Introduction

A System of Justice—
Or a Game About Money?

As consumers, drivers, taxpayers and workers, New Yorkers are paying more and more every year to support a lawsuit industry that has quietly begun to dominate—and distort—our system of justice.

Citizens read about the occasional crazy-sounding lawsuit in the newspaper. But they seldom see the individual impact on themselves—the fact that the lawsuit industry adds $600 to the cost of having a baby in New York, and $400 a year to the cost of insuring a car, for example. Nor do they see the overall impact of the system, which is imposing a heavier and heavier burden on every sector of government and the economy in New York State. As shown in this report:

• Total liability costs in New York as of 1996 added up to $14.3 billion a year. That’s $787 per person—28 percent above the national average. If you think of this as a "tort tax" (the wrongful acts alleged in liability lawsuits are referred to as "torts" in the legal system), it’s a tax that exceeds all state and local sales taxes combined, a tax that’s more than double the total raised by all state business taxes.
• The lawsuit industry itself eats up most of that $14.3 billion. Injured parties get less than half of it. Plaintiffs’ lawyers in New York State now make an estimated $2.3 billion a year from tort suits. And the big contingency fees generated by such cases have given lawyers the financial wherewithal to pour money into politics, to lobby for laws encouraging still more litigation.
• Running counter to the trend elsewhere in the nation, tort filings in New York State jumped by 58 percent between 1988 and 1996. There’s been a surge in motor vehicle-related claims that push up New Yorkers’ auto insurance costs—despite a sharp drop in traffic accidents.

Perhaps most disturbing of all, there is no comprehensive statute developed by the Legislature to regulate the lawsuit industry, setting boundaries and limits for it of the kind that New York imposes on virtually every other industry, from auto repair shops to nursing homes. Unless that changes, New York will never be able to stop the growth of liability costs.

The game of lawsuit lottery

Not only is this lawsuit industry not comprehensively regulated by state legislation, there is strong evidence that its growth is driven not by the needs of clients and the demands of justice, but by the growing numbers—and the growing appetite—of the state’s trial lawyers.

The number of lawyers actively practicing in New York grew by an astounding 40 percent in just the last ten years—even as the state’s total population barely grew at all. Compared to population, New York’s cadre of lawyers is bigger than in all but two other states, and is 66 percent above the national average. "There are hundreds and hundreds of lawyers admitted to the bar each year," says Daniel Santola, president of the Albany County Bar Association. "There are insufficient jobs to accommodate all of them."⁽¹⁾

As a growing number of lawyers fights to find ways to make a living in a slow-growth economy, some of them are turning to flamboyant advertising pitches ("If you’ve been hurt in any kind of accident, you may be entitled to a large cash award!", bellows one typical ad). As the stakes grow, many trial lawyers seem to treat the lawsuit system not as a means to real justice, but as a lottery-like game of chance—an attitude epitomized by an auto license plate frame that is marketed to prosperous trial lawyers, bearing the slogan, "ALL YOU NEED IS AN ACCIDENT AND A DREAM."

As a means of enriching plaintiffs’ lawyers, New York’s liability system is a well-oiled cash machine. But as a means of compensating victims, it is both unfair and inefficient.

National studies show injured parties collect less than half of all the money spent on liability protection under the current system, while the rest flows to legal fees and administrative costs. Meanwhile, the "tort tax" itself falls heavily on drivers, medical professionals, and small businesses. Reflecting the regressive impact of this "tax," a recent survey found that 55 percent of small business owners in New York State rated liability and legal costs as a "very serious" or even "extreme" problem for their firms. More than 69 percent said a lawsuit of any kind would cause a significant disruption of their business. Nearly three out of four small-business respondents said liability concerns had forced them to raise costs of products and services.

Huge tort claims, especially when they involve horrific injuries and rest on novel or complex legal theories, naturally tend to garner the most attention from the general public and the news media. So do cases that feature outrageous disparities between the size of the verdict and the severity of injury—such as a Bronx jury’s recent award of $4.2 million in damages to a woman who sued New York City after she slipped on a snowy sidewalk and damaged a knee joint while chasing her dog.

While the big cases capture the headlines, they also encourage more litigation. After all, a potential claimant might wonder, if that woman in the Bronx can get millions for a bum knee, what is my broken arm worth? So a sizeable chunk of the profits in New York’s multi-billion tort industry—collected via the liability "tax" effectively imposed on everyone else—is generated by a high volume of smaller tort suits and settlements, which the big-money verdicts certainly do nothing to discourage.

