How Much Are Frivolous Lawsuits Really Costing You?
How Much Are Frivolous Lawsuits Really Costing You?
Frivolous Lawsuits and Class Action Lawsuits
Tuesday, May 22, 2007
Most recent one picked up off the web...
How Much Are Frivolous Lawsuits Really Costing You?
"What Is Lawsuit Abuse Costing Your Family?" asked a full-page ad that ran this week in several major newspapers, including The Wall Street Journal. The alleged answer: $3,520 a year.
The ads, paid for by the U.S. Chamber Institute for Legal Reform, a Washington, D.C., pro-business group, also ran in the Chicago Tribune and the Washington Post, and appear on WSJ.com.
The dollar figure comes from an annual estimate of tort costs by the Tillinghast arm of consulting firm Towers Perrin, which in turn is based on insurance data from A.M. Best. Tillinghast adds together the money paid to third parties as a result of tort claims; money spent by insurance companies to investigate and defend claims; and administrative expenses to handle claims. The group said the total cost in 2005, the latest year available, was $260.8 billion; that works out to about $880 per person, or $3,520 for a family of four.
But Russ Sutter, a Tillinghast principal and primary author of the study, told me the firm's numbers are being misrepresented by the U.S. Chamber Institute. The ads make the dubious assumption that every lawsuit in the tort system is frivolous. Mr. Sutter said his group didn't try to evaluate the merit of individual lawsuits, but simply set out to calculate the cost of the entire tort system. "The way they use it makes it sound like the $3,520 is all for abusive lawsuits," he told me. Furthermore, the ad "assumes all the costs we tabulate in our study are due to lawsuits. That's a bit misleading" -- because other costs associated with insurance are also included.
The Tillinghast study didn't claim the American lawsuit system was broken. The introduction reads: "This study takes no position on whether tort costs are too high or too low. ... Further, this 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."
Larry Akey, spokesman for the U.S. Chamber Institute, which is affiliated with the U.S. Chamber of Commerce, defended the ads and the use of the Tillinghast estimate. He cited a much greater estimate of the "tort tax," reported last year by the free-market think tank Pacific Research Institute, of $9,827 per family of four. I asked Mr. Akey whether his group made an attempt to isolate only those tort cases it deems abusive. He said it didn't, but by choosing what he calls the "conservative" estimate from Tillinghast rather than Pacific Research Institute's number, "we think the cost-of-abusive-lawsuit estimate is in the range we assert it to be."
The Pacific Research Institute's number -- discussed by its authors in a Wall Street Journal opinion column last month -- is hotly contested, and could be the subject of another Numbers Guy blog post. The study includes indirect costs, which are hard to measure. Its methods were critiqued by University of Chicago law professor Richard Posner; he concluded the number was fictitious. "I would disagree that our report is unreliable," co-author Hovannes Abramyan, a policy fellow at the Pacific Research Institute in San Francisco, told me. "We base our methodology on very scholarly consensus literature." Here's one piece of that literature, suggesting tort reform could have prevented 22,000 deaths between 1981 and 2000, and a thorough critique by Public Citizen, a public-advocacy group founded by Ralph Nader that supports tort litigation.
The Census Bureau, incidentally, says the average U.S. household has 2.6 members, not the four assumed by the U.S. Chamber Institute. "We say the typical American family is Mom, Dad, brother and sis," Mr. Akey told me. He added, "We can split hairs about what the correct number might be. My response is, how much should the American public pay for a broken lawsuit system?"
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