False, Inflated Drivel: What’s Wrong With The U.S. Chamber Of Commerce’s “Tort Cost” Report

False, Inflated Drivel: What’s Wrong With The U.S. Chamber
Of Commerce’s “Tort Cost” Report

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For decades, “tort reform” groups have published so-called “empirical analyses” of what they call “tort costs.” These reports are bogus for many reasons, the main one being that they fail to examine any tort costs![1] While corporate consulting groups had largely stopped issuing such spurious “tort cost” reports following widespread criticism (described later), the U.S. Chamber of Commerce Institute for Legal Reform (ILR) recently decided to revive this sad tradition.

In November 2022, ILR published a new report[2] claiming it analyzed “tort costs” during the pandemic year of 2020 — a year when courts across America were virtually shut down and nearly all tort cases were put on hold.[3] (The American Tort Reform Association has also recently included an even wackier “tort cost” analysis in another report, described later.[4])

When an analysis finds that, in a year when courts are essentially closed, “tort costs” somehow rose to $443 billion, amounting 2.1 percent of U.S. gross domestic product, you know something is wrong. Indeed, instead of even considering actual tort system costs, like say, the budgets of federal and state courts which are fairly easy to determine, ILR shifts its gaze entirely to the wasteful, inefficient, and (especially during COVID) profiteering U.S. property/casualty insurance industry.[5]

The insurance industry didn’t just profit off the pandemic; it price-gouged policyholders, made a windfall by refusing to refund premiums during quarantine, touted the pandemic’s fabulous impact on insurers’ bottom line, and then rewarded shareholders with dividends.[6] Obviously, these are not “tort costs.”

Here’s more of what’s wrong with ILR’s analysis:

Insurance premiums or losses are not “tort costs.

Before examining how badly the Chamber inflates its insurance data, it’s important to understand why equating insurance premiums or costs with tort costs is a huge error and the very thing that led to such harsh criticism of prior reports.

• Transfer payments. The transfer of insurance money from a wrongdoer to a victim is not a “tort cost.” It is not a system “cost” at all. As the Economic Policy Institute succinctly explained in its 2005 critique of similar methodology used by ILR: [The report] improperly treats the transfer payments of the tort system as “tort system costs.” … Transfer payments merely shift money from the injurers or their insurers to the injured.…Someone – the wrongdoers, taxpayers (through government-sponsored social programs), other insurers (such as health insurance), charities, or the victim – will need to pay or absorb these costs.[7]

• No Litigation. Typical auto liability claims (such as fender-benders) are overwhelmingly settled without claimants hiring attorneys or suing anyone, and with most claims paying only for the damage to the car and perhaps some medical expenses (economic loss) but without any compensation at all for noneconomic loss. To count costs covering all the tiny scrapes of fenders as “tort costs” is a massive mistake. Yet auto accident claims account for $196.5 billion — more than 44 percent of ILR’s total tort cost figure.

• “First party” coverages. With first party coverage, such as no-fault auto insurance, policyholders do not seek compensation from a wrongdoer but cover their losses through their own insurance. Some major auto insurance system costs, like medical payments, can cover anyone hurt in the car, as well as uninsured motorists and underinsured motorists.  They amount to many billions of dollars, none of which should be identified as “tort costs.”

ILR apparently collected data about “earned premiums” and “incurred losses,” which are highly-inflated figures.

Even assuming it was appropriate to examine insurance data to determine tort costs (which it is clearly not), the types of insurance data examined by the Chamber are flawed even for determining insurance trends.

• Bloat. There is only one part of the premium dollar that has anything to do with claims and lawsuits. That’s the “pure premium” or “loss cost.” Yet that’s not what ILR bothers to look at. To swell its numbers, it calls “tort costs” all the industry bloat that contributes to the rest of the premium dollar: industry overhead, rent and utilities for insurance company headquarters, commissions paid to agents, multi-million-dollar salaries, bonuses, lobbying costs, jet planes, advertising expenses. Obviously, it is a huge error to consider these expenses “tort costs.”

• Profit. Also inappropriately included in their “tort cost” figures are insurance industry profits, which contribute to premiums and were particularly “out-of-control” during the pandemic.

