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Tort Turns Toxic
Liability lawsuits, once a mere nuisance, have become a serious threat to the nation’s well-being.
Autumn 2002

Last July 4, at 4:18 pm, Fisty Lawson, a porter at the Golden Nugget, was driving down Paradise Road in Las Vegas when a sports utility vehicle rammed his car. Paramedics, rushing to the scene, found him gravely injured, but they couldn’t take him to the place most likely to save his life—the trauma center at nearby Las Vegas University Medical Center. The center had closed the day before, because most of its trauma surgeons could no longer afford malpractice insurance. The paramedics instead brought Lawson to a local emergency room, where he died about an hour later. No one knows if he would have survived had the trauma center stayed open. But his death sent shock waves throughout southern Nevada, where, on the same day, local medical personnel had to airlift three other emergency patients to Phoenix for specialized treatment now unavailable in Las Vegas.

The medical-insurance crisis that caused the closing of the trauma center isn’t unique to Nevada. All over the country, an epidemic of malpractice lawsuits, combined with ballooning jury awards, has sent premiums skyrocketing into the unaffordable range for many doctors and hospitals, while state legislatures have failed to come up with real solutions. This year, everywhere from South Philadelphia to rural Mississippi to central Texas, doctors who can no longer afford—or even obtain—malpractice insurance have stopped doing suit-prone procedures, leaving patients scrambling for care.

Worse, this medical malpractice emergency is just one part of a vast crisis in America’s civil justice system that has begun to cripple vital aspects of our national life. A swarm of spurious lawsuits against builders, for example, is hobbling construction firms and in some places has brought affordable home-building to a halt. Asbestos litigation is putting many small firms with no history of negligence out of business, destroying jobs and setting dangerous new court precedents. Taken together, these developments have transformed what was the minor annoyance of a “tort tax” into a major disaster for thousands upon thousands of innocent individuals and companies. And reform is nowhere in sight.

The tort mess began with a radical change in our civil justice system, presented as compassionate by its advocates. From colonial times, civil justice lawsuits required allegations of real negligence or broken contracts. But beginning in the 1950s, activist lawyers and judges succeeded in replacing the old tort system with a new one, based on the idea that people who had suffered harm while using a product or service should receive compensation regardless of whether negligence had anything to do with their misfortune. Over time, negligence all but disappeared as a legal concept, replaced by “strict liability,” which meant that anyone remotely linked to a product or service that caused harm might have to pay the injured parties, even if he’d done nothing wrong. Under strict liability, doctors and hospitals guilty of no demonstrable negligence, for example, now found themselves facing—and losing—birth-defect lawsuits. The courts simply assumed that insurers would pack the costs of such judgments into the premiums doctors paid, and that the doctors in turn would pass those costs on to the rest of us in the form of higher medical fees. Misfortune would be compensated, and the cost would be spread across society.

This new form of tort law might at first have seemed compassionate, but lawyers soon used it to file an ever growing number of far-fetched lawsuits, for kids falling off playground jungle gyms, or for wildly inflated auto-injury claims. By the early 1970s, America faced its first tort-provoked insurance crises, as medical malpractice premiums and auto-insurance rates soared, and doctors and drivers squawked. States started to place some ineffective limits on lawsuits, but they left the damaging change in the tort system—the replacement of negligence with strict liability—untouched.

Every day, lawyers found new targets. Soon New York and other cities faced thousands of tort claims, individually trivial but collectively significant, for everything from sidewalk slips to pothole damage to cars. Claims paid out by Gotham rocketed 413 percent, from $23 million in 1978 to $118 million in 1985. Enterprises as various as vaccine makers, auto manufacturers, and nursery schools now faced potentially huge liabilities and soaring insurance costs. By the late 1980s, America’s tort system cost the nation $80 billion annually—more than double what the federal government then spent on Medicaid.

