Overlawyered: Chronicling The High Cost Of Our Legal System

Litigation and the honest working guy

Don Brunell, president of the Association of Washington Business, in the Daily Columbian (via Carter Wood): There is a mistaken assumption that a small proprietor slapped with a lawsuit simply lets his insurance company handle it. Wrong. Many business owners shoulder the costs themselves out of fear of higher premiums or the risk that their […]

Don Brunell, president of the Association of Washington Business, in the Daily Columbian (via Carter Wood):

There is a mistaken assumption that a small proprietor slapped with a lawsuit simply lets his insurance company handle it. Wrong. Many business owners shoulder the costs themselves out of fear of higher premiums or the risk that their insurance company will cancel their coverage. Some start-up businesses simply cannot afford liability insurance. In fact, the [Institute for Legal Reform] study shows that, in 2005, small business owners paid $20 billion out of their own pockets for court costs and out-of-court settlements.

Finally, the smallest businesses, those with revenues of less than $1 million, paid $31 billion in lawsuit-related costs. Let’s put that in perspective. These businesses, which represent just 6 percent of total business revenues, paid more than 20 percent of the national tort tab. These lawsuits really do hit the “little guy” who struggles to make ends meet.

Filed under:

9 Comments

  • As with any statistics I wonder which way these statistics cut.

    The disproportionate amount of out-of-pocket expenses by small businesses could reflect that big companies simply have more resources to make even legitimate claims difficult to litigate.

    Also, I’m not sure what the insurance/out-of-pocket statistic shows. In one sense, insurance itself is an out of pocket expense. The small business owners are most likely then making the rationale choice that they’re less likely to be sued for an amount comparable to paying insurance premiums.

    I guess I’m not really sure what to make of this post.

    • By mmm

  • “Let’s put that in perspective. These businesses, which represent just 6 percent of total business revenues, paid more than 20 percent of the national tort tab.”

    And let’s put that in perspective. 95% of all businesses have less than $1 million in revenue. Thus, 95% of businesses in America are paying only 20% of the litigation costs.

    [TF: I am mystified why Justinian thinks this demonstrates anything. Aside from being the wrong denominator, it means that the other 5% of businesses are paying 80% of the litigation tab.]

  • “more resources to make even legitimate claims difficult to litigate” would be out-of-pocket expenses for court costs. But I agree that it is mystifying to say insurance doesn’t count.

    • By Ted

  • Reporting these costs as a function of revenues is the only way they make sense. THAT is the informative “perspective” on this, and pretty clearly so IMO.

    • By David

  • Question: Why is reporting these costs as a function of revenues the only way that makes sense? Please explain how a company’s revenue should increase its liability.

    My initial thought is that the vast majority of small businesses out there are all doing stuff in the world out of proportion to their revenue. I come into contact every day with many more trucks, employees, equipment, etc. of small businesses than I do large businesses. I’d think the reason that larger businesses still carry the larger load is products liability.

    • By Adub

  • It may be that the larger companies have more effective mechanisms for preventing the sort of conduct that generates lawsuits; better employee safety, quality control, and HR policies, for instance. Also, it’s hard to tell whether those statistics include doctors, whose liability costs would tilt the figure toward the smaller businesses, since doctors’ practices don’t scale up like other businesses.

    • By Tom T.

  • “Please explain how a company’s revenue should increase its liability.”

    VERY generally speaking, the more revenue a company has, the more ACTIVITY a company performs. The more activity, the more opportunity for liability.

    Also, the more revenue, the deeper the pocket…

    • By Deoxy

  • Also keep in mind that many mid-sized companies maintain high deductibles in an attempt to keep premiums down. On one hand, it’s a business decision, but on the other, it’s a good example of the cost of lawsuits.

    I would be interesting in knowing how, specifically, a company’s premiums are affected by the lawsuits it’s hit with. Does anybody know, or is this proprietary information held by the insurance company? This seems to be a murky area of understanding, even for lawyers.

  • “[T]he smallest businesses, those with revenues of less than $1 million, paid $31 billion in lawsuit-related costs. Let’s put that in perspective. These businesses, which represent just 6 percent of total business revenues, paid more than 20 percent of the national tort tab. These lawsuits really do hit the ‘little guy’ who struggles to make ends meet.”

    Maybe so. A far less strained interpretation of these statistics (if accepted as accurate) is that little companies cannot afford the sort of high-priced “elite” defense lawyers that really big companies can afford, and that, in turn, is a product of really big companies and really big law firms symbiotically raising the cost of defending civil lawsuits.

    Think about it. Gosh, could really big companies gain any advantage over smaller competitors by acquiescing in the really humongous fee structures that really big law firms demand to defend civil lawsuits?

    Just idly ruminating.

    • By Jake