From high-stakes personal injury verdicts to class action lawsuits, judgements resulting in exorbitant awards exceeding $10 million — dubbed nuclear verdicts — are surging to record levels in corporate litigation.
This seismic shift in the legal landscape has transformed underdog plaintiffs into formidable contenders, armed with the slingshot of the law and winning monumental victories against corporate behemoths.
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In just four years, the average jury award among the top 100 U.S. verdicts skyrocketed from $64 million in 2015 to $214 million in 2019. This surge is rooted in a changing societal perspective, where there’s a growing sentiment that big businesses can, and perhaps should, bear the brunt of these substantial financial penalties.
A case in point is the recent verdict in Arizona, where a Maricopa County jury awarded a record-breaking $31.5 million against a hospital system in a birth injury case in November 2023. This case isn’t alone. In August 2021, a major trucking company faced a monumental $1 billion verdict. These jury awards exemplify the escalating stakes in this new era of corporate litigation.
Given the magnitude and potential impact of nuclear verdicts, businesses can’t simply hope for the best. Proactive measures are imperative.
Factors Influencing the Rise of Nuclear Verdicts
Several elements contribute to the rising prevalence of nuclear verdicts:
Eroding Trust in Corporate Giants
Once perceived as invincible pillars of reliability, today’s corporate giants face a starkly different reality. A revealing 2022 Pew Research survey paints a picture of this transformation: 71% of people believe these corporate entities are leading the nation astray. Growing consumer mistrust is a powerful undercurrent that’s tipping the scales in courtrooms, making the ground fertile for nuclear verdicts to take root.
The need for corporations to rebuild trust with stakeholders has become more critical in this environment. Effective risk management and adherence to fiduciary responsibilities are paramount.
Companies must focus on delivering quality products, treating customers fairly and providing adequate protection as key strategies to maintain and regain consumer confidence.
The Double-Edged Sword of Third-Party Litigation Funding
Entering the legal fray, third-party litigation funders, primarily hedge funds and private investment firms, have emerged as key players through third-party litigation funding (TPLF). This dynamic empowers them to fuel lawsuits with critical financial backing for plaintiffs. In return, these funders secure a share of any settlement or judgment, contingent on the lawsuit’s success.
As a result, they drive plaintiffs to aim higher, emboldened by the financial muscle behind them. This dynamic is changing the nature of settlements, with plaintiffs less inclined to settle for less, eyeing a larger share of the potential award.
Psychological Warfare in the Courtroom
In the intricate dance of courtroom litigation, attorneys are increasingly resorting to a range of tactics designed to sway jury opinions. Corporate litigation is no different as psychological strategies like “reptile theory” and “anchoring” are employed by plaintiffs’ attorneys to stir jurors’ emotions.
Reptile theory appeals to the primal, instinctual part of the brain, focusing on community safety and protection to elicit decisions based on survival instincts, rather than pure logic.
Anchoring, on the other hand, involves setting a reference point, usually a significant number, early in the trial. This number then influences the jury’s perception of what is reasonable throughout the proceedings.
When employed effectively, these strategies aim to stir emotions and provoke decisions based on a sense of broader community impact, rather than solely on the specifics of the case at hand, leading to larger jury awards and contributing to a phenomenon known as “social inflation.”
Social inflation refers to the phenomenon where insurers’ claims costs rise at a rate exceeding general economic inflation. The term “social” reflects shifting societal and cultural attitudes toward risk absorption and whose responsibility — insurer’s or the plaintiff’s — it should be.
What Can a Company Do to Mitigate Social Inflation Risk?
With the stakes so high, the urgency for businesses to adapt and respond effectively cannot be overstated. Here are some strategies organizations can adopt to curb their vulnerability:
- Choose the Right Insurance Carrier: It’s crucial to have an insurance carrier with staff capable of navigating difficult claims and possessing deep litigation expertise.
- Proactive Incident Management: Treat each incident as if it could substantially threaten your business. Ensure leadership is well-informed about the key areas impacting the litigation environment.
