Last fall, the U.S. Chamber of Commerce Institute for Legal Reform (the organization's tort reform propaganda arm) released a shocking report, Tort Liability Costs for Small Businesses, claiming that our court system costs the average person upwards of $3,000 annually, due to injury and other damages claims. The report also claims that these costs fall disproportionately on small businesses, who in turn pass that $3,000 a year on to all of us. Of course, like many prior U.S. Chamber efforts, they can't honestly make their point, so they fall back on what they do best, lying.
To be fair the Chamber of Crony Capitalism (sadly, I didn't think of that one), doesn't come out and lie to the public's face, instead they engage in an elaborate scare tactic, stacking assumptions and conjuring numbers, to come up with a shocking conclusion. They clothe their arguments in the veneer of logic, science, and math to reach their desired outcome: a public, so scared of the costs of lawsuits that they never properly contextualize that cost.
Normally, I'd organize an article like this by categorizing the different fallacies, exaggerations, and outright lies, then discuss how each one of them is wrong. However, when you're tasked with sifting the charred mess of a dumpster fire, it's best to proceed by cleaning up each piece of debris as you come across it. For that reason, I'll list the lie, then illustrate how it misleads the public.
Lie #1: The Tort System Doesn't Cost Businesses $300,400,000,000.00 a Year
Let's use the U.S. Chamber's own chart to illustrate how their cost to businesses for the court system is a lie:
That's the back-of-the-envelope math that the U.S. Chamber uses to get its $300 billion price tag for the costs of our tort system. A whopping 60% of the total cost is categorized as "retained" liability. This is the category that the Chamber's consulting firm employs to account for insurable costs that aren't covered by an actual insurance policy. The problem is that there is no accurate way to calculate liability when people don't see fit to buy coverage to protect against it.
Put more simply, 60% of the Chamber's number is a guess. It's likely a bad guess, given that by their own admission, the number doesn't come from any data about the insurance marketplace. Further, the number they come up with is 1.5 times the size of the actual insurance market. It strikes me as unlikely that an industry, as sophisticated as insurance companies, is only able to reach 40% of its potential market. The Chamber's guess is akin to trying to infer your favorite football team's season-ending record from their record after 6 games.
Lie #2: Liability Can Be Reliably Calculated by Assuming that Every Business Has the Same Risk Profile
One of the problems with the Chamber's data is that it assumes that liability works the same whether one has insurance or not. For instance, one type of liability that they include in their total is employment discrimination liability. They incorrectly assume that any business could unlawfully discriminate against its employees and find itself subject to a lawsuit.
Just because a large company with many employees may have to guard against the possibility that one of their managers will unlawfully discriminate in hiring or promotions by buying insurance, doesn't mean you can assume that most businesses have the same kind of liability. The Chamber's calculations do this, and they price the uninsured risk at the rate a large company would pay to obtain insurance coverage against that risk.
This sounds good in theory, until one realizes that 23 million businesses in the United States are sole proprietorships, i.e. 80% of which, do not have employees. One can't price a sole proprietorship's liability for employment discrimination like a large corporation, because they can't discriminate against employees that they don't have in the first place. If you're the only employee in your company, your potential liability for hiring discrimination is zero.
Lie #3: Tort Liability Costs Small Businesses More Income than Large Businesses
Identifying the most egregious lie from the Chamber's report is a difficult task, given how many dubious contenders there are, but the following chart is a strong candidate:
Here's what makes this chart so infuriating:
- Our old friend retained liability makes an unwelcome appearance. In fact, retained liability accounts for more than 80% of the Chamber's total estimated liability for businesses with less than $1,000,000 in annual revenue.
- The Chamber's best guestimate for retained small business liability conveniently inflates their portion relative to companies with larger revenues.
- It's simply not plausible that retained small business liability comes close to equaling the combined liability for businesses with more than $50 million in revenue.
I discussed earlier how the Chamber's study treats employment discrimination liability as something that affects all businesses to some degree, ignoring the fact that most businesses don't have employees. They do the same thing with other types of liability, particularly environmental liability.
To see how absurd this assumption is, let's compare two different types of businesses, the web services provider that our law firm uses, with a coal power plant, because in the eyes of the Chamber's study, both of them have to allocate some money to cover the potential damage that they could do to the environment or other people's health.
Our web services provider is a small company that designs and implements web-based solutions. It consists of a handful of very talented professionals, many of whom don't even go to an office, on computers to handle whatever issues might come up in cyberspace.
