Litigation Costs v. Liability Insurance Cost
It is worth noting that what the Institute for Legal Reform, a tort reform lobbying group, is stating, is not that the U.S. has "higher litigation cost" than other countries. They are financed mostly by businesses that have to pay liability insurance expenses and are motivated in their analysis to come up with any analysis to argue in favor of reducing those expenses for their backers.
This Institute is stating that liability insurance costs are greater in the U.S. and that this is a good way to infer that the things that liability insurance costs pay for in the U.S. are more expensive (and both of these narrow propositions are largely true).
But, liability insurance costs have two big components: (1) claims paid, and (2) costs paid in the litigation process itself. And the contexts in which these costs are incurred has to be balanced with other parts of the overall systems. As economists like to say, there is no such thing as a free lunch.
Higher claims paid may be good or bad. Higher claims paid discourages businesses and individuals from doing things that hurt other people, and compensate people who are hurt by wrongful conduct and to the extent that a claim paid does both of these things an an appropriate amount (or even higher considering that not all wrongful harms are litigated for a variety of reasons). But if they are too high they may discourage business activity by overcompensating injured people in a way that discourages business activity that does more good than harm.
Litigation costs are a necessary evil. These cost also discourage tortious conduct, but not so precisely as they can discourage lawful conduct that is improperly the subject of litigation as well (and in many personal injury circumstances it is not obvious in advance to 100% certainty who is at fault) and they don't compensate people who are hurt by wrongful conduct. But litigation costs are necessary to operate the system. To the extent that more litigation costs in the aggregate better distinguishes between rightful and wrongful claims, they have value, to the extent that they do not, they have less value.
Alternatives Within The U.S.
It is also possible to make different choices on the value of litigation costs and U.S. jurisdictions have done this in some circumstances for particular kinds of litigation.
Most U.S. jurisdictions (maybe all of them) impose strict liability on an employer for workplace related injuries greatly reducing the litigation cost share of compensating workers for injuries on the job at the cost of making employers pay for injuries caused by fellow workers or the negligence of the injured employee, rather than the employer or its management. This is called the worker's compensation system.
Some U.S. jurisdictions have made a similar risk reward determination in the case of minor automobile accidents, in a system called "no fault insurance" barring lawsuits for small automobile accidents (a key defined term in such systems) and requiring drivers to instead self-insure form injuries and damages in small automobile accidents, to reduce litigation costs, and limiting litigation to automobile accidents with serious injuries or very major property damage where the costs of litigation are justified in light of the magnitude of the harm for which fault needs to be allocated.
In sum, while liability insurance costs are higher in the U.S., that doesn't necessarily mean that the money is not well spent and appropriate. This is a political choice with pros and cons attached to it.
I haven't moved to close this question because a lot of the key factors are matters of comparative law between systems of accident liability. But this is usually considered as a political and policy issue, usually raised in Politics.SE instead, with which there is often overlap with Law.SE
Also, I haven't really sourced this answer, because it is long and time consuming just to get the major considerations out. There is an extensive academic literature for essentially all of the points that I discuss. But most of my own sources are hard copy books that I can't link and would be time consuming to locate sources for online that I don't have easily available at this time. One good overview of several of the long standing basic comparative civil procedure points discussed below is this article from 1987 by John Langbein, who historically was one of the leading academic scholars in the area of comparative civil procedure.
Drivers Of Claims Paid Costs
There are at least eight big factors that impact the substantive amount of liability awards involved, not all of which may apply in any particular two country comparison.
- One of the big things that liability insurance costs pay for in the U.S. is liability for medical expenses caused by tortious or allegedly tortious personal injuries that are paid for by third parties and not litigated elsewhere.
In most countries, some form of universal healthcare system pays for medical costs and those universal healthcare system paid medical costs can't be recovered in litigation.
In the U.S., in contrast, medical expenses are always recoverable in personal injury litigation even if those costs were actually paid by health insurance, Medicare, Medicaid, or worker's compensation insurance (in cases where the lawsuit is alleging personal injury from someone other than the employer), due to something called the collateral source rule, then the person who actually paid for the medical expenses is entitled to some of the amount recovered by the injured person in the personal injury lawsuit as a consequence of what are called "subrogation rights."
Basically, the U.S. shifts a lot of what would be paid for a different kind of public or private insurance in other countries onto liability insurance. The relative amount of money spent on one kind of insurance rather than another isn't really a big deal in the larger scheme of things.
