Have you heard of social inflation? Learn about the trend and why it matters for businesses, consumers, and the rule of law.

The term “social inflation” speaks to a trend of dramatic increases in costs and verdicts linked to civil litigation that surpass general economic inflation without a corresponding change in legal or factual bases to support them. While social inflation’s causes are complex, its harmful consequences are already affecting businesses, consumers, and the rule of law. The term may have originated in the insurance industry, but it describes a significant threat to all civil litigants. Many have written about the threat social inflation poses, and DRI is actively pursuing the best defense strategies to combat it.

Here’s how social inflation is impacting your practice—and how you can address it.

What’s the state of social inflation today?

The U.S. Chamber of Commerce’s Institute for Legal Reform determined that U.S. tort costs, which hit about $443 billion during 2020, were equivalent to 2.1 percent of gross domestic product (GDP). Costs had steadily increased at an average annual rate of 6 percent between 2016 and 2020, exceeding the growth in inflation and GDP over the same period.

Additionally, the Institute for Legal Reform discovered that for jury verdicts of $10 million or more, the median verdicts increased by 27.5 percent between 2010 and 2019. This also far surpassed inflation of 17.2 percent over the same timeframe.

What causes it?

Several factors contribute to the trend. These include growing litigation involvement by third parties, either outside funders or nonlawyer firm owners. Critics claim litigation funding negatively influences civil litigation by significantly rebalancing credit risk. It could also exert pressure on borrowers by demanding a significant share of a settlement or judgment.

Other causes contributing to the overall issue of social inflation include the rise of “nuclear verdicts,” which are a disproportionally high jury award beyond a typical or rational damage estimate; the use of scare tactics; and attorney advertising, not only to recruit clients, but also to influence potential jurors through saturation marketing through third-party funding.

How will social inflation affect my legal practice?

While advocates of nonlawyer ownership of firms claim it improves overall access to justice, decreases legal costs, and addresses economic and ethical challenges that lawyers face, the facts do not support these claims to date. The reality of this trend is that “alternative legal service providers” and third-party litigation funders are now operating and selling directly to the public without ethical oversight or regulation. While lawyers admitted to the bar follow strict ethical standards, including Model Rule of Professional Conduct 5.4, which prohibits nonlawyer ownership of law firms, there is little regulation of these alternative service providers.

This change in the legal marketplace is outpacing regulation. The District of Columbia and Arizona have explicitly allowed nonlawyer ownership of firms in limited forms. Other states have considered the issue but have not made an official ruling on whether to permit nonlawyer ownership. At least three states have considered and rejected the issue.

Other aspects of social inflation also affect our practices. Outside funding of ever-increasing advertising and “informercials” poison the perceptions of would-be jurors, while such money also changes the dynamic in resolving cases.

A growing, dissonant patchwork of rules and statutes governs these practices and affects our practices.

What can I do to address this now?

While awareness of this issue is important, a response is needed. Read our full paper, “Social Inflation: Observations and Solutions to Support the Right to Fair and Impartial Dispute Resolution,” to learn more about the trend and how you can act against it by demanding transparency, advocating for systemic change, and spreading the word about this important issue.

We hope this information encourages you to learn more and share with others in your network who should be aware of the trend. DRI’s Center for Law and Public Policy continually monitors issues like this to defend justice and fairness through the promotion of an equitable judicial system, protect the interests of business and individuals in the legal system, and more.

Bringing about significant change will require collaboration between individuals, businesses, and counsel, all of whom have a role to play in achieving reasonable reform to flatten the curve of social inflation.