[Mb-civic] The War on Tort

Wed Jan 26 11:42:13 PST 2005

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Economist.com      

The war on tort
Jan 26th 2005
>From The Economist Global Agenda

President George Bush has placed tort reform at the centre of his
second-term legislative programme. Ranged against him are the massed ranks
of America¹s trial lawyers. Who will come out on top?

PITY America¹s trial lawyers. George Bush has made tort reform a priority of
his second term in office and momentum is gathering behind measures to
change the system. Next week Arlen Specter, a Republican senator, is set to
introduce a bill that is intended to break the deadlock over asbestos
litigation while limiting the exposure of firms and insurance companies to
future claims. Bill Frist, the Senate majority leader, hopes to bring a bill
to change the rules on class-action lawsuits to the chamber¹s floor by the
week after. Yet more action is promised to limit pay-outs in
medical-malpractice lawsuits.

Most Americans agree that matters have got out of hand. According to figures
from Tillinghast-Towers Perrin, an insurance consultancy, tort-system costs
amounted to $246 billion in 2003‹excluding vast settlements agreed by
tobacco companies (see chart). That represented 2.2% of GDP, compared with
just 0.6% in 1950 and 1.3% by 1970, when the tort industry began to flex its
muscles. Tort costs grew by some 15% in 2001, by only a slightly less the
year after, and by 5.4% in 2003. The main factor was a considerable rise in
liabilities connected with asbestos claims. Mr Bush believes that much of
this huge sum is money that companies should not have to part with.

America¹s lawyers say that the figures quoted by the president and others
intent on pegging back generous settlements require some cross-examination.
They argue that the numbers come from a consultancy paid by the insurance
industry and include many costs that would exist even without the tort
industry, such as insurance companies¹ costs for handling claims. Economic
losses (ie, straight compensation) as well as punitive damages and other
awards for ³pain and suffering² are all rolled into one. Thus, lawyers argue
that much smaller amounts are at stake and that these are primarily
legitimate payments for real damages. Furthermore, they claim that they
represent the interests of the public seeking redress against huge
corporations that would seek to do them harm.

Haggling over the sums aside, the big pots of money that companies and their
insurers pay out to settle litigation cause both direct and indirect losses.
Companies that owe vast sums may seek bankruptcy protection or go out of
business altogether. In some cases, most notably involving asbestos,
companies have been hounded despite having only a tenuous link to the
product in question. Not only shareholders will feel the pain if large
numbers of workers also find themselves without employment.

Businesses suffer indirect costs too. The threat of lawsuits often causes
financial markets to overreact. Credit-rating agencies are likely to
downgrade firms that face litigation, increasing the cost of financing.
Moreover, corporations are also paying far more for general-liability
insurance these days.

Hence Mr Bush¹s desire to tackle some of the heaviest tort costs. The
asbestos bill may have better luck of gaining the supermajority of 60 votes
in a Senate than previous attempts, thanks to an increased Republican
majority after November¹s elections, but observers rate its chances of
passing at no better than 50/50. It is hoped that the proposed $140 billion
fund will convince all parties‹on the one side businesses and insurers, and
on the other victims and trade unions‹to end a series of legal battles that
has been running since the first asbestos-related claim was filed in 1966.

Both sides have doubts. Victims¹ groups say that the fund is not big enough;
firms worry that a possible provision to allow some victims to pursue legal
remedies at a later date does not bring the matter to a close. But a deal
may prove preferable to more years of court cases and the continued
enrichment of the lawyers involved.

Leaders of both parties in Congress have signalled that a bill on
class-action lawsuits could also pass soon. These suits allow hundreds or
even thousands of people with a similar claim to band together to take on
large corporations or other entities. While playing an important role in
maintaining corporate accountability, class actions have lately offered the
most egregious examples of the mercenary nature of America¹s trial lawyers.
Cases have ballooned in recent years. At worst, lawyers are accused of
³inventing² victims of corporate malfeasance, bringing frivolous cases and
shopping around for friendly jurisdictions. In the case of asbestos, many of
those included in the class actions are not even ill, but merely worried
that past exposure might make them sick in the future.

Republicans, who traditionally favour local or state control where possible,
plan to assist businesses in reducing their exposure to expensive legal
cases with little merit by moving bigger class-action cases (where a
plaintiff is seeking more than $5m) from local to federal courts.
Republicans hope that federal courts will be less inclined to accept less
meritorious cases and will award reduced payouts. Though evidence is
scant‹figures for state-court settlements are not published‹it appears that
local courts are more inclined to award whopping sums in controversial
cases.

Bad medicine

This attempt to limit payouts also informs plans to reform
medical-malpractice lawsuits. Awards against doctors and hospitals have
spiralled: since 1975, medical-malpractice costs have grown nearly twice as
fast as overall tort costs, pushing up insurance rates and the cost of
medical care. Doctors practice ³defensive medicine² and so carry out
millions of expensive but pointless tests on patients to guard against the
prospect of future lawsuits. And evidence suggests that doctors are
eschewing areas of medicine that carry the greatest risk of malpractice
suits.

Mr Bush supports a plan that would leave claims for economic damages
unlimited and introduce a cap of $250,000 on non-medical damages, including
punitive awards. It would also limit liability for drug companies¹ products
that had received approval from the Food and Drug Administration. Some
critics say this does not go far enough, but in a country where ever-higher
costs leave millions unable to afford health-care insurance, any measure to
bring down costs is likely to win widespread support.

Any attempts at reforming the tort system will meet stiff opposition from
America¹s trial lawyers. Democrats, who get huge sums from such lawyers, are
also likely to oppose reform with vigour. Some will argue that, by
restricting public access to the legal process, Mr Bush would be curbing the
freedom of American citizens in the name of redeploying cash away from
Democratic-leaning lawyers. But wealthy trial lawyers do not rank highly in
the public¹s perception of embattled minorities worthy of sympathy and, as
such, make for an inviting target.