Lawsuit Lottery? -- All You Need is an Accident and a Dream

New York hawks its state lottery by assuring bettors, "All you need is a dollar and a dream." A new study by the Public Policy Institute of New York State finds that a growing cadre of entrepreneurial attorneys seem to be assuring injured and aggrieved citizens that they, too, can hit it big: "All You Need is an Accident and a Dream."

"An Accident and a Dream" is the title of a recent report on tort litigation by the Public Policy Institute of New York State, a subsidiary of the Business Council of New York. Readable yet scholarly, this comprehensive analysis of the effect tort litigation has had on New York's economy and legal system concluded that New York consumers and businesses bear a "tort tax" that, in the aggregate, exceeds all other state taxes except for personal income tax. The report finds that New York's total tort tax exceeds that of every other state except California, with double the population and a 75 percent larger economy. The study is excerpted here with PPI's generous permission.

— Ed.

1. A System of Justice —Or a Game About Money?

Citizens read about the occasional crazy-sounding lawsuit in the newspaper. But they seldom see the individual impact on themselves—the fact that the lawsuit industry adds $600 to the cost of having a baby in New York, and $400 a year to the cost of insuring a car, for example. Nor do they see the overall impact of the system, which is imposing a heavier and heavier burden on every sector of government and the economy in New York State.

  • Total liability costs in New York as of 1996 added up to $14.3 billion a year. That's $787 per person—28 percent above the national average. If you think of this as a "tort tax" (the wrongful acts alleged in liability lawsuits are referred to as "torts" in the legal system), it's a tax that exceeds all state and local sales taxes combined, a tax that's more than double the total raised by all state business taxes.

  • The lawsuit industry itself eats up most of that $14.3 billion. Injured parties get less than half of it. Plaintiffs' lawyers in New York State now make an estimated $2.3 billion a year from tort suits. And the big contingency fees generated by such cases have given lawyers the financial wherewithal to pour money into politics, to lobby for laws encouraging still more litigation.

  • Running counter to the trend elsewhere in the nation, tort filings in New York State jumped by 58 percent between 1988 and 1996. There's been a surge in motor vehicle-related claims that push up New Yorkers' auto insurance costs—despite a sharp drop in traffic accidents.

As a means of enriching plaintiffs' lawyers, New York's liability system is a well-oiled cash machine. But as a means of compensating victims, it is both unfair and inefficient.

National studies show injured parties collect less than half of all the money spent on liability protection under the current system, while the rest flows to legal fees and administrative costs. Meanwhile, the "tort tax" itself falls heavily on drivers, medical professionals, and small businesses. Reflecting the regressive impact of this "tax," a recent survey found that 55 percent of small business owners in New York State rated liability and legal costs as a "very serious" or even "extreme" problem for their firms. More than 69 percent said a lawsuit of any kind would cause a significant disruption of their business. Nearly three out of four small-business respondents said liability concerns had forced them to raise costs of products and services.

In public, plaintiffs' attorneys idealize the concept that everyone is entitled to a "day in court." But in practice, targets seem to be chosen not so much on the basis of the suffering of the plaintiff, as on the size of the financial resources (or insurance coverage) held by the potential defendant. If you don't have somebody with deep pockets to sue, don't count on getting your "day in court." But if there is a potential defendant with big money, the payoff for the lawyers can be huge—as illustrated by the literally billions of dollars that a relatively small number of trial lawyers hope to make from legal settlements with the tobacco industry.

Given the current state of the law and the size of recent jury verdicts in New York—an overall median of $273,000, with 25 percent of reported awards exceeding $1 million between 1990 and 1996—defense lawyers will often have to settle a claim even when their clients were not at fault. Both parties to a typical tort suit in New York have reason to view a jury trial as a coin flip. But for a defendant, who generally does not recoup a penny of legal costs even if he prevails, it's always "heads you win, tails I lose." In the right (or, to put it more accurately, wrong) circumstances, even a relatively minor, non-disabling injury can be parlayed into a hefty "pain and suffering" award for a plaintiff—and into a big payday for the plaintiff's attorney.

2. The need for reform

New York has been conspicuous in its absence from the list of at least 20 states that have enacted major tort reforms in the last five years—a list that includes such industrial competitors as Ohio, Illinois, California and Texas. Most of these states have lower rates of tort litigation and lower tort taxes than New York.

A 1997 survey of New York State residents showed strong public support for basic tort reforms—including repeal of the "joint and several" rule under which a defendant who is 1 percent liable may have to pay 100 percent of a damage award; a limit on lawyer contingency fees, similar to what is already in effect for medical malpractice cases; and a cap on non-economic damage awards.

