A study released today shows – no surprise – that legal liability costs in the U.S. are the highest in the world, and more than twice the average level in Eurozone countries.
What’s interesting about the study by NERA Economic Consultants is the number of excuses it dispenses with. Such as: European companies pay less because the state covers more of the healthcare and other costs associated with defective products and the like. Or that U.S. liability costs are higher because courts fill the void left by insufficient regulatory oversight. Or that victims are basically screwed in foreign countries that don’t honor otherwise meritorious tort claims.
NERA adjusted its data to reflect higher social spending in European countries, for example, and found that only raised Eurozone costs by a third, not nearly enough to explain the 260% difference in liability costs. Liability costs are also lower in Canada, which has the same level of social spending as the U.S., study authors said.
The researchers calculated the cost of liability to be 1.66% of GDP in the U.S., compared with an average of .63% for Eurozone countries and less than .5% in Denmark, Portugal, Belgium and the Netherlands. The researchers said there was little evidence of higher regulation or ineffective legal systems to explain the lower European liability costs.
The two factors most closely associated with higher liability costs are the number of lawyers and whether the country has a common-law system — like the U.S., where judges decide much of the law governing liability — or a civil law tradition, where the rules are set down in a relatively unchanging civil code. Researchers at NERA found the two factors combined explained 70% of the difference in liability costs. The three most expensive jurisdictions were the U.S., U.K. and Canada, all of which use the English system of common law.
The study, also not surprisingly, was paid for by the U.S. Chamber’s Institute for Legal Reform, which supports tort-reform measures that would make it more difficult to sue companies and win large jury awards. The researchers relied on insurance premium data supplied by Marsh from 2008 to 2011, which they said provided a good proxy for overall liability costs. They developed country-level data by examining how much property insurance companies bought in each country and then used that to estimate their level of legal exposure, backing out the cost of liability insurance cost from that.
Critics of tort reform often say the U.S. court system supplies compensation victims can’t get anywhere else. They also claim plaintiff lawyers, judges and juries serve as a secondary regulatory system, forcing companies to produce safer products and disseminate more accurate financial information because otherwise they’ll get sued. Supporters of tort reform say the justice handed out by U.S. courts is far too random for companies to derive much useful information from it.
This chart reported by the folks over at the Volokh Conspiracy illustrates the difficulty of determining whether lawsuits, regulators, manufacturers or consumer demand reduce liability. It shows that vehicle traffic deaths plunged from the 1920s until 1970, when the National Highway Traffic Safety Administration was formed, and has improved slowly ever since. Clearly, the escalating number of lawsuits against car manufacturers, and huge jury awards like this $4.9 billion whopper, haven’t generated a commensurate increase in vehicle safety.
Chart source: Wikipedia.