U.S. tort costs up sharply: Tillinghast study

Not surprisingly, tort costs in the U.S. are increasing sharply, as indicated in a new study by Tillinghast-Towers Perrin. In 2001, the U.S. tort system cost US$205 billion, or US$721 per capita. This is a 14.3% increase over the year prior and represents costs equivalent to a 5% tax on wages.
Tillinghast has tracked tort costs since 1950, and in the “U.S. Tort Costs: 2002 Update” finds that the American system is extremely inefficient. Less than 50 cents on the dollar is actually going to those the system is designed to help, with only 22% going to cover actual economic loss.
Prior to 2001, tort costs had been on the decline as a percentage of gross domestic product (GDP), but in 2001 they rose, to slightly more than 2%. Not withstanding this, the actual cost of the tort system has increased one-hundred-fold in the last 50 years.
Asbestos liability is the largest concern, accounting for US$6 billion of the US$26 billion increase in costs in 2001.Another culprit is medical malpractice costs, which have risen on average 11.6% each year since 1975, versus an increase of 9.4% per year for overall tort costs. Other issues include class actions, shareholder lawsuits against directors and officers and increased medical cost inflation.
“These trends continued and became even more pronounced in 2002, with large charges for upward revisions of asbestos liability and a jump in the number of directors’ and officers’ (D&O) liability lawsuits,” says Russ Sutter, survey leader and Tillinghast principal. “Additionally, we believe 2002 data will begin to show the impact of 9/11-related lawsuits and will also show mold beginning to emerge as an important liability issue. Absent sweeping tort reform measures, we expect most of these trends to continue in 2003 and beyond.”
“When the first Tort Costs Study was published in 1985, we attributed the rapid escalation in tort costs to an overall societal attitude of entitlement,” says Jeanne Hollister, a Tillinghast consulting actuary. “But this sense of entitlement has now been coupled with rising anger toward and mistrust of U.S. corporations that can only serve to exacerbate tort costs.”
Tillinghast predicts that without change, tort costs will increase between 7-11% per year for the next several years. This would lead to costs equaling US$1,000 per capita by 2005.
In reaction, Tillinghast expects insurers to put tighter limits on policies, with some insurers withdrawing altogether from troubled markets, such is already occurring with medical malpractice coverage.
“We believe corporations will continue to shift toward self-insurance as they attempt to gain more control over costs and as insurance prices continue to rise,” says Eric Speer, Tillinghast region manager for the Americas. “Rising tort costs, combined with the right congressional environment, will likely create more pressure for tort reform particularly asbestos reform.”
At the moment, the U.S. Senate is considering legislation aimed at class action fairness and tort reform to limit non-economic awards in medical malpractice cases. Asbestos is expected by up for discussion by a Senate committee next month.