The virtue of the way that other countries do it, is that there are fewer people who are injured without an ability to pay for medical care without severe economic disruption in those countries than in the U.S. and untreated medical injuries or massive economic disruption to injured people is more problematic than treated medical injuries that don't cause massive economic disruption.
The flip side of that however, is that by not clearly allocating the costs of medical care to the people who cause severe injuries as a tort liability based system does, businesses have less of an incentive to be careful and injury rates are reduced more slowly. The U.S. has seen a massive reduction in accidental injury over the time period that tort reformers allege has witnesses a surge in tort liability.
An older but heavily cited article on comparative law regarding the collateral source rule and subrogation rights (and other aspects of those topics) is found here. Some countries, like Germany, for example, appear to have the injured party formally assign a right to sue to someone who made payments to the injured party for the injured party's benefit.
- The U.S. has a high costs of living, in general, and of medical costs in particular.
Even in countries where there are awards of medical costs, U.S. awards for this area large because health care costs are much higher in the United States, on average, than in any other country in the world (for reasons beyond the scope of this answer, but as pertinent to this question, including many reasons not related to the malpractice liability associated costs of medical providers).
Furthermore, the U.S., while it does not have the highest cost of living in the world (it ranks twenty-one although some key regions of the U.S. with high liability insurance costs have a much higher cost of living), has a high costs of living relative to most countries. So, claims for lost wages and damage to property, and claims for non-economic damages and punitive damages that are indirectly influenced by the high cost of living in the U.S. are influenced by this fact.
If you cause a U.S. worker to lose ten years of wages due to their wrongfully incurred injuries, you may have caused $500,000 of damages prior to considering the time value of money. The same injury to a worker in China or Mexico might be $50,000 or less.
- and 4. The United States personal injury lawsuit system allows for the recovery of non-economic damages for items like pain and suffering, emotional distress, inconvenience, disfigurement, and the like, which is not allowed, or is allowed more sparingly, in most countries other than the United States; but this is offset by the unavailability of attorney fees to the prevailing party.
Image from here.
In part, the U.S. rule allowing non-economic damages, however, counterbalances the fact that most legal systems allow a prevailing party in a lawsuit seeking damages for personal injury to recover their attorney fees, while U.S. law does not allow a prevailing party in a personal injury lawsuit to recover their attorney fees in most cases. Instead, attorneys for injured parties customarily charge a contingent fee (often 1/3rd of the gross recovery) for their services, and defendants in personal injury cases have their attorney fees paid for by their liability insurer. So, while non-economic damages seem like a much broader recovery in the U.S. system than in non-U.S. systems of personal injury lawsuits, net of attorney fees recoveries that aren't available in the U.S. but are available elsewhere, this difference is not so great.
While no rule mandates this and there are types of cases (e.g. civil rights, privacy and defamation cases) where economic damages don't tend to be proportionate to non-economic damages, in the U.S., in a typical personal injury case, non-economic damages tend to be proportionate to and less than the economic damages award in a case. Thus, in a case with $1,000,000 of economic damages awarded, a $500,000 non-economic damages award might be typical.
- Many people assert that the availability of punitive damages awards is an important factor; it is actually a very minor factor.
In the U.S., when someone tortious injures another and that injury is intentional or reckless, a jury may award punitive damages in addition to the economic and non-economic damages intended merely to compensate the victim of the tort. If the economic damages in the case are significant, this can't be more than an amount proportionate to the compensatory (both economic and non-economic damages combined) award, typically not more than 1-3 times the amount of compensatory damages awarded. When the compensatory damages are very small (e.g. $100), the proportionality standard isn't so strict, but the award of punitive damages still can't be unduly large.
While, in theory, one could imagine a world where this is a major factor, this is actually mostly hype from tort reform advocacy groups. Punitive damage awards are rare and as a share of aggregate tort liability awards in the U.S. account for a low single digit percentage share of the total. See, e.g. U.S. Justice Department statistics. (punitive damages awarded in 5% of cases that go to trial where Plaintiffs prevail, i.e. 700 out of 25,000 trials, only about 3% of cases filed go to trial, and the median punitive damages award is $64,000). Thus, punitive damages are awarded in about one in 1190 tort cases filed.
- U.S. tort awards are mostly made by juries, while this is exceedingly uncommon in all but a handful of other countries.
