Editorial: MTBE and tort costs

April 3, 2006
Gasoline price volatility in store for parts of the US this driving season relates to a larger problem with even larger costs.

Gasoline price volatility in store for parts of the US this driving season relates to a larger problem with even larger costs. The problem is the insufficiently bridled pursuit of riches by plaintiffs and their lawyers in civil courts.

The right of citizens to sue to redress harm caused by the lapses of others will receive no challenge here. In the US, however, that right has become a magic money machine. As a recent study by Towers Perrin Tillinghast shows, it’s a large money machine with an excessive pull on the US economy.

Costs rise

According to the study, the US tort system cost $260 billion in 2004, up 5.9% from 2003. That’s $886/person, $41/person more than the prior year. The 2004 percentage growth in total tort costs was less than the year’s rate of US economic growth, which is unusual. Since 1950, tort-cost growth has exceeded expansion of the gross domestic product by an average of 2-3%/year, Tillinghast says. The firm expects costs of the tort system to increase 6.5%/year in 2005-07.

In comparison with those of other countries, US tort costs are high. In 2002-04, they represented 2.2% of US GDP. Among 10 other countries in the Tillinghast analysis, only Italy came close by this measure in 2003: 1.7%. Other national tort costs as a share of 2003 GDP were Germany 1.1%, Spain and Belgium 1% each, Japan and Switzerland 0.8% each, the UK and France 0.7% each, and Denmark and Poland 0.6% each.

Annual dollar gains in US tort costs lately have been mixed. The $14.4 billion increase in 2004 was greater than that of 2003 ($12.8 billion) but smaller than those of 2001 and 2002.

Among issues that may be moderating US tort costs are several years of declines in the frequency of automobile accidents-a trend unlikely to continue. Also, asbestos litigation subsided in 2004 and might be restrained by reform legislation in Congress. Effects of other potential influences on recent and future tort costs are less clear. Decisions in lawsuits over the painkiller Vioxx so far have been mixed, Tillinghast says, and many more are due in 2006-07. Uncertain at this point are whether obesity issues will breed more and larger cases than they have so far and whether medical malpractice reforms enacted by several states will survive legal challenges. Tillinghast expects some level of liability claims to emerge from Hurricane Katrina. And it calls unclear the effects on future class-action claims of a reform law Congress passed last year.

The Tillinghast study focuses on benefits paid or expected to be paid to third parties, defense costs, and administrative expenses. It estimates costs in three categories: insured costs excluding medical malpractice, self-insured costs excluding medical malpractice, and medical malpractice costs. It excludes indirect costs such as those associated with litigation avoidance, including “the disappearance of certain products or whole industries from the marketplace because of high product liability cost.”

MTBE lawsuits

Product disappearance roils the gasoline market this year. Makers and sellers of the additive methyl tertiary butyl ether face scores of lawsuits nationwide because the oxygenate has leaked into water supplies, mostly in harmless amounts. In the Energy Policy Act of 2005, Congress removed an oxygen requirement for reformulated gasoline and refused to provide a safe harbor for MTBE against defective-product litigation. It thus weakened a legal defense for making and selling gasoline with MTBE and left in place a cause of action that shouldn’t apply to MTBE but is convenient for plaintiffs’ attorneys. So refiners are replacing MTBE with ethanol in a rush causing worry about supply. Most analysts think gasoline prices will rise beyond currently elevated levels in reformulated gasoline markets switching to ethanol.

MTBE litigation thus has the potential to expand tort costs by the Tillinghast measure and to supplement them this year with regional gasoline price increases. Congress could have prevented or at least moderated the costs in both categories. That it chose instead to coddle the plantiffs’ bar provides little confidence that a tort system that costs too much will receive all the repairs it clearly needs.