Social Inflation and Litigation Funding: Understanding the Impact on Nuclear Verdicts

The insurance industry has seen a recent trend of increased costs for liability insurance, known as social inflation. Social inflation is driven by factors such as increased litigation, higher awards and settlements, and changes in social attitudes towards corporate responsibility. This trend has led to higher insurance premiums and more frequent claims, making it more difficult for companies to predict and manage their potential liability exposure.

One of the consequences of social inflation is the rise of "nuclear verdicts," which are large jury awards or settlements in civil litigation. These types of verdicts can have a significant impact on an insurance company's bottom line, as well as their ability to provide coverage for future risks.

Another factor that has contributed to the occurrence of nuclear verdicts is litigation funding. Litigation funding is the practice of providing financial support to plaintiffs or defendants in a legal case in exchange for a share of any settlement or judgment. This funding can come from various sources, including private equity firms, hedge funds, and individuals. The involvement of third-party funders can increase the stakes of a case and provide plaintiffs with the resources to pursue larger and more complex lawsuits, which can lead to larger awards and settlements.

The size of nuclear verdicts can strain the financial resources of insurance companies, as well as their ability to pay out claims. They can also lead to increased premiums for policyholders, as insurance companies pass on the cost of large settlements and judgments to their customers. Additionally, the frequency of nuclear verdicts has been increasing, which can lead to increased uncertainty for claims departments, as they struggle to predict and manage their potential liability exposure.

In conclusion, social inflation and litigation funding have contributed to the occurrence of nuclear verdicts, which are causing havoc for claims departments. The size and frequency of these verdicts are making it more difficult for claims departments to predict and manage potential liability exposure, increasing the likelihood of disputes, straining financial resources, and leading to uncertainty in the industry. Insurance companies must understand and address these trends in order to effectively manage their risk exposure and ensure the long-term sustainability of their business.