In most countries, even those with common law legal systems, all, or very nearly all civil litigation is resolved by judges without juries, and in civil law legal systems not based upon the English legal system, serious tort damage awards are made by a panel of judges and can be reviewed de novo (i.e. redetermined from scratch) by a bigger panel of judges on appeal. In contrast, the lion's share of U.S. personal injury lawsuits that go to trial are resolved in jury trials.
Judges are, for a variety of reasons including desensitization from seeing many cases and social class attitudes, stingier in their award of tort damages on average than juries, and this is particularly true in the case of panels of judges that balance out extreme opinions, relative to the extremes possible with a single judge. The causes of this mirror the fact that judges are much less likely to acquit a criminal defendant than a jury, on average. Of course, there are always exceptional cases and a damages award is based upon a human evaluation of the facts.
In the U.S. a jury's award of tort damages is also much harder to reverse on appeal than a judge's award of tort damages in any system, since it simply states a dollar award and the appellate court must uphold it if there is any plausible justification for such an award in the evidence presented at trial and not merely because the actual articulated reasons of the jurors (which aren't considered in U.S. civil cases) were actually proper and supported by the evidence in the record.
Another related point is the juries are less predictable than judges and single judges are less predictable than panels of judges. Unpredictability causes cases to settle in the U.S. that might have been resolved in favor of one party or the other in another system, and this uncertainty, on average, works against defendants and in favor of people who have been injured. Even in civil law systems with panels of judges, however, there is still a significant amount of uncertainty, because the law of when there is liability in tort for injuries is governed by standards that are fairly vague in almost every country.
- The U.S. has a thinner social safety net meaning that litigation is often the only way to obtain needed economic resources when someone suffers harm from an injury.
In lots of countries there is a robust social safety net of unemployment, disability and welfare payments that can provide income security in the event of lost employment due to an injury. In the U.S. these options are much more meager, so the net benefit that an injured person can receive from suing rather than relying upon the social safety net and not suing even though they could is much greater in the U.S. than in other countries.
- This is despite the fact that U.S. system of tort liability is more heavily fault based than the system used in civil law countries.
In the U.S., while there are situations which are exceptions to the general rule, most tort lawsuits involve proof of negligence by the person that caused the harm, and that the damages suffered were caused by the negligent act.
In civil law countries, there is much less of a focus on whether acts of the defendant that caused the person harmed to suffer injuries. It isn't truly a strict liability system but it is closer. The reduced necessity to prove negligence reduces the cost of litigation in civil law countries while increasing the amount of awards.
Basically, there are far more cases in the U.S. where the decision is that the defendant injured the plaintiff but that there is no liability because "shit happens" than in civil law countries.
Drivers Of Litigation Costs
Participating in the process of recovering damages for tort injuries (i.e. true litigation costs) usually involved more aggregate litigation costs for the defendants (and for plaintiffs, defendants and courts combined) in the U.S. than elsewhere. Several factors drive this difference, including factor eight above and five additional factors. Not all of this apply in every particular two country comparison.
- The U.S. and other common law systems systemically allocate more litigation expenses to the parties than to the courts, than civil law countries.
Image from here.
From here (although there is considerable variation in the number of lawyers per capita in each U.S. state, the U.S average is 4 per 1000 people, but South Carolina with the fewest lawyers per capita has 2, Massachusetts and Connecticut have 6, New York has 9, and the District of Columbia has 77).
Countries with civil law litigation systems (based on the systems of Continental Europe) have vastly more judges (about ten times as many) who are more pro-actively involved in the litigation process per attorney representing a party, than in the U.S. or other common law countries.
Because of this, even if the total litigation cost to all parties and the system itself were equal in common law and civil law countries, a greater share of the cost would be paid for by the government through judicial system budgets at public expense, and less would be paid for by the parties.
This also has the indirect effect of causing U.S. judges to avoid involvement in the case as much as possible until as late as possible in the case in the hopes that the delay will cause it to settle, even if the delay in resolving an issue causes the parties to incur more litigation costs than would have been necessary if the judge had paid attention sooner.
- The Extreme Finality of Jury Trials Results In Systemic Over-Expenditure On Litigation Costs.
In the U.S. system, you get one shot at trial, and particularly given the issues present in a typical tort lawsuit for personal injury, this is virtually unreviewable on appeal. This means that a competent trial lawyer for a party needs to rule out or prepare for every possible uncertainty in advance, rather than only those possibilities at trial that are likely.
