by John Gaver
October 18, 1999

The United States of America has become the most litigious society in the history of the world. I seriously doubt that anyone would argue that point. But, just to give you an idea of how bad it is, the USA has 30 times more lawsuits per person than Japan. The cost of medical malpractice insurance in the United States is 10 times the cost of that in Europe. According to The Economist, tort costs run only 0.5% of GNP in Germany, and only 0.4% of GNP in Japan, but a whopping 2.3% of GNP in the USA. I could go on, but I would only be confirming what everyone already knows.

It is not my intention to dwell on the standard arguments for tort reform. Anyone who has not spent the last 25 years hold up in a bomb shelter has heard the argument that every time an outrageous award is handed down, we all pay in higher product costs. And, does anyone really think that the plaintiffs really get to keep even a significant portion of the award? Of course not. It is common knowledge that the attorneys end up with most of the money. Again, I would probably get little argument on the point that in every litigation, the attorneys win and almost everybody else loses. So, I will leave those arguments behind and concentrate upon the real issue.

 Who Really Benefits?

There are two types of litigation that I would like to talk about here. The first is Product Liability Litigation. The second is Personal Liability Litigation. In each area, we will examine the process to learn who really does benefit.

Product Liability Litigation

To determine who really benefits in Product Liability Litigation, we will start with a known fact. Companies who sell their products in the USA factor in a significant increase in price to cover the potentially exorbitant cost of any potential litigation. This argument is used repeatedly by most of those who argue the case for tort reform, to show how we all end up paying for these outrageous court awards. Although this is a serious problem, it masks the real problems.

Manufacturers Benefit

Many people would argue that point. After all, how can manufacturers benefit? Aren't they are the ones being sued? But, don't forget that most manufacturers or producers of any type of product or suppliers of any type of service generally base their price upon a fixed percentage of cost. Therefore, if the cost of doing business goes up, so does their PROFIT. For example, if an automobile that costs $20,000 to build, including warranty, marketing and insurance for potential litigation costs, sells for a 10% markup at $22,000, it generates a $2000 profit. If prospective litigation costs raise the cost of manufacture by 5% to $21,000, the price of the automobile is marked up the same 10% to $23,100. That means that the manufacturer makes $2100 on the automobile, which represents an increased profit of $100. That does not sound like much. But, if that company sells 100,000 of those automobiles in a year, that means an additional 10 MILLION DOLLARS PROFIT for the manufacturer. Now do you really think that the manufacturers worry about Tort Reform? Sure they do; all the way to the bank.

Insurance Companies Benefit

There are a few people who would argue this point, as well. But, before I can make my point, you must be aware of one very crucial part of the equation. You need to understand how insurance companies make their money. So, here is a very brief tutorial.

Regardless of what you may think, insurance companies do NOT make money off of the difference in premiums collected and claims paid. In fact, on any given type of policy you will probably find that, within a small margin of error, premiums=claims. This is key to why they benefit from exorbitant settlements and awards.

Insurance companies make almost ALL of their profits by investing your premiums until such time as there is a claim.

There are only two ways that an insurance company can increase their profit. They can either get a better return on their investment or they can invest more money. Anyone who has more than a passbook savings account knows that getting a better return is 10% skill and 90% chance. Realistically then, this means that to increase their profits they must invest more money. Again, there are only two ways that they can get more money to invest. The most difficult way is to go out and sell more policies than the previous year. The easy way is to do things to encourage costs to go up, thus justifying higher premiums on the same number of policies.

Insurance companies are severely regulated and cannot raise their premiums in any state without the approval of at least one governmental agency. To get that approval, they have to demonstrate that the average claim for a given policy is going to be higher, by a specific amount, for certain specific reasons. If the actuaries can show a demonstrable tendency towards more lawsuits and higher judgements, then regulators allow them to raise their rates accordingly.

Everything in insurance is based upon averages. Let's look at an example policy that generates, among all of its policyholders, 10 Million Dollars in premiums each year with the average claim occurring at about 10 years. Since, on average, premiums equal claims, you can reasonably expect that the insurance company will likely payout very close to 100 Million Dollars over a 10-year period on that type of policy. So, on average, the insurance company is able to invest 10 Million Dollars per year for 10 years, before having to payout on the claims. If they make 10% per year on their investment, that would mean a profit over 10 years of $72,126,684 (Do the math. Take 120 monthly investments of $833,333 compounded over 10 years at 10% per year).

If the total claims on those same policies were expected to go up by an additional One Million Dollars per year, regulators would allow the premiums on those policies to increase by that same amount. The insurance company is still not making money off of a difference in premiums and claims. Even though premiums still equal claims, that additional One Million Dollars per year makes a tremendous of difference. 11 Million Dollars per year, invested at the same 10%, over ten years, would return a profit of $89,339,352 (Take 120 monthly investments of $916,666 compounded over 10 years at 10% per year). That is an additional profit of $17,212,668 over a 10 year period.

So, with all of this in mind, I ask you, "If you had the choice of collecting interest on 10 Million Dollars per year of OTHER PEOPLE'S MONEY or collecting interest on 11 Million Dollars per year of OTHER PEOPLE'S MONEY, which would you choose?"

Is it any wonder then, that the insurance companies actually spend Millions of Dollars per year lobbying, not only to prevent tort reform, but also to establish precedence for even higher judgements. Then they go moaning to the regulators about how the out-of-control courts are driving their claims up, which forces them to ask for an increase in their premiums, of course claiming all the while how much they really hate to do it. What a tough business.

