Center for America

Speaker's Resource: 3. Lawsuit Abuse Costs, p 3

 

 

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Key Reference Citations (KRC)

 

Costs to:  Charitable Organizations

  • The cost [of the liability crisis] to charity organizations is even greater, because they lose their volunteer workforce as a result of bogus lawsuits.  It has become more and more difficult to find individuals to act as Board Members for those organizations, for fear of being dragged into some litigation nightmare. (KRC: Marcus, “Solutions for the Litigation….”)

  • “It's easy to see business and charity as two separate spheres, and forget that abuses of the legal system have a negative impact on both. The first thing to remember is that charities, non-profits, and foundations are every bit as much in the legal crosshairs as businesses. As a result, volunteers for non-profits are harder to recruit because of their fear of being sued.” (KRC: Marcus, “Solutions for the Litigation….”)

  • “Remember, we're living in an era when Little League umpires are sued by parents for calling junior "out" at home plate. It all adds up to a soaring liability problem that, for many organizations, has been ruinous. Without a doubt, skyrocketing litigation-related costs have come at the expense of programs that should be helping needy and needful Americans.” (KRC: Marcus, “Solutions for the Litigation….”)

Costs to:  States

  • “State-level studies show that tort costs are so high – and varied – that they create significant competitive advantages and disadvantages among states.  (KRC: Hantler, “Seven Myths…” p.6)

  • The payouts for tort losses and insurance premiums associated with state tort cases increased 60 percent in inflation-adjusted dollars during the decade from 1996 through 2005.  (KRC: TLT, Authors calculations using data from A. M. Best Company)

  • “[A]n overwhelming 80% [of in-house general counsel and senior litigators surveyed] report that the litigation environment in a state could affect important business decisions at their company, such as where to locate or do business.”  (KRC: Nicolaides,U.S. Tort Reform and the Implications…” July 2004, p. 5, citing Harris Interactive Inc., “State Liability Systems Ranking Study”, Executive Summary, March 8, 2004)

  • “‘Why would you want to invest in a state with a hostile legal environment?  We want fairness, rather than being the target of frivolous lawsuits. There are states where doctors can’t do business anymore, because malpractice lawsuits are out of control’.” (KRC: Hantler, “Seven Myths…” p.6, quoting former AIG Chairman and Chief Executive Officer Maurice R. “Hank” Greenberg, AIG’s Greenberg is hopeful on SARS, tort reform, Best’s Ins. News, May 13, 2003 ) 

  • States with a comparative negligence standard have larger legal payouts and lower business productivity than states with alternative standards.  Daniel P. Kessler found that settlement amounts in states applying comparative negligence exceeded those in states applying contributory negligence.  (Daniel P. Kessler, “Fault, Settlement, and Negligence Law,” RAND Journal of Economics 26 (summer 1995), pp. 296-313)

  • In fact, New Jersey is second-worst in the nation when it comes to how much of the state’s economic activity is spent on tort litigation, and it has the fourth riskiest tort litigation system in the country.  (Lawrence J. McQuillan &Gregg M. Edwards, Editorial, Tort Reform Would Spark Lagging Local Economy, Star-Ledger, June 23 2008, at 15.)

     

Legal Reform Works!

The meaningful tort reform measures enacted by Texas in 2003, together with reform legislation passed in prior years, have significantly improved the State’s legal environment, paving the way for more businesses, more jobs and a better economy for the State. 

In fact, in a media campaign – “Moving to Texas” – launched to promote Texas as the ideal location for growing and expanding businesses, Governor Rick Perry attributes the State’s passage of sweeping lawsuit reform measures as one of the reasons his state won the coveted 2004 Governor’s Cup award for the largest number of job creation announcements in the country and for its selection as the state with the best business climate in the nation.  Both awards were given by Site Selection Magazine, the premier business publication on job creation.

Watch 30-second Ad*

*This link is to a video on Governor Perry's website.  If the link no longer works,

please notify Kristyn Shayon, CFA@lawexec.com.  Thank you.

 

 

The Impact of Legal Reform

  • For some categories of tort cases, specific reforms cut payouts by more than 50 percent.  The cumulative effect of reforms across all tort categories is a 47-percent reduction in losses and a 16-percent reduction in insurance premiums for consumers.  (KRC: TLT, Introduction, page 9)

  • Of the 25 tort reforms that we examine, the statistical analysis identifies 18 reforms to state civil-justice systems that significantly reduced tort losses and tort insurance premiums from 1996 through 2006.  (KRC: TLT Executive Summary)

  • Collectively, if all of the reforms that had statistically significant coefficients were implemented (that is, regardless of whether the estimated effects were positive or negative), the findings in table 3 indicate a cumulative reduction in losses equal to $295 per capita, or a 47-percent saving relative to the losses in the typical (here defined as the median) state.  (KRC: TLT, The Results: Which Tort Reforms Matter And How Much, page 39)

  • Another study by Kenneth E. Thorpe found that punitive-damage caps lower physician insurance premiums.  Thorpe found that insurance premiums in states that capped awards were more than 17 percent lower than in states with no caps.  (Kenneth E. Thorpe, “The Medical Malpractice ‘Crisis’: Trends and the Impact of State Tort Reforms,” Health Affairs Web Exclusive (January 21, 2004), pp. 20-30)

  • We illustrate how to interpret the results using table 3.  The coefficient for appeal-bond caps variable is -$27.80 in the Losses per Capita column.  This means that aggregate tort losses per capita in a state that has adopted an appeal-bond cap are $27.80 lower than in states without an appeal bond cap.  (KRC: TLT, The Results: Which Tort Reforms Matter And How Much, page 38)

  • The researchers concluded: “States that changed their liability laws to decrease levels of liability experienced greater increases in aggregate productivity than states that did not.”  (Campbell, Kessler, and Shepherd, “The Link between Liability Reforms and Productivity,” pp. 107-148)

  • Thomas Campbell et al. found a significant positive relationship between reforms that decrease business exposure to liability-such as collateral-source reforms-and productivity gains.  States that adopted liability-reducing reforms experienced a productivity boost of 1.7 percent compared with states that did not enact such reforms.  The researchers also noted that liability-reducing reforms had the greatest effect on the insurance industry and industries with the highest liability risk.  (Thomas J. Campbell, Daniel p. Kessler, and George B. Shepherd, “The Links between Liability Reforms and productivity: Some Empirical Evidence,” Brookings papers on Economic Activity. Microeconomics (1998), pp. 107-148)

  • Premiums for product-liability coverage in states that have adopted eight effective reforms are predictably 63 percent below those in states without any of the reforms.  (KRC: TLT, The Results: Which Tort Reforms Matter And How Much, page 50)

  • Limits on medical-malpractice damages lessen liability pressures on physicians and lead to reduced medical expenditures.  This is supported by a report by Daniel Kessler and Mark McClellan, which found that direct malpractice reforms limiting awards reduce “defensive medicine” procedures.  Kessler and McClellen found that these reforms led to a reduction of 5 to 9 percent in medical expenditures without significant effects on mortality or medical complications.  Limits on damage awards are the most direct way to reduce medical-malpractice awards.  (Daniel P. Kessler and Mark McClellan, “Do Doctors Practice Defensive Medicine?” Quarterly Journal of Economics III, no. 2 (1996), pp. 353-390) 

  • Table 5 presents the results for private passenger automobile liability losses and insurance premiums.  For this category, five reforms appear to reduce losses substantially, and the cumulative effect of all reforms is a 36-percent reduction in losses.  (KRC: TLT, The Results: Which Tort Reforms Matter And How Much, page 42)

 

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