Lawsuit reform could boost state economy – Pacific Research Institute

Lawsuit reform could boost state economy

Michigan’s economy continues to struggle, with an unemployment rate of 14.1%, highest in the nation. If lawmakers want to put people back to work, without costing taxpayers another penny for “stimulus,” they can enact desperately needed lawsuit reforms.

In the newly released U.S. Tort Liability Index: 2010 Report, Michigan ranks a dismal 43rd out of the 50 states in the quality of its civil-justice tort climate. The ranking is based on each state’s tort losses, numbers of tort lawsuits and lawyers, number of huge jury awards, and presence of plaintiff-friendly “judicial hellholes.” The data were adjusted for the size of each state’s economy and population.

Michigan fell 15 places from 28th in the previous 2008 edition, so it is heading in the wrong direction. Michigan has the fourth-highest monetary tort losses out of the 50 states. It also ranks 30th in tort litigation risks.

It has the ninth-largest number of lawyers per dollar of state output. Despite the drop in Michigan’s level of economic activity in recent years, the state’s tort costs and number of lawyers filing tort lawsuits stay remarkably high, signaling that Michigan’s courtrooms are still ripe for lawsuit abuse compared to other states, especially in the categories of product liability and auto liability.

The Index reveals that Michigan’s tort rules on the books rank sixth in their ability to contain tort costs and risks. Because of the past reform efforts of former Gov. John Engler and others, Michigan emerges as a “salvageable” state because of its strong tort rules in the face of high tort costs and litigation risks. If the reforms are kept in place and defended against legislative and court challenges by personal injury lawyers, the state’s tort climate will improve and jobs will follow.

When deciding where to start a business, expand operations, or relocate, entrepreneurs prefer states with balanced tort systems that discourage abusive lawsuits. In 2006, job growth was 57% greater in the 10 states with the best tort climates than in the 10 worst states. Business leaders are leery of Michigan because of its sky-high tort costs and skewed courtrooms.

Fear of lawsuits also causes companies to withdraw or withhold beneficial products. Volkswagen planned to sell a 46 m.p.g. three-wheel vehicle. This “green machine” would have cost only $17,000, but VW decided not to market it in the United States because of lawsuit fears.

Total direct tort costs were $255 billion in 2008. Abusive lawsuits cost every American a hidden “tort tax” of about $2,000 a year in higher prices and insurance premiums, fewer jobs and new products, lower wages and benefits for working people, reduced access to health care, and higher taxes to pay for court costs. And the current system is very inefficient at its intended purpose – less than 15 cents of every tort-cost dollar goes to compensate plaintiffs.

Michigan’s lawmakers should get serious and enact further meaningful lawsuit reforms, which would be the best jobs bill. UC Berkeley economist Lisa Kimmel examined six common tort reforms adopted by states from 1970 to 1997 and found that instituting an additional tort reform increased total employment in a state by 1%. In other words, one more tort reform in Michigan would put more than 38,200 people back to work.

Michigan should consider reforms such as strengthening its rules governing class actions, antitrust lawsuits, the retention of private attorneys by the AG, jury service, asbestos lawsuits and construction liability. It should also adopt an “innocent seller” standard and increase the size of juries needed to reach a verdict.

An uncompetitive legal climate has spurred some states, such as Oklahoma in 2009, to enact meaningful reforms. If Michigan politicians are serious about jump-starting the economy, they should act to reduce the state’s massive tort burden. Defending past tort reforms and enacting additional commonsense reforms would bring needed jobs to Michigan.

Lawrence J. McQuillan, PhD, is director of business and economic studies at the California-based Pacific Research Institute. He is co-author with Hovannes Abramyan of the third edition of the U.S. Tort Liability Index, just released by PRI. Contact him at

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.

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