U.S. Tort Costs Down in 2006, According to Towers Perrin Study

First decrease in tort costs since 1997, but signs indicate trend will not continue.

U.S. tort costs totaled $247 billion in 2006, which is approximately $825 per person and $57 less per person than in 2005, according to the 2007 “Update on U.S. Tort Cost Trends” from the Tillinghast insurance consulting practice of Towers Perrin. Tort costs declined by 5.5 percent in 2006, which is significantly lower than the growth rate of 0.4 percent in 2005, 6 percent in 2004 and 5.5 percent in 2003. The $13.4 billion decrease over tort costs in 2005 marks the first downward trend since 1997. The 2007 report analyzes U.S. tort costs from 1950 through 2006, with projections through 2009.

The 5.5 percent decline in tort costs was markedly less than overall U.S. economic growth of 6.1 percent, as measured by gross domestic product (GDP). Since 1950, growth in tort costs has exceeded growth in GDP by an average of 2 percent to 3 percent. However, over the last 20 years, the ratio of tort costs to GDP has stayed within a relatively narrow range, at approximately 2 percent. In 2006, the ratio slipped below 2 percent for the first time in the last six years.

"In 2006, the modest decline in personal tort costs was combined with a significant drop on the commercial side," said Russ Sutter, Towers Perrin principal. "However, given several factors, including the potential fallout from the current subprime loan crisis, we anticipate a reversal in 2007. To put it bluntly, when people lose money, litigation tends to follow."

U.S. tort cost growth since 1950 far exceeds U.S. population growth. Even after adjusting for inflation, tort costs per capita have risen by a factor of more than nine between 1950 and 2005, but inflation-adjusted tort costs per capita were lower in 2006 than in the prior three years.

Auto Costs Remain Flat

Typically, personal auto liability, the greatest contributor to overall tort costs, has shown a decrease in the number of reported accidents, and thus a drop in new claims in recent years. However, there are signs that this trend may not continue.

"Between cell phones, PDAs, and MP3 players, today’s drivers are doing more behind the wheel," said Sutter. "These distractions may mitigate any claim that as a nation we are becoming safer drivers."

Impact of Asbestos Lessens

In recent years, specific costs related to asbestos have had a waning impact on overall commercial tort costs. In 2006, insured asbestos losses totaled $1.9 billion, as compared to $7 billion in 2005, and $7.3 billion in 2004.

"The decrease in commercial tort costs in 2006 is partly attributable to asbestos, but there are cases still active that will determine if the downward movement will continue," said Sutter.

Medical Malpractice Costs Remain Stable

For 2006, medical malpractice tort costs totaled $30.3 billion, up from $29.4 billion in 2005. Since 1975, medical malpractice costs have increased at an annual rate of 11.1 percent compared to 8.2 percent for all other tort costs, according to Tillinghast.

"Medical malpractice figures have been very stable the last few years — possibly a reflection of reforms enacted by several states," said Sutter.

Future Implications

Looking ahead, Tillinghast anticipates growth of U.S. tort costs to be 2.5 percent in 2007, with slightly higher growth of 4.5 percent for the following two years.

A variety of factors may have an effect on the growth of tort costs in the near future, which include:

Whether the declining frequency of auto accidents has bottomed out.
How the recent state-level medical malpractice reforms from the past few years will affect the moderation of recent trends, particularly as Illinois tort reform was ruled by a judge in November to be unconstitutional.
Whether the deterioration in the subprime mortgage market in 2007 will lead to lawsuits from both investors in select financial institutions and homeowners holding mortgages from those financial institutions.
The outcome of current asbestos litigation and impact on reserve amounts.
Potential for litigation against companies related to spotlight issues like global warming and childhood obesity.

"Looking at the list, several of the issues that will impact future trends in tort costs — from subprime mortgages to global warming to backdating of options — were not even a consideration a decade ago,” Sutter said. “Yet, these factors and their prospect for continued and new lawsuits have the potential to make a major impact on overall costs in 2007 and beyond.”

Source: Towers Perrin news release

Posted: Tuesday, December 18, 2007 12:00:00 AM. Modified: Tuesday, December 18, 2007 12:20:40 PM.

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