3. New approaches

In the long run, the greatest breakthrough in reducing the tort tax and improving New York's competitiveness—without shortchanging real victims or encouraging negligent conduct—may come from a more fundamental overhaul of both tort law and lawyer compensation rules.

Proposed "early recovery" guidelines for tort cases would not alter the existing landscape of tort law except to change the basis on which plaintiff's lawyers are compensated. The guidelines would encourage more low-cost settlements early in the process, with the lion's share of financial benefits flowing directly to the plaintiffs themselves while lawyers are compensated only for efforts actually expended.

The second new approach is exemplified by the "Auto Choice" plan, co-sponsored on the federal level by Sen. Daniel P. Moynihan of New York, which would give consumers the ability to opt out of the tort system, in exchange for major savings in their insurance premiums estimated at up to 50 percent or more for many New York drivers.

4. The Trouble with Torts

The liability system in New York State is not governed by a single written "tort law" adopted by the Legislature, but by an elaborate framework of different statutes and judicial precedents. As a leading casebook on the subject puts it, "the present-day hodge-podge of judicially created tort law and statutory tort law is not always easy to comprehend, and certainly is not reconcilable along philosophical, logical or practical lines. New York law of torts has become increasingly more complicated and difficult to understand and apply."

The impact of this confusion can vary, depending on the activity and sector of the economy involved. In the area of product liability, for example, there is no clear-cut statutory framework, only a long string of court cases that have steadily expanded the ways in which manufacturers can be sued.

In the one area of liability that touches the largest number of New Yorkers, as drivers, a statute designed to minimize litigation appears to be fraying around the edges. New York State's no-fault automobile insurance law restricts lawsuits and requires insurers to reimburse economic losses resulting from injuries suffered in car crashes. However, plaintiffs' lawyers have been finding room for a sharply rising number of motor vehicle tort claims under the law's "serious injury" exceptions—despite a drop in personal injury accidents.

5. The law of "contorts"

Traditionally, for a defendant to be held responsible for injuring someone else, it had to be clear that he had failed to use prudent care in the situation. Over the last 40 years, however, the law of torts has evolved into what's been called a law of "contorts" — a system focused less on rights and wrongs than on finding a source of compensation for any injury, regardless of fault. Along the way, in many areas of the law, negligence seems to have become almost irrelevant. Although our system of tort law is supposed to deter hazardous practices, "judges and juries [are], for the most part, committed to running a generous sort of charity," says Peter Huber, a leading critic of prevailing tort laws. "If the new tort system cannot find a careless defendant after an accident, it will often settle for a merely wealthy one. But the wealthy defendant [a manufacturer or municipality, for example] is more often part of the safety solution rather than the safety problem."

Taken at an individual case level, such an attitude is entirely human and easy to understand—as countless jury verdicts have demonstrated. Here is a (perhaps pitiably injured) plaintiff who could really use some money. Here is a defendant that looks like it (or he or she) could "afford" to pay a lot—a big company, a big city, or somebody with a lot of insurance coverage. OK, so the defendant really hasn't been negligent, really hasn't done anything wrong—but hey, the plaintiff needs money, and the defendant has got money, so why not?

Viewed in terms of the impact on the whole system, unfortunately, this attitude corrodes the idea of justice; undermines incentives for safe products, safe operations and safe conduct; and drives up costs for everyone. As lawsuits are decided on the basis of who can afford to pay rather than on the basis of whose conduct has been faulty, respect for the idea of justice declines, and the legal-lottery mentality only becomes more pervasive. When lawsuits are decided on the basis of sympathy rather than on the merits, the incentives for people to follow safe practices and for industry to make safe products are reduced. And if juries think that a big city or a big company or a well-insured defendant can "afford" to pay a big damage award, they are forgetting that in the end everyone pays for such awards, through higher taxes, higher prices, higher insurance premiums.

6. Employer references: Mum's the word

Few areas illustrate the bizarre extremes of liability more vividly than the growing body of case precedents affecting employment references. Employers have learned they can be sued for providing unflattering references about former workers, even when the references are demonstrably true in every respect. But employers also know they might be slapped with a tort suit if they fail to provide a bad reference about a worker who deserves one.

