Injury and Accident Law

The Efficiency of the Tort System as a Mechanism for Compensation

On the question of whether tort costs contribute to efficiency—which is the focus of economic analysis—the available data allow a partial conclusion: even leaving aside the largely unknown indirect costs, the current tort system seems to be an inefficient way to compensate victims. As noted above, Tillinghast estimates that only 46 percent of the total direct costs of the tort system go to victims in the form of economic and noneconomic damages; 54 percent go to transaction costs. By comparison, in the no-fault compensation systems for on-the-job and vaccine-related injuries, administrative costs make up only about 20 percent and 15 percent of total costs, respectively.8

Those comparisons are not entirely apt, however. The administrative costs of those compensation systems exclude spending on claimants’ attorneys—which has reportedly grown in the workers’ compensation system as the regulations governing it have become more complex. Moreover, linking injuries to particular injurers (so their premiums can be adjusted to reflect their own track record, as the workers’ compensation system does) would be more difficult with torts in general. Nonetheless, given the large percentage differences between the tort liability system and no-fault compensation systems, it seems safe to conclude that the tort system costs more than does an available alternative method of compensating victims.

Some types of torts clearly have little impact on deterring injuries; virtually their entire value to society is as a mechanism for compensating victims. Asbestos torts are an example: the injurious actions generally took place decades ago, and asbestos is now in limited use (as a combined result of litigation and government regulation), so today’s cases serve no role in deterring additional asbestos injuries. The same reasoning applies to any torts that deal with injuries whose source was unknown at the time.9 For such torts, liability costs are indeed inefficient.

Next > The Efficiency of the Tort System as a Mechanism for Deterrence

8. Those numbers are CBO’s calculation of the proportion of employers’ costs that are not paid out in workers’ compensation benefits, using data from Cecili Thompson Williams, Virginia P. Reno, and John F. Burton Jr., Workers’ Compensation: Benefits, Coverage, and Costs, 2001 (Washington, D.C.: National Academy of Social Insurance, July 2003), and CBO’s calculation of administrative costs divided by new obligations for the Vaccine Injury Compensation Program Trust Fund, using data from Budget of the United States Government, Fiscal Year 2004: Appendix, p. 409.