Update On U.S. Tort Costs

U.S. tort costs increased by 5.1 percent in 2010,  driven by  the April 2010 Deepwater Horizon drilling rig explosion and resulting oil spill in the Gulf of Mexico, Towers Watson reports.

In its 2011 Update on U.S. Tort Cost Trends, Towers Watson notes that absent the cost from this event, tort costs would have shown an overall decrease of 2.4 percent in 2010.

Looking ahead, Towers Watson expects tort costs to  decline by  4.4% in 2011 due to the lack of such an event during the year. Excluding the impact of the oil spill, Towers Watson forecasts tort costs in 2011 will show a modest increase relative to 2010, in the area of 3%.

The report finds:

The Deepwater Horizon spill was the single most important event affecting 2010 tort costs. In June 2010, BP established a $20 billion fund to compensate the spill’s victims. By November 1, 2011, BP had paid or approved for payment over $7.5 billion in claims related to the spill. While the ultimate tort costs associated with the spill remain uncertain, our estimate of tort costs from the spill was $19 billion.†

The increase in U.S. tort costs for 2010 – which confirms earlier estimates from Towers Watson – follows a more favorable year in which tort costs decreased by 2.7 percent in 2009.

The U.S. tort system cost $264.6 billion in 2010, which translates to $857 per person, versus $820 per person in 2009.

The weak U.S. economy continued to have an influence on costs in 2010, according to Towers Watson:

Due to a lower level of economic activity, opportunities for tort actions have also decreased over the last few years. The decline is most notable in the commercial auto line of business, perhaps the most economically sensitive coverage with a tort component. The line’s tort costs in 2010 were the lowest since 2000 and 19% lower than in 2004.†

Personal auto tort costs showed a 1.1% increase in 2010, and medical malpractice costs continued to be stable.

Overall economic growth in 2010 was 4.2%. As such, the ratio of tort costs to gross domestic product (GDP) rose in 2010 for the second consecutive year after five years of a decline in the ratio.

Since 1950, growth in tort costs has exceeded growth in GDP by an average of approximately two percentage points.

Towers Watson estimates growth in U.S. tort costs will range from 2% to 6% in 2012, with a midpoint of 4%. A similar increase is seen for 2013, with a midpoint of 4%.

Insurance Journal has more on this story.

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