Construction contractors, their brokers and agents and their insurance providers can work together to help curb the rising costs caused by social inflation to the construction industry.
Social inflation is a term used by the insurance industry to explain how and why the cost of insurer claims rise faster than the economy’s general inflation rate. As the Insurance Information Institute (Triple I) explains, insurance companies can generally predict and mitigate the costs of general economic inflation. Social inflation, however, is difficult to predict. It causes increases in insurance claims costs, loss ratios—an insurer’s incurred losses expressed as a percentage of premium earned—and ultimately policyholder premiums.
The drivers of social inflation can affect both the insurance and the construction industries. Among those that the Triple I lists are:
In 2019, U.S. nuclear verdicts of $20 million or more increased by more than 300% over the annual average from 2001-2010, according to data cited by Verisk in a 2021 report.
Contributing factors included the American public’s litigiousness and its generally negative perception of big businesses. A Gallup poll published in 2022 determined that just 46% of Americans had a positive view of big business, down 6% from the year before. The 2022 Edelman Trust Barometer, a global survey produced annually since 2000 by Edelman Data & Intelligence, indicates that while large businesses are more trusted than either government or news media, public distrust in business leaders is increasing. The perception among survey respondents that business leaders “are purposely trying to mislead people by saying things they know are false or gross exaggerations” increased by 7 points between the 2021 and 2022 studies, to 63%.
Although the health-care and trucking industries have been among those most affected, nuclear verdicts are also increasing in numbers and award amounts for construction contractors. As early as 2014, a Texas family was awarded $20.8 million in a suit against a Dallas home builder. In 2019, the top 10 jury awards for construction site accidents ranged from $5.5 million to $110.2 million.
Especially when there is injury to a third party, lawsuits against construction contractors often name every subcontractor attached to a contract, even if specific subcontractors had nothing to do with or weren’t even in the vicinity of the injury. In addition, believing that insurance companies — as big businesses — have deep pockets, plaintiffs and their attorneys hold hopes of outsized awards in nuclear verdicts.
Insurers, in response, tend to pay out settlements to avoid litigation, and the cumulative effect adds up. Unchecked, class-action lawsuits and nuclear verdicts appear likely to continue to increase, forcing insurance companies to adjust. As a result, construction contractors—along with other policyholders—will pay more in premiums.
Fortunately, insurers and their construction contractor clients can work together to slow down social inflation.
Construction contractors, agents and brokers and insurance providers can coordinate efforts to combat social inflation and reduce or eliminate nuclear verdicts. Together, we can help keep insurance costs under control.
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