U.S. Tort Costs Climbed to $205 Billion in 2001, According to Tillinghast Study

Tort Costs Jumped 14.3%: Highest Percentage Increase Since 1986

New York, NY, February 11, 2003 � The U.S. tort system cost $205 billion in 2001, or $721 per U.S. citizen, representing a 14.3% increase in tort costs since the year 2000. At current levels, U.S. tort costs are equivalent to a 5% tax on wages. These findings were reported by Tillinghast – Towers Perrin (Tillinghast) in U.S. Tort Costs: 2002 Update � the only study that tracks the cost of the U.S. tort system from 1950 to 2001 and compares the growth of tort costs with increases in various U.S. economic indicators.

Key findings from the study revealed that:

  • When viewed as a method of compensating injured parties, the U.S. tort system is highly inefficient, returning less than 50 cents on the dollar to people it is designed to help and returning only 22 cents to compensate for actual economic loss.
  • As of 2001, U.S. tort costs accounted for slightly more than 2% of GDP, signaling the end of a 13-year decline in the ratio of tort costs to GDP.
  • While the cost of the U.S. tort system has increased one hundred fold over the last fifty years, GDP has grown by a factor of only 34.
  • Medical malpractice costs have risen an average of 11.6% a year since 1975 in contrast to an average annual increase of 9.4% for overall tort costs.
  • The largest single factor in the rise of tort costs in 2001 was a significant reassessment of liabilities tied to asbestos claims. This accounted for $6 billion of the $26 billion increase over 2000 levels. Other contributing factors include: class action lawsuits and large claim awards; an increase in the number and size of shareholder lawsuits against Boards of Directors; an increase in medical cost inflation leading to higher costs of personal injury claims; and medical malpractice lawsuits.

“These trends continued and became even more pronounced in 2002, with large charges for upward revisions of asbestos liability and a jump in the number of directors� and officers� (D&O) liability lawsuits,” says Russ Sutter, survey leader and Tillinghast principal. “Additionally, we believe 2002 data will begin to show the impact of 9/11-related lawsuits and will also show mold beginning to emerge as an important liability issue. Absent sweeping tort reform measures, we expect most of these trends to continue in 2003 and beyond.”

Future Implications

While it is almost impossible to accurately predict future increases in tort costs, Tillinghast estimates annual increases will be in the 7% to 11% range for the next several years. At this rate of increase, tort costs could equal $1,000 per citizen by 2005.

“When the first Tort Costs Study was published in 1985, we attributed the rapid escalation in tort costs to an overall societal attitude of entitlement,” says Jeanne Hollister, a Tillinghast consulting actuary. “But this sense of entitlement has now been coupled with rising anger toward and mistrust of U.S. corporations that can only serve to exacerbate tort costs.”

Tillinghast expects the insurance industry to react to rising tort costs by placing further limits in policies as it did in the mid-1980s with the elimination of pollution coverage. The firm anticipates some insurers will withdraw completely from certain lines of business and markets, as is happening now in the medical malpractice market.

“We believe corporations will continue to shift toward self-insurance as they attempt to gain more control over costs and as insurance prices continue to rise,” says Eric Speer, Tillinghast Region Manager for the Americas. “Rising tort costs, combined with the right congressional environment, will likely create more pressure for tort reform � particularly asbestos reform.”

About the Study

U.S. Tort Costs: 2002 Update is an update of previous studies published by Tillinghast in 1985, 1992, 1995 and February 2002. For copies of the report, please contact Robyn Hennessy at [email protected].

About Tillinghast � Towers Perrin

Tillinghast provides actuarial and management consulting to financial services companies and advises other organisations on their self-insurance programs. Tillinghast is a premier independent advisor to the insurance industry; its major clients include most of the world’s top insurers. It operates as one global business, through a network of 42 offices in 20 countries. Tillinghast is a division of Towers Perrin, one of world’s largest management and human resource consulting firms. The Towers Perrin family of businesses also includes Towers Perrin Reinsurance, a leading global reinsurance intermediary. Together, these businesses have over 9,000 employees in 23 countries. More information about Tillinghast is available at www.tillinghast.com.