After several states passed tort reform legislation in 2004, the Economic Policy Institute published a report titled “The frivolous case for tort law change: Opponents of the legal system exaggerate its costs, ignore its benefits,” that revealed a number of important flaws in the argument for the necessity for and benefit from tort reform.
Many proponents of tort reform will claim that there is a tort liability crisis, the tort system caused insurance rates to rise dramatically in the early 2000s, the tort system has caused a reduction in real wages, and that tort reform will create jobs. This EPI report demonstrates that each of these four claims is false.
There is no “tort liability crisis”
There is no tort liability crisis. While insurance industry lobbyists will argue that the number of tort lawsuits is exploding, the number of tort lawsuits was declining dramatically in years prior to the passing of state tort reform a decade ago. EPI: “Despite the nation’s constantly growing population, the number of new tort suits has fallen in recent years. The National Center for State Courts (NCSC) tracking system, which closely monitors a sample of 16 states, shows that the absolute number of tort cases filed in those states declined significantly from 1996 to 2000—from 320,976 cases to 260,745. NCSC reports that for a larger group of 35 states, representing 77% of the U.S. population, tort filings declined by 4% over the decade from 1993 to 2002.” (emphasis added)
Considering tort lawsuits per capita, there was an 8% decline between 1975 and 2000 – tort litigation decreased from 230 in every 100,000 US citizens to 212 of the same number the last quarter of the 20th century.
Furthermore, tort reform “costs” are not rising relative to GDP. Quoting the same report, the EPI stated, “Until recently, tort costs … have been falling relative to population and to GDP. The year with the highest ratio of tort costs to GDP is 1987, at 2.33%, and the ratio generally declined until 1999, when it reached 1.82%”.
Tort litigation did not cause insurance rates to rise
Before asserting that tort litigation caused rates to rise in an industry with a gross annual income of $1 trillion, it is key to understand how fluctuations in insurance rates are determined. Insurance rates are tied to the investment income of insurance companies. So, when insurance companies generates more income from investments in the stock market, insurance rates are lower. When insurance companies are not making a lot of money from investments, rates are higher. This makes sense – insurance companies enjoy a steady stream of income, using premiums to offset poorly performing stocks.
Following the tech bubble pop, US stock and financial markets hit the floor. As such, insurance premiums spiked dramatically in 2001 and 2002. Even the conservative Wall Street Journal acknowledged that this bump in insurance rates was due to crashing markets, not tort litigation.
Further, the EPI notes that, “Premiums were also pushed up in those years by other economic developments, including huge increases in medical costs, which created pressure on health care insurance premiums.”
Tort litigation did not reduce wages
One argument commonly put forth in favor of tort reform is that tort litigation is so costly, it in effect levies a “tort tax” on the wages of millions of Americans, purportedly at 5%. This is plainly false, and according to the EPI, “indefensible”.
The authors of this report claim, “Adopting [George W. Bush’s Council of Economic Advisors’] example of the impact of a ‘litigation tax’ that is shared by capital and labor—that 25% of those excessive costs are shifted onto workers through lower wages—the economic effect is insignificant: $14.5 billion on a $6.5 trillion national wage bill. This yields a negligible ‘tort tax’ of 0.2% on U.S. wages, salaries, and fringe benefits. If, as we have argued, [prominent insurance industry consultant,] TTP’s estimate of tort costs is inflated by including transfer payments, the alleged tort tax would be even smaller. The true impact on U.S. wages is probably much lower: there is no substantial evidence that even 10% of tort costs are excessive, and, if TTP’s overall tort cost estimates are grossly inflated, so is this estimated ‘tort tax.’”
Tort reform will not create jobs
A study by Economy.com, a well-respected source for economic news and information, was conducted to demonstrate that tort reform will create jobs using complex statistical models. The statistical models assumed that “(1) changes to the tort system would be so effective that over four years (2004-09) tort costs would increase at the slow 3.3% per annum pace experienced during the 1990s; (2) the baseline against which changes should be measured forecasts that tort costs will rise at the double-digit pace reported by TTP since 2000; (3) corporate tax liability will be reduced by an amount equal to the tort cost savings (this incorporates the unproved notion that tort costs impose a ‘tort tax’ on employers); and (4) proprietors’ (law firm) income and personal transfer payments (tort awards) will be reduced accordingly.” Important to note here is that these assumptions are largely unfounded and biased towards reforming the tort litigation system.
However, interestingly enough, even this study could not demonstrate that tort reform would create jobs. The EPI states, “Far from stimulating job creation, the model predicts that a tort law change effective enough to reduce tort cost increases by more than 10 percentage points per year would lead to lower employment, not greater.”
It seems no wonder that the chief proponents of tort reform are insurance company consultants, but it is nonetheless important to understand that many supposed benefits of tort reform are false. For more information on tort reform, follow the links below.