THE TOPIC

SEPTEMBER 2005

Litigiousness has become a societal problem in the United States. The tort system cost about $246 billion in 2003 in direct costs, which translates into $845 per person, and many billions more in indirect costs. U.S. consumers pay directly for the high cost of going to court in higher liability insurance premiums because liability insurance rates reflect what insurance companies pay out for their policyholders' legal defense and any judgments against them. And they pay indirectly in higher prices for goods and services since businesses pass on to consumers the expenses they incur in protecting themselves against lawsuits, including the cost of commercial liability insurance.

Beginning in the 1980s, in an effort to reduce litigation costs, business groups and others mounted a campaign to reform tort law. Tort law is the basis for the U.S. liability system. Most reforms have taken place on the state level and during the last decade all but a handful of states passed significant tort law reforms. However, some have been overturned by the courts.

RECENT DEVELOPMENTS

BACKGROUND

Developments in liability insurance reflect what is going on in the tort system. (Tort law is the body of law governing negligence, intentional interference and other wrongful acts which result in injury or damage for which a civil action can be brought, with the exception of breach of contract which is covered by contract law.) Liability insurance distributes the costs of the liability system, which, in turn, reflects societal values. Society, through the courts and the legislative process, decides what injuries should be compensated, in what circumstances and in what amounts.

Liability insurance pays for amounts paid to the claimant as compensation for injury and for the costs of defending the policyholder in court. The American civil liability system cost about $246 billion in 2003 in direct costs and many billions more in indirect costs. Tort costs accounted for 2.2 percent of the nation's gross domestic product, compared with 1.4 percent in 1970 and 0.6 percent in 1950, according to the latest data from Tillinghast, an actuarial consulting firm. Looking at the data another way, tort costs equaled $845 per U.S. citizen in 2003, compared with $12 in 1950, which would be about $90 in 2003 dollars.

An earlier Tillinghast study suggests that the tort system is highly inefficient, returning less than 50 cents on the dollar to claimants. Breaking down costs, Tillinghast found that an estimated 22 cents go to litigants for their actual (economic) losses and 24 cents to compensate for pain and suffering (noneconomic losses). Of the remaining 54 cents, 19 cents pays for claimants' lawyers, 14 cents for defense costs and 21 cents for administrative costs associated with the settlement of tort claims.

There are signs that we have reached the limit of what people believe we can afford to pay for compensation, not only in terms of the number and cost of awards but also in terms of the overall impact of excessive litigation. Many legal experts believe the American civil justice system is in need of reform. Such critics cite the number of lawsuits, the size of some awards and the rise in the number of class action lawsuits.

Lawsuits represent only a small portion of total liability claims, however. Only 2 percent of such claims are settled by verdict and only one third of claims become lawsuits. Nevertheless, lawsuit verdicts are important because they influence the damage amount sought by plaintiffs and the size of out of court settlements.

The law is constantly changing in response to societal needs and perceptions of justice. New legal theories or modifications of existing tort law are continually being developed. Fifty years ago reformers worked to rectify what they believed was a bias in the tort system toward defendants and business interests, making it easier for plaintiffs to receive compensation for their injuries. Now reformers are working to reduce what appears to many to be abuse of the tort system by those representing plaintiffs. Supporters of tort reform were successful in the 1980s and early 1990s in getting major legislation enacted in many states. They also set in motion a more conservative attitude toward jury awards among the public. Bills continue to be introduced in those states where major tort reform legislation was never approved and to correct specific situations in many others.

However, critics of tort reform are overturning caps on damages and other legislative provisions, frequently on the basis of their constitutionality. Scores of court decisions have nullified liability laws enacted since the early 1980s to curb excessive awards and frivolous suits. While many provisions have also been upheld, industry observers say significant new liability laws are being struck down.

Changes in Legal Doctrine and Other Trends: In most states prior to the 1960s, an injured person would be compensated only if the defendant was wholly responsible for the plaintiff's injuries. As societal values changed, the doctrine of contributory negligence, under which plaintiffs' claims would be denied if they contributed to the injury through their own actions, gave way to the doctrine of comparative negligence, which requires damages to be apportioned based on the degree of fault. This change gradually occurred in all but a handful of states. According to the American Tort Reform Association, four states and the District of Columbia still have contributory negligence doctrines in effect — Alabama, Maryland, North Carolina and Virginia.