Foreign Companies Benefit

By allowing exorbitant court awards, we are giving a decided business advantage to foreign business. Once again, many people would argue this point with me. They would say that even foreign companies must adhere to our standards if they want to do business in the United States. This is true. But, it ignores two very important points.

The first point to consider is that most US businesses sell most of their wares in the USA, while most foreign businesses sell most of their wares in other countries. Since foreign companies only have to insure heavily for the US portion of their business, litigation and liability insurance can be a much smaller percentage of total cost. This allows them to charge less for the products that they sell in the USA, undercutting their US counterparts.

The second point in a foreign company's favor is that collecting awards from foreign companies can be much more time consuming than collecting from a US company. During all of that additional time, the unpaid awards are earning money for the foreign companies; money that US companies cannot make, since they have to pay court ordered awards in a timely manner. This effectively lowers the foreign companies' cost of doing business relative to their US counterparts, providing them with a decided competitive advantage over US companies.

He Who Cries Loudest

Regardless of what they say publicly, those who cry the loudest for Tort Reform are working hard in the back rooms of Washington, DC to make sure that it does NOT happen. These exorbitant settlements and awards do NOT harm those who they are intended to harm. They actually help corporations, both domestic and foreign, but especially foreign. And, you can see from the numbers above, that the insurance companies jump with joy every time that they hear of another multi million dollar product liability settlement. The only people who really want Tort Reform are the ordinary people who are not heard, because we don't have lobbyists in Washington, DC. If you want Tort Reform, you must shout loud enough to be heard over the roar of those who benefit from the status quo. That means that it will take every one of us shouting in unison.

Personal Liability Litigation

To determine who really benefits in Personal Liability Litigation, we must examine three issues. First, we must determine who represents the plaintiffs and how they get paid. Second, we must determine who are the people most likely to become defendants in a Personal Liability lawsuit. Finally, we must examine the overall long-term results of frivolous and unwarranted lawsuits in general.

Common sense tells us the answer to the first question. Most Personal Liability lawsuits are brought by lawyers who work on a contingency basis (the lower echelon of this group are often referred to as "ambulance chasers"). That means that they do not get paid until and unless their client gets paid. Since they work on a contingency basis, it behooves them to take only cases against people who have a lot of MONEY that they can get to legally.

Common sense also tells us the answer to the second question. The only people who become defendants in Personal Liability lawsuits are those who have the magic ingredient - MONEY; and the more the better. But, more specifically, the prospective defendant must have money that is in the jurisdiction of the court.

Becoming Judgement Proof

It is only when you consider who the plaintiff's lawyers are likely to be and who the defendants are likely to be, that you can begin to appreciate the long-term consequences of outrageous Personal Liability awards. As more frivolous and unwarranted litigation threatens the wealthy, more of the wealthy take action to make themselves "Judgement Proof". To be "Judgement Proof" means that you have put most of your money out of the reach of US courts. So, to become Judgement Proof, the wealthy invest their money offshore through offshore trusts and IBC's (International Business Corporations). If someone wanted to spend the time and money to go after those offshore funds, they might be able to get them. But, the cost would likely be more than the reward; that is, if they were able to get to the funds at all.

But, it gets worse. As more and more wealthy Americans move to become Judgement Proof and shift the majority of their wealth offshore, legitimate suits against these persons are less likely to be brought and those that are, will likely never produce any financial gain for the plaintiff or significant financial loss for the defendant.

And it keeps getting worse. As we have determined, it is the wealthy and upper middle class who are the targets of most frivolous and unwarranted lawsuits. These are the people whose investment in US Business creates US JOBS and builds the US Economy. So, when they move to become Judgement Proof, it has the effect of sending US JOBS offshore and of bolstering offshore economies.

But, here is the real kicker. As more of these wealthy people start dealing with offshore banks and lawyers and make a few trips offshore, they soon learn that they can live just as well or better in at least a dozen foreign jurisdictions as they can in the United States. When that happens, many of them take ALL of their money and choose the Expatriate route. This is not a prediction. That economic exodus is already happening. (See "Tick-Tick-Tick - The Economy Bomb" on this site.)

There are over 200,000 US ExPats living in London alone. A recent survey revealed that over 3 Million US Citizens would leave the USA immediately, if they thought that they could do so and maintain their current lifestyle. Can you guess what income bracket most of those people were in? What will happen when those people realize that there are other countries with a violent crime rate only 10-20 percent of what ours is in the USA, a zero tolerance for drugs, a cap on liability awards, a better educational system and fabulous sunsets (and/or sunrises)? When they choose to leave, it has the added effect of removing ALL of their substantial income from our tax rolls, as well. Guess who gets to pick up the slack.

That is the real rub. The long-term result of allowing these frivolous and unwarranted lawsuits to flourish in the United States is that we are forcing the wealthy to shift major portions of, if not all of, their wealth offshore. So, you see, the REAL WINNERS in our courts are foreign countries. The REAL LOSERS are YOU and I and our wonderful country.

If we do not ALL shout in unison and demand that our elected representatives enact substantive Tort Reform immediately, then in a few years, all that will be left of the America that we used to know will be an empty shell. The wealth and power that makes this country the economic power that it is today will reside offshore.

 The Real Winners are
Foreign Countries

See related website:

www.OverLawyered.com - chronicling the high cost of our legal system