The widespread sense that the system was spinning out of control, with juries awarding multi-million-dollar damages that seemed disproportionate, unjust, or based on junk science, provoked a second round of reforms, much more substantial, starting in the late eighties. More than 30 states enacted statutes of limitations on filing suits, placed restrictions on the outlandish amounts juries were awarding for the “pain and suffering” that plaintiffs endured because of the damage done them, and somewhat limited “joint and several liability,” the legal doctrine that makes one defendant liable for an entire award if other defendants are unable to pay it.

But as these reforms gained ground in legislatures during the 1990s, the trial lawyers counterattacked, using their growing political influence to get activist judges elected or appointed in states like Illinois, Mississippi, Ohio, and Texas. The tort-friendly judges (some of whom had been trial lawyers themselves) then watered down the new laws or overturned them outright in scores of decisions.

At first, the vibrant national economy hid the full economic impact of these judicial verdicts. Insurance companies could put their clients’ money to work in the booming stock market, producing big investment returns that offset losses from underwriting. But when the bull market ended in mid-2000, companies no longer could subsidize such losses, which by the late nineties had grown alarming. In medical malpractice insurance, insurers now took in only $1 in premiums for every $1.40 they paid out. Home insurers did only slightly better, paying out $1.14 for every $1 they took in. Auto insurers racked up losses, too.

The full tort tab, however, is far larger than what shows up on insurance-company profit-and-loss statements. Earlier this year, the president’s Council of Economic Advisers conservatively estimated that the total cost of the nation’s tort system has reached a mind-boggling $180 billion annually—1.8 percent of GDP (three times the 1950s percentage), or $650 for every U.S. citizen. No other country has so big a “tort tax.” The council finds roughly half of the current tab—$87 billion—excessive and wasteful.

Even these numbers, eye-popping as they are, don’t fully capture the mayhem that the tort system now causes in the lives of ordinary Americans. Ambur Peterson of Cleveland, Mississippi, got pregnant just as a medical malpractice crisis hit her state earlier this year. In mid-July, Peterson’s obstetrician told her he was closing up shop because he couldn’t get insurance. That left Cleveland, a town of 14,000, without any doctor who delivered babies. “I’m kind of shell-shocked,” Peterson told a local paper, as she made plans to travel 110 miles to Memphis for care. Mississippi’s especially glad-handed tort environment—lawsuits are common and judges tend to favor plaintiffs—has driven away all but a handful of the 37 insurers who once provided malpractice coverage. But Mississippi merely leads the way for the rest of the nation. Earlier this year, the American Medical Association identified 11 other states facing sky-high malpractice rates and shrinking insurance availability. Dozens more, the AMA warned, are hurtling in the same direction.

In addition to the rising number of lawsuits, medical insurers have had to grapple with the inflated size of jury awards. Over the last five years, the median medical malpractice award nationwide has more than doubled, from $474,536 to $1 million, according to Jury Verdict Research, an independent firm. In childbirth cases, the median is now more than $2 million. Equally troubling is the system’s unpredictability. Recently, a New York appellate court upheld a staggering $50 million verdict against a local hospital in a birth-defect case—and who’s to say whether $50 million might not be $150 million next time out? Pointing to just such uncertainties, the country’s largest malpractice insurer, the St. Paul Companies, rocked the industry in December when it announced it was getting out of the business. It had hemorrhaged $900 million over the previous 12 months.

Big jury verdicts have helped push Pennsylvania into a medical-insurance crisis as severe as Nevada’s. In 2000, reeling insurers paid $352 million in Pennsylvania malpractice awards, raising the state’s insurance premiums 60 percent in 2001 and a further 70 percent in 2002. Philadelphia juries are particularly lavish, giving out awards that average more than double those elsewhere in the state.

