Controversial Study Sees Rise in Cost of Tort System

NEW YORK — It is not surprising that a study reporting a sharp rise in the cost of the tort system would be embraced by the American Tort Reform Association — and just as quickly attacked by trial lawyers. But a close look at the study, which purports to be “unbiased,” demonstrates how difficult it is both to research this complex and sprawling subject and to pass muster with academics who have long mined the same terrain. Several researchers questioned the study’s methodology and language, and suggested it tilts toward the “tort reform” faction. At the same time, some of the same scholars praised the effort to take on this politically charged domain with statistics rather than, as one professor put it, “argument through anecdote.” The study was conducted by actuarial firm Tillinghast-Towers Perrin, which found that the U.S. tort system cost $233 billion in 2002, an increase of 13.3 percent from the 2001 total. This represented 2.23 percent of the country’s gross domestic product, the highest rate since 1990. The cost increase over the past two years, 29.7 percent, is the largest since 1986-87, the study reported. Released this month at www.tillinghast.com/tillinghast, the study was the seventh Tillinghast has published on this issue since 1985. It is apparently the only study that attempts to quantify tort costs nationwide, and recent installments have been widely cited in trade publications, congressional testimony and the popular media. “We cite them all the time,” said Sherman Joyce, president of the American Tort Reform Association, which e-mailed a press release about it to its distribution list. Joyce called Tillinghast “the most reliable arbiters of our legal system.” Lisa Rickard, president of the U.S. Chamber Institute for Legal Reform, an affiliate of the U.S. Chamber of Commerce, said she considers its data the best available on the cost of litigation. “It enables the American consumer to understand the impact of the litigation system on his or her everyday life,” she said. “It translates for you that you’re paying $809 per person; that it’s the equivalent of a 5 percent tax on wages and that you are paying for it every day in the goods and services that you buy.” “It’s the same old song,” counters Carlton Carl, spokesman for the Association of Trial Lawyers of America, “bought and paid for by the insurance industry.” The study used to be sponsored by various groups, including the insurance industry, acknowledged Russ Sutter, a Tillinghast actuary who was the study’s principal author. Though the company’s primary business remains consulting for the insurance industry, it no longer accepts funds for the study to avoid this very criticism, Sutter said. Several prominent researchers don’t believe the former sponsorships, or the company’s close ties to the insurance industry, should disqualify Tillinghast from conducting its research. But they offered sharp critiques of the study. When he reads a study on the tort system, said Thomas Burke, a Wellesley College political science professor and author of “Lawyers, Lawsuits and Legal Rights,” he expects researchers to disclose their methods. “That gives me an understanding of possible problems with the approach.” Though Tillinghast reveals some, it leaves out too many, he said, “which is why I never cite their data.” The study is based not on court records, but on insurance liability costs. The company’s database goes back to 1950, and much comes from the insurance information agency A.M. Best. Costs associated with self-insurance and medical malpractice are derived from Conning & Co. reports and from Tillinghast’s own proprietary research, Sutter said. These details are disclosed in the study, but others aren’t. Tort costs are based on incurred, rather than paid, losses, Sutter explained. Many claims undoubtedly are settled without lawyers or courts, he said, adding that he didn’t eliminate them from the study because there’s no practical way to segregate them. The study breaks down the percentages of recoveries by plaintiffs — 22 percent for economic and 24 percent for non-economic losses, 19 percent for attorneys fees — though it does not explain how they’re calculated. They come from an insurance organization’s study of closed claims. Sutter won’t disclose the company and doesn’t know the sample size, but he said “sampling techniques” ensured it is representative. Deborah Hensler, a Stanford Law School professor, was a longtime researcher at the Rand Institute for Civil Justice, where she and her colleagues studied the costs of tort litigation in the 1980s. As such, she’s been a consumer of Tillinghast’s studies. “I’ve been impressed, any time I’ve been involved in checking into their data, that they’ve tried to get the data straight,” she said. But she, too, complained about the difficulty of understanding the methodology. She also identified “red flags” in the study’s language. “I do think that their presentation reflects a point of view,” she said. The word “tax” paints the system in a way that seems designed for lobbyists, she said. And the characterization of the system as “inefficient” because only 22 cents of every dollar pays for economic losses is unfair, she said. Hensler agrees that it’s inefficient, but the fact that non-economic losses are recoverable reflects “a policy decision. That’s not a reflection of the efficiency.” Stephen Daniels, an American Bar Foundation scholar, said defining the issue in terms of a tax and money out of your pocket was a clever device. The $809 the study touts is merely the total divided by the country’s population and says nothing about actual costs to citizens, but it makes the political point, he said. What he objects to most, Daniels continued, is the focus on money as the system’s sole measure. This framework “reflects the concerns of its original sponsors, the insurance industry, even if [the researchers] did not consciously or unconsciously slant the results.” Responses are apt to confuse or bore the public. And when critics argue with the numbers, they’re tacitly accepting the framework — money. “We’re just trying to put it into context for the reader,” Sutter responded, “and we feel that translating it into a cost per person does that. It’s a picture-is-worth-a-thousand-words type thing.” As for methodology, he said the study discusses much of it. About 70 percent of the data can be obtained from Best. The rest is proprietary. He understands that academics accustomed to full disclosure are left with lingering questions. “We just had to make a business decision. We have a lot of [research and development] that goes into this, and we’re not about to disclose this to the world,” Sutter said. J. Robert Hunter, a consulting actuary and a longtime consumer advocate in the insurance field, found much in the study to criticize. “We’re right in the middle of a classic cycle,” he said. “It has very little to do with the legal system and everything to do with the insurance business.” The evidence, he said, is in the industry’s reserve funds. For years, he said, Best has been saying that asbestos reserves were too low. In 2002, as the study reports, the industry suddenly added $11 billion, citing asbestos claims. Insurance companies often use reserves to “manage profits” like those they experienced in 2001 and 2002, Hunter said. “You wouldn’t get into these psychological or political jacking up of reserves” if the study were based on paid costs, he said. “Payments are facts. Nobody is manipulating payments.” The $11 billion is 40 percent of the systemwide rise that the study reports. Herbert Kritzer, a University of Wisconsin political science professor, added that many of the largest costs compensate plaintiffs for medical care. “Inevitably, the cost of the tort system is going to increase substantially more than inflation if it’s being driven by health costs.” Had the study compared tort costs and medical inflation rather than the GDP, it probably would have shown that the study had more to say about health care than legal costs, he said. Sutter pointed out that medical inflation data are included, even if they aren’t highlighted, and he defended his use of incurred losses. Insurance companies account for losses when claims are filed, and Tillinghast simply followed suit. “We assume insurance companies are setting reserves based on their best estimates of what their costs are going to be.” His study includes only changes in reserves, he added, and only industrywide. “I give them high marks for deciding to do this and do it over time,” Stanford’s Hensler said of Tillinghast’s study. But if Tillinghast wants to play a neutral role, she had a parting piece of advice. “They might think about how they’re presenting [their data],” she said, “and present it in a more balanced fashion.” David Hechler is a reporter for The National Law Journal , aRecorder affiliate based in New York City.