Tort Costs Have Grown at Annual Rate of 7.1%

The Institute for Legal Reform’s (ILR’s) third edition in its series of studies measuring total costs and compensation of the American tort system found that, overall, “tort costs have grown at an annual rate of 7.1% a year over the period 2016 to 2022—with commercial liability growing at a faster rate than personal liability.” This rate exceeds both the annual rate of inflation (3.4%) and GDP [gross domestic product], which grew at 5.4% per year over the same period. “Because increases in tort costs have outpaced increases in GDP, tort costs as a percentage of GDP rose from 1.88% to 2.07%.” 

Results of the Study Explained

The researchers estimate that “the aggregate tort costs in the U.S. amounted to $529 billion in 2022…$296.5 billion of those costs are attributable to general and professional liability claims; $215 billion to automobile claims; and $17.5 billion to medical liability claims.”

More member-created content available in-person at our Annual Conference this April in Dallas

Tort Costs Over Time

As previously mentioned, tort costs have grown at an annual rate of 7.1% per year over the period 2016-2022, with commercial liability growing at a faster rate than personal liability. Furthermore, “the annual growth in commercial liability costs excluding medical liability is even higher at 8.8% and reaches 10.1% per year for commercial automobile liability.” These increases, the researchers continue, exceed both inflation (3.4%) and GDP growth (5.4%) over the same period. Because growth in the tort system outpaced GDP, tort costs as a percentage of GDP grew from 1.9% to 2.1%, which amounts to an average growth rate of 1.6% per year.

The Impact of COVID-19

“COVID caused courts to shut down and greatly slowed down the pace at which tort cases proceeded through the justice system, but this slowdown was not reflected in insurance data, which captures future expected costs of tort liabilities (i.e., from claims expected to be made or tort occurrences expected in the policy year). Consumer price inflation also rose during COVID, but tort costs rose even more.”

However, even though GDP dropped in 2020 due to the economic slowdowns associated with the pandemic—including a temporary drop in traffic volume leading to fewer accidents—tort costs continued to grow overall.

Tort Costs Per Household Across States

Researchers divided the estimated costs by the number of households in the U.S. “Aggregate tort costs of $529 billion in 2022 amounted to $4,207 per household.” They also computed tort costs by state (in dollars and as a percentage of state GDP) and calculated the state-by-state amount per household, according to the report. “Insurance companies allocate premiums and losses to each state or territory based on the physical location of the insured risk, but for some liability coverage where a single premium is determined for multiple locations, premiums and losses can be allocated to the location of the principal office of the insured.”

Costs vary greatly across states, ranging from $676 million in Wyoming to over $72 billion in California, for instance, “but this diversity is not entirely explained by the relative size of the states. For example, in 2022 Ohio was the seventh most populous state in the nation with nearly 12 million residents yet its per-household tort costs were the 47^th highest among the states, at $2,583. Conversely, Louisiana was the 25^th most populous state in 2022 with just over four and a half million residents, but it was 11^th by per-household tort costs, at $4,389.”

Tort costs in the 10 most expensive states were $167.8 billion, notes the report; on average, this amounts to 2.77% of the total GDP in these states, according to the report. The 10 most expensive states in terms of tort costs per household per state reached $289.3 billion, which averages $5,475 in tort costs per household for each of the 52.9 million households in these states.

Tort costs as a percentage of GDP vary across states, the report finds. “After Delaware, Florida has the highest tort system costs as a percentage of GDP (just under 3.4%) which is two and a half times higher than Alaska, North Dakota, and South Dakota, which have among the lowest tort system costs as a percentage of GDP (less than 1.4%). This large variation in state-level tort costs, which is not explained by the total economic output in each state, illustrates that states have differing legal liability climates.”

A Consistent Measure of Tort Costs

The researchers developed estimates of tort costs for the entire U.S. and for individual states, and the research represents an update to ILR’s 2018 study as well as its 2022 study. “For purposes of these studies, we define tort costs as the aggregate amount of judgments, settlements, and legal and administrative costs to adjudicate private claims and enforcement actions,” states the report. “The costs of the tort system also include the portion of liability insurance premiums used to pay administrative expenses and overhead and contribute to the profits of insurers.”

The researchers use data on liability insurance premiums in the U.S. to develop a consistent and transparent measure of tort costs. “Tort liability is, however, not always insured in the commercial marketplace,” emphasizes the report. “It can be self-insured by businesses subject to tort liability. We include in our estimate of tort costs the liabilities of businesses that are self-insured, including businesses with explicit arrangements and risk management programs, as well as those that assume risk passively by choosing to be uninsured.” The liabilities included in the study are only those that are insurable, which will understate tort costs to the extent that certain tort claims are uninsurable.

The principal categories of insurable liability include: liability for personal injury and property damage, in some cases including consequential damages; liability related to commercial disputes based on tort claims, such as negligence, bad faith, misappropriation, or tortious interference; automobile accident liability; product liability and certain environmental liabilities; consumer protection liability; professional liability, including medical professional liability; investor protection liability; labor and employment liability; civil rights (including disability, privacy, and non-discrimination protections); and antitrust liability, such as for unfair competition.

Issues Within the U.S. Tort System

“The cost and efficiency of the tort system have been the subject of public policy debate, and the [U.S.] has been found to have significantly higher costs than other developed countries,” states the report. “Some of the factors contributing to differences in liability costs across countries include: the comprehensiveness of the social safety net; the availability of no-fault compensation schemes; the existence of loser-pays rules for attorneys’ fees in certain jurisdictions; the extensiveness of private rights of action; the access to litigation funding; and the availability and abuses of the class action mechanism.”

Excessive costs of the tort system can have adverse effects on both businesses and individuals, which several studies have identified. In the U.S., there are “large variations in liability costs across states and they have been explained in part by differences in state legal environments, such as the number of lawyers, the perception of the competence of state judges, the strength of evidentiary rules, and the frequency of frivolous or abusive litigation.” Furthermore, a substantial portion of the total tort-related expenditures go toward litigating and defending claims and lawsuits rather than compensating the claimants, the report states.