Litigious Culture Saps U.S. Enterprise Samuel Johnson, back in the 18th century, said that taking risks is worthwhile because it is the “risk of the certainty of little for the chance of much.” However, these days, people infrequently talk about “risks worth taking.” Risk is seen as a negative.

Yet the entrepreneurs and inventors who have explored and expanded the boundaries of human knowledge, and increased our wealth over the centuries, often took great risks to improve the quality of our lives.

Even so, most entrepreneurs, while opportunists, are not prepared to risk all. Most like to have some safety net in case everything goes wrong.

This is the role insurance plays in society. Insurance enables people to take risks, or simply to continue going about their daily lives knowing that they are protected in case disaster strikes.

For example, when Orville and Wilbur Wright were still tinkering with their airplane, Lloyds wrote the worlds first standard aircraft insurance policy. When flying became a business, transporting people and goods, Lloyds underwriters insured the new companies.

If I had to choose one word to sum up the spirit of the American people, my answer would be “enterprise.” However, todays litigious culture–especially in the United States–threatens to upset this delicate balance of risk and reward. The rise in litigation and its costs to business is literally sapping the spirit of enterprise out of America.

The source of this issue lies in the U.S. civil liability system and tort law. Over the years, this system has spawned an American pastime, something that ranks alongside catching a game of baseball or basketball–going to court to sue other people, or companies, or organizations, or various levels of government.

As more and more people have gone to court, not only has the cost of doing so risen, but so, too, has the cost of insuring oneself or ones company against litigation. To a foreigner like me, the drain that this system has on the U.S. economy appears extraordinary.

While the cost of the U.S. tort system has grown 100-fold in the last 50 years, gross domestic product has risen by a factor of only 34. The system cost $205 billion in 2001, or $721 per U.S. citizen, representing a 14.3 percent rise in tort costs since 2000. At current levels, U.S. tort costs are equivalent to a 5 percent tax on wages. By 2005, it is estimated to rise further still–to $298 billion.

To add insult to injury, this system is highly inefficient to those it is meant to serve. It returns less than 50 cents on the dollar to people it is designed to help, and only 22 cents to compensate for actual economic loss. The rest goes to lawyers and other costs.

The surge is partly thanks to claims related to the use of asbestos. So far, at least 600,000 people have filed suits against 6,000 companies. Litigation has already cost $54 billion, and total costs could eventually hit $200 billion-to-$275 billion. Added to this are hidden costs, such as companies that have been forced into bankruptcy, unable to pay the claims. It is estimated that 60,000 people have lost their jobs.

The impact on the insurance market is staggering, and the insurance markets have no choice but to pass on the cost to the consumer sooner or later. So the final nail in the coffin is the effect of higher premiums on companies, small businesses and individuals.

First, there is the “opportunity cost” of not investing this money in new jobs or ventures. Second, and most damaging of all, there is the impact that this new culture of litigation has on anyone taking any risk whatsoever. When we read that companies have been sued for not warning customers that the coffee they are selling is hot, we begin to wonder what we cannot be sued for.

We now have a system in which doctors cannot deliver babies for fear of being sued, and cannot afford to pay for their insurance coverage. In such an environment, what hope is there to keep the spirit of risk-taking alive, to fuel the appetite for innovation and creation?

Would those who trekked their way across the dusty plains, built up vast commercial empires or realized the dream of putting men on the Moon have achieved any of this if they had to face the threat of being sued?

We need to strike a balance where individuals do have a means of redress, and where risk-takers have a safety net should things go wrong, but are not dragged into court at the merest slip.

Congress needs to act as quickly as possible to protect individuals and companies against excessive damages and frivolous or groundless class actions, which reward the lawyer a lot more than the plaintiff.

Meanwhile, specialist insurers like Lloyds underwriters have a role to play. They can help provide coverage and help companies to help themselves.

What do I mean by that? Above all, companies must be prepared. They need to analyze the types of claims they might face and the impact they might have on the balance sheet. They need to trace claim trends so that they can discover the source of the most common ones.

They need to pay attention to the small print of contracts to see who is liable for what, and they need to ensure that any subcontractors they use are properly covered themselves.

Of all the challenges we face, the culture of litigation is one that we can tackle and solve as we–insurers, regulators and legislators–created it. It is a culture that, if left unchecked, threatens to sap the American will.

In the Depression, Franklin Roosevelt memorably told Americans that “the only thing we have to fear is fear itself.” We cannot allow ourselves to create a culture in which you have everything to fear unless you are covered by insurance and have a good attorney.

Mark Twain observed that “there is no security in life, only opportunity.” That is the spirit we must ensure is preserved and encouraged everywhere, but especially so here in America. America became a land of enterprise because risk takers were praised, not punished. Long may it remain so.

Lord Peter Levene is the chairman of Lloyd’s of London.


Reproduced from National Underwriter Edition, May 5, 2003. Copyright 2003 by The National Underwriter Company in the serial publication. All rights reserved. Copyright in this article as an independent work may be held by the author.