There are two major categories of comparative negligence: pure and modified. Under the pure form, damages are reduced by the amount of the plaintiff's negligence. The modified form is divided into three types: the "less than" rule or 49 percent, i.e., plaintiffs may receive damages if their negligence is not as great as the defendant's; the "not greater than" rule or 50 percent system, i.e., recovery is barred if the plaintiff's negligence is greater than the defendant's; and the "slight versus gross" system where the plaintiff may receive damages if the plaintiff's negligence was slight in comparison to the defendant's negligence.

Changes in the area of municipal liability brought about a large increase in the number of suits. Prior to the 1960s in all but a few states, public entities were not liable for civil wrongs, and were protected against personal injury actions by a common law doctrine known as sovereign or governmental immunity. However, as state and local governments began to provide a growing array of services that were also available in the private sector, from paving roads to managing recreational programs, the idea that governments were not subject to the same legal standards as private citizens and corporations carrying out the same activities offended the public's sense of justice. Today government entities can be sued for false arrest, failure to arrest, and failure to meet certain standards of care in almost every aspect of governmental activity.

Class Actions: Class actions settle in a single lawsuit the rights and liabilities of people who have similar claims. In order for claims to be consolidated in a single suit, the court must certify that the case meets Federal Rule of Civil Procedure 23, which sets out the requirements for claims to be eligible for class action status.

Several factors distinguish class actions from other kinds of lawsuits such as automobile accident cases. There are a large numbers of claimants who have suffered a common set of injuries incurred in the same or similar circumstances and most plaintiffs are represented by a small number of law firms, each of which may represent hundreds or thousands of claimants.

There are many different types of class actions including shareholder and civil rights suits. In the 1980s and 1990s, lawyers began to use the class action lawsuit to settle what became known as "mass torts" — personal injury cases involving medical devices, toxic substances such as asbestos, and new pharmaceutical products where many people sustained injuries from the same product. Although class actions have been certified in many personal injury cases, the lawyers and judges who wrote the federal class action rule adopted in 1966 said that a "mass accident" is ordinarily not appropriate for a class action because of the conflicts among state laws and the differences in the claimants' injuries. Nevertheless, they said, a class action may be brought if the legal and factual issues in common outweigh the differences. As a practical matter, some judges certify mass torts because the individual cases would overwhelm the courts.

Although this kind of litigation is not new, the number of class actions appears to have grown in recent years. It is difficult to ascertain the number of cases because state courts, where the majority are filed, publish little data on this subject. From the viewpoint of the claimant, class actions have some advantages. First, they prevent the defendant's assets from being depleted by the first judgment so that little remains for any subsequent claimant. Second, they allow a group of injured citizens to obtain redress without incurring huge legal fees. However, some public policy observers believe that the publicity surrounding class actions is beginning to lead to abuse of the legal system. At their worst, critics say, class actions can amount to legalized blackmail for defendants; a sell-out for claimants who may receive little compensation for their injuries; and a get-rich scheme for lawyers who receive a percentage of the total settlement.

The latest form of class action are the cases brought by state attorneys general against private industries, claiming compensation for the cost of injuries caused by their products to the state. Examples include the cost of treating diseases caused by smoking tobacco, mental retardation among children resulting from ingestion of lead, primarily lead paint, and medical care for victims of gun injuries. In such cases, trial lawyers are hired at no cost to the state because they work on a contingency fee basis but because there is no expenditure of taxpayer monies there is also no legislative oversight. The lawyers may be hired with little or no competitive bidding or public scrutiny. Some public policy observers go beyond criticizing the contracting process. They see these class actions as a subversion of the tort system, a form of regulation through litigation in that attorneys general not only seek payments for government programs that help those who have been injured but also seek changes in the business practices of the industries being sued. In 1998, forty-six states agreed to settle lawsuits against tobacco companies over public-health costs linked to smoking. The $246 billion deal, which eliminated the uncertainty of settling the lawsuits state by state, was the largest civil settlement in U.S. history.