- Review Claims Regularly: Regularly reviewing your open claim inventory for outliers can help you identify potentially volatile claims early on. Recognizing these potential red flags means you’re always a step ahead, ready to take the necessary actions to mitigate risks.
- Open Communication: Keeping an open dialogue with your insurer and broker, especially concerning problematic claims, allows for a more cohesive and informed strategy. Pooling insights can lead to more effective resolution tactics.
- Ensure Compliance: Adherence to local, state and federal regulations isn’t optional; it’s essential. Regular audits and checks can ensure that businesses remain on the right side of the law, reducing the risk of legal repercussions.
- Establish Safety Protocols: Safety isn’t a one-time task; it’s an ongoing commitment. Companies should prioritize establishing and regularly updating safety protocols. This not only protects employees and customers but also helps in warding off potential lawsuits.
- Avoid Negligent Hiring: The quality of an organization is often reflected in its employees. Proper background checks, training and ongoing evaluation can ensure that the team is skilled, ethical and aligned with the company’s values.
- Deploy Early Intervention: Not all claims are best left for a later resolution. Aggressive action plans can expedite resolutions and potentially curb costs. For claims that cannot be settled promptly, rigorous preparation and defense become paramount.
- Boost Corporate Image: Investing in the community, demonstrating good corporate citizenship and fostering local relationships — in a way that’s genuine, not performative — can make a tangible difference. When juries view a company as an integral, positive force in their community, the odds of them rendering an excessively punitive verdict diminish.
- Secure Proper Coverages: Insurance isn’t just about mitigating financial losses; it’s about peace of mind. Ensuring that a company has the right crisis event coverage in place, tailored to its unique risks, can be invaluable when faced with unforeseen challenges.
Impacts on Industries
The effects of nuclear verdicts and social inflation are felt across various industries. One notable consequence is that large payouts are leading to a reduction in the availability of policy coverage.
This trend makes it increasingly challenging for businesses to secure affordable insurance, particularly in sectors that are most susceptible to these changes.
Manufacturing & Retail Industries
Manufacturers and retailers are increasingly finding themselves at the forefront of litigation risk, especially considering that nuclear verdicts against companies most often stem from products liability, accounting for 37% of cases. This statistic underscores the heightened exposure of these sectors to substantial financial impacts from a single claim.
Products with potential health and safety implications are particularly vulnerable. As a result, insurance providers are re-evaluating their risk assessments and premium calculations to mitigate the financial fallout from these high-stakes claims, which can have far-reaching effects on a company’s financial health and brand reputation.
Healthcare
The healthcare industry is another domain experiencing heightened vulnerability. As patients become more informed and empowered, the readiness to pursue medical malpractice litigation has increased. This trend places a considerable strain on healthcare providers, from individual practitioners to large medical institutions.
The perception of negligence, regardless of the actual clinical outcomes, can trigger expensive legal battles. Insurance carriers in this sector are facing a challenging environment, balancing the need to provide adequate coverage against the escalating risk of costly malpractice claims.
Professional Services
Fields like consulting, accounting and legal services are characterized by the high level of trust and reliance placed on the professionals by their clients. Errors, omissions or perceived wrongful acts can lead to serious financial and reputational damages.
This necessitates specialized insurance coverages that are tailored to the unique risks inherent in these services. Insurance providers are increasingly focused on developing bespoke solutions that cater to the nuanced needs of these professional fields.
The New Era of Nuclear Verdicts
The shadow of nuclear verdicts and social inflation looms large over various industries, signaling a new era of heightened risk and vigilance. Each sector, with its specific vulnerabilities, should be compelled to proactively plan and adapt.
As the landscape of litigation continues to evolve, businesses must not only reevaluate their risk management strategies but also foster a culture of compliance and safety to mitigate potential triggers of these large-scale verdicts.
Author: Lisa A. LaVoie is a Principal at Marsh McLennan Agency (MMA). MMA provides business insurance, employee health and benefits, retirement and wealth, and private client insurance solutions to organizations and individuals, combining the personalized service model of a local consultant with the global resources of the world’s leading professional services firm, Marsh McLennan (NYSE: MMC). For more information, visit marshmma.com.
