Politics & Policy

The Tort Tax

Greedy trial lawyers are slowing economic growth and investment.

In recent days, there have been numerous press stories about doctors going on strike to protest high medical malpractice premiums. This is just the most obvious evidence that something is fundamentally wrong with the nation’s tort liability system. A number of reports suggest that the cost is growing out of control, imposing a de facto tax on all Americans that is slowing economic growth and investment, while doing little for those suffering real harm.

According to a new study by Tillinghast-Towers Perrin, the total cost of the U.S. tort system reached $205.4 billion in 2001, an increase of 14.3% over the previous year — far faster than the rate of economic growth. This is like a tax of 2% on everything in the American economy that takes $721 per year out of the pockets of every citizen. This cost is paid in the form of bankrupt companies, reduced investment and jobs, higher prices for medical insurance, and many other goods and services.

Of course, any civilized society has to have a means of compensating victims of personal injuries resulting from medical mistakes, harmful products, and such. But the cost of compensating people for these problems has been going up rapidly without any evidence that the underlying causes are increasing. Doctors are not making more mistakes than they used to and businesses are not manufacturing more dangerous products than they used to. Yet the cost of torts has risen from just over 1% of the gross domestic product in 1973 to twice that this year.

Responsibility for rising tort costs lies mainly with greedy trial lawyers who sue based on the flimsiest of evidence, and out of control juries that think nothing of awarding hundreds of millions of dollars in damages at the drop of a hat. Last year, for example, a jury in California awarded $290 million to the family of 3 people killed in the rollover of a Ford Bronco. Many other examples can be found at www.overlawyered.com, an excellent website that, unfortunately, I find too depressing to read regularly. According to Jury Verdict Research, the median medical-malpractice award doubled between 1995 and 2000, from $500,000 to $1 million.

In recent years, a key cause of rising tort costs has been asbestos. As trial lawyers search farther and farther for “deep pockets,” more than 6,000 companies have become embroiled in litigation, according to a recent RAND study. These defendants include many companies far outside the asbestos and building-products industries. They have already paid out $54 billion, yet it is estimated that there are still another $200 billion to $265 billion in claims yet to be paid.

Increasingly, the only way companies can cope with rising asbestos liabilities is by declaring bankruptcy. Some 80 companies have already done so. These bankruptcies have cost at least 60,000 jobs, according to a new study by economists Joseph Stiglitz, Jonathan Orszag, and Peter Orszag. Each worker lost $25,000 to $50,000 in wages as the result of these asbestos-related job losses, plus another $8,300 in losses in their 401(k) plans.

The rise in asbestos awards has less to do with an increase in asbestos-related illnesses than the failure of a few judges to do their jobs properly. According to a study by economist Michelle White, a few judges in a few jurisdictions are responsible for the bulk of asbestos awards. Perhaps inadvertently, they have changed the rules of the game for defendants, increasing the likelihood that plaintiffs will get large awards and encouraging lawyers to file as many cases as possible.

Yet despite the massive increase in awards, little reaches those that really need it. RAND found that transaction costs eat up 50% of all the money and 65% of what reaches plaintiffs goes to those who have not yet — and may never — develop any asbestos-related disease. Looking at all tort cases, Tillinghast-Towers Perrin found that only 22% of tort costs compensated victims for actual losses.

What is frightening is that the link between medical malpractice or corporate malfeasance and any scientific evidence of wrongdoing or error is becoming increasingly tenuous. For example, a new report by the American College of Obstetricians and Gynecologists found that cerebral palsy almost never results from problems in childbirth. Yet victims of this condition are routinely awarded large sums as if the delivery doctor was solely at fault. Similarly, billions of dollars were awarded to women with silicon breast implants even though there is no scientific evidence that they cause illness, according to the Institute for Medicine.

Judges and juries must learn that the money they are awarding is not free money from the tooth fairy. The tort system today is severely broken and in desperate need of reform. Even the American Bar Association, whose members are enriched by it, has come to agree.


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