On the other hand, a coal power plant stores and burns coal to generate electricity. While there are many modern inventions, such as scrubbers, which mitigate some of the environmental harm that comes with their business, issues such as properly storing coal and other chemicals necessary to keep the plant up and running still exist. If something goes wrong, it greatly impacts the land around the plant, and potentially the health of those living in the vicinity.
If something goes wrong with our web services provider, our law firm's website could be despoiled and lie fallow until we find another web services provider to swoop in and clean up the toxic code.
Contrary to what the Chamber of Commerce would have you believe, our web services vendor doesn't retain some environmental liability, foregoing insurance coverage, because it would be stupid of any web-based company to buy insurance against environmental damage in the first place.
Any Business Risk Disproportionately Affects Small Businesses
It strikes me as likely that the Chamber focuses on the liability for small businesses as another scare tactic. Their argument is that insuring against the consequences of catastrophic mistakes costs proportionally more for small businesses. Like other Chamber tactics, it is an attempt to scare small business owners into believing that they're just one lawsuit away from losing everything.
This obscures the fact that many small businesses are always one awful decision away from losing everything. If the business changes its product or service in a way that customers don't like, it will fail. If the owner (since most small businesses don't have employees) has a health or family emergency, there's a good chance the business fails. If a larger competitor comes out with a better, cheaper product or service, the small business fails. Viewed from a broader perspective, the chance that most business owners are going to kill or injure someone so badly that they're going to lose everything is rightfully far down the list of most small business owners' concerns.
Most perversely, it's the availability of the very liability coverage that the Chamber of Commerce argues imposes too great a cost on small businesses that allows them to survive the enormous costs of accidentally killing or injuring someone. Unless we're going to entirely shift the cost of those injured or killed by businesses to the government, insurance is the instrument that allows businesses, large and small, to manage risks inherent to their operation. Sure it costs money, but businesses who are free to choose, purchase this protection year after year. Does the Chamber think its members can't decide for themselves whether mitigating the risk is worth the cost? The prevalence of insurance policies sure looks like businesses voting with the dollars to me.
Lie #4: We Bear the Costs of Tort Liability Equally
When the Chamber of Commerce claims that lawsuits cost the average American more than $3,000 a year, it is being dishonest. It assumes that each American bears the costs associated with insurance and resulting litigation equally. That is not the case.
Take for instance the lawsuits against automakers for defective Takata airbags that were exploding like grenades into motorists a few years back. Four car companies (Toyota, BMW, Subaru, and Mazda) agreed to pay more than $553 million in a settlement for putting out a dangerous product that killed at least 17 people. If those companies passed the whole cost of the settlement to their consumers in a single year, it would raise the cost of a vehicle by $221, and that's for one of the bigger automotive defect settlements in U.S. history.
Of course, the fallacy in the argument is that unless you buy a car from one of those four companies, you don't actually incur those costs. But, buying a car from any other manufacturer than those four companies, that had to pay for putting out a defective product, doesn't cost consumers a cent.
Just like with taxes or any other cost, averaged costs are misleading. Those who spend more, incur most of those costs. For instance, the federal government spends a bit more than $12,000 per person each year, however, that doesn't mean that if we stopped all federal spending the average person would get an extra $12,000 in their pocket. In fact, most people at the bottom end of the income spectrum would lose money, because they benefit from that spending; they receive far more in benefits than they pay in taxes. Most poor people can't do a thing about vehicle safety, but they drive safer cars because lawsuits impose costs to careless manufacturers, costs that fall disproportionately on those who make more money.
To suggest that someone pays for something that they don't is a lie. Like everything else, those who spend more (i.e. the wealthy and large businesses) end up paying far more for our court liability than the average person.
Lie #5: The Chamber of Commerce Will Include Costs it Doesn't View as Legitimate to Scare People.
In their effort to price the court system as expensively as possible for the average American, the Chamber of Commerce's research does something curious, it includes the cost of professional liability services in its total.
They certainly needed the $22 billion spent by accountants, lawyers, and other professionals to inflate their cost analysis of the court system. However, it strikes me as more than a bit disingenuous that the Chamber would include malpractice insurance costs as a cost to the American public when their whole position is that most lawsuits shouldn't exist in the first place. It's a bit like an employee saying that their employer spends too much on employee compensation and including their own salary and benefits in their numbers, just to make a point.
This isn't the biggest lie in the report, but it does illustrate the depths that the Chamber of Commerce will sink to in order to scare the public.
