Report: Tort Costs At Record $205 Billion

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By Michael Ha

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NU Online News Service, Feb. 12, 12:45 p.m.EST?The cost of defending and paying liability claims inthe U.S. hit $205 billion in 2001, more than $25 billion over theprevious year for a 50-year record, a consulting firm reported.

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Tillinghast-Towers Perrin's tort cost study, in addition toreporting a 14.3 percent jump, also predicted that costs wouldincrease in a seven-to-11-percent range annually for the nextseveral years.

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Tort system costs are defined as costs that go to pay liabilityclaims and to defend those claims, as well as costs to administerthe system--insurance companies' operating expenses, Russ Sutter,survey leader and Tillinghast principal, explained.

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"We thought that 2001 was going to show a significant increasefrom 2000. But I was surprised by the magnitude of the increase. Itwas the largest increase percentage-wise since 1986. In dollarterms, it's the largest increase in the past 50 years," Mr. Suttertold National Underwriter.

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Last year his company put the cost at $179.7 billion. Mr. Suttersaid that a quickening pace of the tort cost increase was the mainreason Tillinghast decided to update its findings after only oneyear.

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The study found that at the current level, U.S. tort costsamount to a five-percent tax on wages and $721 per each U.S.citizen, Tillinghast said in its report, "U.S. Tort Costs: 2002Update."

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Mr. Sutter said Tillinghast issued a report on tort costs in2002, but prior to that the company hadn't written on the subjectsince 1995.

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"The study that was published last year included data through2000, which showed no increase over 1999 in terms of tortcosts-to-GDP ratios. But at the time we were doing the study, whichwas during the fall of 2001, all signs indicated that the costswere going up significantly," Mr. Sutter said.

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"So, it made sense to do the study for this year even though itwas only one year removed from the previous study. We will considerwhether it makes sense to update them more frequently from now onsince trends are changing fairly quickly these days," he said.

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The study found that the largest single contributing factor inthe rise of tort costs was a significant reassessment ofliabilities related to asbestos claims, which accounted for $6billion of the $26 billion tort cost increase from 2000 to2001.

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Another important factor is medical malpractice costs, whichhave risen an average of 11.6 percent per year since 1975, comparedto an average annual increase of 9.4 percent for overall tortcosts, according to Tillinghast.

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Other significant factors include: class action lawsuits andlarge claim awards; an increase in the number and size ofshareholder lawsuits against corporate board directors; and a jumpin medical cost inflation leading to higher costs of personalinjury claims.

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The Tillinghast study called the U.S. tort system an inefficientmethod of compensating injured parties. The system, the studynoted, returns less than 50 cents on the dollar to people it isdesigned to help and returns only 22 cents to compensate for actualeconomic loss.

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While the cost of the U.S. tort system has skyrocketed onehundred fold over the past 50 years, gross domestic product hasgrown by a factor of only 34, Tillinghast pointed out.

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"These trends continued and became even more pronounced in 2002,with large charges for upward revisions of asbestos liability and ajump in the number of directors' and officers' (D&O) liabilitylawsuits," said Mr. Sutter.

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"Additionally, we believe 2002 data will begin to show theimpact of 9/11-related lawsuits. Absent sweeping tort reformmeasures, we expect most of these trends to continue in 2003 andbeyond," Mr. Sutter stated.

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He added that he has also been seeing mold damage claims beginto emerge as an important liability issue, "so this could be thestart of something new. And we will be picking them up in futurestudies."

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"We haven't seen any hard numbers. But from what we have seen inpartial numbers, the tort costs will be up in a seven-to-11-percentrange for 2002," Mr. Sutter said.

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Tillinghast forecasts annual increases in tort costs in aseven-to-11-percent range for the next several years. At this rateof increase, tort costs could amount to $1000 per each U.S. citizenby 2005, the firm said.

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The study also stated it expects the insurance industry to placefurther limits in policies as it did in the mid-1980s with theelimination of pollution coverage.

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"That will be a natural reaction by insurance companies as theylook to improve profitability. Insurance companies have not mademuch money in the last couple of years. One way to attack thatsituation is to provide less coverage," Mr. Sutter said.

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Mr. Sutter also added that some carriers will withdrawcompletely from certain lines of business and markets, as ishappening now in the medical malpractice market. "The most notablewas St. Paul exiting the medical malpractice market in 2001. Youalso have the situation in a number of states where doctors areprotesting the high cost of medical malpractice insurance throughwork stoppages," he noted.

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Eric Speer, Tillinghast region manager for the Americas, saidthe firm believes corporations will continue to shift towardself-insurance as they attempt to gain more control over costs andas insurance prices continue to rise. "Rising tort costs, combinedwith the right congressional environment, will likely create morepressure for tort reform--particularly asbestos reform," headded.

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