The effect has been devastating, especially in eastern Pennsylvania, where the state’s medical society counts more than 200 doctors who retired, left the state, or abandoned the riskiest procedures during the first months of 2002. “We have pregnant women in tears calling my office saying they can’t find medical care,” says Pennsylvania congressman James Greenwood. Earlier this year, Philadelphia’s Methodist Hospital shuttered its maternity ward, eliminating 91 jobs and leaving South Philadelphia without a single hospital that delivers babies.

But it’s not just obstetricians who are growing scarce. Main Line Health System, a network of greater Philadelphia hospitals, recently stopped sending paramedics to accident scenes. Since its insurance premiums had shot up from $6.5 million to $30 million over the last three years, the group had to cut services to cut costs. “Our operating profits are now being entirely absorbed by increases in malpractice insurance,” complains Roger Wells, a network vice president. “We no longer have a surplus to invest in new equipment or other expenditures.”

Confronted with a growing furor over the malpractice emergency, trial lawyers have turned around and blamed the insurers, claiming that firms foolishly underestimated the increasing size of jury judgments. They also contend, somewhat contradictorily, that figures showing ever higher awards are based on sketchy and unreliable information.

Both arguments are specious. True, after the tort reforms of the late 1980s, a number of insurers moved into the malpractice field, assuming that it would become a viable business. But had the companies known that courts would shred these reforms, many would never have taken the plunge. Others would have raised their rates to where they are now, only earlier. “The mistakes the companies made had an impact on their shareholders, because they lost money,” observes Lester Brickman, a professor at Cardozo Law School. “But it doesn’t change the fact that insurers can’t make money in this field at rates that doctors can afford.” In tort-plagued states like Nevada, for instance, premiums for an ob-gyn specialist now average a whopping $83,000 a year.

As for the size of jury awards, backing up the unambiguous statistics from Jury Verdict Research are such typical examples as New York City, which self-insures and runs one of the largest health-care networks in the country: over the last decade, judgments against its 11-hospital Health and Hospitals Corporation have exploded from $66 million to $150 million. Similarly, the average size of a verdict reported by companies that are part of the Physicians Insurers Association of America have increased by 95 percent in the past decade, with most of the gains coming in the past five years.

Medical care is by no means the only critical area of American life that an out-of-control tort system has begun to threaten. The trial lawyers have started to mess up affordable housing in a big way, too.

The heart of the problem is a massive increase in “construction defect” litigation. During the 1980s, when middle-income condo developments sprang up across the Sunbelt, some were jerry-built, and owners and condo associations—properly—sued the contractors. Trial lawyers quickly discovered that suits against multi-unit complexes could be gold mines, since there were so many potential litigants in each case. By the mid-nineties, trial lawyers were actively soliciting condo associations across the country, offering to represent them in suits against builders on flimsy, or even nonexistent, evidence of faulty construction. Judges again made things worse, inventing a notion called “stacked liability,” which meant that not merely the builder’s current insurer but every company that had ever insured him was liable for claims concerning the project.

Result: another insurance crisis. By 1998, for example, California insurers were collecting $19.3 million in premiums from residential builders but shelling out $36 million in costs, a loss of $16.7 million. Two years later, the loss widened to a jaw-dropping $29.6 million—$2.95 paid out for every $1 in premiums collected.

Predictably, insurers are fleeing the market or are ratcheting up their rates so high that builders can no longer afford to construct multi-unit housing. For example, one of California’s biggest builders, Barnett America, no longer builds the affordable, multi-unit housing that it specialized in for 20 years. Now it erects pricey single-family homes instead. “We couldn’t raise prices enough [on condos] to cover the cost of everyone’s increased insurance coverage,” says Mike Pattison, the firm’s chief executive. Multi-unit housing construction has plummeted 85 percent since 1994, even as the Golden State’s economy roared.