In a study on class action lawsuits, "Class Action Dilemmas: Pursuing Public Goals for Private Gain," the Rand Institute for Civil Justice lends its support to some tort reform legislation such as limiting forum shopping. But the study's authors also say that the key to improving outcomes and limiting abuse in class action litigation over money damages is increased regulation of settlements and fee awards by judges. Judges should reward class action attorneys only for lawsuits that actually accomplish something of value to class members and society.

Restoring the Balance between Plaintiffs and Defendants: Over time there have been swings in the balance between plaintiffs' and defendants' rights. It became increasingly apparent in the 1980s that in the attempt to make up for past imbalances the law had swung too far in favor of plaintiffs. For example, in most states, under the doctrine of joint and several liability, if two or more persons have a part in causing a plaintiff's injury, they are joint wrongdoers and are jointly and severally liable. They are, therefore, responsible for the whole amount a plaintiff may recover for his or her injuries, regardless of each defendant's share of fault. The change to comparative negligence in the 1960s and 1970s greatly affected the equity of the joint and several liability rule. It meant that a plaintiff who was 45 percent at fault may collect the whole award payment from a defendant much less to blame for the accident than the plaintiff himself. In such cases, defendants with "deep pockets" — corporations and municipalities seen as having an almost unlimited power to raise money through taxes — often ended up footing the bill. In the mid-1980s states began to modify this rule to make the tort system more equitable. Some abolished joint liability altogether, making each party responsible for its share of blame. Some abolished it for defendants 50 percent or less liable or restricted its application.

There is also the issue of punitive damages. People who bring suits may ask for punitive damages in addition to compensation. Intended to "punish" a defendant's outrageous conduct, punitive damages can amount to millions of dollars although many initially large awards are significantly reduced on appeal. Many believe that the prospect of receiving a big "bonus" brings into court cases that otherwise could be settled without a judge or jury, especially where the dispute is relatively minor. Some argue that if serious wrongs have been committed as opposed to common negligence, wrongdoers should be punished by criminal, not civil, courts. Others believe that punitive damages belong within the domain of civil law, but that the fully compensated winning party should not be the beneficiary (the punitive award should go to the state or to charity) and the size of punitive damages should bear some relationship to the award for compensatory damages. (Since the 1980s a small minority of states have passed legislation that sets aside a percentage of punitive damage awards for the state but in a few states these laws have been repealed.) And in product liability suits, a single defendant should not be "punished" over and over again for the same defect each time a new case goes to trial.

One problem caused by multiple punitive damage awards is that the first few plaintiffs to bring suit may receive large punitive damage awards, leaving the defendant with barely sufficient funds to pay subsequent plaintiffs' out-of-pocket expenses. Fear of using up all available funds to pay punitive damage awards was one of the reasons Manville Corporation, the asbestos manufacturer, A.H. Robins, maker of the Dalkon Shield contraceptive device, and Dow Corning, maker of silicone breast implants filed for bankruptcy.

The issue of punitive damages and their constitutionality has been brought before the U.S. Supreme Court. In the first case designed to guide lower courts on the imposition of punitive damage awards, Pacific Mutual Life Insurance Co. vs. Haslip in 1991, the court ruled that the punitive damages awarded did not violate due process. The court stated that the judicial procedures, designed to ensure that punitive damages were not egregiously out of proportion to compensatory damages, were followed in the case. Punitive damages were four times greater than compensatory damages, which the court acknowledged were high, but they did not cross the line into the area of constitutional impropriety, it said.