In public, plaintiffs’ attorneys idealize the concept that everyone is entitled to a "day in court." But in practice, as the volume of lawsuits against New York City and other large institutions and companies illustrates, targets seem to be chosen not so much on the basis of the suffering of the plaintiff, as on the size of the financial resources (or insurance coverage) held by the potential defendant. If you don’t have somebody with deep pockets to sue, don’t count on getting your "day in court." But if there is a potential defendant with big money, the payoff for the lawyers can be huge—as illustrated by the literally billions of dollars that a relatively small number of trial lawyers hope to make from legal settlements with the tobacco industry. The fees they are claiming would come to $2.3 billion in Texas, and $2.9 billion in Florida, with more claims to come in New York, in other states, and at the national level.

Given the current state of the law and the size of recent jury verdicts in New York—an overall median of $273,000, with 25 percent of reported awards exceeding $1 million between 1990 and 1996—defense lawyers will often have to settle a claim even when their clients were not at fault. Both parties to a typical tort suit in New York have reason to view a jury trial as a coin flip. But for a defendant, who generally does not recoup a penny of legal costs even if he prevails, it’s always "heads you win, tails I lose." In the right (or, to put it more accurately, wrong) circumstances, even a relatively minor, non-disabling injury can be parlayed into a hefty "pain and suffering" award for a plaintiff—and into a big payday for the plaintiff’s attorney.

The need for reform

New York has been conspicuous in its absence from the list of at least 20 states that have enacted major tort reforms in the last five years—a list that includes such industrial competitors as Ohio, Illinois, California and Texas. Most of these states have lower rates of tort litigation and lower tort taxes than New York.

Given New York’s huge concentration of lawyers—nearly the largest in the country, both in absolute terms and relative to population—outsiders may assume the state is not fertile ground for tort reform initiatives.

Contrary to conventional wisdom, however, history shows reform can happen in New York. This was proven during the 1970s, when the state adopted both no-fault auto insurance and several medical malpractice reforms, and again in the following decade, when New York took its first significant steps toward more general changes in liability laws.

Although the most significant reforms adopted in New York State remain limited to the medical malpractice arena, they set a precedent that cannot indefinitely be ignored.

In the mid-1980s, when rising liability costs were first widely viewed as a crisis, then-Governor Mario Cuomo named a bipartisan Advisory Commission on Liability Insurance, chaired by former Court of Appeals Judge Hugh R. Jones.

Trial lawyers and other opponents of tort reform mounted a delaying action, claiming that the source of the problem was overpricing and collusion by insurance companies. But after a lengthy study the Jones Commission came down solidly on the side of the reformers on that crucial underlying issue.

"The tort law is the fundamental determinant of the underwriting cost base of the property/casualty insurance industry," the Commission said in 1986. "It is a surge in this base that has driven the long-term surge in insurance prices, as well as the periodic constrictions of insurance availability."

A 1997 survey of New York State residents showed strong public support for basic tort reforms—including repeal of the "joint and several" rule under which a defendant who is 1 percent liable may have to pay 100 percent of a damage award; a limit on lawyer contingency fees, similar to what is already in effect for medical malpractice cases; and a cap on non-economic damage awards.

These are hardly new ideas; many, in fact, were endorsed by the Jones Commission. And according to an independent economic study, states that enact such reforms enjoy higher levels of productivity and employment growth. Even lawyers ultimately benefit—since a stronger economy, less hobbled by frivolous lawsuits, is better for everyone.

New approaches

In its study, the Jones Commission concluded that the "compensatory thrust" of the tort system "has greatly expanded the number of claims the system must handle, increased the transaction costs that the parties must bear, and stretched the concept of fault to the breaking point."

In the long run, the greatest breakthrough in reducing the tort tax and improving New York’s competitiveness—without shortchanging real victims or encouraging negligent conduct—may come from a more fundamental overhaul of both tort law and lawyer compensation rules.

Proposed "early recovery" guidelines for tort cases would not alter the existing landscape of tort law—except to change the basis on which plaintiff’s lawyers are compensated. The guidelines would encourage more low-cost settlements early in the process, with the lion’s share of financial benefits flowing directly to the plaintiffs themselves while lawyers are compensated only for efforts actually expended.

The second new approach is exemplified by the "Auto Choice" plan, co-sponsored on the federal level by U.S. Sen. Daniel P. Moynihan of New York, which would give consumers the ability to opt out of the tort system, in exchange for major savings in their insurance premiums—estimated at up to 50 percent or more for many New York drivers.

Both approaches aim in the same direction, de-emphasizing the role of lawyers and returning the power of real choice to consumers. Contractual relationships work well in defining other relationships in our economy; they should be given a chance to work in the area of liability.

If approaches like these fail to stem the rising tide of litigation, New York and other states may be forced to consider taking action on the root issue—the skewed financial incentives that attract more and more new entrants each year into a legal profession that is already overcrowded.

1. "Lawyers advertise for new clients," Albany Times Union Capitaland Report, March 1, 1998, Volume II, p. 8.