If you look up the word tort in the dictionary, youll find injury and damage. If you read further, to the derivation of the word, youll learn that it comes from a Latin word meaning twist. And if you pay attention to the news, you know that the tort system in the U.S. is, indeed, twisted " hugely costly, both directly and indirectly; seemingly arbitrary at times; susceptible to fraud. And it is not a problem only for the insurance industry.

The Cost of Torts

Americans are notoriously litigious. We sue and demand redress at the drop of a hat, or a cup of hot coffee. As a recent white paper, Tort Excess 2005: The Necessity for Reform from a Policy, Legal and Risk Management Perspective, distributed by the Insurance Information Institute, puts it, we live in a culture of fault.

There are no accidents, states the white paper, or so American society and American juries have come to believe. The predominant thinking is that some human (or corporate) error must be to blame and somebody must make amends.

Not surprisingly, the cost of the U.S. tort system is staggering. Most experts rank it the most expensive in the developed world. According to the Insurance Information Institute, tort costs in the U.S. have soared from less than $2 billion in 1950 to $246 billion in 2003. Adjusted for the change in the value of the dollar, that amounts to $12 per person in 1950 and $845 per person in 2003.

It is generally assumed that large awards to plaintiffs are the issue. And, in fact, the number of multi-million dollar verdicts keeps growing and includes a wide variety of cases. But plaintiffs see relatively little of that money. The 2003 Tillinghast-Towers Perrin report on U.S. tort costs found that, of the total award, on average plaintiffs received 22 percent for economic loss. Of the remaining total, 19 percent went to plaintiffs attorneys; 14 percent for defense costs; 24 percent for awards for non-economic loss; and 21 percent for administrative costs.

Moreover, the tort system has a serious effect on the economy overall. A report published in 2000 by the Committee for Economic Development points out that tort liability has substantially raised the price of many products; that useful products have been driven from the market by liability costs; and that others never reach the market because liability concerns make the products economically unfeasible.

Without question, the insurance industry takes a tremendous hit. The Insurance Information Institute, pointing out that much of the cost of the tort system is passed along to the industry, cites data indicating that personal and commercial lines insurers shoulder nearly $165.8 billion of the annual costs. I.I.I. further sounds a note of caution, writing that, notwithstanding the positive effects of higher rates and more disciplined underwriting, in 2004 the detrimental impact of torts continued to exact a toll. If tort costs continue to rise, unchecked by reforms, [m]ore ill effects are sure to follow, given that the industry remains under-reserved by an estimated $59 billion.

Federal Reform for a Creature of the State Courts

Tort reform is a very partisan issue, reports NewsBatch, an on-line information service that addresses key policy issues. At every level, supporters of reform are overwhelmingly Republicans; opponents Democrats. And tort reform is a major policy objective of the current administration. A significant success came in 2005, when the Class Action Fairness Act was passed and signed into law by President George W. Bush. The acts key provision removes to federal court class action suits involving more than $5 million and where the plaintiff class consists of citizens of several states. But notwithstanding the introduction, and passage by the House, of a variety of other tort-related bills, no new law has emerged from Washington.

This is not necessarily a condemnation of federal legislators. Robert Detlefsen, director of public policy for NAMIC, pointed out that tort law is a creature of the state courts, and thus the reform movement is really concerned with the states. The 2005 class action reform law, he explained, is that relatively rare example where Congress did have the constitutional authority to intervene, because the phenomenon they were addressing was a situation in which [plaintiffs from] a variety of states were going into one states court, filing suit, and getting a decision that would have implications for all of the states represented by the plaintiffs.

In the class action suit, Avery v. State Farm, Detlefsen said, the Illinois court decision forbade the use by insurers of after-market automobile parts. Massachusetts law, on the other hand, requires their use. In a perfect example of the law of unintended consequences, a carrier that offers automobile insurance in both states cannot avoid running afoul of Massachusetts law or Illinois legal precedent.

