Tort Crisis Overblown, Tillinghast Studies Faulty, Claims Think Tank
The Insurance Journal
May 17, 2005
There is no credible evidence to link the tort system either to the economic ills its critics claim or to the benefits they argue would be produced by altering it, according to a new study by the Economic Policy Institute.
The EPI analysis by economist Lawrence Chimerine and attorney Ross Eisenbrey claims that the so-called tort litigation crisis is based on "wildly overstated cost estimates that have been widely cited by lawmakers and the media as support for calls for legal change."
The authors maintain that economic trends of the past 10-15 years are completely inconsistent with the claim that higher legal costs have hurt the economy. They find, to the contrary, that "draconian change to the tort system is more likely to hurt than help job creation."
The EPI report, The Frivolous Case for Tort Law Change, examines reports prepared by Tillinghast-Towers Perrin, a consulting firm whose clients include many of the world's largest insurance companies. TTP's reports are cited by President George Bush and his Council of Economic Advisors in arguing for tort reforms.
"The insurance consultants have spun a few high-profile but unrepresentative incidents into a horror story that is almost entirely unsupported by the facts," said Chimerine. "It is cobbled together out of gross exaggerations, shreds of fact plucked out of context, and 'secret' data that cannot be examined by anyone but them. The result is a mishmash that bears little resemblance to actual research."
Tillinghast, or TTP, argues that the country is in the midst of a tort litigation crisis that costs the economy nearly a quarter of a trillion dollars a year, but the EPI authors counter that TTP's argument is not supported by the available evidence and is, in fact, often contradicted by it.
For example, the EPI analysts claim:
Tort lawsuits have actually fallen significantly, despite continuing population growth.
According to the National Center for State Courts, there was a four percent drop in cases from 1993 to 2002 in the 35 states that include 77 percent of the population. Rising insurance premiums are not a result of increased tort litigation. Rather they are caused by a combination of economic factors: the collapse of the stock market; record low long-term interest rates; the recession and rising medical costs. Indeed, premiums are now declining because these economic factors have shifted in the past year or two.
Most of the $246 billion price-tag that TTP puts on the tort system is made up of components that have little or nothing to do with the legal system or are indefensible guesswork, according to the EPI analysts. For example, they say that about half of the total is made up of legitimate payments by a wrongdoer of the victim's costs, such as medical bills, which have little or no economic impact. It also includes billions of dollars in insurance industry costs, such as insurance company administrative and overhead expenses, which add up to almost 22 percent of the total.
Much of the total cost TTP alleges is unverifiable, because it is based on data and methodology that it insists on keeping secret.
Experts who doubt the company's claims, including former Texas Insurance Commissioner Robert Hunter, have criticized TTP's estimates as being at least twice as high as honest estimates would be because so much of the TTP total is made up of items "not even vaguely related to the legal system."
EPI says that even TTP acknowledges that many of the "costs" it adds in are guesswork - not actual payments to plaintiffs, lawyers, and others, but "incurred costs" that include estimates of claims not yet reported or filed.
The chief economist at Economy.com, Mark Zandi, in a simulation he ran using the Economy.com macroeconomic model, found that, using TTP's own numbers, changes to the legal system that were effective enough to reduce the costs they ascribe to the tort system by 10 percent would lower, not raise, employment.
"TTP has succeeded in alarming the public and the media by making a manageable situation seem like a crisis," said Eisenbrey. "Their numbers to not stand up to analysis and neither do the promises about the economy that the administration has based on them."
The co-author of the EPI study, Dr. Lawrence Chimerine, is president of Radnor International Consulting Inc. and former chairman, chief executive, and chief economist of Chase Econometrics and the WEFA Group.
Ross Eisenbrey, the other author, is vice president and policy director of the Economic Policy Institute.
The Economic Policy Institute is an independent, nonprofit, nonpartisan research institute - or "think tank" - based in Washington, D.C.