Paul Ruschman

Fun With Numbers: The Insurance Industry’s Phony “Tort Cost” Figures

Inevitably, stories about "lawsuit abuse" and "greedy trial lawyers" mention the cost of tort suits. The figures you hear most often are that tort costs total $246 billion per year, amount to more than two percent of our gross national product, and are equivalent to a five-percent "tax" on wages.

A column by Sebastian Mallaby in the January 17, 2005, Washington Post is typical. Mallaby described our civil justice system as "hideously inefficient," then trotted out the $246 billion tort costs figure, and after that proceeded to attack the justice system and trial bar.

The $246 billion figure has been repeated so often that it become an article of faith, even among journalists. President Bush has repeated it in his relentless attack on the civil justice system.

However, few Americans--presumably including Mr. Bush--can identify the source of that figure, or how it was arrived at. Can you?

Here's the source. Since 1985, a consulting firm, Tillinghast Towers-Perrin, has published a paper entitled " U.S. Tort Costs." According to the 2003 edition, "the study's purpose is to provide a straightforward, objective analysis of cost and trends, and not to support any particular point of view."

"Straightforward"? "Objective"? Let's take a look at this excerpt from the "About Towers Perrin" page:

The Tillinghast business of Towers Perrin provides consulting and software solutions to insurance and financial services companies and advises other organizations on risk financing and self-insurance.

Tillinghast's clients are insurance companies. So its tort cost studies are not only paid for by the insurance industry, but--as we will see--rely on industry-supported data. And Tillinghast's methodology is so flawed that if the study were introduced in court, it would likely be ruled inadmissible as junk science.

In January 2004, Americans for Insurance Reform found that Tillinghast's "tort cost" figures "vastly overstate" the cost of our legal system, by at least 100 percent. AIR identified a number of major shortcomings in the Tillinghast study, including these:

The figures aren't based on real "legal system costs" such as money paid out to satisfy judgments, settle lawsuits, or pay lawyers to defend against tort claims. Instead, they're based on liability insurance premiums, as reported by A.M. Best, the insurance reporting form, and Tillinghast's "internal sources."

Insurance industry overhead--everything from those warm-and-fuzzy ads you see during golf tournaments to the multi-million-dollar golden parachute paid by AIM to Maurice "Hank" Greenberg, who left under a cloud--is classified as "tort costs." Overhead counts for more than one-fifth of the Tillinghast estimate.

Claims against auto insurers for incidents that either can't go to court because of no-fault laws or tend to be settled without litigation are nonetheless are counted as "tort costs." Apparently. medical expenses and uninsured motorist coverage are counted as well.

The tort-cost estimate includes a 32-percent "surcharge" that represents Tillinghast's estimate of self-insured costs. According to AIR, Tillinghast wrongly assumes that self-insurance systems are as inefficient as the insurance industry.

Because Tillinghast's estimate is based on insurance premiums, the insurance industry's recent "hard cycle"--a period when insurers had to raise premiums to make up for poorly-performing investments--is turns a cyclical spike in premiums into a jump in tort costs.

Even though medical costs have risen much faster than the overall cost of living, Tillinghast uses the latter to adjust its tort costs. Using the wrong deflator adds to the misleading impression that tort costs are spiraling out of control. AIR contends that if Tillinghast used medical costs as a deflator, tort costs would have fallen between 1990 and 2001, and risen slightly afterward--and only because of the insurance industry's hard cycle.

Perhaps most importantly, the Tillinghast figures measure only costs. They do not include the countervailing costs saved by the tort system, such as medical expenses not incurred and wages not lost because lawsuits have driven dangerous products such as the Dalkon shield and the Ford Pinto off the market. Even the Tillinghast study grudgingly admits that these countervailing costs exist.

No wonder Joanne Doroshow, the executive director of the Center for Justice and Democracy, said, "Calling this study ' U.S. Tort System Costs' is intellectually dishonest. Tillinghast's figures are so misleading that they are completely irrelevant to any discussion of the civil justice system."

There's an interesting postscript to this story. Last January, the Center for Justice and Democracy spotted some interesting language in the 2004 U.S. Tort Costs update. For the first time, Tillinghast admitted that "the costs tabulated in this study are not a reflection of litigated claims or of the legal system." If so, then what do those costs represent? And if the study isn't reflective of tort costs, why does Tillinghast continue to publish it?

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Posted at 7:19 AM, Sep 27, 2006 in Insurance Industry
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