Reforming the nation's tort system--by enacting legislation to change the common-law rules that state and local courts use in cases of injury to people or their property--has become a prominent issue at the federal level. The Congress is considering legislation to restrict damage awards in medical malpractice and asbestos lawsuits and to transfer class-action suits to the federal court system. However, most states have already enacted tort reforms similar to those being considered by federal lawmakers. This Congressional Budget Office (CBO) paper reviews the major recent studies that evaluate state-level tort reforms and assesses the relevance of that research for evaluating similar proposals at the federal level.

The studies examined by CBO have empirically tested whether reforms undertaken by the states in recent decades have had a measurable impact on tort activity and its effects on economic performance. A number of those studies have found that state-level tort reforms have decreased the number of lawsuits filed, lowered the value of insurance claims and damage awards, and increased insurers' profitability as measured by payouts relative to premiums in the short run.

Those findings, however, should be interpreted cautiously, for several reasons. First, data are limited, and the findings are not sufficiently consistent to be considered conclusive. Second, the more persuasive studies were limited in that they analyzed specific types of torts, such as claims of bodily injury from automobile accidents, making generalizations difficult. Third, because tort reforms are often enacted in packages at the state level, distinguishing among the effects of different types of tort reforms can be difficult, obscuring the conclusions that may be drawn by federal policymakers.
 

The Goal and Status of Tort Reform in the States

At the heart of many states' tort reform statutes is the presumption that too many tort claims are filed and that court awards, such as those for punitive damages (which are intended to punish a defendant for willful and wanton conduct) and pain and suffering, tend to be excessive. Tort reforms that limit the amount that can be awarded for such noneconomic damages, as well as those that decrease awards by the amount of payments from third-party sources, aim to make it less worthwhile to pursue marginal cases--thus reducing the number of such cases and inefficiencies in the tort system. Other tort reforms seek to limit liability by making it more difficult to pursue cases against multiple defendants. Still other reforms focus on procedural changes, again making it less likely that marginal cases will be pursued.

Although tort reform is a continuing issue, it gained prominence in the mid-1980s, when many states enacted reforms in response to a perceived problem in insurance costs. Those reforms sought to limit exposure to liability, thereby reducing general insurance premiums. Indeed, premiums fell by 40 percent for some commercial policies in 1987, after tripling in the 1984-1986 period.

Since 1986, states have put in place various other tort reforms, with different specifics and in different combinations. (See Summary Table 1 for a list of selected reforms and the differences among states.) For example, although 34 states enacted a cap on punitive damages, those caps vary. Some caps limit punitive damages to two or three times compensatory damages (which cover medical costs and lost wages); others are for fixed amounts ranging from $250,000 to $10 million. Furthermore, some reforms focus on specific areas, such as medical malpractice torts, whereas others are applied more widely. Those differences make it difficult to identify statistically which reforms, applied in what manner, are most effective in achieving their intended effects at the state level.

General Findings from the Empirical Literature on Tort Reform

The most consistent finding in the studies that CBO reviewed was that caps on damage awards reduced the number of lawsuits filed, the value of awards, and insurance costs (see Summary Table 2). One study of automobile-related torts found that caps on noneconomic damages decreased not only the value of noneconomic claims made to insurance companies but also the number of lawsuits filed. Other studies suggested that those caps led to increases in insurers' profitability for both medical malpractice and general liability insurance. (Evidence on whether premiums were affected was mixed.)

Yet even those findings must be viewed in context. As a whole, the studies provided little systematic evidence that any one type of reform had a significant impact on any of the various outcome measures studied. Few of the findings--except for a reduction in the losses experienced by insurers--were independently corroborated by other studies. Some studies were unable to document any measurable effects from the tort reforms, a result that may be more reflective of the lack of data than of any failure of the reforms.

At least two issues complicate the analysis of tort reform. First, data limitations preclude separately estimating the effect of each of the many types of reform. Second, it is difficult to control for differences between states that reformed their tort system and those that have not. Controlling for such differences is critical in assessing the effect of tort reform on outcomes such as the level of insurance premiums.
 

