Center for America

Speaker's Resource: 3. Lawsuit Abuse Costs, p1

 

 

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Key Reference Citations (KRC)

 

Chapter 3:

Lawsuit Abuse Costs

 

 

Introduction

 

The amounts awarded in civil liability cases are often shocking, and yet they represent only a fraction of the total tort costs in the United States. In fact, awards and settlements are less than half of total tort costs, according to the most recent report by Tillinghast-Towers Perrin.  In 2003, total tort costs were $246 billion, and that figure reflects only direct costs such as amounts paid to plaintiffs by defendants (or their insurers), defense costs, or administrative expenses.

  • These figures do not reflect any indirect costs including those caused by layoffs and bankruptcies, lost opportunity costs, and the costs of safety precautions which are not tracked or measured.

As long as tort costs continue to run rampant, the U.S. healthcare system will remain in jeopardy, products and services which might save lives will not be developed or offered in U.S. markets, states without legal reform will remain at a competitive disadvantage, there will be fewer jobs and higher taxes for many Americans, and the U.S. participation in the global economy will be limited.

 

Note:  Costs related to healthcare will be found in Chapter 4: The Healthcare Crisis.

 

Fast Facts

  • “To put the annual social cost of the U.S. tort system in perspective, it is equivalent to an eight-percent tax on consumption, a 13-percent tax on wages, the combined annual output of all six New England states (Connecticut, Maine, Massachusetts, New Hampshire, Rhode Island, and Vermont), or the total annual sales of the U.S. restaurant industry.” (KRC: Pacific Research Institute, "JACKPOT JUSTICE…”  p. 28)

  • Of the 25 tort reforms that we examine, the statistical analysis identifies 18 reforms to state civil-justice systems that significantly reduced tort losses and tort insurance premiums from 1996 through 2006.  (KRC: TLT Executive Summary)

  • “The annual price tag, or “tort tax,” for a family of four in terms of costs and forgone benefits is $9,827. “(KRC: Pacific Research Institute, "JACKPOT JUSTICE…”  p. 28)  Note:  Includes both direct AND indirect costs.

  • According to the Pacific Research Institute, excessive tort costs in the United States due to lawsuit abuse total $589 billion each year.  (KRC: McQuillan, Abramyan, and Archie, Jackpot Justice, p. 34)

  • “Tort costs in the U.S. far surpass those of the other countries [we examined], partly a result of different health care systems and legal systems. However, this difference may raise the issue of competitiveness of U.S. products in a global marketplace’.” (KRC:  Pacific Research Institute, "JACKPOT JUSTICE...” p.32. quoting Steve Lowe, www.towersperrin.com, Releases/2006/20060313)

  •  “Not all tort costs, therefore, are ‘excessive’ or ‘wasteful’.  Some tort costs are necessary as part of a thriving free-enterprise economy operating under the rule of law.”  (KRC:  Pacific Research Institute, "JACKPOT JUSTICE...” p.30)

  • “Only 22 cents of every tort-cost dollar go to injured parties to compensate them for actual economic losses. Twenty–four cents go to noneconomic payments, including punitive damages. The U.S. tort system returns less than 50 cents of every tort-cost dollar to injured claimants, those it was designed to help.” (KRC: Pacific Research Institute, "JACKPOT JUSTICE…”  p. 15)

  • “The U.S. tort system returns less than 50 cents of every tort-cost dollar to injured claimants, those it was designed to help.” (KRC: Pacific Research Institute, "JACKPOT JUSTICE…”  p.15)

  • “Every product we sold – for example, lawn mowers, ladders, hammers – there’s a dollar amount built into those products from the manufacturers [to pay for liability and legal costs]. (Bernie Marcus, Co-founder of The Home Depot, “JACKPOT JUSTICE…” p. 13)

  • For some categories of tort cases, specific reforms cut payouts by more than 50 percent.  The cumulative effect of reforms across all tort categories is a 47-percent reduction in losses and a 16-percent reduction in insurance premiums for consumers.  (KRC: TLT, Introduction, page 9)

  • “The stock market does an excellent job of accounting for the long-term costs of tort litigation.” (KRC:  Pacific Research Institute, "JACKPOT JUSTICE...” p.29]

  • Tort costs grew by 5.4% in 2003 reaching a record $246 billion; that’s $845 per person, or $35 per person more than 2002. (KRC:  Tillinghast, "... 2004 Update", p. 2)  

  • “Even under conservative estimates, the American tort system is the most expensive in the world, and presents costs greater than twice that of the average cost of liability systems in other industrialized nations.” (KRC: Council of Economic Advisors, “Who Pays For….”, p. 1-2)

  • “While it is impossible to accurately predict future increases in tort costs, it does seem reasonable to assume that without sweeping structural changes to the U.S. tort system, annual increases will be in the 5% to 8% range for the next several years.  At this rate of increase, tort costs could approach $1,000 per U.S. citizen by 2006 – representing a new quadruple-digit benchmark.” (KRC:  Tillinghast, "... 2004 Update", p. 2)  

