Small Businesses Pay 33% of Rising Tort Costs Out-of-Pocket

A new study from the U.S. Chamber of Commerce shows that small businesses shoulder a sizable burden of the nation’s tort liability costs, having paid $105.4 billion in 2008— a third of it out of their own pockets.

According to the report, small businesses bore 81 percent of business tort liability costs but took in only 22 percent of revenue.

The study, Tort Liability Costs for Small Businesses, also found that small businesses ($10 million or less in annual revenue) paid, collectively, $35.6 billion of these costs out-of-pocket rather than through insurance.

The study was conducted for the Chamber’s Institute for Legal Reform (ILR) by NERA Economic Consulting.

Noting that small businesses have created 64 percent of all net new jobs in the U.S. over the past 15 years, ILR President Lisa Rickard said the tort system is costing jobs. “As America struggles out of this current economic downturn, this study shows that our lawsuit system continues to be a drag on job-creating small businesses,” she said.

The NERA also examined the costs of the medical liability system for doctors in small groups and small medical labs. For these small businesses, the liability price tag totaled $28 billion in 2008. This is 94 percent of the total costs of medical malpractice ($29.8 billion).When medical malpractice costs are added to all other tort liability costs, the total for small businesses reaches $133.4 billion.

According to the report, the litigation liability costs for small businesses are expected to continue to grow. NERA forecasts that by 2011, small businesses, including small medical businesses, will be paying $152 billion in tort costs.

“Our lawsuit system is increasingly burdening owners, workers and our entire economy,” Rickard said. “Regrettably, next year’s escalating lawsuit costs will be arriving at the worst possible time for small businesses operating on razor thin margins and straining to keep their workers employed.”

To estimate the tort liability costs for businesses of this size, NERA drew on reports from actuarial services firm Tillinghast/Towers Perrin, insurance broker Marsh and market research firm MarketStance. The costs included are: benefits paid or expected to be paid to third parties (losses and incurred losses), defense costs, and administrative expenses incurred by insurance companies or self insured entities.