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 themselvesthe
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 person28
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 costsdespite 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 hugeas 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 Yorkan overall median of $273,000, with 25
percent of reported awards exceeding $1 million between 1990 and
1996defense 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 plaintiffand 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 yearsa 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 reformsincluding 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 competitivenesswithout shortchanging
real victims or encouraging negligent conductmay 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" exceptionsdespite 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 understandas 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 lota 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 wrongbut 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 warnin 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 devicesleading 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
insurancealthough 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
Texasall 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 juriesespecially in the Bronx and Brooklynthat
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 lossesdefined
to include both medical expenses and lost wagesif 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 lawdespite 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 costsreflecting
businesses, municipalities and other entities that go without
liability insuranceare 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 billionsecond
only to California's in absolute terms. On a per-capita basis, New
York's tort tax ranked sixth at $787 per personabout 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 combinedincluding 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 overstatedand,
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 helpand 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
goingthere 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 lawyersand 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 www.bcnys.org.
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