One of the most challenging and unpredictable issues facing the insurance industry lately is social inflation. This trend describes the “phenomenon of unexpected rising insurance claim costs because of societal trends and views toward litigation.” Increased litigation and higher jury awards are reshaping the landscape for many lines of business. Social inflation and E&O risks are connected as agents must manage policyholder expectations even as claims costs rise, premiums remain high, and denials are issued for claims policyholders expected to be covered.
Learn more about social inflation and E&O risks and how to manage these concerns.
Rising Social Inflation Means Increasing E&O Risks for Agents
The rise in social inflation impacts agents and brokers as they manage both higher claims costs for policyholders and a greater risk of E&O losses as policyholders face denials, expensive premiums, and less coverage. Unforeseen litigation costs can drive up the costs of claims unexpectedly and policyholders may feel they were not advised of their coverage adequately. This could lead to an E&O claim as policyholders are disappointed in claims outcomes.
Social inflation is being driven by many factors, including:
- More frequent nuclear verdicts (jury awards that exceed $10 million)
- The rise of third-party litigation funding where investors fund lawsuits in exchange for a return of the settlement
- Changing public sentiment toward insurance companies means juries may be more likely to side with claimants and issue large punitive verdicts
Agents and brokers need to be proactive about managing this growing E&O exposure.
How to Manage Growing E&O Exposure Related to Social Inflation
Social inflation increases claims severity but it can also cause policyholders to blame their agents when coverage gaps arise or premiums increase unexpectedly. Here’s how agents can help manage this rising E&O exposure:
Explain coverage limits and recommend umbrella insurance or sufficient limits. Rising social inflation is making claims more expensive with jury awards and settlement costs escalating in many venues. Depending on where the policyholder is located, social inflation costs could be devastating if an insured has a liability loss that exceeds their coverage. Coverage limits that were sufficient in recent years could be woefully outdated in today’s market, and agents need to explain this to policyholders. Recommend sufficient limits or umbrella coverage to close this potential E&O risk — and be sure to document the discussion and the policyholder’s decision.
Stay informed about market updates, legal issues, and relevant court cases and jury awards. Agents should be experts in their venues, becoming knowledgeable about recent trials and jury awards. Knowing how the courts are trending is helpful when recommending coverage limits and understanding what level of coverage different policyholders may need in the future as clients who previously were covered for expected losses may now have insufficient limits. If a policyholder has an uninsured or underinsured loss because their agent did not ensure they had sufficient limits for their risk level, they may feel misled and file an E&O claim. Staying updated on current legislation and trends through webinars, blogs, articles, and seminars is a best practice for agents and brokers.
Educate policyholders about challenging hard market conditions. Agents and brokers need to be realistic when presenting coverage and pricing options to policyholders. The hard market has challenged many industries and the reduced capacity and increased costs are a reality many have needed to face in recent years. Educating policyholders about the risks of selecting lower limits to save premium dollars, for example, can be helpful if a policyholder later faces a loss that exceeds their limits. Agents need to clearly explain the risks of underinsurance and document the decisions made by the policyholder. Agents can also offer alternatives, like higher deductibles, self-insured retentions, or improved risk management strategies.
The American Agents Alliance Offers E&O Quotes
California-based agents and brokers can request their free quote for E&O insurance from the American Agents Alliance. Check out our program and rates as you consider your coverage needs.
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