P&C National Underwriter: Study Says, Lawsuit Activity Costs May Rise 3% This Year

Dec 15, 2009

P&C National Underwriter published this article on December 15, 2009.

Civil litigation costs rose only 1.1 percent in 2008, but this year the percentage may have nearly tripled, driven up by damage from the financial crisis and medical malpractice cases, a consulting firm reported.

The $2.7 billion 2008 increase in tort was listed in the Towers Perrin 2009 Update on U.S. Tort Cost Trends. The uptick in 2008 is the second cost escalation since 2005 and follows a $5.1 billion increase in 2007, the company said.

According to the study, the relatively slight increase last year is due to several factors, including a decrease in miles driven, which kept personal auto and commercial auto costs in check and a slight decrease in medical malpractice. 

In the future, with the potential for increases in the areas of employment practices and medical malpractice, as well as litigation associated with professional services errors and omissions in the wake of the financial crisis, Towers Perrin said it is estimating that U.S. tort costs will increase 3 percent in 2009, an additional 4 percent in 2010 and 6 percent in 2011.

The study projected that continued weakness in the economy will contain auto liability costs again in 2009.

In medical malpractice, it found that while some recent reforms have been overturned or challenged, the trends appear to be remaining modest. Costs will likely rise in directors and officers liability, particularly for financial institutions. In addition, employment practices liability (EPL) costs are expected to rise by more than inflation, as layoff activity will likely lead to an increase in allegations of improper actions by employers, Towers Perrin said.

The firm guessed that the change to a Democratic administration in Washington would lead to the appointment of judges with different
attitudes regarding the rights of plaintiffs versus defendants in litigation.”

Russ Sutter, a Towers Perrin consultant and author of the report, said in a statement, “Despite the chaos in the financial markets in 2008, the tort cost environment in the United States was relatively benign. The slight increase was less than the general inflation rate in the U.S. and was well below the growth rates seen earlier this decade.”

 Mr. Sutter added that beyond 2009, and probably 2010, “we see general inflation and judicial attitudes as being potential catalysts for higher tort cost growth rates.”

Towers Perrin, he explained, sees medical malpractice as very susceptible to a quick change, given its costs.

“Further, because of the long time period needed to resolve many malpractice claims, coupled with the heavy use of the court system, this area of tort costs could see a return to the growth rates seen in the mid-1970s, mid-1980s and for a brief time, earlier in this decade,” he said

The 2009 report analyzes U.S. tort costs from 1950 through 2008, with projections through 2011.

Among the report’s findings:

From a statistical standpoint, the U.S. tort system cost $254.7 billion in 2008 – or $838 per person – versus $836 per person in 2007.

Overall economic growth in 2008 was 3.3 percent.  As such, the ratio of tort costs to gross domestic product (GDP) shrank in 2008, marking five consecutive years of a decline in the ratio.  Since 1950, growth in tort costs has exceeded growth in GDP by an average of approximately two percentage points.

The total tort costs from commercial lines in 2008 fell by 0.4 percent over 2007.  The 2008 costs were also below the levels seen in 2003 through 2005.  The reduction from those prior years appears to be attributable to a reduction in the number of claims.

Towers Perrin said its study 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 and Towers Perrin said that while it 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.

Also, Towers Perrin has not included costs incurred by federal and state court systems in administering actual suits in the report.  Certain indirect costs are also omitted, such as those associated with litigation avoidance.

The study examines only U.S. tort system costs and attempt has been made to measure or quantify the benefits of the system, such as a systematic resolution of disputes, the company said.

Further, Towers Perrin noted that the study makes no conclusion that the costs of the U.S. tort system outweigh the benefits or vice versa.  The study, said the company, is not funded or subject to approval by any outside organization.  The report is available at: www.towersperrin.com.