March 31, 2023 Social Inflation is Shaking Up Manufacturing

How the rising cost of insurance will impact manufacturing professionals and what they should do to minimize risk.

The increased cost of verdicts surpassing $10 million (nuclear verdicts), and litigation disputes have become more than hot-button topics. This trend of rising insurance costs due to increased litigation, plaintiff-friendly judgments, and skyrocketing jury awards is now known as “social inflation.” Employment and labor disputes were some of the main drivers for increased exposure to risk in 2022. According to Norton Rose Fulbright’s Annual Litigation Trends Survey, respondents say that trend will continue through 2023. Since the average costs of a jury award have nearly tripled in recent years, the threat of liability insurance being out of reach for most manufacturing companies is real. 

Unprecedented settlement costs 

There are many reasons for these sky-high settlement costs. One key reason was that during the pandemic, the judicial system was put on pause. Now that courts are back in session and jurors are meeting in person again, many claims are coming out of that holding pattern and onto the courtroom floor. This is causing a spike in nuclear verdicts since these claims aren’t typically settled during litigation. 

Plaintiff attorneys are also using a strategy known as “Reptile Theory” to elicit a desired response from the jurors. The tactic comes from the book “Reptile: The 2009 Manual of the Plaintiff’s Revolution,” in which authors Don C. Keenan and David Ball advocate appealing to jurors’ “reptile brains.” This is believed to be the part of our brain that governs our survival instincts. The tactic involves depicting the defendant as “scary” to elicit a primal defense response from the jury. The goal is to steer the jury toward a—potentially nuclear—verdict with minimal scrutiny of the facts of the case.  

Increasing the scrutiny of insurance contracts  

Because of the inflation in settlement costs and nuclear verdicts, underwriters and manufacturing companies are reviewing contracts more thoroughly. Underwriters want to see that you have risk mitigation, risk transfer, and hold harmless agreements in your insurance contracts. For manufacturing companies, they want to see supply agreements with all businesses involved in the production of products. Most importantly, they want to see agreements with subcontractors. They want to be sure there is a “wall” protecting you from all outside partners if a subcontracted item or business service is at fault for something going wrong and calls for a lawsuit. 

Reassessing business partnerships 

Since the pandemic, supply chain disruptions have increased the need for more scrutiny of supplier relationships. However, litigation trends require manufacturing companies to carry more insurance than before. This means companies are approaching contracts with more scrutiny. They must also weigh whether it is worth the increase in coverage costs to meet the contractual obligations of insurance contracts. The rise of inflation is expected to continue well into 2023. Supply challenges and disputes are likely to happen more frequently. This means your risk-sharing contracts will be tested in and out of the courtroom.  

Additionally, new developments in product-related class actions are taking over. Plaintiffs are going after a newer class of chemicals and substances called perfluoroalkyl and polyfluoroalkyl substances (PFAS). PFAS are notably named “forever chemicals” because they do not break down and may be present in the blood of 97% of Americans. The substances are the subject of many litigations across the U.S. and are in a wide number of claims including alleged property damage, environmental law regulations, personal injury such as cancer, and more. 

Preparing your business for the continuation of these litigation trends 

A way you can manage risk across your contracts is solidifying who is responsible for what in the contracting process and how that will impact key resources, marketing, legal departments, and IT. You should carefully analyze their processes to make sure you are surrounded by the right resources and people.  

If you want to learn more about minimizing your social inflation risks, contact a Marsh McLennan Agency industry specialist here.  

About the Author:
Shalin Johnson is a Senior Risk Consultant at Marsh McLennan Agency and has over 25 years of experience in the insurance industry. He draws on every facet of that experience daily to provide his clients with sound and timely advice on their risk management programs. He prides himself on his ability to help his clients understand their risk and find the best way to prevent it.

www.Marshmma.com

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