Lie #6: Getting Rid of the Civil Damages System Would Create Savings for the Average American
If the United State drastically reduced the value or even eliminated lawsuits, it wouldn't save people a dime. Absent lawsuits that help the injured recover a substantial portion of their losses, the only way to pay for the damage that people who could no longer work after an accident or their families suffer is the social safety net. Programs such as Social Security Disability Insurance, Medicare, Supplemental Nutrition Assistance, etc. would swell if people could not recover their losses from the businesses that hurt them.
Restricting access to the courts could take a bite out of the $3,000 per person that the Chamber of Commerce claims that lawsuits cost the average American, it wouldn't eliminate those costs. Instead, taxpayers would foot the bill. Since the average American is also an average American taxpayer, shifting costs comes out as a wash, at best. Given that most government programs have much higher administrative costs than the court system, it's possible that everyone will be worse off if the Chamber gets its way.
At the very least, moving costs from the businesses that kill and injure people to the taxpayers makes business balance sheets look better (until taxes rise across the board to cover increased government expenditures). Since the Chamber's members are those businesses, it's a win for them, at the expense of everyone else.
Lie #7: Courts Are All Cost and No Gain
While the Chamber goes to great lengths to quantify the costs of the American tort law system, it lies by omission, when it doesn't give due consideration to the benefits of the system. One can give the Chamber's literature a fair read and come away with no idea what the money spent on the courts and victim compensation goes to. It would be akin to trying to shock people about consumer spending, without ever mentioning what people get for their money.
Our courts serve two purposes: they provide financial relief for those who are injured through carelessness, and they also give people the tools to obtain justice for the wrong that's done to them. Both of these goals take the form of money because that's the only remedy available in civil court.
While the Chamber attempts to paint the costs of this system as burdensome and too much to bear, I would argue they're a bargain compared to the alternative. Here's why...
Absent Monetary Damages, Violence, and Imprisonment Are the Only Remedy for Serious Wrongs
Suppose for a moment that the Chamber of Commerce gets its way and the costs of our legal system shift from companies to the taxpayer. In order for it to save people money, the government would have to compensate people far less than they lose. This is dangerous because it is unjust to force victims to subsidize the bad behavior that led to their injuries. We'd never allow someone to cut off our hands, let alone pay them to do so.
For instance, if you're a reasonably successful person who ends up seriously injured because a truck driver fell asleep behind the wheel and hit your car, no government program can make you whole. Whatever lifestyle you had before will certainly decline, because government programs, by design, only cover necessary survival expenses.
If this successful person's injuries prevent them from doing their job, as they could before, losing their house and financial ruin are very real possibilities. That's a heavy price to pay for someone else's mistake. It's not uncommon for people to suffer serious brain injuries, lose limbs, or even have chronic, life-long pain after crashes. According to the Chamber, the victim should foot the bill for an injury they didn't cause? They're supposed to lose their house, while the company whose employee injured them gets off scot-free? That's no one's idea of justice.
Forcing a person to endure that kind of wrong, without any recourse, or hope of obtaining justice, will not lead to violence in most instances, but desperate people with nothing left to lose, no stake, or prospect for a better life can be dangerous. They're especially dangerous when they're put in that situation, because of someone else's carelessness. Even if there isn't a noticeable uptick in violence towards the wrong-doers, who the courts can no longer touch, the call for justice won't go unanswered.
In fact, the most likely outcome is that the public will demand that more and more types of accidents carry criminal punishment. Absent the ability to obtain compensation and justice for an injury via the civil courts, tossing a sleepy truck driver in jail for carelessness provides some measure of justice. It doesn't make the victim's life better, but it soothes some of their anger to know that the person who put them in an awful situation isn't enjoying their life either.
A system where victims can't get justice is neither desirable nor possible. The reality is that people won't stand for it. Absent our civil courts, the only alternatives are so bad that even businesses, once they get a taste of them, will long for the good ol' days when all that was on the line was money, not their freedom.
Capping Damages in Injury and Wrongful Death Lawsuits Gives Bad Actors a Competitive Advantage
The most infuriating part of the Chamber of Commerce's campaign against our courts isn't the dishonest means they use to mislead the public about how our courts work, but that the Chamber styles itself as a champion of free markets.
One of the pillars of free markets is that businesses rise or fall based on their merits. Companies that offer better products and services at better prices eventually force the companies that can't do the same out of business. Lawsuits play a valuable part in determining the true price of a company's goods or services.
