For the longest time a political football, the US tort liability system may now be close to reform. By Phil Zinkewicz.

The US tort liability system has been the subject of considerable controversy for decades. Often, it has been described as a political football, being kicked and thrown about by opposing teams, with business interests and insurance companies seeking drastic changes in the system on the one side, and plaintiffs' attorneys who want to retain the system as is in order to keep replenishing their own coffers on the other.

So far, the plaintiffs' bar has been scoring all the goals. But there are signs that the game might just be on the verge of a turnaround, and the reason is that other players have gotten in on the action. For one thing, the US citizenry is becoming more aware of the effects of a tort liability system run amok on their personal lives. In the malpractice area, for example, New Jersey residents watched earlier this year as 4,000 of their physicians went on a work stoppage to protest soaring malpractice insurance premiums. The physicians blamed the tort liability system, and the stoppage received a good deal of coverage in the media. Other states are seeing an exodus of qualified physicians because of malpractice premiums, leaving consumers in need of quality health care. That, too, has garnered a good deal of press attention. And, the cost of the tort liability system to the consumer and to the overall economy is being driven home to the solons on Capitol Hill. One reason is that legislators are beginning to see how the current system is disrupting the economy.

In a recent study entitled Tort Costs: 2002 Update, consultancy Tillinghast-Towers Perrin estimated that the US tort system cost $205bn in 2001, or $721 per US citizen, representing a 14.3% increase in tort costs since the year 2000. Tillinghast said that, at current levels, US tort costs are equivalent to a 5% tax on wages.

Other findings of the study include:

  • when viewed as a method of compensating insured parties, the US 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, US tort costs accounted for slightly more than 2% of GDP, signalling the end of a 13-year decline in the ratio of tort costs to GDP;
  • while the cost of the US tort system has increased 100-fold over the last 50 years, GDP has grown by a factor of 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; and
  • 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 $6bn of the $26bn increase over 2000 levels.
  • Furthermore, Tillinghast projects that, without change in the overall tort system, things might get worse before they get better. Its study does not factor in the possible liability lawsuits that will come further down the road as a result of September 11. Additionally, the corporate scandals that have rocked the investment community have brought about a significant increase in investor lawsuits and directors' and officers' liability lawsuits, and more are on the way.

    But cost is not the only arrow that is being slung against the present tort liability system. Horror stories abound of plaintiffs' attorneys being compensated for their services in class action suits in the multimillions of dollars, while injured parties in those suits receive only a small fraction of a settlement or jury award. In some cases, it has been reported that people who have been named in class action suits without their knowledge actually owe money after a settlement has been reached.

    Perhaps the most heinous charges levied at the tort liability system relate to asbestos. Some unscrupulous plaintiffs' attorneys have been dumping people into asbestos class action lawsuits who have only been 'exposed' to asbestos products but who have not manifested any illnesses. Those people are sharing awards with unquestionably injured victims who are in need of the money because of their life-threatening illnesses. Even the American Bar Association has come out against this practice and has said it will back federal reform legislation that would make certain only genuinely injured parties receive compensation.

    So, for all of these reasons tort liability reform has hit the spotlight. President Bush has been pushing for such reform and support seems to be gaining ground, and those on either side have apparently stopped political footballing and have become involved in serious debate.

    Those who argue against reform - plaintiffs' attorneys and some self-styled consumer activists - argue that tort reform would do nothing to hold down insurance premiums. J Robert Hunter and Joanne Doroshow of the Center for Justice & Democracy, in a special report entitled Premium Deceit: The Failure of "Tort Reform" To Cut Insurance Prices, say that tort reform laws have been passed on a state-by-state basis since the mid-1980s, and then go on to show, using their own data, that liability insurance premiums have not decreased in those states.

    The report concludes: "Just as the liability insurance crisis was ultimately found to be driven by the insurance underwriting cycle and not a tort law cost explosion as many insurance companies had claimed, the remedy pushed by he insurance companies failed. Laws that restrict the rights of insured consumers to go to court do not produce lower insurance costs or rates, and insurance companies that claim they do are severely misleading this country's lawmakers."

