Tort Costs Top $233 Billion

Tort-related costs involving insured and self-insured claims in the U.S. civil litigation system grew to a record high in 2002, according to a study by New York-based Tillinghast-Towers Perrin.

The U.S. tort system cost $233 billion in 2002a $27.4 billion increase over 2001representing the largest dollar increase in U.S. history, the study noted. Those costs translate into a “tort tax” of $809 per U.S. citizen–$87 more than in 2001–and $797 more than in 1950.

Tort costs increased by a total of 30 percent in the last two yearsthe largest two-year increase since 1986/1987. The 2002 costs represent 2.23 percent of Gross National Product, compared to 2.04 percent in 2001, and the highest GDP ratio since hitting 2.24 percent in 1990.

“It sounds trite, but the consumer ultimately pays for tort costs,” said study sponsor Russ Sutter, a Tillinghast principal and actuary in St. Louis, Mo. “America is an increasingly litigious society, and we are all feeling its effects.”

Mr. Sutter explained that the study defines “tort costs” as including what insurers and self-insurers spend for judgments and settlements in liability-related claims, plus their defense costs and administrative expenses in litigating or settling the claims. Such costs do not include expenses related to running the court systems or to torts between private individuals in which no insurance carrier is involved, according to Mr. Sutter.

Overall, litigation related to auto accidents was by far the largest single component, accounting for about $74 billion of the $233 billion total cost.

The biggest factor in the $27.4 billion rise in tort costs in 2002 was asbestos claims. At $11 billion, these costs were double the 2001 level and more than one-third of the total cost increase. “Any asbestos reform bill that may be passed by Congress might lower these costs in 2004 and 2005,” Mr. Sutter noted. He added that frequency was the main problem with asbestos claims, as there are a lot of small suits that need to be defended and settled.

Other contributing factors to the cost increases were the proliferation of class action lawsuits and large claim awards; an increase in the number and size of shareholder lawsuits against boards of directors of public companies; an increase in medical cost inflation leading to higher costs of personal injury claims; and medical malpractice lawsuits.

When viewed as a method of compensating injured parties, the U.S. tort system has become increasingly inefficient, returning less than 50 cents on the dollar to the people it is designed to help and returning only 22 cents to compensate for actual economic loss, the study concluded.

Medical malpractice costs totaled nearly $25 billion in 2002, or $85 per person, compared with $5 per person in 1975. The increase in medical malpractice costs continues to outpace increases in overall U.S. tort costs, rising an average of 11.9 percent per year, versus an increase of 9.3 percent per year in all other tort costs. “Physicians are relocating or changing practices as a result of escalating liability insurance,” Mr. Sutter noted. “Unlike asbestos, which has a frequency problem, medical malpractice has a severity problem,” he added.

“Manufacturers are looking at severe cost increases from asbestos claims, which could translate into more layoffs and plant closings,” added Mr. Sutter. “Most pundits look at tort costs in terms of their impact on revenue and profits, but it is just as painful to patients who cant find a specialist or workers who cant find a job.”

Things will not be getting better any time soon, according to the study. Tillinghast estimated annual tort cost increases for the next several years in the 6 percent to 11 percent range. At that rate, tort costs would exceed $1,000 per citizen by 2005, the study noted.

“These projections assume the status quo,” Mr. Sutter explained, meaning no federal or state tort reforms or other events that might influence the numbers. One of the main ingredients in the predictions is how tort costs have historically grown in relation to GDP, he indicated.

Reproduced from National Underwriter Property & Casualty/Risk & Benefits Management Edition, December 12, 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.