Not only is tort reform the purview of the states, it is a matter of considerable economic significance to them. I.I.I.s 2005 white paper explains, The results of an econometric analysis, published by the U.S. Chamber Institute for Legal Reform, concluded the impact of a states legal system on economic growth is statistically significant. Companies can and do avoid doing business in counties with legal systems perceived to be inequitable. This costs states jobs, taxes, wages, and investment.

In an April 2006 article, the Wall Street Journal reported that the Institute for Legal Reforms 2006 survey of senior lawyers at leading companies showed an improvement in the overall tort system as more states clean up venue requirements, reform punitive and non-economic damages, and tighten up the criteria for class actions. According to the article, Governors in reform states report a real change in business climate. Insurers are returning and reducing premiums; corporations are expanding to create jobs.

Ranking the States

Like the private sector, states, too, look for the competitive edge, and a report released in May 2006 by the Pacific Research Institute may offer comfort to some and incentive to others. Texas ranked number one, rated as having the best overall tort climate with respect to burdens and reforms. Vermont ranked 50th. Others in the top five were Colorado, North Dakota, Ohio, and Michigan. In the northeast, only New Hampshire did well, ranking 18th. Maine was 34th, Massachusetts 41st, Connecticut 44th, New York 48th, and Rhode Island 49th. For states that dont institute reforms " a metric factored into the ranking, said report co-author Lawrence J. McQuillan, the writing is on the wall.

For a slightly different way of looking at the various states enthusiasm for reform, one can turn to The Tort Reform Record, published twice a year by the American Tort Reform Association (ATRA). Although the July 2006 report has not yet been released, the December 2005 report, which lists reforms enacted since 1986, suggests that the states with the fewest reforms are also those ranked low by the Pacific Research Institute. As of the end of 2005, for example, New York had not enacted reform legislation since 2003, when it remedied poorly drafted language in a 1986 law concerning structured settlements. Vermonts last reform legislation, in 1992, addressed medical liability. Texas, in contrast, passed five tort reform laws in 2005 and 19 in 2003.

The ATRA report also summarizes the number of states that have enacted reforms in each of ten areas:

Joint & Several Liability40

Collateral Source Rule23

Punitive Damages32

Noneconomic Damage23

Prejudgment Interest15

Product Liability16

Class Action8

Attorney Retention7

Appeal Bond33

Jury Service12

Reform Measures

While tort reform, as promoted or vilified by politicians and reported in the press, often sounds like a single sweeping change, in fact it addresses a variety of aspects of the law and, where enacted, takes different forms.

The joint and several liability rule, for example, allows a plaintiff to recover damages from multiple defendants collectively, or from each defendant individually. In effect, a defendant found to be only minimally liable could be compelled to pay 100 percent of the damages if the others are bankrupt. Some states have abolished the rule entirely; others have limited its application.

Non-economic damages, another target of reform, include pain and suffering, emotional distress, and other intangible injuries. ATRA explains that [i]t is very difficult for juries to assign a dollar value to these losses, given the minimal guidance they customarily receive from the court. As a result, these awards tend to be erratic and, because of the highly charged environment of personal injury trials, excessive.

Detlefsen pointed out a secondary, and perhaps even more costly consequence of the award of non-economic damages. In most [states], he said, the pain and suffering award is some multiple of economic damages " it could be two or three times as much. This, in turn, gives plaintiffs and their attorneys a huge incentive to inflate the economic damages, driving up the cost of medical treatment, for instance, with unnecessary and expensive therapies and tests.

Other targets of reform include punitive damage awards, which, as the Tort Excess 2005 report notes, were originally intended to punish defendants for engaging in extremely egregious conduct, but are today often no longer limited to such cases. More than half the states, according to the report, have passed laws limiting the imposition of punitive damages; others now require that some portion of those damages be paid into a state fund.