Specific Findings by Type of Tort Reform

The nine studies that CBO reviewed looked at the effects of various types of tort reform: limits on damages, modifications to joint-and-several liability, changes to the collateral-source rule, and reforms considered as a group. Some studies evaluated more than one type of reform.

Caps on Noneconomic Damages

Four of the studies analyzed the effect of caps on noneconomic damages. One of those, a 1999 study by Mark J. Browne and Robert Puelz, found that those caps led to lower noneconomic insurance claims by victims of automobile bodily injury and significantly reduced the probability that they would file a lawsuit. The other three studies--by Kenneth Thorpe (2004), Patricia Born and W. Kip Viscusi (1998), and W. Kip Viscusi and coauthors (1993)--found that insurers' profitability, as measured by their losses for either their general liability or medical malpractice lines, or both, increased after the reform, although the study by Viscusi and coauthors found no significant effect on loss ratios. Two of the three studies found that premiums also declined significantly for at least some insurance lines; the third found no significant effect.

Two of those studies looked at the impact of caps on punitive damages separately from other reforms. Browne and Puelz found that those caps had a negative effect on noneconomic claims but a small positive impact on economic claims, which yielded an overall negative impact on total claims. Their study also found that caps on punitive damages led to the filing of fewer lawsuits. Viscusi and coauthors found that punitive damage caps had a negative impact on general liability premiums but not premiums for medical malpractice insurance.

A fifth study, by Albert Yoon (2001), analyzed legislation that imposed caps on noneconomic damages and punitive damages as well as limits on wrongful death suits. That study found that the recovery of damages by plaintiffs fell significantly after the enactment of those reforms.

Modifications to Joint-and-Several Liability

Four studies looked at the impact of reforming (either by restricting or eliminating) the common-law rule of joint-and-several liability, under which any one injurer or subset of injurers can be held responsible for paying all of the damages for injuries caused by more than one party.

Thorpe found no significant effect from that reform. Although Mark J. Browne and coauthors (1994) found no impact on the number of lawsuits filed after the reform was enacted, the researchers did find a significant surge in cases before the reform took effect. Additionally, Browne and Puelz found that reform of joint-and-several liability ed to an increase in the value of noneconomic awards but found no other significant effects. Finally, Viscusi and coauthors offered evidence that joint-and-several liability reform was a factor in lowering insurers' losses in the mid-1980s and that it had a negative impact on premiums.

Reform of the Collateral-Source Rule

The two studies that separately analyzed the impact of reform of the collateral-source rule found some effect. Browne and Puelz determined that both economic and noneconomic damages were reduced by reforms that allowed evidence of payment from sources other than the defendant to be introduced at trial, third-party payments to be subtracted from awards, or both. Thorpe found that "discretionary" collateral-source offsets (those considered at a judge's discretion) led to increased profitability for insurers.

Reforms Considered as a Group

Many of the studies looked at the effect of various reforms as a group. Browne and Puelz, for instance, found that the presence of sanctions on frivolous suits or defenses, prejudgment interest, structured settlements, or any combination thereof led to a decrease in the value of both economic and noneconomic claims and in the number of lawsuits filed for automobile-related torts.⁽¹⁾ In addition, several studies by Daniel P. Kessler and Mark B. McClellan presented evidence that tort reform in medical malpractice led to a reduction in unnecessary medical expenditures, implying both the existence of defensive medicine (excessive tests and procedures that limit doctors' malpractice liability but have minimal medical benefit) and the ability of tort reform to reduce its practice. However, those studies were conducted on a restricted sample of patients, whose treatment and behavior cannot be generalized to the population as a whole. Related research by Kessler and McClellan also found that tort reforms in general led to fewer medical malpractice claims. In particular, those reforms that directly capped awards led to a decrease in the number of claims paid, the number of claims incurring legal expenses, and the time it took to resolve claims; the other reforms that the authors studied tended to have the opposite effect.