New Study Shows U.S. Legal System is a Competitive Liability

As international commerce penetrates every corner of the world, the United States and each of her fifty states must continue to implement economic policies that make themselves more competitive on the world stage.  The United States already participates in trade frameworks that eliminate tariffs and import quotas with several partners around the world.  The International Relations Task Force of the American Legislative Exchange Council has model policy on a number of already ratified agreements as well as model policy on agreements currently being negotiated. However, data contained in a study recently released by the U.S. Chamber Institute for Legal Reform suggests that civil justice reform would play an important role in increasing the global competitiveness of American businesses.

“International Comparisons of Litigation Costs: Europe, the United States and Canada” written by David L. McKnight and Paul J. Hilton of NERA Economic Consulting seeks to compare liability costs as a fraction of GDP across Europe, the United States, and Canada.  For the purposes of the study, the term “liability costs” represents the cost of claims either resolved through litigation or some other claims resolution process.  General liability insurance sold to businesses is the primary tool used to develop these estimates.

The study reveals that of all countries surveyed, the United States has the highest liability costs of all, totaling 1.66 percent of GDP.  This number is 2.6 times greater than the average found in countries in the European Union and is 4 times greater than those in the least costly European countries surveyed: Belgium, the Netherlands, and Portugal.  What this suggests is that the United States through an unpredictable and burdensome civil justice system has placed itself at a competitive disadvantage compared to other developed economies in the Western world.

The study also determines that the higher liability costs in the United States are most likely a result of more frequent claims, higher claim costs, or both, when compared to other countries.  Having long been at the forefront of the lawsuit reform movement, the Civil Justice Task Force of the American Legislative Exchange Council has adopted several pieces of model legislation designed to address these two growing and problematic trends.

In order to reduce the frequency of frivolous civil claims, states may consider adopting policy similar to ALEC’s model Punitive Damages Standards Act, which establishes a reasonable standard of liability for punitive damages while raising the burden of proof needed to “clear and convincing evidence.”  The model Class Actions Improvements Act can also be used to rein in abuse of the class action mechanism and to ensure that class actions serve their proper function.  These are just two examples of policies that can be employed to reduce the frequency of claims.

ALEC has also developed model policy that addresses the higher claim costs associated with torts.  The model Fair Share Act, for example, would only require defendants to pay damages in proportion to their determined liability.

These and other policies would make civil claims more predictable and less burdensome for the businesses (both big and small) that employ everyday Americans.  Such reforms would significantly reduce the liability costs for American businesses, giving them a much-needed advantage over international competition.

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