In recent years, the cost of insurance has been steadily rising, largely due to a phenomenon known as “social inflation.” Social inflation refers to the increasing costs of insurance claims due to societal and legal trends. While businesses are heavily impacted, the ripple effects of social inflation touch everyone, from individual policyholders to families. Understanding the factors driving social inflation can shed light on why claim costs are rising and how they affect both businesses and individuals.

1. Litigation Trends and Nuclear Verdicts

One of the primary drivers of social inflation is the rise in litigation, particularly the increase in “nuclear verdicts.” These are jury awards that exceed $10 million and often far surpass reasonable compensation for the damages incurred. As jury verdicts in personal injury, medical malpractice, and liability cases grow larger, insurance companies face higher payout obligations. These massive verdicts create a trickle-down effect, raising the cost of insurance for everyone as insurers seek to cover these expenses. Even individuals involved in minor accidents may experience increased premiums as a result.

2. Shifting Public Attitudes Toward Corporations

Changing public attitudes toward accountability and corporate responsibility also affects social inflation. Many people believe businesses, especially large corporations, should be held financially responsible for societal issues, from workplace safety to environmental concerns. This sentiment often extends to lawsuits, with juries awarding larger sums based on moral or emotional appeals. However, these increased awards don’t just affect businesses; they drive up the cost of insurance premiums for individuals, including home, auto, and health insurance.

3. Third-Party Litigation Funding

Third-party litigation funding is another factor that has fueled social inflation. In this practice, outside investors fund lawsuits in exchange for a share of any eventual settlement or verdict. These investors, eager for a return on their investment, may encourage plaintiffs to pursue more aggressive legal actions, resulting in longer, more costly cases. The increasing prevalence of litigation funding puts additional pressure on the legal system, ultimately driving up insurance costs for individuals and families.

4. Expanding Legal Theories of Liability

Over the years, courts have expanded legal theories of liability, making it easier for plaintiffs to bring lawsuits against a wider range of defendants, from individuals to companies. As the legal system holds more parties responsible for accidents, product defects, or negligence, insurers are forced to cover more claims. This broader application of liability contributes to rising claim costs, which in turn causes higher premiums for everyone, not just businesses.