Prepared By

The Institute for Policy Research and Evaluation
of
The Pennsylvania State University
Stephen Foreman, J.D., M.P.A., Ph.D.
Assistant Professor, The Pennsylvania State University
Dennis G. Shea, Ph.D.
Associate Professor, The Pennsylvania State University
John Gabala
Research Associate, The Pennsylvania State University

January, 1999

Projected Economic Impact of Lawsuit Abuse Reform on the Pennsylvania Economy

Executive Summary

The Pennsylvania Civil Justice Coalition commissioned this study to measure the potential impact if lawsuit abuse reform on the Pennsylvania economy. To accomplish this task, we conducted an extensive review of the literature on lawsuit abuse reform. We also evaluated the results of lawsuit abuse reform impact studies in other states and conducted an analysis of the potential impact of lawsuit abuse reform on the Pennsylvania economy.

The economic impact analysis includes a projection of the impact of lawsuit abuse reform on gross state product, employment, unemployment and poverty. In addition, we conducted a survey of Pennsylvania businesses, local government entities, non-profit organizations and practicing professionals (generally "economic entities") to determine their impression of the tort liability problem and the potential benefits that might be available through lawsuit abuse reform. The major findings of our study are as follows:

The costs of the civil justice system are large and are growing faster than the national rate of inflation.

• Premiums for general liability insurance went from $6.5 billion in 1984 to $20 billion in 1996, two to three times the general rate of inflation.
• A report by a major national consulting firm, Tillinghast-Perrin Tower, concludes that 1994 tort costs were 2.2% of the U.S. gross domestic product, more than double the average of other industrialized countries.
• A recent New York study estimated that the costs of the tort system in Pennsylvania in 1996 were $7.8 billion, 2.5% of the Commonwealth's gross state product.
• Our study estimates that the costs of the tort system in Pennsylvania were $7.2 billion in 1996.
• Based on experiences in nearby states, we estimate that case filings for tort actions in Pennsylvania have risen four to nine percent annually during the past ten years.

The current legal liability system is distorted and produces results that are often unfair.

• A RAND study of the legal liability system concluded that less than half of all the amounts spent for the system go to compensate injured victims. A majority of tort system costs go to pay attorneys, court costs, and other costs of running the system.
• Other studies have found that a large number of meritorious claims are never filed.
• Fear of legal liability changes the way that business, government and professionals provide goods and services, often in ways that are not consumer-oriented.

Pennsylvania businesses, non-profit organizations, local governments, practicing professionals and economists all perceive that the civil justice system needs to be reformed. There are a number of examples.

• A 1990 survey of the CEOs of major Pennsylvania businesses concluded the threat of liability exposure had a negative impact on the state's economy.
• A 1995 survey determined that many Pennsylvania accountants had discontinued services due to the fear of legal liability.
• A 1998 survey of Pennsylvania economists disclosed that only 12% of the respondents believed that the present liability system is working well.
• Our survey found that 62% of Pennsylvania businesses, local government, non-profit organizations and practicing professionals said they took defensive measures to protect themselves against the risk of legal liability.
• More than half of the health care professionals that responded to our survey had been sued for malpractice during the past six years. Some had been involved in a large number of legal actions.
• 16% of the respondents to our survey refrained from producing certain goods or services due to fear of liability.
• 19% of the respondents to our survey were aware of a frivolous or groundless claim for recovery. In many cases they had experienced such a claim and described it in their response.

Pennsylvania consumers also believe that the civil justice system operates poorly and needs to be reformed.

• 88% of Pennsylvania voters polled in a 1998 survey felt that the current liability system was not working well and should be changed.
• 84% of voters surveyed said that the present system is being abused: too many lawsuits are being filed and the system should be improved.
• More than two-thirds of voters concluded that lawsuit abuse reform would benefit large and small businesses, taxpayers, consumers, insurance companies, people with legitimate lawsuits and doctors and other professionals in almost equal proportions.

Most other states have adopted lawsuit abuse reform and have derived substantial benefits.

• The American Tort Reform Association found that all but five states (Arkansas, Maine, North Carolina, Pennsylvania and Rhode Island) adopted lawsuit abuse reform between 1985 and 1995.
• Business journal credit lawsuit abuse reform as playing a key role in revitalized economic health for industries and states.
• A 1998 University of Texas study involving attorneys, mediators, judges and claims adjustors found agreement that defense costs had been reduced, jury awards were lower and were more favorable to defendants and cases had settled for less money.
• A National Bureau of Economic Research study estimated that states that adopt lawsuit abuse reforms experienced employment growth of 8.8%, productivity growth of 3.5% and growth of total output of 12% for each liability reducing reform.

The results of out economic analysis suggest that lawsuit abuse reform can produce major benefits for the Commonwealth.

• While the impact of lawsuit abuse reform in Pennsylvania may be different from other states and while other unforeseen economic factors may intervene, our forecasts show that substantial benefits will flow from adoption of lawsuit abuse reform.
• We considered the potential economic impact of six of the nine civil justice system reforms proposed for adoption in Pennsylvania. Each of the proposed reforms associated positively and significantly with an improved state economy.
• A model for the impact of lawsuit abuse reform in Pennsylvania suggests that reform efforts could produce an increase of $637 billion in Pennsylvania's gross state product, a two percent increase.
• Forecasts show that lawsuit abuse reform could produce an additional 34,000 jobs, an increase of 0.5%.
• The results of economic models suggest that unemployment in Pennsylvania might drop by 39,000 as a result of lawsuit abuse reform, a 10% reduction.
• The economic models predict that the number of Pennsylvanians who live below the poverty level may decline by 49,000 annually after lawsuit abuse reform, a 3.5% reduction in the state's poverty level.

By reducing inefficiency, lawsuit abuse reform can improve the wellbeing of Pennsylvanians without producing unwarranted burdens.

Prepared by The Institute for Policy Research and Evaluation of the Pennsylvania State University, January, 1999, "Projected Economic Impact of Civil Justice Reform on the Pennsylvania Economy"