Social inflation impacts employment litigation losses

Joseph Kelly is a Senior Vice President at Sompo and is the National Practice Leader for Sompo’s Employment Liability, ERISA, and Fidelity products.

In the past, excessive claims losses driven by social inflation have most often been associated with product liability, general commercial liability, commercial auto liability, and medical professional liability claims.[1] But critically, brokers and their clients should be aware that since 2021 social inflation has also significantly driven up damage awards in employment litigation.

A Persistent, Complex Challenge

Social inflation refers to higher, punitive jury awards that eclipse actual economic losses. Because of social inflation, at least in part, damage awards are growing faster than the rate of economic inflation[2].

There is no single cause of social inflation, but several factors appear to be driving the phenomenon, including:

• Anti-corporate sentiment—Public distrust in large businesses has grown in recent years, which may be exacerbated by growing wealth disparity.
• Reptile theory—Drawing on a theory of brain function, plaintiff attorneys stoke fear in jurors, who respond by punishing defendants with large punitive verdicts[3]. [4]
• Increased emphasis on mental health and emotional distress—Growing public awareness and concern about the psychological stress of workplaces may contribute to higher awards for employment litigation.

Third-party litigation funding—where outside investors pay legal costs in return for a portion of a jury award—may also contribute to increasing employment litigation risk.

The Growing Risk of High-Dollar Employment Litigation Losses

Regardless of the exact causes, the cost of employment litigation has risen dramatically since 2021. While the number of cases with damage awards declined between 2016 and 2022—with a slight uptick in 2023—the peak cost for damages increased substantially.

In the years prior to the COVID-19 pandemic, employment litigation awards were more closely aligned with employee compensation. Damages were determined in large part by calculating real and prospective lost salary. Punitive and other exemplary damages represented only 30% of total awards in employment litigation from 2015-2019. By contrast, from 2020-2023, punitive and other exemplary damages represented 62% of total awards, far surpassing compensatory damages.

A case in point: In 2022, a jury awarded two utility employees a record $464.6 million for being forced out of work after reporting sexual harassment and racial language. This award included $24.6 million in compensatory damages and $440 million in punitive damages.[5] Several other cases have seen punitive awards surpassing $100 million, though in some instances, courts have subsequently reduced damages[6]. (For an overview of trends in employment litigation, see this Sompo infographic.)

Mitigating the Growing Risk of Employment Litigation

Employers, with the help of their brokers and insurers, can mitigate employment litigation risk by taking the following steps:

• Review limit adequacy—Given the growing frequency of high-dollar employment litigation damage awards, brokers and their clients should review and consider increasing limits.
• Review and enhance risk mitigation and training operations—Employers should evaluate and strengthen as needed employee compliance training, pay equity auditing, legal review operations, and other programs aimed at mitigating employment litigation risk. Many insurers provide employment risk mitigation services to their clients as a policy benefit.
• Seek early dispute resolutions outside the courtroom—If employment litigation or the threat of litigation arises, employers should work with legal counsel and their insurer to resolve the issue before the case goes to a jury trial.

A complex combination of cultural and economic forces drives social inflation—and likely makes this a long-term, intractable challenge. But this challenge can at least be tempered by a robust risk mitigation program. On this count, brokers have an opportunity to be a valuable and trusted resource for their clients.

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Social inflation impacts employment litigation losses

Brokers and their clients should be aware that since 2021 social inflation has significantly driven up damage awards in employment litigation. A robust risk mitigation program—including employee training, dispute resolution outside the courtroom, and adequate policy limits—can help meet this growing challenge.

[1] Triple-I Blog | Legal System Abuse/Social Inflation Adds Costs and Challenges for US Casualty Insurance: AM Best

[2] sigma 4/2024: Social inflation: litigation costs drive claims inflation | Swiss Re

[3] https://defensecounsel.com/the-reptile-theory-a-new-plaintiffs-strategy-to-secure-large-jury-verdicts/

[4] Tipping the Scales: Measuring the Impact of Social Inflation – Actuarial Review Magazine

[5] Viewpoint: Jury Blasts Defense with a $464.5 Million Nuclear Verdict

[6] PLBH Receives Largest Employment Verdict In American History – Learn How We Fought for Justice for Our Clients Who Where Awarded $464.5 Million – PLBH