Let's imagine two widget companies, Safe Widget and Dirt Cheap Widget. Safe Widget makes its product by emphasizing its safety. It spends a bit more on manufacturing and quality control because Safe Widget knows that poorly made widgets can kill its customers. In contrast, Dirt Cheap Widget tries to make the cheapest widget possible, despite knowing that a poor quality widget can kill and injure people.
I think everyone can agree on which company they would prefer to use in the abstract, but for most consumers, the only information they receive about a company's product is the price on the shelf. Absent our courts, Dirt Cheap Widget will have a clear advantage on price since most people shop for the lowest price. Dirt Cheap Widget gains an advantage by putting people at risk.
Thankfully, in the real world, Safe Widget would end up being the cheaper company in the long run. Once Dirt Cheap starts to lose in court to the people that its product injured, those losses would show up in Dirt Cheap's price. If Dirt Cheap injured and killed enough people, it would actually be more expensive to operate that way.
If we take the expense of courts out of the equation, then companies that take the time and incur the costs to deliver their services safely will find themselves at a disadvantage compared to their corner-cutting competitors. Honest businesses will face a choice, adopt unsafe practices or perish.
That's just one thing we get for the "costs" of our civil legal system.
Our Courts Are a Bargain, and That's the Truth, But Don't Expect to Hear it From the Chamber of Commerce
It's cliché to say that you can't put a price on justice. In effect, the Chamber's research attempts to do just that, in an attempt to scare people into believing that the cost is too high. By implication, there must be a better way of doing things, if only someone would think of it.
I mentioned before how our current system balances the needs of compensating victims, allowing them to hold wrong-doers accountable, and not punishing the carelessness too harshly. Reading Chamber of Commerce propaganda, one could be forgiven for believing that trial lawyers designed this system to enrich themselves, but the truth is that our current civil justice system isn't the product of any one mind, but an institution that evolved through the generations, an evolution that stretches back more than 1,000 years.
When this whole endeavor began, a continent away (in England), the idea was to create a way to prevent blood feuds. Over time, the system grew more and more formalized, as countless generations grappled with the need for the injured to obtain justice and the rights of the accused not to be taken advantage of.
One consequence of this evolution is that costs have grown, but they have done so because they our ability to produce income and the sophistication of medical treatments to preserve our health also grew. Lawsuits cost more today because killing and injuring people costs a person more.
1,000 years ago, a couple of cows were about all a wrongful death would cost, because human beings weren't that productive. Today, even the poorest workers among us will earn more than $1,000,000 in their lifetimes, while the average worker will make closer to $3,000,000. A couple of cows won't keep families financially afloat these days, so the cost of injuring the average American is much higher, and that's to say nothing of increases in medical procedures and associated costs.
While the Chamber of Commerce cries poor, it neglects the other half of the equation; not only are the costs of injuring people higher but so is the ability of businesses to pay. One major company reported a profit of $44.2 billion in 2020. If that company accidentally killed 1,000 people, it could pay all the families fair compensation and still make a profit.
The Chamber's logic doesn't add up. Strip away the numbers and the Chamber's argument is that businesses benefit from more affluent customers, which allows the business the ability to be even more successful, but when a company's mistake harms these wealthier customers, the costs of making that right is just too much of a burden for the business to bear. When one takes a moment to look more carefully at the Chamber's concerns, it sounds like what they're really worried about is their inability to have their cake and eat it, too.
I think it's obvious that I don't view our court system the same way as the Chamber of Commerce does. If they were to argue in an honest manner, then that would be just another disagreement in a free society. Unfortunately, the Chamber chooses to lie and stoop to making propaganda to further its agenda. That's something we should all take issue with.
Our courts do have costs, but they provide:
- Compensation to victims
- An avenue for victims to obtain justice, without putting every careless person who kills or injures someone in jail
- Protections for the accused
- A tool to predictably price risky behavior
- Reduced reliance on government welfare programs
How many of those benefits does the Chamber of Commerce disclose? None. If one were to read Chamber literature and nothing else, the courts sucker Americans into paying a large sum of money for absolutely no benefit. That's perhaps the biggest lie that the Chamber tells.
Even if we use the kitchen sink cost analysis that the Chamber provides, our courts cost the American economy 1.7% of GDP. Could our government achieve so much, if given a comparable sum of money? Would our society and marketplace be among the safest in the world if didn't? My feelings on the matter should be obvious by now, as should the fact that the Chamber refuses to honestly engage in the issue.
Those are the facts, now it's up to each and every person to make up their own mind.