While businesses continue to absorb higher liability insurance premiums, a new report about rising tort costs is refueling the debate between proponents of tort reform and trial lawyers.
Tort costs in the United States increased by 13.3% in 2002, according to the new report by New York-based Tillinghast-Towers Perrin.
The U.S. tort system cost $233 billion in 2002, the most recent data available, according to the report. Tort costs, as defined for the report, are a combination of the amounts paid to claimants, the costs to defend lawsuits and associated administrative expenses, said Tillinghast-Towers Perrin principal Russ Sutter.
The 2002 data represents a second consecutive double-digit annual increase in tort costs, which jumped by 14.4% in 2001.
By contrast, tort costs increased only 3.3% between 1991 and 2000, according to the report.
The latest tort costs are equivalent to $809 per U.S. citizen, $87 more than in 2001 and $797 more than in 1950, the report stated.
"None of it is shocking to me," said Frank Daily, senior partner and head of the product liability group for Milwaukee law firm Quarles & Brady. "I have seen the cost of defending tort litigation just continue to escalate."
The increase in tort costs affects small businesses in a variety of ways, including rising liability insurance premiums and employee health insurance premiums. Further, businesses either must absorb those costs or pass them along to their customers.
According to a report by President George W. Bush’s Council of Economic Advisers, the cost of "excessive tort" for the economy is estimated to be the equivalent of a 2% tax on consumption, a 3% tax on wages or a 5% tax on capital income.
Last month, President Bush urged congress to take action on proposed tort reform legislation to reduce "junk lawsuits." A tort reform measure passed the House in 2003 but has stalled in the Senate.
Daily said the cost for services used by attorneys, such as expert witnesses, has increased in recent years. Some doctors charge $1,000 to $2,000 per hour for expert testimony in court, he said.
The biggest factor in the rise in tort costs in 2002 was a significant increase in liabilities associated with asbestos claims, the report says. Asbestos claims account for about $11 billion of the increase in 2002 tort costs over 2001 levels, according to the report.
"There’s nothing shocking there," said Paul Benson, partner and chairman of the product liability group for Milwaukee law firm Michael Best & Friedrich. "The judicial system’s inability to handle asbestos cases is one of its greatest failures.
We, the judicial system, are not equipped to handle this appropriately. They’ve tried to settle all of these cases, and they set up all of these trust funds to handle claims. They completely underestimated the number of claims there would be, some of which are believed to be fraudulent."
Increases in class action lawsuits and large claim rewards, record jury awards in medical malpractice cases, an increase in lawsuits against boards of directors of publicly traded companies and higher costs for personal injury claims have also driven up tort costs, according to the report.
The impact of rising tort costs also is being felt among public transportation systems throughout the nation. According to a December report by the American Public Transportation Association, 84% of the public transportation systems in the United States incurred liability insurance premium increases in 2003, and the average increase was 56%.
Unless changes are made to the U.S. tort system, annual increases of 6% to 11% will occur for the next several years, according to the Tillinghast-Perrin Tower report. At that rate of increase, tort costs could reach $1,003 per U.S. citizen by 2005, according to the report.
The increase in tort costs affects consumers and businesses, Sutter said.
"Physicians are relocating or changing practices as a result of escalating liability insurance," he said. "Manufacturers are looking to severe cost increases from asbestos claims, which could translate into more layoffs and plant closings. Most pundits look at tort costs in terms of their impact on revenue and profits, but it is just as painful to patients who can’t find a specialist or workers who can’t find a job."
Tillinghast-Towers Perrin is an independent advisor to the insurance industry. However, critics of the company’s tort cost report, including trial lawyers, say the report is biased in favor of insurance companies, which are Tillinghast’s main client base.
Tort reform would damage the judicial system in the United States, some trial lawyers say.
"The (report) is slanted in favor of Tillinghast’s client base," said Lance Grady, trial attorney for The Schroeder Group, a Waukesha-based law firm. "(The report’s) conclusion sells well if you are a proponent of tort reform and attempting to swing the public’s view in favor of statutory caps on damage awards. Tillinghast’s conclusion strongly benefits the interests of its largest client base. Tort reform favors insurance carriers because it acts to limit their financial exposure."
Trial attorney James Mentkowski, who has offices in Milwaukee and Brookfield, said business interests support tort reform because they can have more influence over lawmakers than juries, and the businesses want to weaken the judicial system.
"What they’re trying to do is remove the power of the jury from the American system of checks and balances," he said. "The corporations can dominate the legislature. What they can’t do is buy every jury."
"A problem I see with tort reform is that in large part you are taking decision-making away from our juries," Grady said. "Overall, our jury system does a fine job. Sure, we have these runaway lawsuits, but they’re few and far between."
Trial lawyers say supporters of tort reform who claim there has been a dramatic increase in lawsuits are wrong.
According to the Wisconsin Association of Trial Lawyers, the number of civil cases filed in Wisconsin decreased from 359,232 in 1991 to 256,596 in 2001. Tort filings in Wisconsin declined from 10,785 in 1991 to 8,581 in 2001, according to the association.
Also, trail lawyers point to a report by the U.S. General Accounting Office in 2003 that refutes the claim by some tort reform supporters that doctors are leaving some states, such as Pennsylvania, because they cannot afford medical malpractice insurance.
Nevertheless, Michael Eckert, chairman of the litigation section of the State Bar of Wisconsin, said tort reform does not necessarily hurt the so-called little guy in favor of big business.
"A review of the tort system should be a constant and ongoing process," he said. "There are abuses, but there are also legitimate uses of the tort system."
Benson said he supports a tort reform proposal to have federal courts handle more class action lawsuits. Some local courts are flooded with class action lawsuits because trial attorneys believe those locales are favorable to them.
"What happens is if a judge makes a ruling, that ruling could be in conflict with another state’s laws," said Gretchen Schaefer, spokeswoman for the American Tort Reform Association. "Essentially a local judge is setting national policy."
Benson said he also supports a Wisconsin bill that would allow judges to determine if testimony from an expert witness will be appropriate for a case.
"The jury shouldn’t be listening to junk science," he said.
The rising costs to defend a business against a legal challenge is a growing concern for companies, Daily said.
"The cost of litigation has accelerated at a frightening pace," he said. "It’s a matter of concern for everyone, especially for people in small businesses."
Daily represented Miller Brewing Co. in the well-publicized "Seinfeld" case. The case involved a Miller employee who was fired in 1993 partly because a female co-worker complained she was offended when he talked about an episode of the show involving a joke referring to a female body part.
The employee who was fired sued Miller, and a jury initially awarded him $26.6 million. However, higher courts eventually reversed the jury ruling and threw out the entire award.
"The whole business community was up in arms (about the case) because this guy was an employee at will," Daily said. "Miller spent millions of dollars (in its defense), which they don’t get back."
A business should be willing to endure the time and money spent to defend itself in a class action lawsuit if executives are convinced the company is not at fault, Daily said.
Many companies decide to settle such lawsuits, hoping to just make them go away and end a public relations headache, he said. However, that approach only encourages more frivolous lawsuits against the company, he said.
"Word gets around," Daily said. "These guys don’t have the stomach for it. They’re going to cave."
"It just keeps coming and coming," Benson said.. "(Settling) only encourages more suits."
A determined legal defense by a company deters people and their attorneys from suing the company, Daily said.
In some cases, companies choose to settle a lawsuit because of advice from their insurance providers.
"Insurance companies don’t care about the reputation of the company," Daily said. "They’re in the business of evaluating risks. Sometimes they want to settle when I don’t think they should settle."
Jan. 9, 2004 Small Business Times, Milwaukee