Walter Olson of the Manhattan Institute cites the example of the Exxon Valdez oil spill, which gave rise to a $20 billion lawsuit accusing the oil company of taking a "callous, cold-hearted business risk" in allowing a captain with a history of alcoholism to command the ship. "At the very same time, Exxon was being sued by numerous other employees who had been moved from sensitive positions due to alcohol or substance abuse," Olson writes: "It became a standing joke: after the lawyers were done suing you up one side of the street, they'd sue you down the other. They would sue when you gave a bad reference, then sue for a failure to warn—in other words, failing to give a bad reference — when your employee committed some atrocity in his new job. They would sue when you turned away a job applicant with a violent of criminal past, or sue if you did take him and he hurt someone."

So, a New York supermarket was ordered to pay half of a $1.15 million damage award to a former employee who had been stabbed by a co-worker in the store's parking lot. Although the supermarket did not know of the assailant's criminal past when it hired him, the plaintiff argued, it should have known or found out about it. Of course, in New York, an employer is prohibited from denying employment to someone solely because of a criminal record.

7. Impeding the sources of progress

The chilling effects of liability lawsuits and mushrooming insurance costs have been especially dramatic in the pharmaceutical field. For example, the number of firms producing vaccines for five serious childhood diseases plummeted from 13 to three, and the cost of the vaccines skyrocketed, during the 1980s. And only a handful of firms are researching new contraceptive devices—leading the National Academy of Sciences to recommend that pharmaceutical firms somehow be shielded from the costs of product liability lawsuits.

Merit and safety often become moot issues in the ongoing liability drama. When Bendectin, the popular and effective morning sickness drug, was withdrawn from the market by Marion Merrell Dow Pharmaceuticals, it was not because the product had proven unsafe. It was because Bendectin sales barely covered the annual costs of legal fees and insurance—although the company had never lost a product liability case, and claims against the product were proven to be unfounded.

8. Reduced competitiveness

In today's global economy, tort costs can leave New York companies and workers priced out of the international market.

This concern was reflected in the results of a 1991 survey by the Public Policy Institute. Half of the respondents said the state's product liability system had a "strongly negative" or "negative" effect on their company's ability to compete with foreign and domestic firms.

In Holzer's study, 69 percent of those surveyed felt New York's product liability laws put them at a competitive disadvantage with foreign firms (almost none of whom face a litigious atmosphere in their home markets remotely comparable to that prevailing in New York). Given the work and money New York State invests in attracting business, the system is clearly contradictory and counterproductive.

And New York State's competitive disadvantage is getting worse. In the last five years, significant tort reforms have been enacted in at least 20 states, including Ohio, Illinois, California and Texas—all of which also happen to be major industrial competitors of the Empire State.

9. The taxpayers' "deep pockets"

High local taxes are another crucial competitiveness factor for New York. And taxes are pushed higher when the state's prevailing liability standards are combined with a prevailing view among jurors that local governments can easily afford big damage awards.

No municipality in the United States foots a bigger tort bill than the city of New York, whose annual liability costs — more than $260 million — exceed its expenditures on parks and libraries combined. In the slip-and-fall category alone, suing the city has given rise to a legal cottage industry — the Big Apple Pothole and Sidewalk Protection Corporation. Hard to believe though it may be, this is an actual corporation established by trial lawyers to catalog holes, uneven slabs and other sidewalk irregularities for which the city can be held liable.

Mayor Rudolph Giuliani calls it a system in which "reason has given way to chaos." "A criminal, a subway mugger preying on the elderly, becomes a multimillionaire thanks to a Manhattan jury which awards him $4.3 million for being shot as he attempts to flee from the scene of his crime. One Bronx jury votes to give $500,000 to a woman who breaks her toe in a pothole, and another awards $6 million to the family of a drunk who fell in front of a subway train, finding him wholly without blame. The height of absurdity is reached when the jury in a medical malpractice case awards $27 million to the injured patient, and another $6 million to the members of his family, who hadn't even sued."

Highway accidents are another major category of litigation against the city. One of the more extreme examples cited by Mayor Giuliani involved a $650,000 jury verdict against the city in the case of a drunk driver, who collided with another car while speeding northbound in the southbound lanes of the Hutchison River Parkway.

"Because the drunk was also killed, the jury was forced to speculate where from among at least three possibilities he had entered [the highway], and that he must have been confused by one or another of the posted `WRONG WAY' signs. Nevertheless, although no one could show a single previous instance of a car actually traveling in the wrong direction on the Hutchison River Parkway, a Bronx jury took very little time to find (the drunk driver) less culpable than the City's traffic engineers."

