The U.S. Chamber of Commerce’s Institute for Legal Reform, which describes itself as “the country’s most influential and successful advocate for civil justice reform, both in the U.S. and abroad,” issued a report on October 24, 2018 entitled “Costs and Compensation of the U.S. Tort System” that concluded, in part: “in 2016 the costs and compensation paid in the tort system amounted to $429 billion or 2.3 percent of U.S. gross domestic product (GDP). We further estimate that 57 percent of tort system costs were paid in compensation to plaintiffs. The remaining 43 percent covered the cost of litigation, insurance expenses, and risk transfer costs.”
The report acknowleges that the tort system in the United States “play[s] two important economic roles in society: (1) to compensate for harm actually incurred; and (2) to prevent future harm by encouraging responsible behavior.” The report states “[t]he legal basis for seeking damages arises from two principal sources of legal liability: (1) the common law, or court-made law, of torts, such as negligence and product liability; and (2) statutory protections established through legislation that expand on torts in the form of laws such as consumer protection acts, labor and employment law, and securities laws.”
The U.S. Chamber of Commerce’s Institute for Legal Reform (“ILR”) defined “compensation” and “costs” of the U.S. tort system in its report as “the aggregate amount of judgments, settlements, and the legal and administrative costs of adjudicating the associated private claims and enforcement actions. We also include market-determined gross profits for insurers as costs of the tort system [because these] costs are required to entice insurance companies to willingly bear the transferred liability risks.”
The ILR used in its analysis “total earned premiums of liability insurance policies to estimate the size of the tort system. Earned premiums cover, on a present value basis: the aggregate amount of covered awards and settlements, the legal costs of administering and adjudicating claims, the costs of managing liability risks (including contributions to cover insurers’ operating expenses), and insurers’ profits for bearing risk.”
The ILR estimated in its report the self-insured costs and compensation paid in the tort system “by using reported rates for commercially-available insurance to price hypothetical insurance based on estimates of self-insured risk exposures.”
The ILR concluded:
“We find that in 2016 the costs and compensation paid in the tort system amounted to $429 billion or 2.3 percent of U.S. gross domestic product (GDP). Of this amount, $250 billion stemmed from general and commercial liability exposure, which covers a broad range of personal injury, consumer, and other litigation. Liability related to automobile accident claims accounted for $160 billion of the total. Medical malpractice litigation accounted for the remaining $19 billion in tort costs.
“We further estimate that 57 percent of the tort system costs and compensation was paid in compensation to plaintiffs. The remaining 43 percent covered the cost of litigation of both sides, operating costs for the insurers, and profits to effectuate risk transfer.
. . . .
“Tort system costs and compensation in the most expensive states are up to 2.1 times larger than in the least expensive states.
. . . .
“Factors contributing to differences in liability costs across states include: the comprehensiveness of the social safety net, availability of no-fault compensation schemes, extensiveness of private rights of action, forms of litigation funding (including contingency fees) and availability and abuses of the class action mechanism. Variation in liability costs across states has also been explained in part by differences in state legal environments, such as the number of lawyers, the perception of the competence of state judges, the strength of evidentiary rules, and the frequency of frivolous or abusive litigation.”
The ILR report stated, “On average, the costs and compensation paid in the tort system amounts to $3,329 per household … [t]he 43 percent of the aggregate costs and compensation of the tort system that are not paid in compensation go towards the payment of legal costs of plaintiffs and defendants, and the cost of risk transfer to insurance companies. This cost goes to pay insurance companies’ additional operating costs and profit margins in excess of the losses and loss adjustment expenses paid incurred on claims. This “cost of risk transfer” represents 12 percent of the aggregate cost of the tort system.”
Nonetheless, with regard to medical malpractice liability insurance costs, the ILR reported “Medical malpractice rates [only] increased at about five percent per year between 2011 and 2018.” For 2016, the ILR estimated “liabilities relating to medical malpractice exposures were $19 billion.”
Despite the dubious methodology employed by the ILR in calculating what it believes to be the costs associated with the tort system in the United States, the ILR complains: “Excessive costs of the tort system can adversely affect businesses and individuals, and a number of studies have identified negative externalities of elevated liability risks … High liability costs can also make businesses in the United States less competitive internationally … the tort system has been found to lack efficiency, with a large portion of the total expenditures going to prosecuting and defending claims and lawsuits rather than compensating claimants.”
The ILR ended its report by stating “We hope that the objective, clear definition of tort costs and transparent cost estimation methodology will provide a basis for research and improved performance management of the tort system in the future.”
On the same day the ILR issued the above report, the ILR issued another report entitled “A Rising Threat: The New Class Action Racket That Harms Investors and the Economy.”
A spokesperson for the American Association for Justice, which is the largest plaintiffs’ bar organization in tbe United States that is dedicated to protecting the rights of innocent victims of tortious wrongdoing to seek and obtain fair compensation for the harms they suffered, responded to the findings and conclusions espoused in the ILR’s reports by stating, in part: “The Chamber’s claims on the costs of litigation have no basis in reality and include items tangentially associated with litigation, like insurance companies’ administrative costs and profits. Then, on the same day, they advocate curbing the ability of shareholders to hold a company accountable if it defrauds its investors. These ‘reports’ serve as more proof that the Chamber will do and say anything to make sure that unscrupulous pharmaceutical companies, big banks, and large corporations are never held accountable in court.”
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