Looking ahead, 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 is estimating that U.S. tort costs will increase 3% in 2009, an additional 4% in 2010 and 6% in 2011.
"Despite the chaos in the financial markets in 2008, the tort cost environment in the United States was relatively benign," said Russ Sutter, a Towers Perrin consultant and author of the report. "The slight increase was less than the general inflation in the U.S. and was well below the growth rates seen earlier this decade.
"Looking beyond 2009, and probably 2010, we see general inflation and judicial attitudes as being potential catalysts for higher tort cost growth rates," added Mr. Sutter. "As such, we see 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."
Among the report's key findings:
* The $2.7 billion uptick in 2008 is the second cost escalation since 2005 and follows a $5.1 billion increase in 2007.
* 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%. 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% over 2007. The 2008 costs were also below the levels seen in each of 2003 through 2005. The reduction from those prior years appears to be attributable to a reduction in the number of claims.
Methodology
The methodology used in the Towers Perrin 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. While Towers Perrin 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.
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 2009 Update on U.S. Tort Cost Trends is the 13th study of U.S. tort costs published by Towers Perrin. The study examines only one side of the U.S. tort system: the costs. No attempt has been made to measure or quantify the benefits of the tort system, such as a systematic resolution of disputes, and the study makes no conclusion that the costs of the U.S. tort system outweigh the benefits or vice versa. The study is conducted entirely by Towers Perrin; it is not funded or subject to approval by any outside organization. The report is available at: www.towersperrin.com.