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The Tort Burden On Texas Businesses, By the Numbers

Many tort reformers argue that the civil justice system places a crushing burden on businesses. That burden, they argue, makes business less competitive. Tort reformers then try to sell legislation as a means on improving the economy. South Carolina Governor Mark Sanford made that argument recently:

We’ve got the eleventh-worst civil justice system in the nation and it continues to hold us back as a state. If we’re ever going to be competitive in business and healthcare, we’ve got to have a more equitable civil justice system… tort reform is a big part of us becoming more competitive on both fronts.”

The National Small Business Association makes the same argument:

Time and again we hear from National Small Business Association members that an increasingly litigious business environment stifles innovation, drives up the cost of insurance and threatens to run promising ventures out of business. Reform and common sense must be returned to our system of civil litigation.

What seems to be missing from the debate over the effects of the tort system on business, and small business in particular, is reliable data.

Many of the talking points arise from a study commissioned by the U.S. Chamber of Commerce’s Institute for Legal Reform:

According to a 2004 study commissioned by the Institute for Legal Reform, small businesses alone pay $88 billion a year to cover the cost of America's tort system- money that could be used to hire additional workers, expand productivity and improve employee benefits.

Please forgive me for being skeptical of claims made based on a tort reform study commissioned by the Institute for Legal Reform. The Chamber of Commerce is not an unbiased source. What is needed is solid data from an independent source.

A while ago, Kevin Drum linked to the abstract of a study by four law professors concerning medical malpractice in Texas. Kevin summarizes the abstract:

Since 1988 the number of large claims was stable, the number of small claims declined, the number of paid claims was stable, the average payout per claim was stable, and total payouts were stable. In other words, whatever it was that's caused malpractice premiums to skyrocket, it hasn't been any actual change in malpractice awards against doctors.

I looked for the full study on the net and did not find it. In the process, however, I did locate the 2002 Texas Liability Insurance Closed Case Annual Report (pdf). That report provides data on the burden borne by the Texas business community as a result of the tort system.

The report is published by the Texas Department of Insurance pursuant to the requirements of a Texas statute. The report is prepared annually (2002 was the 15th annual report) and seeks to provide “reliable information concerning liability insurance claims, related court actions and other information pertinent to the claims settlement process and the civil justice system in Texas.”

The Texas Insurance Department collects the data directly from insurance companies offering commercial liability coverage in Texas. The universe of data includes all types of business liability insurance lines including general liability, medical professional liability, other professional liability, commercial automotive liability, and the liability portion of commercial multi-peril insurance. Thus, the data covers essentially all liability insurance written for businesses and professionals in Texas.

The universe of claims is not complete as the department collects data only on payments (whether by settlement or judgment) of at least $10,000. The smaller payments are ignored. That is not a serious defect in the data. Payments ranging from $10,000 to $25,000 comprised about 40% of all claims but accounted for just 6% of payments. Including claims smaller than $10,000 should show only a very small effect on the total costs.

Texas is a big place. In 2002, it had a population of almost 22 million people or roughly 7.4% of the U.S. population. In other words, about 1 in 14 Americans live in Texas. Texas had a Gross State Product in 2000 of more than $742 billion or about 7.6% of the GDP of the United States in 2000.

Texas is only one state and, with regard to national tort statistics, it may not be typical. Nonetheless, the report of the Texas Department of Insurance can provide us with some hard data in an area that seems doomed to debate by anecdote. What follows are some of the highlights I gleaned from the report:

• There were 9,723 personal injury claims in the universe reported. Including payments made by insurers, insureds (primarily consisting of the deductible), and uninsureds, the total payout (pursuant to both judgments and settlments) in those cases was about $1.8 billion. The average payment was about $114,500.

• The Texas Insurance Department asked the insurance companies for their allocated loss adjustment expenses (ALAE). The report notes that such expenses were 18% of the total paid in settlements and judgments. ALAE includes, among other things, attorney fees and litigation expenses (it is not clear to me whether the ALAE figure includes the costs incurred in the cases the defense won. If it does not include such costs, then the cost of defending those claims should be added to the numbers presented below). Assuming the ALAE includes all cases, total expenses would be about $324 million bringing the total cost of personal injury claims to Texas businesses and professionals to about $2.1 billion per year

• As one in fourteen Americans live in Texas, if the Texas experience was repeated in each of the fifty states, the total cost to businesses, big and small, of the personal injury tort system would be on the order of $30 billion per year, not the $88 billion claimed by the Chamber of Commerce as the cost to small business alone.

• In 2002, Texas had a gross state product of about $742 billion. The personal injury costs to Texas businesses and professionals in 2002 represented a little more than a quarter of one percent of the Texas GSP.

• With a price tag of about $2.1 billion, the cost of personal injury cases to businesses works out to about $95 per Texan per year. In 2001, per capita personal income in Texas was $28,581. Tort costs to businesses amounts to about one third of one percent of per capita income, or about a quarter per day per Texan. If you imposed all of the costs of personal injury on the victims and gave defendants immunity from damages for personal injuries, and if those businesses passed the savings along to consumers, the average Texan would save enough money to take a round trip on the Dallas bus system once a week or so.

• Of the 9,723 closed cases in 2002, 4073 (about 42%) involved payments of $25,000 or less. More than four-fifths of the cases (7,945 of 9,723) involved payments of less than $150,000. There were 170 payments (less than 2%) of $1,000,000 or more.

• Car wrecks accounted for 60% of the claims and 40% of the payments.

• There were 625 closed product liability cases in Texas in 2002. Those cases had an average payment of $122,491 and an average allocated loss adjustment expense of $25,286. Thus, the total cost of product liability claims incurred by Texas businesses in 2002 was a bit over $92 million or about $4.20 per Texan per year.

• Medical professional liability represented about 12% of the cases. In 2002, there were 1,181 closed claims under medical professional liability policies in Texas. Those claims were the most expensive of any category with an average payment of about $261,000. That is perhaps not surprising since medical error has the potential for such severe harm. For instance, although medical professional liability cases accounted for just 12% of the total claims, it accounted for 48% of the death claims.

Med mal cases are expensive to litigate (which, perhaps, is also a function of the stakes being high in such cases). The ALAE for med mal cases averaged $62,118. The total cost of the med mal tort system (including settlements, judgment, attorney fees, and litigation expenses) was a little less than $382 million per year. That works out to about $17 per year per Texan.

• For those who believe that litigation is a lottery in which the amount awarded is unrelated to the severity of the injury, the Texas data may change your mind. The three categories of injury with the highest average payments were brain damage ($450,000), spinal cord injuries ($350,000), and death ($300,000). The lowest was back injuries ($55,000).

• Non-economic damages made up 57% of verdicts awarded at trial. Thus, a damages cap of $250,000 on non-economic damages would have little or no effect on cases with payments of $500,000 or less. In 2002, there were 566 cases closed with payments of half a million dollars or more (please note that is for all tort cases against businesses or professionals, not for med mal cases alone).

There is a lot more data contained in the report. It is really nice to have a ready source of actual data available for discussions of the civil justice system. If we maintained and published national data comparable to the Texas data, the debate over tort reform might move away from debate by anecdote. That would permit us to shed more light and less heat on the subject.

Posted by Dwight Meredith at April 14, 2005 11:11 AM | TrackBack