An April 2002 study prepared by the White House Council of Economic Advisers determined that the U.S. has the most expensive tort system in the world, consuming 1.8% of GDP. At $636 per capita, it’s more than twice the average percentage of other industrialized nations.
Put another way, the $179 billion the nation spent in 2000 on direct costs for insurance administration, attorneys, witnesses, and awards to victims under the American tort adjudication system equals 150% of the amount Americans spent on pharmaceuticals.
The curious can review this disturbing CEA report here.
Perhaps the best respected source of overall tort costs is Tillinghast-Towers Perrin, a firm that has been tracking the tort system, here and abroad, for decades. In its February 2002 update, it finds that insurance firms are an integral part of the system, paying out $128 billion in non-medical tort costs in exchange for premiums.
The concentrated role of insurers makes systemic data collections possible, producing an analysis that indicts the system as wasteful. This is how insured tort costs are broken out.
— Insurance administration and overhead: 25%
— Plaintiffs’ attorney fees: 17%
— Defense costs: 16%
— Victims awards for economic losses: 20%
— Victims awards for non-economic losses: 22%
According to this data, only 42 cents of an insurance company’s claim payment dollar goes to compensate injured parties.
Few reformers believe that economic damages are too high today, because the calculation of such costs is reasonably straightforward. For example, a motorist struck head-on will receive an itemized bill from the hospital that treated him, have identifiable three-month physical therapy costs, will secure a quote citing the value of his totaled two-year-old Lexus, and can document how much he lost in wages after his sick leave expired.
It’s the non-economic losses that are the problem. Most are for “pain and suffering,” a catch-all category for emotional and physical discomfort. How much should the accident victim above receive to compensate him for the aggravation and pain of being hospitalized for two weeks, for being bedridden for another three, and for losing a year before his tennis game returns to its prior form? There is no measurable answer.
One jury may quote JFK, who said, “Life’s unfair,” and provide little. Another may come to dislike the defendant and his insurance company’s attorney and award $1 million to the plaintiff.
In about 3% of the tort cases that go to trial, a judge or jury will provide another type of non-economic award to winning plaintiffs — punitive damages. The urban legend that punitive damages are routinely and outrageously awarded is untrue, in part because final damages are typically lowered considerably on appeal, but there are cases when final punitive damages are a multiple of combined economic and pain-and-suffering damages.
The Tillinghast-Towers Perrin report documents that the average tort victim is made “whole” for his economic losses, but in addition receives a “profit,” equaling another 110% of his economic damages, in non-economic damages.
GOP congressional reformers believe that both pain-and-suffering damages and punitive damages should, in many cases, be subject to legal maximums. The Democrats’ philosophy on tort meshes with their philosophy on corporate misbehavior — in both cases they side with the financial interests of the legal profession.
In 2000, lawyers received 33 percent of tort expenses, or $60 billion. This symbiosis is reflected in campaign contributions reported to the Federal Election Commission.
The 1,403 candidates who ran for Congress in 2002 raised almost $879 million to finance their campaigns. Although only 1 of every 130 in the workforce has a law degree, the legal profession provided candidates with 8% of all the campaign cash they raised to keep their jobs, or $73 million.
Not surprisingly, lawyers directed $50 million to Democratic candidates while Republican office seekers received $23 million. In rough terms, this small group supplied 12% of the fuel for the campaigns of Democrats and 5% for Republicans.
Outsized campaign giving by lawyers and partisan skewing is not a recent phenomenon. In fact, the Center for Responsive Politics (CRP) has ranked the legal industry as the largest industry contributor in every national election for the past twelve years. Furthermore, according to FEC data that the CRP has compiled, lawyers and law firms have favored Democrats over Republicans by at least a two-to-one margin since 1990.
Fifty years ago, U.S. tort costs equaled 0.6% of GNP, as they do now in England, not the 1.8% of today. An impatient President Bush, with a bill-signing pen in his hand, wants to lower these costs right away. With a 229-206 partisan edge in the House, the White House knows it is half-way home. And while a Senate filibuster on the issue looms, tort reformers have their best chance to win in half a century.
— Stuart J. Sweet is president of Capitol Analysts Network, a political risk-management firm based in Chevy Chase, Md.