Navigating Social Inflation: A Deep Dive into Litigation Funding and Its Impact

Understanding Social Inflation

Social inflation refers to the increase in litigation costs and their impact on insurers' claim payouts, loss ratios, and ultimately, the premiums policyholders pay. This phenomenon is crucial to understand as it affects businesses of all sizes and individuals, particularly those perceived as having 'deep pockets'. The insurance lines most affected include commercial auto, professional liability, product liability, and directors and officers liability. There is also evidence that private-passenger car insurance is beginning to be affected. As litigation costs rise, so do premiums, which are passed on to consumers and can stifle investment in innovation that could create jobs and benefit the economy.

The Role of Litigation Funding

Litigation funding, the practice of third parties financing lawsuits in exchange for a share of any funds the plaintiffs might receive, has become a significant contributor to social inflation. Once widely prohibited, litigation funding has grown as bans have been eroded in recent decades. This practice has clear historical roots and is less complex than other sociological aspects of social inflation, making it a logical starting point for a deeper exploration.

Current State and Future Implications

The current state of litigation finance involves ongoing ethical debates within the legal community. This series, led by IRC Vice President David Corum with support from The Institutes and input from industry experts, aims to provide a comprehensive understanding of litigation funding and its evolution alongside social inflation. By examining the emergence of the practice, its spread from abroad to the United States, and its current status, we can better grasp its impact on the insurance industry and the broader economy.

For readers, understanding social inflation and litigation funding can help in making informed decisions about insurance coverage and risk management. Staying updated on these trends and their implications can be crucial for both individuals and businesses.