The Liability System
Overview: Addressing the Cost of the Liability System
Excessive Litigation Continues to Increase Insurance Costs
In 2007, the tort system cost the U.S. approximately $252 billion in direct costs. This figure translates to $835 per person or 1.8 percent of the gross national product. Indirect costs are estimated to reach as high as three times this amount.
Consumers pay directly for the costs of litigation through higher liability insurance premiums, and indirectly in higher prices for goods and services that reflect increased business costs from liability claims and insurance. Notably, lawsuits represent only a portion of total liability claims, with just one-third of claims becoming lawsuits.
Recently, there has been a decline in the number of new lawsuits. Some expect the latest economic downturn to result in an increase in liability litigation. In addition, in the wake of the 2008-2009 financial crisis, there has been an increase in securities-related class action lawsuits.
Key Trends in Liability Reform
Federal and state policymakers have considered or enacted policies to rein in excessive litigation and high-dollar payments for noneconomic damages. Initiatives and proposals include:
- Federal Liability System Reform—The previous administration, supported by many lawmakers, advocated creating federal standards that would preempt state tort laws. For now, the Obama administration has opposed such standards except in instances where there exists a well-defined legal basis. Two recent rulings of the U.S. Supreme Court have upheld the rights of states to define their own tort laws.
- State Tort Reform—In the absence of federal tort reform, several states have enacted liability system reform, with particular emphasis on capping noneconomic damage awards. In some instances, tort reform laws have been challenged in the courts.
- Alternative Dispute Resolution—The private sector, including some insurers, organizations and attorneys, are addressing liability system inefficiencies by using Alternative Dispute Resolution (ADR), including arbitration and mediation. Parties that use ADR are exploring ways of qualifying mediators and establishing other guidelines to govern the legal process, including class action lawsuits.
- III White Paper—Liability System
An in-depth discussion of the impact of the current liability system on the insurance industry.