Tort Liability Costs for Small Business

Small businesses are the engine of job growth in this country.  At a time when unemployment rates are high, it is important to understand the forces that impair the ability of small businesses to thrive and grow. This report contains the findings of a study that estimates the tort liability costs that fall on small businesses. It was commissioned by the U.S. Chamber Institute for Legal Reform (ILR) and conducted by NERA Economic Consulting (NERA). The data reveal that small businesses bear an extraordinary tort liability cost burden.

EXECUTIVE SUMMARY

In its “American Free Enterprise. Dream Big.” campaign the U.S. Chamber of Commerce has focused a spotlight on small businesses. Small businesses are the engine of job growth in this country. They have generated 64 percent of the net new jobs over the past 15 years. Particularly at a time when unemployment rates are high, it is important to understand the burdens small businesses bear, with the objective of creating an environment in which small businesses will thrive. To this end, the U.S. Chamber Institute for Legal Reform has commissioned a study of the tort liability costs of small businesses from NERA Economic Consulting (NERA). Their findings are as follows:

• The tort liability price tag for small businesses in America in 2008 was $105.4 billion.
• Small businesses bore 81% of business tort liability costs but took in only 22% of revenue.
• Small businesses paid $35.6 billion of their tort costs out of pocket as opposed to through insurance.

Although we may think of physicians and medical labs primarily in their professional roles, they are also businesses dealing with the customary issues of running a business, striving to keep costs manageable and operations running smoothly. The unpredictability and high costs of the medical malpractice system create a significant business challenge.

• Medical malpractice costs for doctors in small groups and small medical labs total $28 billion.
• This is 94% of the total costs of medical malpractice ($29.8 billion).
• When medical malpractice costs are added to all other tort liability costs for small businesses, the total is $133.4 billion and 83% of total tort costs for all businesses ($160.5 billion).

A 2007 Harris poll of small business owners/managers who are concerned about litigation found that 62% make business decisions to avoid lawsuits, and 61% reported that these decisions make their products and services more expensive. More than a third of those surveyed had been sued, and 73% of those sued said the business suffered because the litigation was very time consuming.

In its most recent report, “2009 Update on U.S.Tort Cost Trends,”Tillinghast/Towers Perrin forecasts future tort cost growth, estimating that tort costs will reach $183.1 billion in 2011 for all businesses. NERA estimates that, in 2011, $152 billion will fall on small businesses.

Americans have a stake in protecting small businesses from wasteful and excessive costs in the tort system. Legislators should be alert to pending legislation that could expand liability and harm small businesses. Moreover, meaningful common sense reforms at the state and federal level should be considered and passed into law.