What's really going on in such cases, legal observers agree, is the apparent belief by juries—especially in the Bronx and Brooklyn—that the city's pockets are not only deep but bottomless. That's why Mayor Giuliani and other local officials are seeking a law that would require damage suits against municipalities to be filed in the non-jury Court of Claims, where cases against state government are now heard.

11. No-fault? No problem!

New York is one of 13 states with a no-fault auto insurance law designed to minimize litigation by ensuring the automatic reimbursement of property and personal injury damages arising from the vast majority of accidents. Under New York's statute, a driver's auto insurance policy will cover up to $50,000 of economic losses—defined to include both medical expenses and lost wages—if he or she is injured in a car crash, regardless of who was at fault.

In exchange for this guarantee of coverage, policyholders are not allowed to sue another driver for damages except in cases of "serious injury," which is defined by law to include death, dismemberment, significant disfigurement, a bone fracture, loss of a fetus, "permanent loss of use of a body organ, member, function or system," "permanent consequential limitation of use of a body organ or member," and "significant limitation of use of a body function or system."

Serious injuries under the no-fault law also are defined to include "a medically determined injury or impairment of a non-permanent nature which prevents the injured person from performing substantially all of the material acts which constitute such person's usual and customary daily activities for not less than ninety days during the one hundred eighty days immediately following the occurrence of the injury or impairment."

On the surface, the language sounds very restrictive. But in recent years, plaintiff's lawyers appear to be exploiting more and more exceptions to the no-fault bar on tort suits.

For example, New York courts have found that a medical diagnosis of a "herniated, desiccated or bulging disk" resulting from a car crash can constitute grounds for a serious injury claim under the no-fault law—despite recent medical research showing that two-thirds of the adult population have the same disk abnormalities with no back pain at all. Courts have also allowed auto accident lawsuits based on "serious injuries" as minor as a sprained ankle and scars on one knee.

12. New York's "Tort Tax"

The cost of the liability system is immense but invisible, passed through to consumers in the form of higher prices for goods and services of nearly every kind. This cost is sometimes referred to as the "tort tax" — and here, as in so many other areas, New York's economy is saddled with one of the heaviest tax burdens in the country.

The use of the word "tax" in this context is bitterly resisted by the trial bar. It is clear, however, that the more juries are pressed to assess damages against a defendant on the basis of the defendant's ability to pay rather than the defendant's actual culpability, the more the tort cost comes to resemble a tax. Like a tax, it uses the force of law to extract money from the general economy (in this case through higher costs for government, higher prices for business, higher insurance premiums), and then to distribute that money to achieve a perceived social good, i.e., compensation to the injured.

Peter Huber, a leading critic of the nation's tort system, has put the issue of tort costs in this perspective: "Unlike better known taxes, this one was never put to a legislature or a public referendum, debated at any length in the usual public arenas, or approved by the president or any state governor. And although the tax ostensibly is collected for the public benefit, lawyers and other middlemen pocket more than half the take."

Just how large is the tort tax in New York — and how does it compare to liability costs in other states? The best way to arrive at the answer is to gather data on what individuals, state and local governments, and corporate entities must pay — in the form of insurance premiums, and amounts set aside for self-insurance — to cover any claims made against them for personal injuries and other damages.

Our tort tax estimate is the sum of three components:

  • Liability Insured costs include direct written premiums for private (i.e., personal) and commercial automobile liability; product liability and other liability insurance. The impact on premiums paid for homeowners, farm owners and multi-peril insurance was also included, to reflect the portion of those coverages devoted to paying benefits to third parties alleging injury or damages caused by the insured persons or companies.

  • Medical Malpractice costs consist of direct written premiums as derived from A.M. Best data and reported in the annual "Fact Book" of the Insurance Information Institute. (Note: If anything, our estimate severely understates this component of the tort tax; for example, based on a proprietary internal database, Tillinghast comes up with a national figure for medical malpractice that is more than twice as large as the sum of our state estimates. However, our method was chosen as the best available for coming up with at least roughly comparable conservative estimates for all states.)

  • Self-Insurance costs—reflecting businesses, municipalities and other entities that go without liability insurance—are based on estimates by Tillinghast that 5 percent of personal lines and 30 percent of total commercial lines are effectively self-insured.

Our key finding is this:

New York State's tort tax in 1996 amounted to $14.3 billion—second only to California's in absolute terms. On a per-capita basis, New York's tort tax ranked sixth at $787 per person—about 28 percent above the national average. The burden of liability costs in New York State is among the highest in the nation — and it is also higher than any tax levied by the state government, except for the personal income tax.

