A new study estimates the economic burden of the tort system at $443 billion a year, or 2.1% of GDP.
Dec. 11, 2022 3:43 pm ET
We always knew trial lawyers were filling their pockets, but it’s still a surprise to learn how much they’ve been emptying ours. The total economic cost of the U.S. tort system in 2020 was $443 billion, according to a recent study by the Chamber of Commerce Institute for Legal Reform. That’s 2.1% of GDP, and it works out to $3,621 per household.
Only a small percentage of American families are involved in tort cases or class-action lawsuits in a given year, but the burden of jackpot payouts is carried by nearly everyone. The costs spread through the economy in the form of higher insurance premiums that fall on nearly every family, either directly (car insurance) or indirectly (medical malpractice or product-liability insurance).
And costs are rising. Between 2016 and 2020 the tort system grew 6% a year, the study says, more than inflation and GDP growth. Commercial liability grew the fastest, at 7% a year. Also alarming is that only half the money goes to injured parties. “We estimate that only 53 percent of the total expenditures of the tort system were paid to claimants,” the authors write. In other words, “for every dollar paid in compensation to claimants, 88 cents were paid in legal and other costs.”
The boom in tort costs is owing to the boom in litigation financing, in which investors fund lawsuits and then claim a portion of the winnings. In a recent Litigation Finance Survey conducted by Bloomberg, three quarters of litigation funders reported their business had grown in the past year. Litigation has a particular appeal for investors when the economy is down, since the odds of success in a lawsuit are independent of the stock market.
State judicial systems vary in how much the tort system cost residents. Households in such states as Maine, South Dakota and New Hampshire absorb about $2,000 a year in tort costs, according to the Chamber study. Residents of California, Florida and New Jersey, which are more plaintiff-friendly, bear about $4,500. Pity New Yorkers who are shouldering some $5,400 a year. Florida is a particular embarrassment on this list given its GOP-led government.
The tort system warps the economy in broader ways, too. Litigation costs make businesses slower to debut new products, since they must first assess potential liability risk. Big companies that are setting up new factories weigh the litigation and insurance costs in the states they’re considering, and manufacturing overseas might be cheaper.
We’re hard pressed to think of another industry whose existence costs the average American family more than $3,000 a year. Too bad there isn’t a way to sue the plaintiffs bar for a refund.