The war on tort

Jan 26th 2005
From The Economist Global Agenda

President George Bush has placed tort reform at the centre of his second-term legislative programme. Ranged against him are the massed ranks of America’s trial lawyers. Who will come out on top?

PITY America’s trial lawyers. George Bush has made tort reform a priority of his second term in office and momentum is gathering behind measures to change the system. Next week Arlen Specter, a Republican senator, is set to introduce a bill that is intended to break the deadlock over asbestos litigation while limiting the exposure of firms and insurance companies to future claims. Bill Frist, the Senate majority leader, hopes to bring a bill to change the rules on class-action lawsuits to the chamber’s floor by the week after. Yet more action is promised to limit pay-outs in medical-malpractice lawsuits.

Most Americans agree that matters have got out of hand. According to figures from Tillinghast-Towers Perrin, an insurance consultancy, tort-system costs amounted to $246 billion in 2003—excluding vast settlements agreed by tobacco companies (see chart). That represented 2.2% of GDP, compared with just 0.6% in 1950 and 1.3% by 1970, when the tort industry began to flex its muscles. Tort costs grew by some 15% in 2001, by only a slightly less the year after, and by 5.4% in 2003. The main factor was a considerable rise in liabilities connected with asbestos claims. Mr Bush believes that much of this huge sum is money that companies should not have to part with.

America’s lawyers say that the figures quoted by the president and others intent on pegging back generous settlements require some cross-examination. They argue that the numbers come from a consultancy paid by the insurance industry and include many costs that would exist even without the tort industry, such as insurance companies’ costs for handling claims. Economic losses (ie, straight compensation) as well as punitive damages and other awards for “pain and suffering” are all rolled into one. Thus, lawyers argue that much smaller amounts are at stake and that these are primarily legitimate payments for real damages. Furthermore, they claim that they represent the interests of the public seeking redress against huge corporations that would seek to do them harm.

Haggling over the sums aside, the big pots of money that companies and their insurers pay out to settle litigation cause both direct and indirect losses. Companies that owe vast sums may seek bankruptcy protection or go out of business altogether. In some cases, most notably involving asbestos, companies have been hounded despite having only a tenuous link to the product in question. Not only shareholders will feel the pain if large numbers of workers also find themselves without employment.

Businesses suffer indirect costs too. The threat of lawsuits often causes financial markets to overreact. Credit-rating agencies are likely to downgrade firms that face litigation, increasing the cost of financing. Moreover, corporations are also paying far more for general-liability insurance these days.

Hence Mr Bush’s desire to tackle some of the heaviest tort costs. The asbestos bill may have better luck of gaining the supermajority of 60 votes in a Senate than previous attempts, thanks to an increased Republican majority after November’s elections, but observers rate its chances of passing at no better than 50/50. It is hoped that the proposed $140 billion fund will convince all parties—on the one side businesses and insurers, and on the other victims and trade unions—to end a series of legal battles that has been running since the first asbestos-related claim was filed in 1966.

Both sides have doubts. Victims’ groups say that the fund is not big enough; firms worry that a possible provision to allow some victims to pursue legal remedies at a later date does not bring the matter to a close. But a deal may prove preferable to more years of court cases and the continued enrichment of the lawyers involved.

Leaders of both parties in Congress have signalled that a bill on class-action lawsuits could also pass soon. These suits allow hundreds or even thousands of people with a similar claim to band together to take on large corporations or other entities. While playing an important role in maintaining corporate accountability, class actions have lately offered the most egregious examples of the mercenary nature of America’s trial lawyers. Cases have ballooned in recent years. At worst, lawyers are accused of “inventing” victims of corporate malfeasance, bringing frivolous cases and shopping around for friendly jurisdictions. In the case of asbestos, many of those included in the class actions are not even ill, but merely worried that past exposure might make them sick in the future.

Republicans, who traditionally favour local or state control where possible, plan to assist businesses in reducing their exposure to expensive legal cases with little merit by moving bigger class-action cases (where a plaintiff is seeking more than $5m) from local to federal courts. Republicans hope that federal courts will be less inclined to accept less meritorious cases and will award reduced payouts. Though evidence is scant—figures for state-court settlements are not published—it appears that local courts are more inclined to award whopping sums in controversial cases.

Bad medicine

This attempt to limit payouts also informs plans to reform medical-malpractice lawsuits. Awards against doctors and hospitals have spiralled: since 1975, medical-malpractice costs have grown nearly twice as fast as overall tort costs, pushing up insurance rates and the cost of medical care. Doctors practice “defensive medicine” and so carry out millions of expensive but pointless tests on patients to guard against the prospect of future lawsuits. And evidence suggests that doctors are eschewing areas of medicine that carry the greatest risk of malpractice suits.

Mr Bush supports a plan that would leave claims for economic damages unlimited and introduce a cap of $250,000 on non-medical damages, including punitive awards. It would also limit liability for drug companies’ products that had received approval from the Food and Drug Administration. Some critics say this does not go far enough, but in a country where ever-higher costs leave millions unable to afford health-care insurance, any measure to bring down costs is likely to win widespread support.

Any attempts at reforming the tort system will meet stiff opposition from America’s trial lawyers. Democrats, who get huge sums from such lawyers, are also likely to oppose reform with vigour. Some will argue that, by restricting public access to the legal process, Mr Bush would be curbing the freedom of American citizens in the name of redeploying cash away from Democratic-leaning lawyers. But wealthy trial lawyers do not rank highly in the public’s perception of embattled minorities worthy of sympathy and, as such, make for an inviting target.

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