  • We spend more than twice as much on our tort system in America as we do on new cars. (CFA,  Fast Facts on the Litigation Lottery, 2005, p. 1)

  • “Tort costs not only distort the competitive standing of states – the magnitude of tort costs is so extreme that they are beginning to affect the willingness of exporters to do business in the United States”.  (KRC: Hantler, “Seven Myths…”, p. 6)

  • To gain an historical perspective consider: “A 1988 survey by the Conference Board of more than 2,000 chief executive officers found that 47 percent of manufacturers have withdrawn products because of fear of litigation, 89 and 25 percent have discontinued some product research for that reason”. (KRC: Hantler, “Seven Myths…”, p.  )

  • “If companies aren't making profits, or if they have to spend a lot of money on legal expenses, they have less to give back to the community. So do their shareholders. So do their workers. When companies are doing well, the community does well.”  (KRC: Marcus, “Solutions for the Litigation….” citing Jack Welch)

  • “Lawsuits can wreak havoc on a company’s share value, reputation, and even business model…The threat of a lawsuit and the related media damage can present a no-win situation for companies: either settle a false claim to end the bad publicity or fight on the facts but get tarnished in public anyway.”  (KRC:  Hantler, “Minimizing the Damage From Lawsuits”)

  • “Lawsuits are no longer tried exclusively in the courtroom; today they’re also tried in the court of public opinion, where the messages are that business puts profits ahead of safety and fair dealing, and large damage awards are the only way to get business to act responsibly.”  (KRC:  Hantler, “New Core Competencies”, p 19)

  • To put this in perspective, an additional tort reform in California would create more than 152,000 jobs, and an additional tort in New York would create more than 87,000 jobs.  (Lisa Kimmel, The Effect of Tort Reform on Economic Growth (Berkeley: Economics Ph.D. Dissertation at the University of California, Berkeley, 2001)

     

Direct Costs of Lawsuit Abuse

  • In 2003, the direct costs of the U.S. tort system – losses, defense costs, administrative expenses – added up to $246 billion or 2.23% of GDP. (KRC:  Tillinghast, "... 2004 Update", p. 2, 5)  

  • [S]mall business alone pays $88 billion a year to cover the cost of America’s tort system – money that could be used to hire additional workers, expand productivity and improve employee benefits. (www.legalrefornnow.com, citing a study commissioned for the U.S. Chamber Institute for Legal Reform, 2004)

  • “The overall cost of this “tort tax” on our economy over the next 10 years will be more than $3.6 trillion, assuming tort costs increase at their 30 year trend. If tort costs increase at their 2001 pace, the ten-year cost of the tort tax will be over $4.8 trillion – almost triple the size of the 2001 and 2003 Bush tax cuts combined. “ (KRC: Manhattan Institute, Trial Lawyers, Inc., p. 5)

  • “Incredibly, what Americans spend on lawsuits could pay for all the following Government programs combined: “Education, training, and employment; general science, space and technology; conservation and land management; pollution control and abatement; disaster relief and insurance; community development; Federal law enforcement and administration of justice; and unemployment compensation.” (KRC: Hantler, “Seven Myths…” p. 6, quoting Council of Economic Advisers, Who Pays For Tort Liability Claims? An Economic Analysis of The U.S. Tort Liability System April, 2002, note 31, p. 17.)

  • “If left unchecked, tort costs will ultimately damage the competitive standing of the U.S. economy, much as states with lax systems of civil justice are losing business to states that have passed lawsuit reform.” (KRC: Hantler, “Seven Myths…” p.7)

  • “To sum up, runaway tort costs – costing every American some $809 a year  [2002] – harm the business climate of states, enforce a kind of “tort protectionism” that isolates parts of the U.S. economy from world trade, reduce access and affordability in health care, and kill goods that promote safety and human health”. (KRC: Hantler, “Seven Myths…” p.  )

  • According to Tillinghast­­-Towers Perrin, which compiles the most frequently cited study on tort costs, direct U.S. tort costs were $261 billion in 2005, which translates into $880 per person.  In contrast, costs were only $96 per person in 1950, adjusted for inflation.  (Tillinghast-Towers Perrin, 2006 Update on U.S. Tort Cost Trends (New York: Tillinghast-Towers Perrin, 2007))

  • In the past 50 years, direct U. S. tort costs have risen more than 100-fold.  In contrast, population has not even doubled, and economic output has risen by only 37-fold.  As a result, tort costs have become a larger share of our economy.  (KRC: USTIL, Introduction, page 9)

 

How Tort Costs Are Spent

  • “[O]nly a minority of the total costs of the tort system goes toward compensating the injured plaintiff.  Awards for non-economic loss constitute 24% of tort costs, and awards for economic loss compose 22% of tort costs.  This means that only 46% of the costs associated with tort liability are given to plaintiffs to compensate them for their injuries.  The majority of the costs of the tort system go elsewhere:  14% of costs are spent on defending claims, 19% are spent on plaintiffs’ attorneys’ fees, and 21% goes toward administering costs.”  (KRC: Nicolaides,U.S. Tort Reform and the Implications…” July 2004, p. 5)

 

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