U.S. civil suit costs declined by 5.5 percent in 2006, according to a consulting firm, which forecast they would rise more than 2 percent when 2007 figures come in and go even higher this year.

The findings came in the Tillinghast insurance consulting practice of Towers Perrin's “2007 Update on U.S. Tort Cost Trends.”

“In 2006, the modest decline in personal tort costs was combined with a significant drop on the commercial side,” said Russ Sutter, a Towers Perrin principal. “However, given several factors, including the potential fallout from the current subprime loan crisis, we anticipate a reversal in 2007. To put it bluntly, when people lose money, litigation tends to follow.”

Looking ahead, Tillinghast said it anticipates growth of U.S. tort costs to be 2.5 percent in 2007, with slightly higher growth of 4.5 percent for the following two years.

Tort costs in 2006, the firm said, totaled $247 billion, or approximately $825 per person–$57 less per person than in 2005.

Their report said the 5.5 percent decline was significantly lower than the growth rate of 0.4 percent in 2005, 6 percent gain in 2004 and 5.5 percent hike in 2003.

The $13.4 billion decrease in tort costs for 2006 marks the first downward trend since 1997, Tillinghast reported. The 2007 study analyzes U.S. tort costs from 1950 through 2006, with projections through 2009.

According to the report, the 5.5 percent decline was markedly less than overall U.S. economic growth of 6.1 percent, as measured by gross domestic product.

Tillinghast noted that since 1950, growth in tort costs has exceeded growth in GDP by an average of 2-to-3 percentage points.

However, it added that over the last 20 years, the ratio of tort costs to GDP has stayed within a relatively narrow range, at approximately 2 percent. In 2006, the ratio slipped below 2 percent for the first time in the last six years.

U.S. tort cost growth since 1950 far exceeds U.S. population growth, the report noted. Even after adjusting for inflation, tort costs per capita have risen by a factor of more than nine between 1950 and 2005, but inflation-adjusted tort costs per capita were lower in 2006 than in the prior three years, Tillinghast said.

The report said that typically the greatest contributor to overall tort costs–personal auto liability–in recent years has shown a decrease in the number of reported accidents, and thus a drop in new claims. However, there are signs that this trend may not continue.

“Between cell phones, PDAs and MP3 players, today's drivers are doing more behind the wheel,” said Mr. Sutter. “These distractions may mitigate any claim that as a nation we are becoming safer drivers.”

The report found specific costs related to asbestos have had a waning impact on overall commercial tort costs. In 2006, insured asbestos losses totaled $1.9 billion, as compared to $7 billion in 2005 and $7.3 billion in 2004.

For 2006, medical malpractice tort costs totaled $30.3 billion, up from $29.4 billion in 2005. According to Tillinghast, since 1975, medical malpractice costs have increased at an annual rate of 11.1 percent versus 8.2 percent for all other tort costs. Mr. Sutter said stable malpractice figures could be “a reflection of reforms enacted by several states.”

Tillinghast said factors that may have an effect on the growth of tort costs in the near future include:

o Whether the declining frequency of auto accidents has bottomed out.

o How the recent state-level medical malpractice reforms from the past few years will affect the moderation of recent trends–particularly as Illinois tort reform was ruled by a judge to be unconstitutional last month

o Whether the deterioration in the subprime mortgage market in 2007 will lead to lawsuits from both investors in select financial institutions and homeowners holding mortgages from those financial institutions.

o The outcome of current asbestos litigation and impact on reserve amounts.

o Potential litigation against companies related to spotlight issues like global warming and childhood obesity.

These factors “and their prospect for continued and new lawsuits have the potential to make a major impact on overall costs in 2007 and beyond,” said Mr. Sutter.

The report incorporates three cost components–benefits paid or expected to be paid to third parties (losses), defense costs and administrative expenses.

Administrative expenses are identified separately in the report. While Tillinghast outlines why these are a real cost of the tort system, it said it takes no position on the efficiency of the insurance industry's administrative expenses.

Tillinghast did not include costs incurred by federal and state court systems in administering actual suits. Certain indirect costs are also omitted, such as those associated with litigation avoidance.

The report is available at www.towersperrin.com/tillinghast.

Special Reports /

Tort Cost Increase Foreseen By Tillinghast

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