Recently, the Court moved closer to determining when punitive damages may be excessive in a State Farm case involving a bad faith award. The ruling was handed down in April 2003. However, the high court has yet to rule in a case that involves physical harm. In the State Farm case, State Farm v. Campbell, the high court overturned a $145 million punitive damage award (145 times the compensatory damage verdict) imposed by a Utah jury. The court ruled that juries should generally not be allowed to consider a defendant’s wealth when setting a punitive damage award. This was the first time the court had addressed this common but controversial practice directly in a majority opinion. The court also characterized the ratio of the compensatory damages to the punitive damages as unreasonable. However, when the Utah court again reviewed the case, it lowered the punitive damage award to $9 million, an amount that still exceeds the guidelines issued by the nation’s highest court. The U.S Supreme Court declined to review its decision, letting the Utah Supreme Court ruling stand. Insurers said this could send the message to other state supreme courts that they need not take into account U.S. Supreme Court rulings

In State Farm v. Campbell, the high court elaborated on an earlier 1996 decision in an Alabama case, BMW of North America, Inc. v. Gore, which set out three guidelines to determine when punitive damage awards are constitutional. Justice John Paul Stevens, writing for the majority, described the three-part fairness test: the degree of reprehensibility of the defendants' conduct; the ratio of punitive to compensatory damages or actual harm to the plaintiff; and the difference between the award and comparable penalties under the law. Applying these precepts to the BMW case, Justice Stevens said that BMW had not acted in bad faith and had caused only minor economic loss (as opposed to personal injury); that the ratio of punitive damages to actual harm was 500 to 1; and that under Alabama's Deceptive Trade Practices Act, the defendant would have paid a $2,000 penalty, a tiny fraction of the award, and lesser amounts in some other states.

While punitive damages are awarded nationally to a small percentage of plaintiffs, about 4 percent according to a 2002 study by Cornell University professors, in some jurisdictions the percentage of punitive damage awards can be exceedingly high. A 1997 study conducted by Cornell University and the National Center for State Courts found that in one Georgia court punitive damages were awarded in 25.8 percent of cases in which plaintiffs prevailed. Because without clear limits there can be dramatic exceptions to the norm, fear of an irrational punitive damages award still influences settlements, tort reform advocates note.

Scientific Evidence: The U.S. Supreme Court ruled in 1993 on the admissibility of scientific theories as evidence in federal courts. The decision in the case, Daubert vs. Merrell Dow Pharmaceuticals Inc., focused on the use of "junk science" in personal injury trials. A federal district court upheld a ruling that the evidence the plaintiffs used was "sub-standard" — it had never been published, nor had it gone through a "normal peer-review process." The federal court ruled that such a process was necessary to prove the general acceptance rule of evidence.

In the past, federal courts had relied on two measures of acceptancy for scientific evidence. The first, used in this case, is known as the Frye rule after a 1923 case in which the judge refused to allow the results of an early lie detector on the grounds that the results of lie detector tests were not generally accepted by scientists and others in the field as reliable. A less stringent rule was adopted in 1975 by Congress as one of the Federal Rules of Evidence. That rule (702) says that experts who are qualified in their field may present their ideas as evidence to a jury, even if their ideas do not represent a consensus of their colleagues, as long as the evidence is relevant to the case and may help a jury to reach a verdict.

In a unanimous decision, the Supreme Court said that the newer rule should be used to determine the admissibility of evidence. In addition, the high court said that federal judges must act as gatekeepers, excluding testimony that is not relevant or reliable. Writing for the majority, Justice Harry A. Blackmun said that federal judges possess the capacity to determine whether the reasoning or methodology underlying the testimony is scientifically valid and to decide what evidence the jury should hear.

In December 1997 further defining its 1993 decision in Daubert vs. Dow, the U.S. Supreme Court ruled that trial judges may not only act as gatekeepers to ensure scientific testimony is relevant and reliable, as it ruled in 1993, but also that their decisions should be upheld unless found to be manifestly erroneous. Then, in March 1999, broadening the scope of the 1993 ruling, the high court said in the case of Kumho Tire Co. vs. Carmichael that a judge's gatekeeping powers were not limited to scientific matters. The Kumho case, which involved the failure of a minivan tire on a cross country trip, centered on the testimony of a mechanical engineer who had worked in the field of tire design for 10 years. The American Association for the Advancement of Science has initiated a five-year demonstration project, starting in May 1999 to make available to judges independent scientists who would educate the court, testify at trial and assess the litigants' cases.

