Backgrounder: Are “Frivolous Lawsuits” by “Billboard Lawyers” Driving Up your Insurance Rates?

BACKGROUNDER

ARE “FRIVOLOUS LAWSUITS” BY “BILLBOARD LAWYERS”

DRIVING UP YOUR INSURANCE RATES?

The answer: absolutely not.

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There is a common trope that has been promoted for many years by economically powerful corporations and their political allies. It goes as follows: “Frivolous lawsuits” are driving up your insurance rates. The only way to bring them down is to enact laws that take away your legal rights, or block attorneys from representing you if a corporation harms you or your child.

No part of this trope is true. Our courts are not flooded with frivolous lawsuits. Lawsuits, lawyers and victims have nothing to do with why insurance companies price-gouge policyholders. Trying to solve insurance problems on the backs of sick and injured children is not only cruel, it never works. That’s because what drives insurance rate hikes has nothing to do with lawsuits.

IS THE U.S. CIVIL JUSTICE SYSTEM OVERRUN WITH FRIVOLOUS LITIGATION?

No, unless you count banks and debt collectors who are flooding the courts.[1]Those are cases brought against consumers, and when combined with other kinds of “contract” cases (e.g., corporations suing each other) make up nearly half of all civil cases. On the other hand, “billboard lawyer” cases or other kinds of personal injury lawsuits represent only 7 percent of all incoming civil cases today.[2]

Notably, in the 1990s, the Rand Institute for Civil Justice found that for the typical injury, “the injured person does not even consider the notion of seeking compensation from some other person or entity.” Only 10 percent file a claim, which includes informal demands and insurance claims. Only two percent file a lawsuit.[3] Considering the work of current U.S. Food and Drug Administration Commissioner Marty Makary, formerly of Johns Hopkins University School of Medicine, who foundthatonly about 1% of adverse events due to medical negligence result in a claim,[4]it is clear little has changed since Rand’s initial study. If anything, fewer victims are choosing to sue. Far more harm is occurring for which no one is being held accountable.

DO “BILLBOARD LAWYERS” OR “TRIAL LAWYERS” FILE FRIVOLOUS LAWSUITS?

No. Attorneys who represent injured people are paid on contingency, meaning they must front the costs of litigation themselves and are only paid if they win (as a percentage of the judgment). If the case has no merit and they lose, they are paid nothing. If lawyers made a habit of bringing frivolous cases, they would quickly go out of business. Many conservatives have praised this system for screening out baseless litigation.[5]  They believe the system works. On the other hand, corporate defense and insurance lawyers are paid by the hour, so they are guaranteed a fee no matter what they do (e.g., drag out cases, double or triple bill).

In addition, our legal system has checks and balances in place. This means that if someone brings a case that a judge deems frivolous, their suit is thrown out and sanctions may be available.

IS THERE A “FRIVOLOUS LAWSUIT HIDDEN TAX”?

No. An inflammatory “$4,200 frivolous lawsuit hidden tax” figure has been listed in some recent paid advertising, as if thousands in cash would end up in our pockets if we gave up our legal rights (with laws that block legitimate lawsuits[6]). It is absurd. In fact, the entire notion of a “hidden tax” or “tort tax” has been widely debunked for years.[7] The number was concocted by the Institute for Legal Reform (ILR), the “tort reform” branch of the nation’s second largest corporate lobby group, the U.S. Chamber of Commerce.[8] To reach it, ILR does not look at anything remotely connected to the courts: jury verdicts, settlements or even the costs of maintaining our civil court system. Instead, it totals insurance premiums. Premiums incorporate all kinds of bloated insurance industry expenses – multimillion-dollar executive salaries and bonuses, jet planes, advertising – not to mention the industry’s enormous profits.[9] It also includes auto liability claims (such as fender-benders) that are overwhelmingly settled without claimants hiring attorneys or suing anyone. In sum, not only does ILR’s figure have nothing to do with so-called “frivolous lawsuits,” it has nothing to do with lawsuits at all.

WHAT CAUSES HIGH INSURANCE RATES?

There are several reasons for recent spiking insurance rates, which are completely unnecessary as insurance industry profits[10] and surplus[11] are now at astronomical levels.

Commercial insurance. When it comes to commercial lines of insurance (mostly for businesses), history shows that insurance payouts generally track the rate of inflation and population. Premiums, however, sometimes spike. That’s because insurers make most of their money from investment income (investing the premium dollars they collect), and this creates an economic cycle. During the “soft” phase of the cycle, companies engage in fierce competition for premium dollars to invest for maximum return. Rates stabilize. During the “hard” phase of the cycle which follows (as in today’s market), those cumulative price cuts become too severe, and/or investment income drops. The industry always responds by increasing premiums.[12]

Personal insurance. Personal insurance lines, like homeowners and auto, may be less prone to the impact of this investment cycle. Yet rates are still out of control. Why? As for homeowners insurance, the Consumer Federation of America recently found several reasons: “[t]he rising costs of construction and building materials, climate change, an expensive and tight global reinsurance market, and weak regulatory oversight by state insurance commissioners.”[13] And when it comes to auto insurance rates, which should be dropping, the industry is now blaming tariffs for keeping rates high.[14]

IF THERE WERE FEWER LAWSUITS, WOULD YOUR INSURANCE PREMIUMS GO DOWN?

No. Five decades of evidence show that this never happens. Weakening our legal rights (“tort reform”) may reduce costs for insurers. But those cost savings are never passed on to policyholders. That money goes right into the pockets of insurance companies.[15]

In fact, the legal system saves far more money than it costs. That’s because the civil justice system has an important economic function: to deter “noncost-justified accidents,” with tort law creating economic incentives for “allocation of resources to safety.”[16] Time and again, history has shown that lawsuits deter irresponsible and unsafe businesses, auto manufacturers, polluters, hospitals and other entities from repeating their negligent behavior or misconduct and gives them the proper economic incentive to become safer and more responsible.[17] The amount of money lawsuits actually save local, state and federal economies in terms of injuries and deaths prevented, health care costs not incurred, wages not lost and so on is incalculable. And it is important to note that proposals to block legitimate lawsuits do not eliminate injuries or the need for compensation. They merely shift the costs away from the wrongdoer onto someone else, namely taxpayer-funded health and disability programs like Medicaid. We all pay for that.

WHAT ARE THE COSTS OF THE U.S. CIVIL JUSTICE SYSTEM?

While no entity has ever credibly compiled the costs, we do know certain things. According to the most recent Benchmark Survey from RIMS, the annual insurance and claims costs for U.S. businesses including property damage, workers compensation and all other premium and claim costs is just $10 per $1000 of revenue, where it has hovered for years.[18] Meanwhile, small business surveys have consistently listed “lawsuits” or “liability” at the bottom of their list of concerns, if they’re mentioned at all.[19] In fact, this issue – the cost of liability and lawsuits – now ranks an extraordinary 72nd out of 75 possible topics of concern to small business owners.[20] Needless to say, small businesses, like the rest of the country, have other priorities.

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