The tort tax exceeds the combined burden of state and local sales taxes in New York, which add 7 to 8 percent to the cost of most retail goods, depending on the locality. The tort tax runs a close second to the state's personal income tax. It's more than double the combined total of all business taxes levied by the state. And the tort tax is more than quadruple the amount raised by all remaining New York State taxes combined—including state excise taxes on fuel, tobacco and alcohol, estates and gifts, and real estate transfers.

Like the sales tax, the tort tax is at least partially "exported" to consumers elsewhere; for example, the cost of product liability coverage for New York manufacturers is reflected in prices they charge for products sold throughout the world. By the same token, some portion of insurance and self-insurance costs in New York reflects injuries and losses suffered in other states.

It is important to note, however, that tort tax differences among states are disproportionate to size. For example, California's population and gross state product exceed New York's by 53 percent and 75 percent, respectively, but California's gross tort tax is only 27 percent higher than New York's.

Measuring the tort tax relative to the size of each state's economy, as a percentage of gross state product, is a way of compensating for differences in the way liability costs are distributed within and among states. Even using this approach, New York's tort tax is comparatively high.

New York's tort tax in 1996 was equivalent to 2.35 percent of its estimated gross state product of just over $600 billion, compared to a national average of 2.22 percent. Only seven states had higher liability costs than New York, relative to their economies.

Matching the national average tort tax, as a share of gross state product, would save roughly $800 million a year, or roughly 6 percent, in liability premiums and self-insurance payments in New York. Matching California's tort tax level, which was 1.98 percent of gross state product as of 1996, would cut premiums and self-insurance payments in New York by 8 percent, or nearly $1.3 billion a year.

New York's high tort costs also make it less attractive to firms with heavy foreign competition. According to a separate study by Tillinghast, tort tax rates as of 1994 were 0.5 percent in Japan; 0.8 percent in Canada, France and the United Kingdom; and 1.3 percent in Germany. (Tillinghast­Towers Perrin, "Tort Cost Trends: An International Perspective," 1995)

13. Where the money goes

Taxes are supposed to yield benefits for society in proportion to their costs. Does the "tort tax" do so?

Defenders of the current liability system say its benefits take the form of increased safety for consumers as well as financial pay-outs for those who have been injured. However, as discussed in Section 1, the safety claims are vastly overstated—and, as documented by several studies, so are the benefits to injured persons.

"When viewed as a method of compensating claimants, the U.S. tort system is highly inefficient, returning less than 50 cents on the dollar to the people it is designed to help—and less than 25 cents on the dollar to compensate for actual economic losses," The Tillinghast study noted.

Even when non-economic "pain and suffering" awards are included, Tillinghast has estimated that claimants ultimately collect only 46 percent of the money raised by the tort tax. The remaining cash feeds the system's huge transactional costs — 24 percent for overhead and administration, 14 percent for defense costs, and 16 percent for claimants' attorney fees.

Applied to our state tort tax estimate, these figures yield the following breakdown of liability expenditures in New York as of 1996:

$6.57 billion in payments to claimants (including $3.1 billion for "pain and suffering" awards and only $3.4 billion for actual economic damages). $3.4 billion for administrative overhead. $2 billion for defense costs. And nearly $2.3 billion for plaintiffs' attorneys.

In sum, more than half the money extracted from our consumers, our taxpayers and our economy by New York's phenomenally expensive liability system doesn't go to its supposed beneficiaries. The real irony, of course, is that this is exactly what keeps the tort system going—there is so much money to be made by people who live off the process.

14. Economic impacts

The "tort tax" numbers offer a good approximation of what the liability system takes out of people's pockets, directly and indirectly. But they only partially express the impact on the state's economy of laws that depress employment and wage growth. A study published in 1995 by the respected National Bureau of Economic Research compared the impact on state economies of "liability-reducing" tort reforms, such as caps on damage awards and reform of joint and several liability, with the impact of "liability-increasing" tort reforms such as required payment of pre-judgment interest on damages and comparative negligence statutes, which allow plaintiffs to collect even when they are partly at fault.

The study's conclusion: "liability-reducing reforms are associated with higher levels of output per worker and employment, in a broad range of industries." Reforms defined as "liability increasing" had the opposite effect in most industries. In other words, New York is likely to gain more jobs if we adopt the kinds of reforms opposed by the trial lawyers—and we're likely to lose jobs if we enact laws opening the doors to still more lawsuits, as the plaintiffs' bar wants.

* For reprints of the full text of "An Accident and a Dream," contact David Shaffer at (518) 465-7517 ext. 273, or access the PPI's website at


2001 The Federalist Society