    Representatives of the insurance industry counter this by saying that state reform has often been no reform at all. They say that many state reforms, once enacted, have proven to be all too easily overturned by state court systems swayed by the influential trial bar.

    Stephen Foreman, Director of the Pennsylvania Medical Society Health Services Research Institute, has taken on the Hunter-Doroshow study with a vengeance. In his Critique of a Center For Justice & Democracy Study By J Robert Hunter and Joanne Doroshow, Foreman says he uses the data compiled by Hunter and Doroshow and concludes that "there is substantial evidence that liability insurance reform is correlated with diminished premium increases for general liability and medical professional liability insurance."

    Referring to the Center for Justice study, Foreman says: "The authors of the report state that their work is 'the most extensive review of insurance rate activity in the wake of the liability insurance crisis ever undertaken.' There are, however, quite a number of studies on this issue, some of them empirical. Hunter and Doroshow contend that the 'tort reform' movement largely originated in the mid-1980s while the US was 'suffering through' a severe 'liability insurance crisis'. In fact, liability insurance efforts began in the 1960s and the 1970s with efforts to curb large increases in automobile insurance premiums.

    "Hunter and Doroshow fail to include in their report any description of the unprecedented expansion of legal liability that occurred in the US between 1930 and 1980."

    Continues Foreman: "They maintain, without support, that the 'liability insurance crisis' of the 1980s 'was ultimately found to be caused not by legal system excesses but by the economic cycle of the insurance industry.' They conclude that current liability insurance premium problems that appear to be leading the industry back into a 'crisis' situation are also attributable to insurance industry mismanagement."

    Foreman then goes on to say that the Center For Justice report exhibits "a full range of problems." Among those problems he lists are:

  • misstatements and omitted concepts;
  • unsupported statements and conclusions;
  • inappropriate attention to irrelevant background facts;
  • distorted methodology that makes it impossible to find any relationship between liability insurance reform and insurance premiums;
  • use of a spurious multiplier to hide findings;
  • unwarranted conclusions; and
  • improper statistical concepts and conclusions about causality.
  • Foreman's critique continues to pick apart the Center For Justice report point by point and then, using the Center's own data and methodology, argues the opposite of their conclusion - i.e. that "there is some indication that liability insurance reforms may have played a role in reducing increases in general liability and medical professional liability insurance premiums between 1985 and 1998 (the period covered in the Center's study)."

    He concludes: "We suggest that future studies pay close attention to defining the impact variable of liability insurance reform. Rather than simply counting numbers of reforms, it would be important to attempt to identify 'levels' and strengths of reforms. For example, the level of caps on punitive and non-economic damages might be an important variable. An assessment of the existence and length of statutes of limitations would be appropriate. Damage limits (caps) should not 'count' the same as other less important reforms like joint and several liability. In addition, future studies should include data for times earlier than 1985 and later than 1998. We can conclude with certainty that the statements contained in the report regarding the supposedly ineffective and 'failed' legal liability reforms as well as the report's observations regarding the 'cause' of insurance crises are erroneous."

    In addition to debates such as this, business interests are taking a stronger stance than ever before regarding tort reform. In a special White Paper recently released by American International Group (AIG), the Insurance Information Institute and the US Chamber of Commerce - the advocates for reform - spoke strong words indeed.

    "The American legal system is out of control," says the treatise. "It costs more than any other civil justice system in the world, more than double that of other industrialised nations. The average jury award has doubled and in some areas even tripled over the past several years. The likelihood of a defendant corporation losing its case and confronting a multimillion-dollar punishment is greater now than ever in the history of US justice. It's easy to chuckle at the absurdity of lawsuits arising from allegedly dangerous Oreo cookies, obesity-promoting French fries or blush-provoking reality TV pranks, yet the truth is that US courts have become so clogged with frivolous lawsuits that justice cannot be administered in a timely fashion. Moreover, jurors have been led to believe that they must top the last headline-making damage award in order to send a meaningful message in our society - especially when the defendant is a corporation."

    The White Paper goes on to say that, in some states, juries return million dollar-plus verdicts in one out of every four or five cases. Nearly one in ten businesses have experienced a liability loss of $5m or more over the last five years.