And what is happening in California is metastasizing to other states, including Arizona, Idaho, and Washington. Spokane insurance broker Judy Rapp has watched coverage dry up for many of the construction firms she serves. One, a small subcontractor that mostly does non-residential building, recently agreed to work on a multi-unit development in Idaho. When its insurer found out, it dropped the firm’s coverage. Rapp hasn’t been able to find a replacement policy for the company for less than $100,000 a year—compared with its former $3,000 annual premium. “No insurer wants to be stuck with what it considers unlimited liability and a virtual certainty it will be sued someday over that project,” she says.

Not content with chasing builders from the multi-unit housing market, trial lawyers have now trained their sights on single-family housing. Out of the unwholesome cauldron of junk science, they have conjured up lawsuits over something called “toxic mold.” These suits charge that poor home construction allows the growth of dangerous molds that seriously damage homeowners’ health—a potential bonanza in pain-and-suffering or punitive damages.

Mold litigation has advanced with startling speed, despite cautions from the Centers for Disease Control that toxic molds, if they exist at all inside houses, are extremely rare. The press has fanned the flames, spreading panic—and stoking litigation—by publishing more than 6,000 articles about toxic mold over the last two years, including a splashy New York Times Magazine story with a cover photo of the author in a hazmat suit. Much publicized lawsuits by Johnny Carson’s former sidekick Ed McMahon and movie heroine Erin Brockovich have fed the frenzy. But nothing has inflamed it more than a few gigantic awards, including a $32 million judgment in a Texas case.

Texas has become a breeding ground of mold litigation. In just the last year and a half, mold claims have increased nearly 600 percent in the state, where insurers paid out an astonishing $854 million in such cases last year. Three of the largest providers of homeowners’ insurance in the state have either left that market or now write renewal policies only. Texans’ homeowners’ insurance is as a result going through the roof. Those insurers who’ve stuck around are now charging up to $1,500 a year for insurance on an $80,000 home—more than double the national average. Though nationally the typical homeowner spends less than 1 percent of his income on home insurance, in Texas the figure is 2.5 percent, and growing. At this rate, Texans will be paying as much in “mold tax” as they do in property tax.

What’s already happened in Texas and a few other western states is starting to move across the country, with trial lawyers holding seminars on how “mold is gold.” Inevitably the litigation is spreading beyond single-family homes to encompass multi-family units and public buildings. In Florida, to take one example, Martin County recently won a $14 million judgment against a contractor and its subcontractors, whom a jury held responsible for the allegedly toxic mold that showed up in a new county courthouse.

New York City, an inviting target because of its many older multi-unit buildings, will likely see a torrent of such litigation in the near future. In a worrying sign, the owner of a Manhattan apartment complex recently agreed to shell out $1.7 million to settle a mold suit. Because of court precedents, litigation could pursue any builder who ever had a hand in refurbishing an older residential building or any insurer who ever covered the building. “I can imagine a day when every apartment building in New York City has some level of mold remediation going on in it,” says Mike Dehlmer, head of risk management for Crista Construction, a major New York builder. “People are going to be showing up to these buildings wearing respirators.”

Whether toxic mold exists or not, one thing that unquestionably behaves like toxic mold is tort litigation itself: it spreads everywhere, it can’t be stopped despite strenuous efforts to eradicate it, and it is deadly. The nation’s experience with asbestos litigation is the most advanced case in point so far. It should serve as a warning about where all tort litigation is heading, if we don’t get it under control, fast.

The main lines of the asbestos story are familiar. The substance, widely used for many years as an insulator or flame retardant, causes several kinds of fatal pulmonary illness that can take decades to develop. Though the government began restricting the use of asbestos more than 30 years ago, cases of asbestosis started cropping up in the 1970s, leading to a slow growth of litigation—970 lawsuits by the end of the decade. But then, as the tort industry began revving up, asbestos suits soared. During the 1980s, plaintiffs filed more than 47,000 suits, bankrupting several major firms, including Armstrong World, Pittsburgh Corning, and U.S. Gypsum.