In a civil law system, you can prepare for only what is likely and if you are surprised at trial, you can appeal the factual findings made and introduce evidence or arguments to address the surprises you encountered on appeal only if they actually come up. This kind of trial preparation is much less expensive than the extreme no stone left unturned approach that is typical in the U.S.
As an answer from @JohnFx to this question notes, a lot of this pretrial preparation manifests itself in the form of "discovery" costs.
A related subset of this factor is that the behavior of judges when presented with a tort case is much more predictable than the behavior of a random panel of citizens selected only at the end of a case. Knowing who will decide the case can focus and reduce the kind of preparation of needed and what kind of outcome is likely. For example, you can know from experience that certain kinds of testimony and evidence will be given weight by a particular judge or panel of judges to a greater degree than you can with a jury where evidence that may have lots of impact to one juror may not have as much impact as a different kind of evidence with a different juror.
- The stakes are higher in U.S. litigation so more litigation expense is justified as proportional to the higher stakes.
If you have a serious personal injury case in the U.S. with $2,000,000 of medical costs, $1,000,000 of plausible non-economic damages award, and $500,000 of other economic damages for a total of $3,500,000 at stake, it is rational for both sides to spend money to maximize the quality of their case than they would in a case where only $500,000 plus attorneys fees can be awarded to a winner and a loser pays the other side's attorney fees, in system where medical costs paid by a third party aren't litigated and non-economic damages aren't awarded.
- Attorney compensation is more heavily regulated in other countries.
In the U.S. attorneys are allowed to charge what the market will bear. In many countries there is government regulation of attorney fees that limit hourly rates or per task rates and don't allow for contingent fee awards. This can make U.S. litigation fees higher than in other countries.
- Earlier resolution of cases on the merits is possible in most other countries because decision making isn't reserved for a jury trial at the end.
A logistical reality of a jury trial system in the U.S. is that the jury meets once for a few days and can't be reconvened. This means that pre-trial resolution of issues reserved for the jury is allowed only in the clearest cases where no jury could reach a different result that would be upheld on appeal.
In contrast, in almost every other country, where judges resolve all or almost all tort lawsuits, it is much more feasible to arrange decision making in a manner calculated to minimize litigation costs.
For example, in a U.S. personal injury lawsuit, the plaintiff must almost always present evidence of both liability (i.e. that they were wrongfully injured by the defendant) and damages (e.g. lots of medical expert and medical expense and cost of care and lost wages testimony) in the same trial that happens over the course of a few days.
In many other countries it is common to bifurcate the trial so that liability is tried first and evidence of damages is only presented once the issue of liability is determined.
In many other countries it is also common to resolve issues of special preconditions to liability, such as whether the driver of a truck causing injury was acting within the scope of employment, or whether a statute of limitations has run, on the merits based upon both disputed evidence and law, before the liability trial.
In cases that don't go the distance to a trial on all issues, this reduces litigation costs. And, even if the resolution of early issues like preliminary issues or liability is favorable to the plaintiff, wins on those issues may cause the later issues in the case to be resolved without a trial and settled.
Since I questioned the motives of the Institute for Legal Reform based upon an interest biasing it in a particular direction, I will also disclose my own relevant interests and experiences.
I litigated many cases on behalf of insured defendant with casualty insurance (or the self-insurance pool equivalent) at a firm where I was employed for three years early in my career. Over the remainder of my career (more than twenty years), I have represented roughly the same number of plaintiffs in litigation where insurance is potentially a source of recovery, and a smaller but not insignificant number of defendants who also have insurance defense counsel. Most of my litigation practice involves commercial and probate cases where there is no insurance coverage for either side. I also represent many clients in transactional and commercial litigation matters who are business owners or businesses that have to pay significant liability insurance premiums in the course of their business or profession and have done considerable asset protection planning work and have taught courses on that subject to other lawyers.
I have been self-employed as an attorney for more than fifteen years, and in that time period I have had to maintain both health insurance and liability insurance policies.
My practice has also involved a small, but constant and significant, amount of representation of U.S. based clients with legal affairs that involve other countries such as international trade, business investment, tax, probate and child custody matters that require familiarity with the legal systems of other countries. I was an award winning law student in these subject of comparative law in law school where I was also a senior editor in the Michigan Journal of International Law.