U.S. Tort Costs Climbed to Record $233 Billion in 2002, According to Tillinghast Study

Costs Were 13.3% Higher Than 2001: Second Year of Double-Digit Growth Rates

New York, N.Y., December 10, 2003 — The U.S. tort system cost $233 billion in 2002, a $27.4 billion increase over 2001, representing the largest dollar increase in U.S. history. Current costs translate into $809 per U.S. citizen, $87 more than in 2001 and $797 more than in 1950. These findings were reported by Tillinghast – Towers Perrin (Tillinghast) in U.S. Tort Costs: 2003 Update — the only study that tracks the cost of the U.S. tort system from 1950 to present and compares the growth of tort costs with increases in various U.S. economic indicators.

Key findings from the study reveal that:

  • The largest single factor in the rise of tort costs in 2002 was, once again, a significant reassessment of liabilities tied to asbestos claims. At $11 billion, these costs were double the 2001 level and more than one-third of the total cost increase. Other contributing factors remained consistent with last year: 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.

  • As of 2002, U.S. tort costs accounted for 2.23% of GDP, the highest cost-to-GDP ratio since 1990. This is the second year ratios have increased following a 13-year decline. “This is an important barometer of the international competitiveness of the U.S.; higher tort costs can have an adverse impact on U.S. businesses,” says Steve Lowe, Towers Perrin Principal and Tillinghast Global P/C Insurance Practice Leader.

  • When viewed as a method of compensating injured parties, the U.S. tort system has become increasingly 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. In 1985, 25 cents on the dollar was returned to injured parties for their actual economic loss.

  • While the cost of the U.S. tort system has increased a hundred-fold over the last 50 years, GDP has grown by a factor of only 35, and population has grown by a factor of less than two.

  • Medical malpractice costs totaled nearly $25 billion in 2002, or $85 per person, compared with $5 per person in 1975. The increase in medical malpractice costs continues to outpace increases in overall U.S. tort costs, rising an average of 11.9% per year versus an increase of 9.3% per year in all other tort costs.

  • Tort costs increased by a total of 30% in the last two years — the largest two-year increase since 1986/1987.

“It sounds trite, but the consumer ultimately pays for tort costs,” says Russ Sutter, Tillinghast survey sponsor. “America is an increasingly litigious society, and we are all feeling its effects. Physicians are relocating or changing practices as a result of escalating liability insurance. Manufacturers are looking at severe cost increases from asbestos claims, which could translate into more layoffs and plant closings. Most pundits look at tort costs in terms of their impact on revenue and profits, but it is just as painful to patients who can’t find a specialist or workers who can’t find a job.”

Future Implications

While it is almost impossible to accurately predict future increases in tort costs, Tillinghast estimates annual increases will be in the 6% to 11% range for the next several years, and the cost- to-GDP ratio will continue to rise. At this rate of increase, tort costs could equal more than $1,000 per citizen by 2005, representing a new, quadruple-digit benchmark.

“The spike in tort cost growth during the past two years is like nothing we’ve seen in the last 15 years,” says Jeanne Hollister of Tillinghast. “In the past, the government and industry responded with tort reform measures, public opinion campaigns against excessive jury awards, a greater focus on safety and risk management, and changes in insurance company claim practices. The current surge in tort costs may lead to similar reactions in the near future.”

“The recent surge in tort costs raises the stakes in reform discussions taking place in many state legislatures as well as in Washington,” says Amy Bouska, Tillinghast’s P/C Insurance Practice Leader in North America. “At the same time, new issues such as investment management malfeasance are still unfolding, which is likely to put further pressure on the tort system.”

Katie Cullen, head of Tillinghast’s Claim Practice, adds, “Rising tort costs have contributed to the destabilization of claim costs over the last few years, which has direct implications for claim reserves and pricing. This environment will require insurers to both carefully monitor their prices and pay closer attention to case reserve adequacy.”

Tillinghast expects the insurance industry to continue to raise rates in selected liability lines; some insurers will cease to provide coverage for areas in which they believe the liability risks are too unstable.

U.S. Tort Costs: 2003 Update is an update of previous studies published by Tillinghast in 1985, 1992, 1995, 2002 and February 2003. The report is available at www.tillinghast.com.

About Tillinghast – Towers Perrin

Tillinghast provides actuarial and management consulting to financial services companies and advises other organizations 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 insurance organizations. It operates as one global business, through a network of 42 offices in 20 countries. Tillinghast is a division of Towers Perrin, one of the 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 24 countries. More information about Tillinghast is available at www.tillinghast.com