US pays huge price for inefficient tort system

The point of the U.S. tort system is to provide an efficient way for people who are harmed to seek justice. However, a new report from The Brattle Group, commissioned by the U.S. Chamber Institute for Legal Reform (ILR), indicates that Americans are paying a premium for a system that sometimes fails to deliver.

The study, Costs and Compensation of the U.S. Tort System, found that the total costs and compensation paid in the U.S. tort system exceeded $429 billion in 2016—the highest ever recorded. The study defines ‘costs’ and ‘compensation’ of the tort system to include the total amount of judgments and settlements awarded to injured parties, as well as the associated legal and administrative costs, including attorneys’ fees.

{mosads}No doubt our tort system is expensive. In fact, a 2013 study showed that, as a percentage of its economy, the U.S. legal system is the costliest system in the world: over 150 percent more than the Eurozone average, and 50 percent more than the United Kingdom.

To put that $429 billion into perspective, it’s almost six times the Department of Education’s budget that year and nearly 75 percent of the entire U.S. defense budget. It also translates to over $3,300 per household, or almost twice what the average family spent to fill their gas tanks.

Considering its expense, does our system provide value to those who seek justice through it? Unfortunately, not so much. According to the study, of every dollar paid into the tort system in 2016, only 57 cents went to plaintiff compensation. The rest went to pay for lawyers, administrative costs and insurance costs.

But even that isn’t the full story. A chunk of these tort costs are class action lawsuits. And these cases are much less friendly to actual plaintiffs. Other recent research has shown that on average, only 4 percent of class members collect the often-miniscule shares of the total award that are available to them. Some of that award can go to third-party groups or programs, often unrelated to the lawsuit, in a practice known as cy pres.

This happened in a class action settlement involving AOL a few years ago. Under the terms of the settlement, the plaintiffs were to receive no money. The attorneys would be paid $320,000, and three organizations that had nothing to do with AOL or the class action would get payments of $25,000 each. The real amount of money going to victims in our tort system is much less than 57 percent.

While American households do not pay a direct bill for the tort costs, indirectly we are all paying—from increased prices of the medicines we buy, to the cars we drive, to even the food we eat. The tort costs ripple throughout the economy.

For residents of states with poor lawsuit climates like Florida and New Jersey, this “invisible line item” has an even bigger impact. ILR’s study found that as a percentage of their respective state’s gross domestic product, Florida and New Jersey pay more than twice as much as states like Alaska, Wisconsin and Wyoming. These states’ higher costs for an inefficient system means billions of dollars are going to waste.

To be sure, most Americans will not be surprised to learn that our lawsuit system is expensive. Surveys conducted for my organization demonstrate that people overwhelmingly believe our nation has too many expensive lawsuits that primarily benefit lawyers, not real victims.

This tort cost study should be a wake-up call to both state and federal lawmakers. Prioritizing commonsense legal reforms can have real benefits, both in cost savings for our society and in achieving more justice for the people our system purports to help.

Our tort system certainly benefits the plaintiffs’ lawyers, but for the rest of America, it’s a premium investment for a below average return.

Lisa A. Rickard is the president of the U.S. Chamber Institute for Legal Reform. To learn more, visit www.InstituteForLegalReform.com.