·      Across the board, U.S. property/casualty insurance companies reported large profits in 2020, extending into 2021,[8] while accumulating record-breaking surplus (increasing to $914 billion and now a trillion dollars).[9]

·      This profit was made, in part, off the backs of small businesses owners whose “business interruption” insurance claims were largely rejected by insurers.[10]

·      Large premium increases, which began before the pandemic, grew through 2020 and continued, greatly contributing to industry profits.[11] These increases were and continue to be unjustified and amount to systemic price-gouging.[12]

·      Auto insurance companies in particular made a windfall from the pandemic. Early into the pandemic, the Consumer Federation of America and the Center for Economic Justice began pressing auto insurance carriers for premium refunds as people stopped driving. While some companies responded with some premium relief, they did so only for a short time. As a result, as both groups put it, “The staggering drop in accidents this year resulted in a dramatic drop in claims paid by insurers, handing companies massive windfall profits even after accounting for the woefully inadequate premium relief provided in the spring.”[13]

• “Incurred losses.”ILR calculates premiums which are partly based on a figure known as insurance “incurred losses.” But an “incurred loss” is not what an insurer has actually paid out. “Incurred losses” include billions of dollars of estimates — not actual costs — that insurers make in rate filings and have in the past proved to be wildly overstated.[14] “Incurred losses” increase when insurers increase reserves to pay claims. During hard market periods (the most recent of which began in 2019), the increases in reserves are not the result of actual increases in claims or payouts (e.g., lawsuits, jury verdicts, or other tort system costs). Rather, they are an accounting device used by insurers to mask profits and justify rate hikes.[15] They are clearly not “tort costs.”[16]

Other costs and savings are ignored.

• ILR’s calculations are not discounted one cent for the benefit that is gained from repairing damage. If a fender-bender caused $500 in auto repairs to fix, the insurance company of the person who caused the accident pays. No lawyers are involved. ILR does not deduct a cent from the $500 spent as a benefit to society. This is absurd.

• More broadly, ILR ignores any countervailing costs saved by the tort system, which provides the financial incentive for companies and institutions to act more safely. This includes the amount of money the civil justice system saves the economy in terms of injuries and deaths that are prevented due to safer products and practices, wages not lost, health care expenses not incurred, and so on. 

Widespread criticism.

Earlier “insurance-not-tort-cost” reports received brutal criticism from scholars and experts for deceptive and discredited numbers.

• Conservative theorist Judge Richard Posner used terms like “fictitious” to describe analyses like this.[17]

• Civil justice and insurance experts have written that such figures are “without scientific merit and present a very misleading picture of the American tort system and its costs.”[18]

• TheWall Street Journalsaid in a March 2006 article, “[C]ritics of past years’ studies – and there are many – say the number and the projections that come with it are deeply flawed. For instance, they include payments that don’t involve the legal system at all. Say somebody smashes his car into the back of your new SUV and his insurance company sends you a $5,000 check to fix the damage. That gets counted as a tort cost. Critics say it’s just a transfer payment from somebody who wasn’t driving carefully to somebody who has been legitimately wronged. How is that evidence of a system run amok?”[19]

• On March 14, 2005,Business Week called a similar analysis a “wild exaggeration,” stating that it “includes everything from payouts for fender-benders to the salaries of insurance industry CEOs.”[20]

• A January 2005 Congressional Quarterly article said, “The company’s estimates of tort costs include the insurance industry’s administrative expenses and payments on claims that never involve courts or lawyers, such as auto collisions.”[21]

• In October 2004, Stephanie Mencimer wrote in theWashington Monthly, the report “includes in its definition of the ‘tort system’ insurance company administrative costs and overhead and the salaries of highly paid insurance company CEOs…. One thing it doesn’t include: court budgets, which makes its study seem a lot more like an assessment of the insurance industry than of the legal system.”[22]

• In a January 29, 1999 report, Fordham University Law School Professor Daniel Capra called such figures “folly,”[23] “disingenuous,”[24] “nothing but absurd and self-serving overkill,”[25] and “vastly overinclusive.”[26] Moreover, he pointed out that “much of the unnecessary cost in the system results from corporate wrongdoing causing injury, and ‘hardball’ litigation tactics of insurance companies that deny legitimate claims.”[27]

• A recent American Tort Reform Foundation Report cites a similarly-flawed 2021 analysis from the Waco, Texas company, “The Perryman Group,” run by a guy named Ray Perryman. Perryman has been called “the most bought economist in Texas” and is known to “produce any conclusion you want.” Thomas Saving, former chairman of the economics department at Texas A&M, said of his work, “It's just this black box. Hocus-pocus,” and “Go to an American Economics Association meeting and ask who Ray Perryman is. Nobody will have ever heard of him.”[28]

Notes