Social Inflation, Nuclear Verdicts Causing Concern in Insurance Industry

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By Vanessa Orr

Matt Gracey

Matt Gracey

As jury awards have gotten larger over the past decade, it has had a significant impact on the legal environment, especially those awards being made against corporations and doctors.

One of the reasons for this is social inflation, a term that is used to describe the increasing amount of awards that juries are now giving to plaintiffs as a result of societal trends and views.

“These awards seem to be breaking all records; they can’t be predicted as they are way out of the norms of any actuarial projections or normal trends that the industry could expect,” explained Matt Gracey, managing director, Risk Strategies Danna-Gracey Division.

“We’re seeing more and more of these ‘nuclear’ awards, which is considered anything over $10 million.”

Gracey gives the example of a recent Florida verdict in which the jury came back with a $1 billion award for a traffic accident. “This sent shockwaves through the insurance industry as a result,” he said. “There was another billion-dollar verdict in Georgia in a 2019 sexual assault case, and another $441 million awarded during a 2020 Florida motorcycle accident case.

“These awards have gotten out of control, and this is bleeding over into all sectors of the insurance market,” he added. “It has certainly affected insurance rates for doctors and hospitals throughout Florida.”

There are a number of reasons driving these immense awards, according to Gracey. Some believe that millennial dissatisfaction and their distrust of large corporations are the impetus behind these jury decisions.

“Millennials are very focused on ‘making things right’ in our society and they are against big corporate, big pharma and big medicine,” said Gracey. “They are also concerned about pay disparity in our culture. They see these huge data breach cases in the news, like the ones against Monsanto and Pfizer, which lead to huge class action suits awarded with huge settlements, and it distorts the value of money.”

The fact that caps on noneconomic damages have been thrown out in many states including Florida may also be partly to blame as those caps previously protected against nuclear verdicts.

“When you layer COVID on top of this, it’s going to get even worse,” predicted Gracey. “Approximately 90-95 percent of last year’s cases
concerning COVID have not been heard yet, and while a lot will get thrown out, we’ll probably see even more nuclear verdicts because of COVID dissatisfaction and anger in society.”

Gracey adds that these awards could also be the result of plaintiffs having access to a better plaintiff bar these days, with attorneys working together during trials to solve problems in real time. “They are working with a lot more psychologists, and are using other analytical tools as well,” he said.

“Advertising has ramped up considerably; you’re now seeing many more big billboards from attorneys looking for auto cases or other cases.”

The industry is also seeing an increase in litigation funding, with companies offering to finance plaintiffs and their attorneys for a return of a percentage of the jury award, which means that these cases are extremely well-funded.

As a result, the insurance industry is having a difficult time figuring out pricing.

“In actuarial models, which is how the entire industry sets rates, a billion-dollar judgement sets all projections on their ears,” said Gracey. “Pricing is problematic at best, and this also affects settlements.”

While the majority of medical malpractice cases go away without payment and the rest are usually settled, a very small percentage are
taken to trial. “Because of the potential for nuclear verdicts, settlements are also now affected, and insurance companies are under siege because of that,” said Gracey.

“According to the National Practitioner Data Bank (NPDB), between 2014-20, there has been a 42 percent increase in payments of medical malpractice cases,” he added. “During that time, the U.S. inflation rate rose 15.3 percent. Medical malpractice awards and settlements have been going up much faster than inflation.”

For more information, contact Matt Gracey at (800) 966-2120