Problems with the Towers Perrin Annual Study

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Problems with the Towers Perrin Annual Study 

Towers Perrin claims to measure “tort costs” in its annual study, but it has little to do with the legal system. In years past, groups such as the American Tort Reform Association and NORCAL Mutual Insurance Company have funded the widely discredited report. 

The report has been widely discredited because it includes the cost of paying insurance claims, such as multimillion dollar salaries and bonuses for insurance CEOs, rent on office buildings, and administration overhead. Business Week editorialized that the study “includes everything from payouts for fender-benders to the salaries of insurance industry CEOs. It's a wild exaggeration.”1

A May 2005 report2 from the Economic Policy Institute (EPI), a nonprofit, nonpartisan think tank in Washington D.C. revealed that Towers Perrin's reports are one-sided, exaggerating the impact of the tort system and ignoring its benefits, and that evidence supporting them is shaky or nonexistent. Claims that the tort system harms the U.S. economy do not square with the data. In fact, there is a good deal of evidence to the contrary. EPI's careful examination concludes that nearly half of the “costs” of the tort system described in the Towers Perrin study are actually payments made to from wrongdoers to injured people for lost wages, property damage, or medical care—costs that are the result of injuries caused by the defendants and would be borne by society one way or another, whether by government programs or charities, or absorbed by the victims and their families.

  • Respected legal scholars have criticized Towers Perrin’s work. Judge Richard Posner of the United States Court of Appeals for the Seventh Circuit in Chicago concluded that Towers Perrin’s work was “almost certainly exaggerated, given the financial connection between the firm and the insurance industry.”3 Law professors Tom Baker, Herbert Kritzer, and Neil Vidmar have also criticized the author’s methods and lack of peer review.4
  • Congressional Quarterly Called Conclusions of Towers Perrin Study “Sketchy at Best.” Congressional Quarterly Weekly did an entire story describing the evidence behind the figures cited by President Bush in his call for legal restrictions “sketchy at best.” They examined the “tort tax” figure and found, “Nearly all the assertions about the growing cost of the tort system are based on the figures from just one actuarial and management consulting firm, Towers-Perrin, that works for the insurance industry, which has a stake in limiting lawsuits. … The company’s estimates of tort costs include the insurance industry’s administrative expenses and payments on claims that never involve courts or lawyers, such as auto collisions.”5
  • Towers Perrin Admitted that Past Study Not a Reflection of the Tort System. After being criticized for the methodology, Towers Perrin was forced to admit in their 2005 edition that “the costs tabulated in this study are not a reflection of litigated claims or of the legal system.”6
  • The Study's Primary Author Said Study Used in a Misleading Way.  Russ Sutter, primary researcher for the study, admitted in 2005 that tort reform advocates use the data “in a way that's probably misleading.”7
  • Towers Perrin has taken money from the insurance industry and other "tort reform" groups to fund studies.  This has included the American Tort Reform Foundation, NORCAL Mutual Insurance Company, the Physician Insurers Association of America and the HealthCare Liability Alliance (which includes the American Medical Association).  All of these groups have spent millions to undermine the civil justice system.
  • Wall Street Journal: New Version of Towers Perrin Study "Includes Payments that Don’t Involve the Legal System at All.”  The Wall Street Journal previewed the new version of the Towers Perrin report, and noted that it includes costs that are not part of the legal system:  “…critics of past years' studies -- and there are many -- say the number and the projections that come with it are deeply flawed. For instance, they include payments that don't involve the legal system at all. Say somebody smashes his car into the back of your new SUV and his insurance company sends you a $5,000 check to fix the damage. That gets counted as a tort cost in Towers Perrin's number. Critics say it's just a transfer payment from somebody who wasn't driving carefully to somebody who has been legitimately wronged. How is that evidence of a system run amok?”8

Sources

  1. "How Partisanship Puts Big Solutions Out Of Reach," Business Week editorial, 3/14/05
  2. "The frivolous case for tort law change; Opponents of the legal system exaggerate its costs, ignore its benefits," Lawrence Chimerine and Ross Eisenbrey, The Economic Policy Institute, 5/17/05; http://www.epi.org/content.cfm/bp157
  3. "Is the Tort System Costing the United States $865 Billion a Year?," Richard Posner, 5/1/07, http://www.becker-posner-blog.com/archives/2007/04/is_the_tort_sys.html
  4. "Jackpot Justice and the American Tort System: Thinking Beyond Junk Science," Tom Baker, Herbert Kritzer, Neil Vidmar, 7/1/08, http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1152306
  5. "'Tort Reform' Battle: A Simple Case of Complexity," Congressional Quarterly Weekly, 1/29/05
  6. "U.S. Tort Costs: 2004 Update," Tillinghast-Towers Perrin
  7. "Tort issue creates a tussle," Kansas City Star, 5/18/05
  8. "Math Divides Critics As Startling Toll of Torts Is Added Up," Wall Street Journal, 3/13/06

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