"Liability Costs for Small Businesses"

June 2004 Chamber of Commerce Study is Unscientific and Biased

The Chamber of Commerce released an unscientific and biased report titled "Liability Costs for Small Businesses" in June 2004. Written by employees of partisan organizations, the data and study methodology have been criticized by reputable scholars nationwide. Flaws with this study include:

Independent and Neutral?

• Report authors Judyth Pendell and Paul Hinton work for the conservative AEI-Brookings Joint Center for Regulatory Studies and NERA Economic Consulting, respectively.
  
  
• Pendell is a longtime board member of the American Tort Reform Association, an executive committee member of the Litigation Section of the Federalist Society, and a former Vice President of Aetna insurance company, where she headed the company's Civil Justice Reform Project.¹
  
  
• Pendell, whose entire career has been founded on reducing access to the courtroom for ordinary people, is also a past Chair of the National Chamber Litigation Center, the U.S. Chamber of Commerce’s litigation arm, which boasts of championing the business community’s interests through its 700 lawsuits.² One rule for ordinary citizens, one rule for big business?
  
  
• Whatever Hinton claims to know about small businesses does not come from being part of one. Hinton’s NERA Economic Consulting is a subsidiary of Mercer Inc. Mercer and its various subsidiaries made $2.7 billion from consulting work like the “cost analysis” produced by NERA.
  
  
• NERA does much of its work for defendant corporations across “product lines including asbestos, building products, tobacco, guns, automobiles and medical devices.”³ Mercer itself is part of the huge Marsh & McLennan Companies (MMC). MMC has annual revenues of over $11 billion, mostly generated by insurance work, and more than 60,000 employees. MMC is run by J.W. Greenberg, son of AIG head Maurice Greenberg, the man who described trial lawyers as terrorists.

Transparent, Trustworthy Data?

• The report relies on internal data from the parent conglomerate Marsh and a study from Tillinghast, which itself relied upon internal data. The media and the public will never be allowed to see this data, nor the ways in which it was twisted and turned. Scholars have long criticized reliance on internal data, and vague methodology. The Tillinghast study’s principal author refused to name the company that was the source of some of his data, and admitted to the National Law Journal that he didn’t even know the size of the sample.⁴

Small Businesses?

• In its most glaring example of manipulation of data, the report classifies small businesses as those with $10 million in annual revenues. The U.S. Small Business Administration classifies businesses as “small” if they have fewer than 500 employees or up to $6 million in sales.

Half an Employee?

• Report estimates that the average cost of tort liability for what it calls small businesses is $16,580 a year, or 1.7% of revenue. $16,580 would pay for 56% of one employee, assuming the employer paid no taxes, social security, or benefits.⁵ Or if the employee was J.W. Greenberg, CEO of Marsh & McLennan—the group that performed the cost analysis, $16,580 would pay for 0.08% of his total compensation.⁶

Based on Another Trusted Source?

• Report takes the Tillinghast estimate of the aggregate cost of the tort system and applies its own set of assumptions to it. However, the report’s claim that scholars “have come to rely on the Tillinghast studies” is false. The National Law Journal found that many prominent researchers “offered sharp critiques” of the study’s methodology and language.⁷
  
  
• Thomas Burke, a Wellesley College political science professor, told NLJ that Tillinghast had a propensity to omit methodology, and said he would never cite its data.
  
  Deborah Hensler, a Stanford Law School professor and researcher at the Rand Institute for Civil Justice, “complained about the difficulty of understanding the methodology,” and, “identified ‘red flags’ in the study’s language.”
  
  Stephen Daniels, American Bar Foundation scholar, objected to the study’s focus, and claimed that the study “reflects the concerns of its original sponsors, the insurance industry.”
  
  
• In a January 29, 1999, independent study prepared for the New York State Bar Association, Daniel Capra, Philip Reed Professor of Civil Justice Reform at Fordham University School of Law, called these figures “vastly overinclusive.” Ralph Nader noted in 1991 congressional testimony, “If consumer advocates came to Congress asking for a complete overhaul of the nation’s regulatory laws based on made up and mischaracterized numbers like these, we would rightfully be laughed out the door.”⁸

Tillinghast—Costs Don’t Just Disappear

• The Tillinghast study implies that the costs it estimates would not exist in a world without lawsuits. That’s not true. Judgments in lawsuits pay to cover real costs that people incur when they are injured by the irresponsible behavior of others—costs they wouldn’t face if they never had been hurt. These costs include such things as medical bills and lost wages. If denied compensation, seriously and permanently injured citizens may be forced to seek assistance elsewhere. The legal system simply assures that the costs of injuries are paid by those who caused them, and not by every taxpayer.
  
  
• The costs associated with compensating injured people through the legal liability system pale in comparison to the real cost of injuries. A RAND study estimated that medical spending for the treatment of injuries cost the U.S. economy nearly $154 billion in 1997 (about 20 percent of the nation’s health care bill) and that lost work time added another $100 billion. The National Safety Council estimated that accident costs totaled $480.5 billion in 1998.

Tillinghast—CEO’s Compensation is a Tort Cost?

• Tillinghast wildly overstates the actual cost of lawsuits by including many insurance costs that would exist even without the legal system, such as the value of claims paid when no lawsuit has been filed.
  
  
• For instance, most of the liability insurance premiums that Tillinghast uses in its calculations are auto insurance premiums, which accounted for $82 billion of premiums earned in 2002. Auto liability claims are typically settled without any lawsuit, and a large portion of the claims pay only for damage to the car. Yet Tillinghast includes these as costs that could presumably be eliminated.
  
  
• Tillinghast also includes the overhead of the immensely wasteful and massively profitable insurance industry as a “tort” cost. Overhead, including ballooning executive salaries and corporate headquarters, represent 21% of Tillinghast’s “tort” system. At the same time as including every possible insurance cost, whether or not it is related to lawsuits, it fails to account for the substantial profits that insurers reap by investing premiums in stocks and bonds, particularly when the stock market is booming. The insurance industry is typically among the most profitable sectors in the economy.

1. http://www.aei-brookings.org/about/advisorybio.php?id=343, viewed June 9, 2004 
2. http://www.uschamber.com/nclc/default.htm, viewed June 9, 2004
3. Global Services and Capabilities, NERA Economic Consulting Brochure, http://www.nera.com/image/63578.pdf, viewed June 9, 2004
4. The Combustible World of Pricing Tort System, David Hechler, National Law Journal, December 22-29, 2003.
5. Assumes income of $29,451. Per Capita Personal Income 2000, U.S. Department of Commerce, Bureau of Economic Analysis.
6. Total compensation $20,428,905 (2003). http://www.usatoday.com/money/companies/2003-ceo-pay-chart.htm, viewed June 14, 2004.
7. The Combustible World of Pricing Tort System, David Hechler, National Law Journal, December 22-29, 2003.
8. Committee on Commerce, Science and Transportation, Sept. 19, 1991.

Posted June 2004