    So these are some of the arguments that Congress will be wrestling with this year as yet another push for tort liability reform is being made. And there are indications that Congress is ready to listen.

    Class action reputation
    The class action concept is one of the elements of the US tort liability system that has fallen into disrepute among business interests. Those who seek reform of class action lawsuits complain that the system has become nothing more than an opportunity for lawyers to go 'venue shopping'. Critics of the system say that plaintiffs' attorneys seek out courts in various states that are usually pro-plaintiff and try the cases there. Recently, there has been a move on the part of Congress to change all that. In June, the House of Representatives passed class action reform legislation by a vote of 253 to 170. The bi-partisan Class Action Fairness Act of 2003, HR 1115, sponsored by Rep Bob Goodlatte, R-Va, allows for the removal of certain interstate class action lawsuits to federal courts from state court if requested by either plaintiffs or defendants.

    "This bill directly and effectively addresses the issue of abusive class action lawsuits," said Monte Ward, federal affairs vice president for the National Association of Mutual Insurance Companies (NAMIC). "NAMIC believes that Congress must pass this legislation to stop the current class action crisis and put interstate class actions in federal court where they are more appropriate," said Ward. "The bi-partisan Class Action Fairness Act is a narrowly-tailored bill that allows large interstate class actions to more easily be heard in federal court rather than forcing them to remain in state courts selected through 'forum shopping' by trial lawyers," he added.

    In the Senate, a companion class action reform bill, S274, was favourably reported out of the Senate Judiciary Committee by a 12-7 margin in early April. The Senate is expected to take up the bill sometime this year.

    The Class Action Fairness Act of 2003 would allow for the removal of certain class action lawsuits from state to federal court in cases where there is at least $5m in controversy and the class members meet certain set requirements. Additionally, the Act establishes a consumer class action bill of rights that would include provisions for judicial review of non-cash settlements, protection against loss by class members, and clearer settlement information.

    "Congress clearly believes the American legal system needs to be fairer and simpler," said Melissa Shelk, vice president for federal affairs for the American Insurance Association. "The decisive House vote is another significant stride toward the legislative finish line, and toward implementation of a more efficient, equitable court system for all parties".

    In addition, the judicial branch of the US government appears to be taking seriously one of the problems that have been plaguing the tort liability system - huge punitive damage awards.

    The US Supreme Court this year handed down a decision mandating federal guidelines that would restrict punitive damage awards in civil cases, sending shouts of "hosanna" throughout the insurance industry and the business world at large. The case, State Farm Mutual Automobile Insurance Co v Campbell et al, involved a Utah insured of State Farm that was suing the insurer for refusing to settle a claim against him, which he said was required under the terms of his insurance contract, for $50,000. State Farm's insistence on taking the case to court resulted, after a trial court proceeding and a state Supreme Court proceeding, in a verdict of $1m in compensatory damages and a whopping $145m punitive damages award. State Farm brought the case to the US Supreme Court for review.

    The nation's highest court has struggled with punitive damage cases from the mid-1980s throughout the 1990s without ever resolving the issue of whether it had jurisdiction over what many considered to be huge punitive damages awards handed down in the state courts.

    But in this case, the Supreme Court finally took a position. "A punitive damage award of $145m, where full compensatory damages are $1m, is excessive and violates the Due Process Clause of the Fourteenth Amendment," said the US Supreme Court. The court then went on to set guidelines for lower courts in reviewing punitive damages. The Supreme Court said lower courts should consider:

  • the degree of reprehensibility of the defendant's misconduct;
  • the disparity between the actual potential harm suffered by the plaintiff and the punitive damages award; and
  • the difference between the punitive damages awarded by the jury and the civil penalties authorised or imposed in comparable cases.
  • In terms of punitive damages, the court said that single digit multipliers of compensatory damages should be used.

    With all these developments, it now seems more promising than in past years that the US will come to terms with tort reform, whatever compromises are reached. There are still problems, of course. The US Congress is still not close to dealing with asbestos reform legislation, and medical malpractice is still a major issue. However, if overall tort reform is realised, then these issues might come more into focus on Capitol Hill.

    By Phil Zinkewicz

    Phil Zinkewicz is a re/insurance journalist based in New York

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