Jump-Starting The Economy

If the presidential candidates are serious about bolstering the economy, they should address one of the major drags on it–widespread abuse of the tort system.

The role of the tort system in compensating victims for their injuries is certainly valuable. But meritless plaintiffs and their opportunistic personal-injury attorneys clog the courts with junk suits, and that sticks the American people with a massive bill.

In the past 50 years, direct tort costs have risen more than 100-fold and now add up to more than 2% of GDP in the United States. To put that in perspective, U.S. direct tort costs are roughly equivalent to what the federal government spent last year on public education, transportation, agriculture, energy and scientific research combined. It is the most expensive tort system in the world, more than double the average tort cost for industrialized nations.

When one considers the indirect costs as well, excessive litigation cost America’s economy $589 billion in 2006, equivalent to a yearly tax of more than $7,000 on a family of four. Much of that money went to overhead; just 15 cents of each tort-cost dollar actually goes to compensate plaintiffs.

Tort abuse also contributes to the crisis in health care.

One out of eight physicians gets hit with a malpractice suit every year. Medical liability concerns prompt doctors to practice “defensive medicine,” ordering more tests and procedures than they would otherwise deem necessary in an attempt to avoid litigation. The resulting cost, $124 billion each year, adds 3.4 million Americans to the rolls of the uninsured.

Tort law varies by state, so how much you pay to cover lawsuit abuse depends on where you live.

In the newly released U.S. Tort Liability Index: 2008 Report, we examined the tort systems of all 50 states by looking at existing rules, total monetary impact, the frequency of litigation, and other metrics. Based on our analysis, we put each state into one of four categories: sinners, salvageables, saints, and suckers.

Nearly half the states qualify as “sinners,” meaning they suffer from weak tort rules plus high tort costs and high litigation risks.

Massachusetts is particularly bad. Using the state’s absurdly broad “consumer fraud” statute, one resident recently filed a $1 billion lawsuit against Kellogg (nyse: K – news – people ), claiming the cereal maker made her children overweight by advertising on kids’ television.

In Alabama, the state’s malpractice laws have led to a severe doctor shortage. Although the state comprises 2% of the nation’s population, only around 0.3% of medical graduates settles there.

Another 15 states are “salvageable.” Although they experience high tort abuse, it could be curtailed if their existing laws are enforced and reform continues. Texas and Florida lead the way toward sanity among the salvageables.

Together with federal prosecutors, Florida’s state bar association recently brought down Louis Robles, the infamous “King of Torts.” With the millions Robles made from his Miami-based litigation practice, he spent decades bankrolling a comically opulent lifestyle that included mansions in Los Angeles and Manhattan and dozens of servants. Robles was found guilty of defrauding clients of more than $13 million. He is currently serving a 15-year federal prison sentence.

The five “saint” states–Alaska, Mississippi, Ohio, Tennessee and Utah–reap the rewards of strong tort rules with low costs and relatively low litigation risks.

Finally, there are nine “suckers.” Like the saints, tort abuse is relatively low in these states, but they lack the requisite laws to keep it that way. They are ripe for future exploitation by personal-injury lawyers.

One sucker is Hawaii.

A few years ago, a California man visiting Hawaii sued a kayak-rental company after his wife went missing, claiming she had been killed by a shark. Never mind that the recovered gear showed no signs of an attack. Or that the company had explicitly warned the couple to stay close to shore. Or that a lower court had ruled against the husband. The kayak company settled for an undisclosed sum to avoid further legal expenses from the man’s appeal.

A tort system’s impact on the economy is real. When deciding where to start a new business or expand operations, entrepreneurs strongly consider the legal environment. They are attracted to states that have reliable tort systems and that discourage excessive litigation.

In 2006, for example, job growth was 57% greater in the 10 states with the best tort systems than in the 10 states with the worst. The same year, state-level GDP grew 25% faster in the 10 best vs. the 10 worst.

Every state, sinner to saint, would benefit from common-sense tort reforms. If politicians are serious about jump-starting the economy, they can’t afford to ignore our massive tort burden.

Lawrence J. McQuillan, Ph.D., is director of business and economic studies at the Pacific Research Institute, where Hovannes Abramyan is a public-policy fellow. They are coauthors of the U.S. Tort Liability Index .

Nothing contained in this blog is to be construed as necessarily reflecting the views of the Pacific Research Institute or as an attempt to thwart or aid the passage of any legislation.

Scroll to Top