Social Inflation – Legal System Abuse: Observations and Solutions to Support the Right to Fair and Impartial Dispute Resolution

The term “social inflation” describes a trend of dramatic increases in costs and verdicts associated with civil litigation that outpaces general economic inflation without significant change in legal or factual bases to support it.¹ Social inflation’s causes are complex. Its damaging consequences are palpable for businesses, consumers, and the rule of law.

Real data proves it exists. The U.S. Chamber of Commerce’s Institute for Legal Reform finds that U.S. tort costs, which reached about $443 billion in 2020, were equivalent to 2.1 percent of GDP. Costs had steadily increased at an average annual rate of six percent from 2016 to 2020, outpacing the growth in inflation and GDP over the same period.² The Institute for Legal Reform found that for jury verdicts of $10 million or more, the median verdicts increased by 27.5 percent from 2010 to 2019, far outstripping inflation of 17.2 percent over the same period.³

Understandably, then, businesses and consumers alike have felt the effects of social inflation. Certain sectors have more openly decried its impact, particularly insurance, trucking, the retail industry, drug and medical device makers, and other product manufacturers. The upward spiral in costs and very large verdicts affect a broad scope of businesses, fueling the concern. Simultaneously, polling shows a continuing downward slide in public trust of the judiciary⁴ and business.⁵

What we could not foresee three years ago was the coming cataclysm of the COVID-19 pandemic and multiple consequential social and political upheavals. These turbulent times are revealing negative shifts in the perceptions of business defendants among jury-eligible people. The idea of a level playing field for business defendants is threatened.

Social inflation has many causes. One cause is growing litigation involvement by third parties, either outside funders or nonlawyer firm owners. Litigation funding is a multibillion-dollar industry. Critics claim that it negatively affects civil litigation by significantly rebalancing credit risk. It may also exert pressure on borrowers by exacting a significant portion of a settlement or judgment. While the data suggest trends, the influence on specific litigation is unknown, primarily due to a lack of transparency. These arrangements certainly have an influence on setting a settlement floor. Some courts have even considered whether these arrangements constitute usury.⁶

Litigation funding drives up the length, cost, and outcomes in civil cases. It also pays for advertising to drive up litigation.

The lack of transparency in funding arrangements and the fear of outside influence on parties are drawing the attention of the American Bar Association, as well as courts, rules committees, and legislatures.