Even as claims have sharply increased, however, actual cases of asbestos-related disease have declined and today make up only a small part of asbestos litigation. Asbestos-related deaths in the U.S. peaked in 1991 at around 7,500 annually. These days, only about 2,000 new cases of asbestos-related cancer show up yearly, and the number continues to fall. Yet plaintiffs are filing new asbestos claims at a record rate—90,000 over the last 12 months alone.

Why the disparity? Blame judges and juries, who keep expanding the field, allowing plaintiffs who aren’t even sick to win huge sums. A West Virginia jury, for example, awarded $5.8 million to six healthy retired railroad workers for “emotional distress” purportedly caused by past exposure to asbestos: they keep worrying that they might get sick. Such outlandish rulings have set off a stampede to file claims—there are now 600,000 currently on file nationwide, and experts believe that the total could eventually reach 2.5 million. The Rand Institute calculates that as many as 2,000 companies, representing half of all business classifications in the U.S., have faced or are currently facing lawsuits. In the last two years, 60 of them have gone belly-up. The final bill to resolve this mess might top $200 billion.

One firm driven under, AC&S, a small Lancaster, Pennsylvania–based former insulation installer, shows how the asbestos-litigation plague works its mischief. Back in 1969, 30 or so employees of AC&S bought the firm from its parent company for $1 million. Over the next couple of decades, they lived the American dream, expanding the company into a flourishing enterprise that employed 1,500 or so construction workers and reinvesting profits to create other businesses. Then asbestos lawsuits began hitting AC&S, including several where no clear evidence existed that it had ever even worked on the litigated site. In one such dubious case, the firm had to pony up $84 million—more money than the company had cumulatively made in its history. After declaring bankruptcy earlier this year, this once thriving firm is down to just two employees—both working only to process asbestos claims. “Once, this company was a good corporate citizen that earned money and paid significant taxes; now it incurs only losses and pays no taxes to anyone,” says Kirk Lidell, whose father was one of the company’s original 30 investors.

The precedent that healthy plaintiffs can sue and win giant awards portends further mischief. It’s now only a matter of time before this principle shows up in other product-liability litigation. One can easily imagine, say, healthy people successfully suing a pharmaceutical company over a drug withdrawn from the market for safety reasons: the mere knowledge that they took the drug in the past, they will claim, has caused them emotional stress.

Despite such abuses, tort-reform efforts never get very far. Mississippi lawmakers, for example, recently shot down 72 bills designed to improve the nation’s most toxic tort climate before enacting in October a weak malpractice law that caps pain-and-suffering awards at $500,000 for now, but allows the limit to rise to a heady $1 million in the future. The Pennsylvania legislature only managed to pass a watered-down medical malpractice bill that didn’t include the two reforms that doctors most wanted: a cap on pain-and-suffering awards and restrictions on where lawyers can file suits (currently they can file in any jurisdiction in the state, so they gravitate to where juries hand out fat awards). In California, construction firms have unsuccessfully pushed for sensible legislation that would require homeowners to give builders the chance to fix defects before suing them.

The trial lawyers can stave off reform because they’ve become the biggest single-issue political givers, locally and nationally, especially to Democratic candidates, who share their anti-business bias and aversion to tobacco companies, gun manufacturers, and fast-food purveyors. San Francisco mayor Willie Brown rightly calls the trial bar one of the “anchor tenants” of the Democratic party.

Between 1988 and 1996, the trial lawyers gave tort-reform opponents $60 million, and in the 2000 elections the American Association of Trial Lawyers’ PAC was the second-biggest national contributor of soft money to state parties. In California’s recent legislative primaries, the Civil Justice Association of California estimates that trial lawyers contributed about $3 million—more than half of all giving in some races. These huge sums are likely only to grow larger as trial lawyers rake in fees from big verdicts. One of the top ten donors to state elections in 2000 was Florida trial lawyer Wayne Hogan, who stands to collect $180 million for helping Florida shake down the tobacco companies.