The establishment of minimum medical requirements " or medical criteria laws " has become the focus of considerable attention recently, Detlefsen said, a response to the flood of asbestos and silica cases. Essentially, he explained, only those plaintiffs who meet certain medical criteria and are genuinely ill could bring suit. In recognition of the possibility of a length of time between exposure to asbestos or silica and the onset of illness, people believing they have been exposed would be enabled to have their case placed in an inactive docket for a specified period of time. This would mean that truly sick people would get to court first, Detlefsen said, adding that some states have a tremendous backlog of cases.

Surprisingly, given the high profile and notoriety of class action suits in recent years, only eight states have enacted reforms. Whereas such suits were intended as a tool of judicial economy, ATRA explains, some are now meritless cases in which thousands, or millions, of plaintiffs are granted class status. It is widely recognized that the plaintiffs, who may indeed have been wronged, often receive only pennies, or coupons of little value.

Educated Judges and Juries

Residents of New York State and some 11 others are familiar with another increasingly popular measure, jury service reform. Most occupational exemptions are being eliminated, standards for hardship excuses are higher, prospective jurors are given greater latitude in scheduling their service, and payment for service has been increased. Though the rationale cited for such reforms is typically the right to a trial by a jury of ones peers, most proponents of reform acknowledge that the issue is a jury pool that disproportionately excludes the perspectives of many people who understand the complexity of issues at play during trial, as ATRA puts it.

Reforming jury service, however, begs a larger question: can an ordinary jury, however well stocked with people who understand complexity, be expected to grasp the highly technical and often arcane information presented in many cases, especially those involving medical matters? For that matter, can the judges?

Unlike many other countries, Detlefsen said, we dont have specialized courts, other than those dealing with family or tax issues. Generalists " most judges and certainly the juries " are put in a position of having to depend on the testimony of experts hired by both sides, he continued. The result is often dueling experts, whose opposing points of view neither jurist nor juror has the expertise to analyze and compare. The solution, Detlefsen proposed, would be health courts, presided over by judges with special training who would hear only medical and other health-related cases. To the extent that expert testimony might be needed, the judge could have recourse to a list of accepted and reputable experts, vetted by the appropriate authority, such as the relevant medical association.

Regulation Through the Courts

Detlefsen, among others, has a larger concern with the tort system: what he calls judicial usurpation of insurance regulatory authority. In a recent scholarly article by that title, he writes that [i]n a growing number of class action lawsuits against insurers, plaintiff attorneys seek not only to win large monetary awards, but also to regulate insurers behavior in the marketplace and manage their relations with consumers. Citing the 2003 Texas class action reform measure, he notes that law provides that the courts first determine whether the claims advanced in a class action are properly within the jurisdiction of state agencies, in which case the court must refrain from certifying the class.

In the recent past, Detlefsen explained, scarcely any important insurance regulatory question arises in the United States that is not eventually transformed into a judicial question, notwithstanding the fact that class action lawsuits are remarkably ill suited as forums for addressing regulatory issues. He bases his argument, in large measure, on the fundamental principle of separation of powers and on the necessity for transparency and accountability in the making of laws and in their implementation. Laws, Detlefsen noted, are made by legislators, elected by and answerable to the people; implementation is the function of agencies, which belong to the executive branch, presided over by a similarly elected and accountable governor or president. In contrast, he said, [r]egulatory class actionsempower private attorneys with personal agendas to act as de facto regulators.

Where litigation is both appropriate and, perhaps, inevitable, Detlefsen said that some are advocating that contingency fees be abolished, explaining that most economically-advanced countries do not allow contingency fees, because they see it as corrupting the process. Rather than taking a percentage of the award " standard practice in the U.S. and widely accepted as the key factor in the escalation of awards " attorneys would enter into a straight fee arrangement with clients. Attorney compensation would thus be unrelated to the size of the award.

So many of the reforms " enacted, proposed, or still merely contemplated " seem like simple common sense. But well before specific tort reforms become law, politicians will have to agree that reform is a worthy and necessary objective. Too many legislators, in too many states, are still too busy arguing about whether or not the system is broken.