Increase in U.S. Tort Costs Driven by Gulf Oil Spill: Study

January 27, 2012

The April 2010 Deepwater Horizon drilling rig explosion and resulting oil spill in the Gulf of Mexico were the key drivers in the 5.1 percent increase in U.S. tort costs in 2010, according to a new report.

The 2011 “Update on U.S. Tort Cost Trends” from global professional services company Towers Watson found that without the costs from that Gulf event, tort costs would have shown an overall decrease of 2.4 percent for the year, the findings indicated.

In a previous report, Towers Watson found that tort costs fell by 2.7 percent in 2009.

In total, the U.S. tort system cost $264.6 billion, which translates to $857 per person, versus $820 per person in 2009. Personal tort costs totaled $96.7 billion; commercial tort costs were $168 billion. The 2011 report analyzes U.S. tort costs from 1950 through 2010, with projections through 2013.

“The incident in the Gulf was the single most important event affecting tort costs in 2010,” said Russ Sutter, Towers Watson consultant and author of the report. “While the ultimate tort costs related to this event remain uncertain, our 2010 tort cost estimate includes $19 billion of costs related to the spill.”

The weak U.S. economy continued to have an influence on tort costs, which would have shown a decline minus the Deepwater Horizon event, Sutter said.

He said the decline in tort costs is most notable in the commercial auto line of business, perhaps the most economically sensitive coverage with a tort component. The insured commercial auto tort costs in 2010 were the lowest since 2000 and 19 percent lower than in 2004.

Commercial auto tort costs were $16.1 billion in 2000, according to Sutter. They rose to $20.4 billion in 2004 and were $16.5 billion in 2010.

Further, overall economic growth in 2010 was up 4.2 percent. As such, the ratio of tort costs to gross domestic product (GDP) rose in 2010, the second straight year of an increase in the ratio after five years of decline. Since 1950, growth in tort costs has exceeded growth in GDP by an average of about two percentage points.

Just as the Deepwater Horizon disaster caused an increase in costs in 2010 versus 2009, Towers Watson said it expects tort costs to show a 4.4 percent reduction in 2011 due to the lack of such an event during the year. Excluding the impact of the oil spill, Towers Watson forecasts tort costs in 2011 will show a modest increase relative to 2010, in the area of 3 percent.

Personal automobile-related tort costs showed a 1.1 percent increase in 2010, and Sutter said he expect a slightly higher increase in 2011.

The study also shows higher asbestos costs being recognized by U.S. insurers. “While still well below the peak years of 2002 and 2003, asbestos costs were up in 2010, and insurer activity in 2011 that has already been announced suggests a potentially further increase in 2011,” Sutter said.

Medical malpractice trends “continue to be mild, despite recent challenges and overturns of reforms that were implemented previously, and we do not see this changing in 2011,” Sutter said. “The increasing employment of physicians by hospitals may also exert some downward pressure on medical malpractice tort costs through more coordinated patient care and claims defense.”

Towers Watson estimates growth in U.S. tort costs will range from 2 percent to 6 percent in 2012, with a midpoint of 4 percent. A similar increase is seen for 2013, with a midpoint of 4 percent.

 Study Methodology

The study examines only one side of the U.S. tort system: the costs. No attempt has been made to measure or quantify the benefits of the tort system, such as a systematic resolution of disputes, and the study makes no conclusion that the costs of the U.S. tort system outweigh the benefits or vice versa. The study is conducted entirely by Towers Watson; it is not funded or subject to approval by any outside organization.

The study incorporates three cost components: benefits paid or expected to be paid to third parties (losses), defense costs and administrative expenses. Administrative expenses are identified separately in the report. While Towers Watson outlines why these are a real cost of the tort system, it takes no position on the efficiency of the insurance industry’s administrative expenses.

Towers Watson has not included costs incurred by federal and state court systems in administering actual suits in the report. Certain indirect costs are also omitted, such as those associated with litigation avoidance.

 

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