One reason the trial lawyers have so much to spend on politics is the contingency-fee system. Under this system, lawyers get paid only for cases they win—typically 15 to 40 percent of each judgment. But as awards have grown humongous, fees increasingly bear little relation to any actual work the lawyers have done. In a Texas case that produced a $122 million payment to the families of victims of a fatal bus accident, for example, lawyers merely participated in settlement negotiations and never set foot in court—but scooped up $40 million in fees, or about $25,000 an hour, estimates Cardozo law professor Brickman. But even such mammoth sums seem tiny when compared with the fees from tobacco litigation. To date, lawyers have won nearly $13 billion for themselves, with some estimates of their hourly rates running as high as $100,000.

Nothing shows the trial lawyers’ political muscle more clearly than their success in blocking federal legislation that would let the government offer terrorist-attack coverage to businesses, after private insurers withdrew from the market following September 11. The legislation stalled when Republicans insisted on limiting punitive damages and pain-and-suffering awards, so that trial lawyers couldn’t gain unlimited access to the federal treasury. Spurred by the trial lawyers, the Democrats have resisted such limits and have squelched the early versions of the bill in the Senate.

Trial lawyers have also used their riches to leap directly into public office, where they stave off tort reform. In Mississippi, trial lawyer-legislators control the chairmanship of three committees through which any reform legislation must pass. In the New York State Legislature, trial lawyer-pols have long chaired the judiciary and insurance committees. Personal-injury lawyers elected to the supreme courts of Ohio and Illinois have helped overturn civil justice reform in those states.

A trial lawyer has even risen to the Democratic party’s top ranks. Since joining the Senate in 1998, North Carolina’s John Edwards, who amassed a fortune as a medical malpractice attorney, has relentlessly sought to expand federal rights to sue health-maintenance organizations and has become one of the key players in the federal terrorism-insurance debate. He’s widely seen as a top vice-presidential (or perhaps even presidential) candidate, in part because of support from trial lawyers, who have poured money into the PAC he recently formed to explore a presidential run, Roll Call magazine reports.

What will it take to bring sanity to the civil justice system? Strong White House leadership could do a lot. Encouragingly, President Bush, who as governor of Texas was an ardent tort reformer, has recently offered his support for a federal malpractice reform bill that includes caps on pain-and-suffering awards, limits on lawyers’ fees, and an end to joint and several liability. Such national reforms could accomplish swiftly what it would take the 50 states years to do.

Short of comprehensive reform, the president could press for two incremental changes that would deprive trial lawyers of some of their resources and thus blunt their power to oppose change. “Early offer reform” would limit the contingency fees that trial lawyers can collect in cases in which a defendant makes a quick settlement offer. If the lawyer chooses to sue anyway, he can only base his fee on the amount he wins over and above the original settlement offer. A national bill that promised consumers lower auto-insurance rates if they agree not to sue for pain and suffering after an accident—though they could still collect economic damages—would also help rein in the trial lawyers’ influence. Like the contingency-fee bill, this legislation would reduce lawyer fees in an area that provides them with much of their easy money.

In the end, reforming the civil justice system is about more than saving consumers from rising insurance costs or ensuring access to medical care. The originators of the current tort regime may have thought they were advancing justice by socializing risk, but that impulse is at odds with the self-reliant spirit of a commercial republic. Even more at odds with that spirit are the efforts of today’s trial lawyers and their allies, from Ralph Nader to Common Cause, to inflame resentment against our free-market system by consistently portraying corporations, doctors, and other favored targets as greedy conspirators against ordinary citizens and the common good. To be sure, the trial lawyers have grown rich by proclaiming themselves champions of the little guy against the system. But increasingly, the experiences of the little guy—of Nevada patients, California homebuyers, or small-business owners and employees caught up in the asbestos-litigation whirlwind—reveal the trial lawyers to be not the champions of ordinary Americans, but their exploiters.

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