The Dow Jones industrial average has fallen more than 1,500 points since last year. Bear Stearns has gone belly up. Every week talking heads point to a different blue-chip company supposedly teetering on the brink of financial ruin.
It seems as if things couldn’t get worse for Wall Street and the broader economy. But if lawyers continue to abuse the tort system, things could deteriorate even further — particularly in New York and New Jersey.
Tort law covers instances when one person infringes on the legally recognized rights of another, harming the other person. A tort award is supposed to fully compensate the victim for his injuries and damages.
But when people file frivolous tort suits, justice is not served. And citizens pay the price through higher insurance premiums, higher product prices and a stagnant economy. Monetary tort losses amount to $865 billion each year — or 6.5 percent of the nation’s gross domestic product. New York had $16 billion in losses in 2006, according to the new U.S. Tort Liability Index: 2008 Report. New Jersey suffered $8 billion in tort losses that year.
Monetary losses from tort lawsuits are greater in these two states than virtually anywhere else. Only one state spends more on torts, as a share of its economic activity, than New Jersey does. Just three spend more than New York. Both states are in the top five nationally for the number of civil suits per 100,000 residents. All these lawsuits sap a tremendous amount of output from local economies.
How do these tort costs manifest themselves?
Consider health care. Thanks to a fear of medical malpractice lawsuits, defensive medicine — that is, unnecessary tests and procedures to avoid tort lawsuits for “negligence” — is widespread in New York and New Jersey.
That fear is well-founded — the two states lead the nation in relative monetary tort losses due to malpractice lawsuits.
Extra procedures carry a high cost. Defensive medicine accounts for 8 percent of personal health care costs — or $124 billion annu ally. Medical tort abuse also results in a “brain drain” of good doctors, as many seek legal refuge in safer jurisdictions.
In 2003, for example, Texas capped monetary awards in medical malpractice lawsuits. Doctors from across the country flocked to the state as a result. New York was the source of 145 out-of-state doctors seeking licenses to practice in the Lone Star State in 2006, according to the Texas Medical Board. That’s the most from any state.
Physicians aren’t the only ones subject to this poisonous legal environment. New York- and New Jersey-based businesses face the third- and fourth-riskiest tort litigation systems in the country. Such litigation threats hamstring their economies.
A survey of executives by consultancy McKinsey found that litigation risks were second only to the supply of qualified workers in deciding where to base a company’s operations. Executives take litigation risks seriously because losing one lawsuit could force them into bankruptcy.
Small firms are particularly vulnerable, but big firms are not im mune. Just ask Philip Morris.
A few years ago, the corporate giant lost a several-hundred-billion- dollar lawsuit and sought to appeal the decision. But the judge in the case ruled that the company could do so only if it posted a $12 billion appeal bond. That’s a steep price for due process. Not even Philip Morris could afford it.
Court rulings like these have triggered an exodus of companies from high-risk jurisdictions like New York and New Jersey. And the rulings tend to deter firms from setting up new operations in either state.
Texas and Colorado, by contrast, reformed their tort laws several years ago by instituting common-sense policies like caps on tort payouts. Their friendly business cli mates have jolted economic growth.
By contrast, New Jersey, which has yet to take similar action, has watched its economy lag behind. The Garden State had a significantly lower rate of economic growth in 2007 than Texas — three percentage points lower, according to the Bureau of Economic Analysis. New Jersey’s economy grew half as fast as the national economy in 2007.
Tort reform also benefits average citizens. Take auto insurance.
The National Association of Insurance Commissioners reports that the average New Jersey car owner pays the nation’s highest rates. Insurers have to charge high rates in part to insulate themselves from the high cost of auto tort lawsuits. Auto liability reforms would reduce insurance costs, delivering Garden State drivers some much- needed relief.
Tort reform could substantially aid the recovery of the New York and New Jersey economies. If the region’s policymakers are serious about boosting the economy, they can’t afford to ignore this burden.
Lawrence J. McQuillan, is direc tor of business and economic studies at the Pacific Research Institute and co-author of the U.S. Tort Liability Index: 2008 Report. Gregg M. Ed wards is the president of the Center for Policy Research of New Jersey.