Growth in Delays: Compounding the problem of growth in the volume of lawsuits is growth in the time it takes to move a case through the trial process, resulting in backlog and delay. Just a few decades ago, the protracted lawsuit was a rarity. Today, as a result of budget cuts and a system not designed to handle so many cases, their disposition may take months and even years. In 1950, only 20 civil trials in federal courts lasted longer than 20 days. By 1981 the number of comparably lengthy trials had multiplied ninefold. The National Center for State Courts, in the most comprehensive study of court delay ever undertaken, found that median processing time in 1989 for all tort cases in the 25 urban trial courts studied was 441 days. Median times for tort cases varied greatly, ranging from 215 days in Wichita to 953 days in Boston. Median times in civil cases disposed of by jury trial ranged from 356 days in Fairfax, Virginia, to almost five years in Providence. The study also found that there is no statistical correlation between the size of a judge's caseload and case processing time.

One avenue being explored to lessen delay is known as alternative dispute resolution mechanism (ADR), which includes arbitration, where disputants agree to be bound by the decision of an independent third party, and mediation, where a third party is used to try to arrange a settlement between the contending parties. ADR is being used successfully by some insurance companies to resolve disagreements among parties to auto accidents and by many businesses although it has yet to gain universal acceptance. In 1994, 21 insurance companies agreed to solve their inter-company disputes with an ADR program. Property insurers may also use ADR to resolve disagreements between claimants and their insurers about catastrophe damage claims. Meanwhile, both lawyers and organizations that use ADR are investigating ways of qualifying mediators and setting other guidelines to govern the legal process, including class action suits.

State Reform Measures: The large number and size of awards, the belief that the pendulum has swung too far in favor of plaintiffs, and the realization that the costs of the civil justice system are borne by individuals in the form of higher insurance premiums, directly or indirectly, has led to a ground swell of support for civil justice reforms. Tort reform advocates believe changes are necessary in four key areas to help restore fairness to the civil justice system: modification of the joint and several liability rule, revision of the collateral source rule, a cap on noneconomic damages, restrictions on punitive damage awards, and reinstatement of the state-of-the-art defense. Since the tort reform effort began in earnest in the mid-1980s, hundreds of reform measures have been passed, some challenged and about 90 overturned.

Among the five areas targeted, joint and several liability rules have been subject to the most legislative activity. According to the American Tort Reform Association, 40 states had enacted reforms in this area since 1986, as of July 2005. Joint and several liability is a rule under which defendants only minimally responsible for injury may be required to pay the full amount of the damages. Reform measures may completely abolish this rule or modify it by limiting its application. For example, many states now forbid application of the rule to noneconomic damages, such as pain and suffering or eliminate joint liability. The measure may apply to all tort actions or only one specific type such as medical malpractice, or may exclude one or more key areas in which joint and several liability is frequently applied, such as auto, pollution and medical malpractice cases.

The collateral source rule refers to a rule of evidence that bars the introduction of any information indicating a person has been compensated or reimbursed by any source other than the defendant. Approaches taken by modifying legislation include: permitting consideration of compensation or payments received from some or all collateral sources; and requiring that any award be offset by the amount of collateral source payments. Twenty-three states have approved laws that would significantly change this rule.

The concept of capping noneconomic damages has been endorsed by about two dozen more states. In some states, laws now limit the liability of defendants in liability suits in one of several ways: by limiting recovery of a particular type of damages (usually noneconomic damages, such as pain and suffering); by limiting the total amount of damages recoverable; or by placing an absolute cap on liability as in wrongful death cases. Reform measures may apply to all tort suits or only to specific types, such as medical malpractice.

Originally designed to punish defendants who showed a wanton disregard for safety, punitive damage awards no longer are limited to such cases and may substantially exceed the amount of compensatory damages awarded. More than half the states have passed laws that limits the imposition of such damages. Reform measures may require punitive damage awards to be paid to the state; set limits on the amount that may be awarded in total or relative to compensatory damages; limit the type of case in which they may be awarded; or require hearings to establish a case for punitive damages before they may be sought in court. Some states have never had provisions for punitive damages. Almost two thirds of states have enacted reforms in this area since 1986.

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