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June 10, 2004

Study: Small business owners bear brunt of business liability burden

U.S. small businesses pay up to 68 percent of all tort liability costs borne by business, even though they bring in only 25 percent of the nation’s total business revenue, according to a new survey by the United States Chamber of Commerce Institute for Legal Reform.

The study found that the total liability cost to small businesses (businesses with less than $10 million in annual revenue) is more than $88 billion a year.

“Very small businesses ($1 million or less in annual revenue) bear 26 percent of the business cost, paying $33 billion a year,” the study found.

Small businesses are forced to pay out billions a year in liability costs, including settlements or awards paid by uninsured companies, expensive liability premiums, deductibles and damages excluded from insurance policies as well as damages exceeding policy limits and punitive damages in states where they cannot be insured.

Those “excessive” liability costs have a direct impact on the entire U.S. economy the study said.

“Small businesses bear a significant share of the costs of the U.S. tort liability system,” the study noted. “These same businesses generate 60 to 80 percent of the net new jobs each year, and pay approximately 40 percent of the total private payroll in the United States.”

The study also found that businesses with less than $1 million in revenue a year carry $33 billion of the tort liability cost. Forty-four percent of that figure is paid out-of-pocket, as opposed to being paid through insurance, the study said.

Most small businesses do purchase liability insurance to protect themselves from lawsuits, the study said. “But the decision to buy liability insurance is not as simple as it might seem. Without liability insurance, a small company can be devastated by one lawsuit. On the other hand, money spent on liability insurance could have been spent instead in ways that might contribute to the growth of the business.”

“Politicians routinely pay homage to small businesses as the backbone of the American economy, yet little has been done to ease the burden placed on these enterprises by the steadily growing costs of litigation,” the study said. “This report demonstrates that legal reform is not just a corporate issue; litigation costs affect every business in America, from the biggest of the Fortune 500 down to the neighborhood pharmacy.”