Recent conversations in the corporate law environment have been increasingly peppered with a term that might not have been as familiar to most until recently: “Social Inflation”. But why is this now part of the dialogues among legal professionals across the globe, and why should it matter to the corporate world?
The term “social inflation” has seen a resurgence, less due to its novelty, but more because of a considerable rise in its implications. It refers to a trend of substantial increases in costs and verdicts linked to civil litigation that outpace general economic inflation. What stands out about social inflation, however, is the fact that these heightened costs do not correlate with a change in either the legal or factual bases to support them(JD Supra).
Gone are times limited to simple calculations done comparing costs of similar instances in the past. The shifting societal attitude towards litigation has become more expensive with a significant impact on businesses, consumers, and indeed, the rule of law. The implications for corporations and their legal representatives are far-reaching, vital to note in today’s rapidly changing legal landscape.
- The rise of social inflation developments test the resilience of companies’ risk management strategies. Firms must invest more resources in updating and expanding their strategies to better tackle and anticipate the possibility of escalating litigation costs.
- The lack of correlation between the bases of legal judgments and their magnified costs disrupts forecasting models, making financial planning more unpredictable. This new factor compels businesses to reassess the way they manage and account for potential legal exposures.
- Social inflation also impacts insurance rates, and indeed the insurance industry as a whole. With more substantial verdicts arising from civil litigation, insurance companies bear the burden, leading to increased premiums and potential policy changes to mitigate the risk.
We are creatures of habit and heavyweight institutions such as courts or corporations tend to embrace change slowly. But in the face of these profound shifts, the legal world and the companies navigating within it have to adapt and innovate. Processing the realities of social inflation and how they will influence corporate operation and litigation is a necessary step toward a productive future.