DES PLAINES, Ill. – A new study has found that with a staggering price tag of over $865 billion per year, America’s tort system significantly impacts the cost of liability insurance, increases the cost of goods and services, lowers our standard of living, and makes it harder for U.S. companies to compete in the global marketplace, according to the Property Casualty Insurers Association of America (PCI).

Tort costs drive liability insurance premiums. Jackpot Justice: The True Cost of America’s Tort System, released today by the Pacific Research Institute (PRI); a free-market think tank based in San Francisco, California highlights the economic consequences of our legal system.

“Rising tort costs, increase the demand for and cost of liability insurance,” said David Golden, director of commercial lines for PCI.  “The majority of what you pay in liability premiums goes directly to pay for tort costs.  As a result, our out of control legal system forces you to pay more whether you are purchasing insurance for your car, small business or other liability coverage. Every time you purchase food, clothing, cars, toys, or anything else, a portion of what you pay goes to cover the cost of lawsuits.  The excesses in our litigation system also have tremendous significance for small businesses, which are always just one lawsuit away from bankruptcy.”

The PRI study calculated that the nation’s tort system imposes a yearly “tort tax” of $9,827 for a family of four.  Additionally it found that the U.S. spent 2.2 percent of its gross domestic product (GDP) on direct tort costs.  Advanced economies around the world spend an average of 0.9 percent of GDP on direct tort costs.  This means that the U.S. spends 1.3 percent of its annual GDP on excessive tort costs.  So, compared to our economic competitors, 59 percent of direct tort costs, or $589 billion per year of social tort costs, is wasted on excessive tort costs.

“Our focus is on curbing excessive litigation,” said Golden.  “While we have spent years trying to bring greater balance to the civil justice system, there is a persistent effort to reverse the gains.  Mississippi and Texas serve as examples of where we face challenges to laws that are just starting to show their positive effects.  However, there are also states such as Illinois, which has three of six “judicial hellholes” identified by the American Tort Reform Association, where we are fighting legislation that would make the legal climate even worse.  This study highlights the importance of pursuing civil justice reform across the nation in order to ease the burden that consumers and businesses bear.”

The new PRI study provides the most comprehensive examination ever of U.S. tort costs.  According to the study’s lead author, Dr. Lawrence J. McQuillan, unlike previous studies, Jackpot Justice calculates both the direct and indirect costs of America’s legal system. 

These include not just the direct cost of annual damage awards, plaintiffs’ attorney fees, defense costs and administrative expenses from torts but also the indirect cost of the legal system’s impact on research and development spending, the cost of defensive medicine, the related rise in health care spending and reduced access to health care, and the loss of output resulting from deaths due to excess liability.

“America’s legal system doesn’t just transfer wealth from companies to personal injury lawyers,” said Dr. McQuillan.  “It also changes behavior in economically unproductive ways.  Any true estimate of the economic cost of our tort system must include these dynamic, negative-spillover costs.”

Among the report’s critical findings: 

Burden on the U.S. Economy

• The $865 billion annual cost of America’s tort system is equivalent to the total yearly sales of the entire U.S. restaurant industry.
• Every day, the American economy takes a $2.4 billion hit to sustain our out-of-control legal system.

Lost Jobs and Lost Retirement Savings

• More than 51,000 U.S. jobs have been lost due to asbestos-related bankruptcies alone.  Employees at these bankrupted companies have lost $559 million in pension benefits. 

114,000 Needless Deaths; Increased Cost of Health Care

• An overly expensive liability system increases the cost of many risk-reducing products and services and health care services, making them less accessible, and in some cases unavailable to consumers.  PRI estimates that more than 114,000 people would be alive and working today, but are not due to inefficiencies in the tort system over the last two decades. 
• The practice of “defensive medicine” by litigation-fearing physicians increases American health care costs by $124 billion per year and adds 3.4 million Americans to the rolls of the uninsured.

Suppresses Innovation

• American companies suffer over $367 billion per year in lost product sales because spending on litigation curtails investment in research and development.

Loss of Shareholder Wealth

• Lawsuits against American corporations generate an annual loss of $684 billion in shareholder value.  Who are American shareholders? Not just Bill Gates and Warren Buffet. 50% of all US shareholders are ordinary individuals.

Decline in U.S. Competitiveness

• U.S. tort costs far outstrip our economic competitors.  According to another study cited by PRI, the U.S. spent 2.2 percent of its GDP on tort costs, compared to 0.7 percent for the United Kingdom, 0.8 percent for Japan, and 1.1 percent for Germany.  If you assume U.S. costs should be in line with our rivals, the authors project that America wastes $589 billion per year on excessive social tort costs, equivalent to the total annual output of Illinois.

Jackpot Justice: The True Cost of America’s Tort System, authored by Lawrence J. McQuillan, Hovannes Abramyan, and Anthony P. Archie, can be downloaded at www.americanjusticepartnership.org. 

PCI is composed of more than 1,000 member companies, representing the broadest cross-section of insurers of any national trade association.  PCI members write over $194 billion in annual premium, 40.1 percent of the nation’s property/casualty insurance.  Member companies write 51.3 percent of the U.S. automobile insurance market, 39 percent of the homeowners market, 32.1 percent of the commercial property and liability market, and 38.7 percent of the private workers compensation market.