Tillinghast: Overall U.S. Tort Costs Dropping; Fewer Auto Claims Drive Decline

U.S. tort costs totaled $261 billion in 2005, which is approximately $880 per person and $4 less per person than in 2004, according to the 2006 Update on U.S. Tort Cost Trends from the Tillinghast business of Towers Perrin.

The growth rate of tort costs in 2005 was 0.5%, which is significantly lower than the growth rate of 5.7% in 2004 and 5.5% in 2003. The $1.1 billion increase over tort costs in 2004 is the smallest since 1997. The 2006 Update analyzes U.S. tort costs from 1950 through 2005, with projections through 2008.

The 0.5% rate of growth in tort costs was less than the overall U.S. economic growth (as measured by gross domestic product — GDP) of 6.3%. Since 1950, growth in tort costs has exceeded growth in GDP by an average of 2 to 3%. However, over the last 20 years, the ratio of tort costs to GDP has stayed within a relatively narrow range, at approximately 2%.

“It’s difficult to say whether tort reform measures have impacted this slow down in tort costs growth,” said Russ Sutter, Principal. “We have yet to see what, if any, impact the class action reform legislation that was passed in February 2005 will have on future class action claims – as well as whether the newly elected Democratic Congress will have an impact. What has certainly had an impact on tort costs trends has been the decade-plus decline in auto accident frequency, as the basic auto accident is the single largest portion of U.S. tort costs.”

U.S. tort costs 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; but, inflation-adjusted tort costs per capita were lower in 2005 than in 2003 and 2004.

Impact of Asbestos Lessens
Similar to the 2004 report, asbestos costs continue to be less of a factor in overall commercial tort costs. While insured asbestos losses expanded an additional $7.0 billion in 2005, the total cost was lower than the comparable increases in 2002, 2003 and 2004 ($12.4 billion, $10.2 billion and $7.3 billion, respectively).

“As the growth of asbestos-related tort costs has continued to drop over the past couple of years, so has the growth of commercial tort costs overall,” said Sutter.

Medical Malpractice Tort Costs Remain at Moderate Level
For 2005, medical malpractice tort costs totaled $29.4 billion, up from $28.3 billion in 2004. According to Tillinghast, since 1975, medical malpractice costs have increased at an annual rate of 11.4% versus 8.7% for all other tort costs.

“The medical malpractice figures seem to indicate that tort reforms on the state level have had some effect in slowing growth rates in recent years,” said Sutter.

Future Implications
Looking ahead, Tillinghast anticipates growth of U.S. tort costs to be 3.5% in 2006, with slightly higher growth of 4.5% for the following two years. A variety of factors may have an effect on the growth of tort costs in the near future, including:

Whether additional significant increases in asbestos reserves will occur;

How the recent state-level medical malpractice reforms from the past few years will affect the moderation of recent trends;

Whether the recent allegations of several U.S. corporations having backdated options grants will cause a resurgence of liability claims among directors and officers;

If the legislation on class action litigation, passed by Congress in February 2005, will affect future claims.

“The findings have shown that the trend toward more moderate increases in tort costs appears to be holding in 2006; however, continued lawsuits in the pharmaceuticals industry and obesity-related litigation, as well as asbestos claims and the backdating of options in U.S. corporations have the potential to change things going forward,” said Sutter.

Methodology
Tillinghast says that the methodlogy used in its report incorporates three cost components: benefits paid or expected to be paid to third parties (losses), defense costs and administrative expenses. Administrative expenses are identified separately in the report. While Tillinghast outlines why these are a real cost of the tort system, it takes no position on the efficiency of the insurance industry’s administrative expenses.

Tillinghast has not included costs incurred by federal and state court systems in administering actual suits. Certain indirect costs are also omitted, such as those associated with litigation avoidance.
2006 Update on U.S. Tort Cost Trends is the tenth study of U.S. tort costs published by the Tillinghast business of Towers Perrin. The study examines only one side of the U.S. tort system: the costs. No attempt has been made to measure or quantify the benefits of the tort system, such as a systematic resolution of disputes, and the study makes no conclusion that the costs of the U.S. tort system outweigh the benefits, or vice versa. The report is conducted entirely by Tillinghast; it is not funded or subject to approval by any outside organization. The report is available at www.towersperrin.com/tillinghast.

Source: Towers Perrin and Tillinghast
www.towersperrin.com/tillinghast