Evidence About the Costs of the Tort System

The most comprehensive estimates of tort liability costs —which cover only direct costs—come from studies by Tillinghast-Towers Perrin, an actuarial and management consulting firm.3 Those estimates take advantage of the fact that most tort costs are paid through the insurance industry, in the form of legal costs to defend policyholders, benefits paid to victims and their attorneys on behalf of policyholders, and internal costs for handling claims. Thus, Tillinghast uses financial data from the insurance industry to estimate insured costs for all types of policies except medical malpractice insurance. (Those costs are estimated separately using the firm’s proprietary database of state-level costs, controlling for the changing mix of insured versus self-insured providers.) Finally, Tillinghast estimates self-insured costs (again, except for medical malpractice) on the basis of various specialized studies. Because of a lack of data, the estimates exclude awards and settlements that cannot be insured in particular states (such as those for contract and shareholder litigation or for punitive damages) and certain extraordinary self-insured costs, such as those of the tobacco settlements.4

By that definition of costs, the U.S. tort system cost a total of $205.4 billion in 2001, Tillinghast estimates. That figure represented 2.04 percent of gross domestic prod-uct—the largest share among the 12 industrialized countries that Tillinghast investigated.5 Of that amount, 46 percent constituted transfer payments to plaintiffs: 22 percent for economic damages and 24 percent for non-economic damages. The other 54 percent represented true costs: transaction (procedural) costs for plaintiffs’ attorneys (19 percent), defense costs (14 percent), and insurance companies’ administrative costs (21 percent).6

Estimates for most of the indirect costs of the tort system do not exist—which is not surprising given that many of those costs are difficult to observe. For example, even firms that keep track of their safety-related spending would probably have trouble identifying the share driven by tort liability rather than by regulation or other factors. One notable exception to the lack of estimates of indirect costs comes from a recent study released by the U.S. Chamber of Commerce, which estimated that asbestos liabilities have caused $0.6 billion to $2.1 billion in disruption costs from bankruptcies and layoffs.7

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3. Tillinghast-Towers Perrin, U.S. Tort Costs: 2002 Update—Trends and Findings on the Costs of the U.S. Tort System (2003).

4. The estimates also omit courts’ administrative costs, but those are thought to be relatively small. An estimate from the RAND Institute for Civil Justice cited by Tillinghast-Towers Perrin puts those costs at 1 percent of total direct costs.

5. Tillinghast-Towers Perrin, U.S. Tort Costs: 2002 Update. In its previous report, dated February 2002, Tillinghast included estimates of tort costs in other countries. That report stated that in 2000, tort costs equaled 1.9 percent of gross domestic product in the United States, compared with 1.7 percent in Italy and 1.3 percent in Germany—the next two closest countries.

6. Administrative costs are insurance companies’ overhead expenses. Tillinghast says it includes those expenses because they are “real costs, directly associated with administering the settlement of tort claims.”

7. Jesse David, The Secondary Impacts of Asbestos Liabilities (prepared by NERA Economic Consulting for the U.S. Chamber of Commerce, January 23, 2003), available at www.legalreformnow.com/resources/012303secondary.pdf.