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Towers Watson Study: U.S. Tort Costs Drop in 2009

Source: Towers Watson

Posted on 14 Jan 2011

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A decline in both real and nominal GDP, a rising unemployment rate and decreasing tort activity as a result of a lower level of economic activity helped drive tort costs down by 2.7%, or $6.8 billion, in the United States in 2009, according to the 2010 Update on U.S. Tort Cost Trends from global professional services company Towers Watson.

In total, The U.S. tort system cost $248.1 billion in 2009, which translates to $808 per person, versus $838 per person in 2008. The 2010 report analyzes U.S. tort costs from 1950 through 2009, with projections through 2012.

The drop-off in 2009 was most evident in commercial tort costs, as total tort costs from commercial lines decreased 5.0% from 2008 to 2009. At $152.7 billion, 2009 commercial tort costs were 11.9% lower than average commercial tort costs in the peak years 2004 and 2005. The decline in commercial tort costs offset modest gains in personal tort costs – torts alleged against individuals, excluding medical malpractice – which increased slightly from $94.2 billion in 2008 to $95.4 billion in 2009.

"The lack of a robust economy contributed to a decrease in the opportunity for tort actions," said Russ Sutter, Towers Watson consultant and author of the report. "This decline was most notable in the commercial auto line of business — perhaps the most economically sensitive coverage with a tort component — as insured commercial auto tort costs fell by 7.4% in 2009.

"We had also anticipated a surge of directors and officers (D&O) liability litigation in 2009, largely related to the credit crisis that began in 2008," said Sutter. "However, the costs of this litigation are lower than we were expecting."

Further, overall economic growth in 2009 was minus-1.3%. As such, the ratio of tort costs to gross domestic product (GDP) shrank in 2009, marking six consecutive years of a decline in the ratio. Since 1950, growth in tort costs has exceeded growth in GDP by an average of about two percentage points. Looking ahead to 2010, Towers Watson is forecasting a 9% increase in tort cost, primarily due to the BP Deepwater Horizon disaster in the Gulf of Mexico. Excluding the Gulf spill, however, Towers Watson estimates tort costs in 2010 to be fairly stable, perhaps up 2%.

"Automobile-related tort costs remain subdued due to the weak economy, and medical malpractice trends continue to be mild," Sutter said. "We do, however, expect an uptick in the employee practices liability arena, with increasing disputes related to overtime compensation."
Towers Watson estimates growth in U.S. tort costs to range from 1% to 5% in 2011, with a midpoint of 3%, excluding the impact of the BP oil spill. A higher increase is seen for 2012, with a midpoint of 4%.

The 2010 Update on U.S. Tort Cost Trends is the 14th study of U.S. tort costs published by Towers Watson. 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 Watson; it is not funded or subject to approval by any outside organization.

The methodology used in the Towers Watson 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 Watson 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 Watson 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.