Freedom in the 50 States

Deciding tort claims among private parties is an important function of a decentralized legal system that provides justice to victims of the unjust, harmful acts of others. In an efficient civil liability system, the costs that defendants must pay are merely compensation for wrongs and not a limitation on their freedom. Moreover, in an efficient system, the liability insurance costs that businesses must pay reflect the likelihood that they will impose harms on others.

In practice, however, the United States’ civil liability system imposes vastly higher costs on everyone than every other developed country’s system does.¹ Moreover, the costs of the system vary widely by state. In fact, it is more appropriate to think of there being 50 separate civil liability systems in the United States than one national system, and “bad” state systems can impose significant costs above those necessary to remedy wrongs. That is especially the case when defendants are from another state.²

The civil liability index captures risks and costs to property and contract freedoms that businesses must pass on to consumers as higher prices.

The freedom index includes a single variable, an index of how plaintiff-friendly each state’s civil liability system is, which depends in turn on eight variables. We use principal component analysis to find the common variance among each of those: in no particular order, (a) ratings of lawsuit climate by businesses,³ (b) partisan elections for the supreme court, (c) partisan elections for trial courts, (d) lawyer concentration index, (e) legal-services share of GDP, (f) blanket punitive or noneconomic damages cap, (g) burden of proof for conduct justifying punitive damages, and (h) joint and several liability abolition.

Even though the U.S. tort system is largely at the state level, certain nationwide features affect the tort environment in every state. Even the “best” state will have a “tort tax” of some kind. Moreover, a state’s poor tort environment affects out-of-state defendants, creating an interjurisdictional externality.⁴ Nevertheless, economist Nicole Crain and others found that adopting all recommended tort reforms could reduce a state’s tort losses by 49 percent and annual insurance premiums by 16 percent.⁵ Using an econometric model of insurance costs and tort system perceptions, Paul Hinton, David McKnight, and Ronald Miller found a potential reduction in tort costs ranging from $20 million in Vermont to $5.3 billion in California, from comprehensive tort reform.⁶ We use their estimates to come up with an estimate of how nationwide tort reform amounting to a standard-deviation change on our variable would affect liability insurance premiums. While higher insurance premiums might seem to be justified as a way of securing justice for injured plaintiffs, higher premiums indicate that something has gone wrong with the deterrent effect of the liability system. If fear of being sued efficiently deterred firms from risky activities and products, then liability insurance premiums would be low. Despite criticisms, then, we maintain that the cross-state variation in liability insurance premiums that is amenable to change through the policies included in our index reflects something inefficient in the tort system. Then, we divide by 0.55 to take into account deadweight loss and costs of legal representation, which are 45 percent of the tort tax (excluding administration and lost innovation costs) according to one rough estimate.⁷