BACKGROUND:

America’s civil justice system for resolving personal injury and property damage claims, commonly referred to as the tort system in legal parlance, has spiraled out of control and places a heavy burden upon both the U.S. economy as a whole and every single American citizen. In 2006, the overall cost of the U.S. tort system was $247 billion, which amounts to $825 for every man, woman and child in the nation – an economic burden of $3,300 per year for a family of four.*

From 2000-2002, tort costs increased by 30 percent. However, tort costs actually declined by 5.5 percent in 2006. The $13.4 billion decrease over tort costs in 2005 marks the first downward trend since 1997. Looking ahead, though, growth of U.S. tort costs is anticipated to be 4.5 percent for both 2008 and 2009. U.S. tort cost growth since 1950 far exceeds U.S. population growth. Even after adjusting for inflation, tort costs per capita have risen by a factor of more than nine between 1950 and 2005.

Over this period of time, the civil justice system has become increasingly inefficient, returning less than 50 cents on the dollar overall to claimants with less than 22 cents of that dollar going towards actual economic losses according to a 2003 study on U.S. tort costs conducted by Towers Perrin and Tillinghast. The majority of funds recovered now go to pay attorneys’ fees and other costs incurred in bringing lawsuits.

Many reform proponents have begun calling the added costs of doing business attributable to the tort system the “tort tax.”

To illustrate just how much this impacts individuals and businesses, a number of products and medical services were studied to compare the actual costs against the costs when the “tort tax” is factored in. For example, an eight-foot aluminum ladder’s average retail price is $119, but the true price is only $94 after profit is taken into account, resulting in a tort tax of $25 per ladder. By the same token, a football helmet’s average retail price is $200 while the actual cost is only $100, translating into a doubling of the price on account of the liability involved with manufacturing this protective gear.*

Price escalation driven by concerns over tort liability is especially prevalent in the medical field and is a major factor in the escalating cost of health care. For a simple tonsillectomy, the actual cost is just $377, but the average doctor’s fee is $578 due to skyrocketing medical liability costs that tack the extra $201 on to the bill. Likewise, a two-day maternity stay in the hospital costs $3,367 when the $500 “tort tax” is added on to the real cost of $2,867.

TALKING POINTS:

• The overall cost of the U.S. tort system was $247 billion in 2006. This amounts to $825 for every man, woman and child in the nation and totals $3,300 per year for the average family of four.
  
• The tort system is inefficient, with less than 22 cents of each dollar recovered going toward actual economic losses.
• The tort system sends few clear signals about what type of conduct will subject a defendant to liability and what the scope of that liability will be. As such, it fails in one of its principle goals: deterring wrongful conduct.
• Small businesses with $10 million in annual revenue or less bear 68 percent
  or $88 billion of the total cost of tort claims to businesses.
• NSSGA supports efforts to reduce lawsuit abuse and reform asbestos
  litigation as they are desperately needed and in the best interests of both the
  business community and those who have been truly injured and need access
  to the system.

FOR MORE INFORMATION:

The American Tort Reform Association
www.atra.org

The Institute for Legal Reform
www.legalreformnow.com

Sources:

• Towers Perrin and Tillinghast, December 2007
• U.S. Chamber of Commerce, Institute
  for Legal Reform
• The Lawsuit Tax: America’s Hidden Tax;
  J.V. Schwan, Citizens for a Sound Economy: 05.25.2000

Updated: November 2008