As an insurance buyer, you may have heard the term “social inflation” used by your agent to explain the factors driving up the cost of coverage in today’s market. In general, social inflation refers to the rising costs of insurance claims that are a result of societal trends. Trends such as increased litigation, broad insurance policy interpretation, plaintiff-friendly legal decisions and larger jury awards all drive social inflation in the insurance space.

It’s important for businesses to understand what’s driving social inflation. Doing so provides you with a better understanding of the issues that affect your insurance costs. It also helps you take proactive steps to protect your business in the face of litigation.

Increased Litigation: One of the factors driving social inflation has to do with increased litigation or, more specifically, litigation funding. Litigation funding is when a third party provides resources to attorneys to finance a lawsuit. In exchange, the third party receives a portion of the settlement. In the past, the steep cost of attorney fees often scared plaintiffs away from taking a claim to trial. Through litigation funding, most or all of the costs associated with litigation are covered by a third party, which has increased the volume of cases being pursued.

Tort Reform: Tort reform refers to laws that are designed to reduce litigation, prevent frivolous lawsuits and preserve laws that prevent abusive practices against businesses. In recent years, states have modified tort reforms or challenged them as unconstitutional. Opponents believe tort reforms lower settlements to the point where attorneys are less likely to take on new cases and help victims get justice for their injuries or other damages. Should tort reform continue to erode, there could be fewer restrictions on punitive and noneconomic damages, statutes of limitations and contingency fees—all of which can drive up the cost of claims and exacerbate social inflation.

Plaintiff-friendly Legal Decisions and Large Jury Rewards: The overall public sentiment toward large businesses and corporations is deteriorating, and anti-corporate culture is more prevalent than ever. A number of factors are contributing to this increasing distrust, including highly publicized issues related to the mishandling of personal data and social campaigns like the #MeToo and Occupy Wall Street movements. This has had a considerable impact on how businesses are perceived by a jury in court, and organizations are held to a high standard for issues related to the way they conduct their business.

While it’s impossible to completely eliminate the threat of litigation, it’s important to take the proper steps to ensure your business is prepared for a lawsuit. This is increasingly crucial as social inflation continues to drive up the cost of claims. The following are some ways your organization can protect itself:

Consider purchasing an umbrella policy: Commercial umbrella insurance provides financial protection above the limits of your organization’s other liability policies.

Protect yourself from employment practices claims: To protect your business, review your employee handbook regularly and ensure policies related to sexual harassment, workplace violence and similar issues are communicated effectively. In addition, you may want to consider purchasing standalone employment practices liability insurance. Social inflation can introduce a level of uncertainty when it comes to your risk management and claims prevention practices. To ensure your business is ready for any issue that may arise, contact your local independent agent.

Ethan Johnson works at Chalmers Insurance and has over 19 years of experience in the industry. A USM graduate, he is passionate about helping people and giving back to his local community of Gorham, where he lives with his family.