How much do lawsuits cost you? $3,300 per household, $429B nationwide, study says

By: Jonathan Bilyk

Across the U.S., Americans pay hefty costs for lawsuits, with the price tag stretching from the courthouses to the most basic levels of American life, adding thousands of dollars each year to Americans’ household budget costs, according to a new study of tort litigation costs.

The study, released by the U.S. Chamber of Commerce’s Institute for Legal Reform, indicates, nationwide, the cost of litigation hit $429 billion, or 2.3 percent of U.S. gross domestic product in 2016.

And, study report authors said, only about 57 cents of every dollar in those costs actually went to compensate plaintiffs, with the rest going to pay lawyers, insurance and administrative costs.

These bills have broad societal and economic effects, said ILR president Lisa Rickard, as they “drive costs, chill innovation and kill jobs.”

The ILR unveiled the litigation cost report at the organization’s annual conference, known as SummitXX, at the U.S. Chamber’s headquarters in Washington, D.C.

The report was prepared for the ILR by authors Paul Hinton and David McKnight, of The Brattle Group, and Lawrence Powell, director of the Alabama Center for Insurance Information and Research at the Culverhouse College of Business.

Rickard noted the nation’s total estimated litigation costs stand at about three-quarters of U.S. defense spending, six times the budget for the U.S. Department of Education and $100 billion more than Americans spent on retail drugs in 2016.

“We have the most expensive civil litigation system in the world,” Rickard said.

The study report authors said they calculated their litigation costs and compensation estimates from an analysis of data on commercial and personal liability insurance premiums, and estimates of the liability exposure of businesses and individuals who are self-insured.

The report noted its authors used data derived from commercial general liability policies, medical malpractice liability insurance, auto liability policies, and personal liability policies, such as homeowners and renters’ insurance.

It further noted the litigation cost burden can vary widely among the states, based on a variety of factors, including the size and nature of a state’s economy, and a state’s specific regulatory and legal environment. For instance, the report noted doctors and other medical practitioners in states with higher health care costs and legal environments skewed toward plaintiffs would likely be required to pay more for medical malpractice insurance, while states that limit the amount plaintiffs can win at trial “would be expected to affect the cost of commercial liability insurance, as well as medical malpractice insurance.”

In California, raw litigation costs as measured in the report stood at nearly $56 billion in 2016. New York’s litigation costs were next largest at $43.7 billion, followed by Texas and Florida at about $33.7 billion each.

Pennsylvania and Illinois then rounded out the list of the six top states with highest litigation costs at about $18 billion each.

The report also compared litigation costs as a share of each state’s GDP.

Florida’s litigation costs topped the list among U.S. states when expressed in that way, checking in at 3.6 percent of the Sunshine State’s economic output. Other states weren’t far behind, however, as litigation costs equated to 3.1 percent of New Jersey’s GDP; 3 percent in Nevada; 2.9 percent in Louisiana, New York, Montana and Rhode Island; and 2.8 percent in West Virginia.

Larger states generally fared better, simply because of the size of their economies, the report’s authors noted, as California – the country’s most populous state and largest state economy – logged litigation cost estimates equal to about 2.1 percent of GDP. In Texas, the country’s second most populous state, litigation costs also equaled about 2.1 percent.

Pennsylvania’s litigation cost burden equated to 2.5 percent of state GDP, while in Illinois the cost share stood at 2.3 percent.

The costs, however, are not solely borne by so-called “big business,” or even the targets of the lawsuits, the study authors said, noting the added costs baked into the U.S. economy from the effect on more expensive insurance policies.

Across the country, that additional cost translated to a burden of about $3,300 per household in 2016.

But those costs also varied widely from state to state, the study said.

In New York, for instance, the per household burden stood at $6,000 in 2016, the study said. Meanwhile, in half the states, the burden stood at less than $3,000 per household.

Other states with high per household litigation cost burdens included New Jersey at $5,550; Delaware, $5,383; Connecticut, $4,574; Florida, $4,442; California, $4,324; Nevada, $4,272; Louisiana, $4,015; Rhode Island, $4,066; Massachusetts, $3,869; and Illinois, $3,738.

In Texas, the burden per household came in at $3,535, the report said.

The added burdens are having real-world impacts, speakers at the ILR conference noted.

Stephen Waguespack, president and CEO of the Louisiana Association of Business and Industry, said, in his home state, litigation costs have contributed to making Louisiana’s insurance rates the second highest in the nation. And that, he said, has translated into pushing trucking firms and manufacturers, among others, to explore opportunities to transfer their facilities and production to other nearby states.

Waguespack said he hoped the report and similar reports to follow, which could delve more deeply into the questions, can shed more light on the issue, and help voters and consumers better understand how such litigation costs stand as an unofficial “tax” on employers and households.

“Most people think a tort is a pastry, not an issue,” said Waguespack. “This helps break the issue down into understandable, bite-sized chunks.

“It shows how this makes a difference in your life.”