America’s economy remains in terrible shape and federal lawmakers are trying to kick-start a recovery by spending money. A better strategy would be to reform the country’s inefficient tort system, which is failing to promptly compensate true victims.
Instead, meritless lawsuits clog courtrooms while outsized monetary awards cripple businesses and quash economic growth.
From 1996 through 2005, roughly 20 million tort lawsuits were filed in U.S. state courts. During that time, the combined payouts for losses and insurance premiums associated with state tort cases jumped a full 60 percent in inflation-adjusted dollars.
Unfortunately, less than 15 cents of every tort-cost dollar goes to compensate the injured victims, so those huge payouts wind up lining the pockets of the middlemen—the personal-injury lawyers.
Tort reform can stop this cycle of spiraling tort costs, which get passed along to consumers in the form of higher prices for goods and services. Tort Law Tally, a new study from the Pacific Research Institute, identified 18 measures that, taken together, can slash tort payouts by almost 50 percent and cut consumers’ annual insurance premiums by 16 percent.
That translates to yearly savings of $128 for the average American. By reducing the liability burden on businesses, a typical tort reform can increase employment in a state by one percent. That would equal nearly 87,000 new jobs in New York State alone from just one tort reform.
Implementing caps on non-economic damages for “pain and suffering” or “mental distress” is one especially effective reform. Victims should obviously be justly compensated if harmed, but without proper standards, the judgments can surge without limit and vary wildly.
Monetary caps on damages deter plaintiffs from filing baseless lawsuits in hopes of scoring a jackpot. A study from business professors Mark J. Browne and Robert Puelz found that the imposition of non-economic damage caps produced a 65-percent reduction in the probability of filing a tort claim. Colorado leads the way, limiting non-economic damages to about $470,000, except when the court finds specific evidence that justifies a larger award.
States have also been able to reduce tort costs by regulating attorney fees. Trial lawyers often work on a contingency basis. This can encourage lawyers to target deep-pocket defendants and grab a greater share of the money. Illinois uses a sliding scale for fees, with the lawyer’s share decreasing as the award goes up. Oklahoma limits contingency fees to half of what the plaintiff recovers.
Reasonable attorney fees are particularly beneficial in health care, reducing baseless malpractice lawsuits and bringing down costs. A study by Stanford business professor Daniel P. Kessler found that attorney fee limits, along with other malpractice reforms, can increase the supply of physicians by 3.3 percent.
States should also adopt stricter standards for asbestos and silica lawsuits. Since the 1960s, asbestos claims have been filed against about 8,400 businesses, costing defendants and their insurers $70 billion.
As a result, more than 70 companies have declared bankruptcy and more than 60,000 workers have lost their jobs. Yet only one out of every 10 plaintiffs in these cases actually has cancer that may be related to asbestos. More rigorous medical standards for filing asbestos and silica claims can dramatically reduce the number of claims, lower defense costs, and save jobs and pensions.
Florida, for example, has set minimum medical criteria and a statute of limitations for asbestos and silica claims. Texas has similar rules, plus a requirement that asbestos cases be tried individually, shutting down the mass screening of potential claimants.
States should also appoint supreme court justices rather than elect them. Elected judges can easily become politicized, and are
often more sympathetic to in-state plaintiffs, who are voters. Elected judges are also highly dependent on trial lawyers for campaign funds. A judge will understandably face pressure to deliver a verdict for a personal-injury lawyer if that lawyer is also a campaign contributor.
Economists Alexander Tabarrok and Eric Helland found that tort awards are higher in states with elected judiciaries. Appointed justices, on the other hand, are not subject to such political pressures, resulting in fairer courtrooms.
The most effective tort reform, according to Tort Law Tally, is transparency in the hiring of private lawyers to work on the state’s behalf. Without competitive bidding for state contracts and an open, transparent selection process, public officials have incentives to reward political cronies to pursue baseless lawsuits. Several states have implemented “attorney-retention sunshine” reforms.
North Dakota requires that an emergency commission approve the attorney general’s selection of a private lawyer in civil cases where the amount in question exceeds $150,000. Virginia requires open, competitive bidding for all contingency-fee contracts between the state and outside lawyers where fees and services are likely to exceed $100,000. Such measures pay big dividends. In fact, sunshine reforms can cut tort losses by up to 12 percent.
Sunshine reform also promotes growth, which must take place if the United States is to emerge from economic lethargy and lead a global recovery. More government spending may make politicians feel good about themselves, but will not get the job done. A package of common-sense tort reforms is a better strategy, and tort reform holds a key advantage.
None of the savings these reforms achieve needs to be paid back by future generations of taxpayers. That is why federal legislators looking to promote economic growth should put tort reform at the top of their priority list in 2009 and beyond.
Sally C. Pipes is president and CEO of the Pacific Research Institute and author of “The Top Ten Myths of American Health Care.” Lawrence J. McQuillan, Ph.D, director of Business and Economic Studies and co-author of PRI’s recently released Tort Law Tally, assisted in the preparation of this article.