The size and scope of tort damages and awards in the U.S, and the staggering costs of litigation, remain ongoing issues for business, insurance and reinsurance markets. Over the years, state legislatures and court decisions have addressed these issues through tort reforms such as caps on non-economic losses, special requirements in medical malpractice actions and limitations on class actions. In times of economic distress, excessive awards from corporate “deep pockets” are often granted. Recent changes in political administrations may swing the pendulum back the other way and some state legislatures are now rolling back tort reforms. We provide an overview of the current tort reform landscape and important considerations for re/insurers.

Tort reform represents efforts, generally in state legislatures, to place limitations on jury awards and recoveries by plaintiffs in civil tort actions, arising primarily out of personal injury. It has been driven by the insurance, medical, health and business communities in an effort to reduce the costs of litigation, as well as curb excessive jury verdicts which impact the costs of liability insurance and doing business.  

Tort reforms adopted by many U.S. states over the past 25 years include:

• Caps on non-economic loss: The pain, suffering and emotional distress arising out of personal injury actions are difficult to quantify – emotion and sympathy can lead to erratic jury verdicts. Many states have introduced caps and limitations on non-economic damages ranging from $250,000 to $1,000,000 in various types of lawsuits.
• Special requirements in medical malpractice actions: Soaring insurance rates, frivolous lawsuits and costly, unnecessary testing to avoid malpractice claims (“defensive medicine”) have put a severe strain on medical practitioners and the health system. Medical malpractice tort reforms have included: shortening the statute of limitations (the period of time in which an action must be commenced); stricter standards to qualify as an expert witness; more stringent pleading requirements, which can lead to the dismissal of unsubstantiated claims; special caps on the liability of emergency room practitioners and “Good Samaritans”; and phased payment of medical jury awards. 
• Class action reform: A class action allows for the aggregation of numerous claimants, all alleged to have been damaged or injured in the same way by the same defendant, often as the result of a product, securities issue or business practice. While the individual losses may be too small to justify or financially support a lawsuit, the collective loss of the class, as well as attorneys’ fees, can be enormous. Class action abuse, including “forum shopping” (commencing lawsuits in courts and states known to be friendly to class actions), has been a concern. State courts have generally been more receptive to permitting classes, even if the action has little connection to the state. The “Class Action Fairness Act” of 2005 gave federal courts enhanced jurisdiction over larger class actions. Federal securities class action activity reportedly declined in the first half of 2009.

However, tort reform is opposed by consumer advocacy groups and plaintiffs’ trial lawyers, and some state courts have struck down caps and limitations on recoveries as an unconstitutional deprivation of due process rights.

Considerations for insurers and reinsurers
Reducing severity, claims and reserves
Tort reform has had an overall positive impact on insurance and reinsurance underwriting, claims and operations over the past decade. If the parties to a reinsurance agreement know that tort reforms have been enacted in a particular state, they can model their general and professional liability program accordingly in expectation of less severe losses. Similarly, claims payments, reserves and allocated loss adjustment expenses may be lower where states have implemented reforms that limit awards. (Recent Tillinghast studies show that litigation costs have decreased on an inflation-adjusted per capita basis; the Congressional Budget Office (CBO) announced this month that medical malpractice tort reform could save $54 billion with lower premiums and reduced "defensive medecine" costs.) Caps on non-economic losses bring some degree of predictability to the uncertain financial component of a tort recovery and may also decrease losses in excess of policy limits. Shortening the statute of limitations, or enhancing the requirements of proving a medical malpractice lawsuit, can also help to weed out lawsuits which lack merit, but have the potential to result in an excessive jury verdict. Limiting “joint and several liability”, where a plaintiff can recover the entire verdict from one defendant no matter how small its share of the risk, can provide a greater degree of assurance that an insurer will not have to pay more than its insured’s allocated share of a risk.

Recognizing unfair jurisdictions
In addition to their own due diligence, insurers and reinsurers should be aware of the particular litigation risks present in certain jurisdictions, designated by the American Tort Reform Association as the “most unfair jurisdictions in which to be sued”. While this is not a scientific study, it raises serious issues concerning the disparity of justice among the various states. Ranked No.1 in 2008 was West Virginia, followed by South Florida; Cook County, Illinois; Atlantic County, New Jersey; Montgomery and Macon Counties in Alabama; Los Angeles County, California and Clark County, Nevada. 

Social inflation – is the trend shifting?
Tort reform has become a highly political issue, subject to changes in Washington, state capitols and the judiciary. While a number of tort reforms have been enacted over the last 25 years, the social pendulum could now start to swing the other way – taking a more pro-plaintiff position. This is aided by the change from a Republican to a Democratic administration, and the economic downturn, where jury sentiment shifts to reward the “underdog” by punishing the “deep pocket” corporations.

Knowledge mitigates risk
Both insurers and reinsurers have a strong interest in reducing the uncertainty of runaway jury verdicts and mounting allocated loss adjustment expenses, both of which can have an adverse impact on overall results. Tort reform remains a significant factor in the structuring of reinsurance programs and analysis of liability exposure in individual states. There will always be elements of the business and re/insurance communities which press for tort reforms, just as there will be segments equally committed not only to undoing them, but to the expansion of tort recoveries in new areas. Most important is an awareness of changes on a state-by-state basis, to stay current on what may impact underwriting, actuarial and claims operations.