What is social inflation? It is a term that refers to settlement cost inflation due to things like higher verdicts and more liberal interpretations of policy language. For example, where juries may have looked suspiciously at inflated medical bills in the past, they may use them as a starting point today. It is generally seen as a phenomenon that explains these rising costs. This is interesting academically, but it offers no practical insight into what to do about it (other than raise premiums). What people miss as they use social inflation to explain ugly verdicts is that social inflation is a result of interesting and effective innovations by the plaintiff bar. And it has occurred with no response from insurers or the defense bar.
To get to practical insight, some appreciation of the innovations that have driven the change is needed. Over the past decade (and even longer), the plaintiff's bar (with help from medical providers) has consistently and repeatedly pushed beyond traditional ways of litigating to leverage more money from each settlement. While this has occurred, the insurance industry has done, frankly, little to check these advances (if you count complaining, then a lot has been done).
It's best to look through a few examples. Here are three I find to be useful:
1. The "lizard brain" – You may have heard of this by a different name. In a nutshell, this strategy uses shock and fear to turn a jury against the defendant by turning them into a danger. This is interesting because it doesn't focus on damages so much as negligence. It makes the defendant into a menacing figure who should be feared and puts the jurors into the position of defending society. It promotes punishment without asking for punitive damages. The idea of damages takes on a new meaning amplified by disgust over "bad behavior". It uses the amygdala (fight or flight reaction) and stays away from the reasoning part of the brain. What's missing in the defense and resolution? Constant, enduring, meticulous return to facts. Defense won't out-do the plaintiff in plucking the heart strings and playing on the fears of a jury. They have to appeal to their reason. Most defense lawyers dismiss this as "too tedious and boring". Maybe injecting a little sobriety into the theatrics is the point.
2. "Boarding" exaggerated medical charges – Anchoring is a HUGE concept in negotiation. It works (link to our research)….the higher the bills, the higher the settlement. Our research shows how much control the plaintiff attorney can have simply by using the medical bills (whether they are legitimate or not) as the fulcrum for determining damages. This is more than the old "3x meds" formula. Fostering allies in the healthcare arena to pump up their bills works really well. What is missing from the defense end? How about the most logical argument: The charges on a bill don't have anything to do with what the provider ever gets paid by anybody. "Charges" bear no relationship to "reasonable value."
3. Bad faith set up - This has gone from concerning to scary to irrational. The key driver to bad faith may actually be the myriad rules and procedures that claims organizations implement. These procedures focus on tasks over adjusting. The net result is claims folks stop focusing (and thinking) on the developing case and just "check the box" on a task. Plaintiff attorneys have become expert at exploiting this. Oddly, the remedy has been to saddle organizations with more procedures (which got you there in the first place), rather than think about the key decision-making skills needed to understand a case and take action.
While you may think it is shocking to pat the back of the plaintiff attorney, I say it's high time the industry really started to take a few lessons from them. I made this point when I was leading organizations (and we did this to very good effect in managing litigation) and I make it more emphatically now. When you keep getting beat running the same defense, it may be time to rethink your strategy.
If you're interested in discussing social inflation and how to contain personal injury loss costs, please contact me at jimkaiser@casentric.com or 877-433-4141 Ext. 5.
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