What’s driving social inflation in Canada?

Canadian defence lawyers are seeing an increase in legal advertising and third-party litigation funding, attendees heard last week during Insurance Bureau of Canada’s (IBC) Commercial Insurance Symposium.

Legal advertising refers to marketing efforts, particularly by personal injury and class-action law firms, that may prompt more people to file claims and encourage larger settlements.

Third-party litigation funding is an arrangement in which a third-party company — not the plaintiff’s law firm — agrees to fund all or part of the plaintiff’s costs in a lawsuit. In return, they get a portion of the win or settlement; if the plaintiff loses, the company loses its investment.

Third-party funding arrangements, which are subject to judicial approval in some jurisdictions, can drive up social inflation, says Wendy Moody, a partner with Dentons Canada LLP in Edmonton during a conference session on social inflation and commercial liability.

“What we’re seeing is an increase in legal advertising within Canada,” she says. “We’re also seeing an increase in class actions in terms of the environment and the health space. We’re also seeing an increase in third-party funding.”

Moody notes third-party funding is intended to improve access to justice. “But what we’re actually seeing is that it’s been used more as business for investment. It seems to be used more as a business tool to increase investment and the profits of the independent litigation funders.”

Dentons teamed up with IBC to create a report about emerging industry trends, one of which was social inflation. Moody describes social inflation as “trends of increased insurance costs and liability that outpace economic inflation.”

Looking south

To determine what drives social inflation, the report looked to the U.S., which is seeing an explosion in litigation. The U.S. is reporting the increased use of third-party litigation funding, mass legal advertising, bad faith claims, class actions, and mass litigation (individual claims but the same defendant and cause of action), and nuclear verdicts (claims at or exceeding $10 million).

“We looked at those trends within Canada, and those trends are similar to in the United States, except on a smaller scale,” Moody says, adding that Canada doesn’t see a lot of nuclear verdicts. One reason is that Canadian cases are more often decided by judges and not juries. But the country is seeing an increase in legal advertising and third-party funding.

So, what can be done to help deal with social inflation?

“We can look at pricing,” Moody says.

When reassessing policies in terms of risk, insurers can factor in “social inflation being in Canada,” she says. “We can also look at all of us being more proactive as consumers, or consumers looking at legal advertising in terms of being watchful for legal advertising, which drives up claims, which drives social inflation.”

Regarding third-party funding, it’s an area in need of regulatory reform, Moody says.

“Courts only see those agreements with respect to insolvency and class actions,” she adds. “Otherwise, there are private agreements that are made, and therefore they’re completely unregulated.

“Those social funding agreements do take a large part of the settlement or the award for damages, which would drive up the social inflation…because the damage awards have to be higher. You might have to go to trial in order for you to meet the obligations within the agreement.”