insurers and consumers. As the costs of insuring against certain types of risk continue to rise, it is important for companies to take a proactive approach to managing their risks and for insurers to develop innovative products that can help manage these costs.
Matthew Prickett | R&R insurance services
Commercial insurance consultant