Former Gov. Gary Johnson has been through it.
Neil Hise, president of an Albuquerque manufacturing firm, has been through it.
It is getting sued, and though statistically on the decline, a fear of crippling lawsuits pervades the New Mexico business community.
It’s a fear driven in part by high-profile tort cases – the McDonald’s hot coffee spill being legendary – that some call the end of personal responsibility and others call justice being served. It’s a fear that has real effects: bigger liability insurance policies for worried businesses.
It’s a fear that the New Mexico Alliance for Legal Reform, a nonprofit organization watching over New Mexico’s courts, wants to do something about.
“An unfriendly legal climate is not good for the businesses that are trying to survive here and it’s certainly not good for economic development,” says Barbara Bruin, director of the alliance. “We’re just trying to restore a little sanity to the system.”
The U.S. tort system – the branch of law dealing with people and businesses seeking monetary compensation for harm – cost $233 billion in 2002, or $809 per person, according to a 2003 report by Tillinghast Towers-Perrin, an international management and actuarial consulting firm. That’s up 13.3 percent from the $206 billion it cost in 2001, and 2002’s cost was equivalent to 2.23 percent of the country’s gross domestic product, the highest percentage since 1990, the report notes.
It’s a tort system that has produced stories, sometimes exaggerated and sometimes accurate, of plaintiffs receiving millions for alleged harm from the products, services and actions of other people.
But the Center for Justice and Democracy, a nonprofit organization working on informing the public about the civil justice system and tort reform, calls Tillinghast’s numbers misleading.
A full 14.9 percent of Tillinghast’s estimate is attributed to insurance companies’ overhead expenses; the center points out such expenses can include everything from executive salaries to rent and advertising. Tillinghast’s estimate also includes insurance claims paid out without any lawsuits being filed.
“It’s just too broad,” says Geoff Boehm, legal director at the center.
And despite Tillinghast’s estimation of increasing tort costs, the number of tort trials decided by jury and the monetary awards they produced in 2001 is lower than it was in 1992, according to a 2004 study by the U.S. Bureau of Justice.
The study, based on data from America’s 75 largest counties, showed the median award in all tort jury trials going from $64,000 in 1992 to $28,000 in 2001, and the total number of tort jury trials dropping from 9,431 in 1992 to 7,218 in 2001.
In New Mexico, the number of tort filings went from 356 per 100,000 people in 1993 to 205 per 100,000 people in 2002, according to a 2003 study by the National Center for State Courts. The study also showed that the number of tort filings in 35 states dropped 4 percent from 1993 to 2002.
Boehm said much of the clamor over the tort system’s alleged flaws is based on a few unique lawsuits – like the McDonald’s coffee case – that can misrepresent its true condition.
“A lot of the anecdotes are either just false or wildly exaggerated,” he says. “It’s easy to do.”
Behind the numbers
Regardless of how many tort cases there actually are or what their total cost may be, for those who end up in lawsuits, it can be a painful experience.
Ex-Gov. Johnson’s former company, Big J Enterprises, an Albuquerque construction company, went through a lawsuit from 1992 to 1998 that ended up costing about $1.5 million, Johnson says. It would have been cheaper to settle, but, firmly believing his company was innocent, he went to court. He lost.
“It just changed my entire business because of it,” Johnson says, pointing out that his former company’s legal fees went from nearly nothing up to around $250,000 a year after the lawsuit, mostly to defend against what he saw as a sudden increase in opportunistic plaintiffs. “It was an incredible turn-off to being in business.”
“You can’t do business without considering these lawsuits,” says Hise, president of Cemco, an Albuquerque manufacturing company. “It absolutely stifles invention.”
Cemco went through a lawsuit from 2000 to 2003. On top having to pay a settlement, the company’s liability insurance premiums rose significantly and probably won’t normalize for another 10 years, Hise says. And the company is slower to introduce new products amid fears of additional lawsuits, Hise says, and funds that might normally go toward expanding the business are being redirected toward legal and insurance expenses.
Premiums for the customized commercial liability insurance policy with Allstate Insurance Co. went up 5.3 percent in 2002, 1 percent in 2003 and 1 percent in 2004, according to Merrill Gilling, senior underwriter for commercial insurance with Allstate.
More noticeable has been the ballooning size of liability insurance policies. Gilling says some tenants in strip malls have, under pressure from their landlords, upped their coverage from $500,000 to $1 million up to $2 million or more. Depending on the size and nature of the business, that can mean premium increases as little as $50 or double the current premium – sometimes as much as $10,000.
“The awareness of the business customer to potential loss has increased,” he says. “We all hear about the ones . . . like the McDonald’s claim.”
Median awards in product liability tort jury trials went from $140,000 in 1992 to $543,000 in 2001, according to the 2004 study by the U.S. Bureau of Justice.
“Being the litigious society that we live in, if you project this big picture down the road 15 years, 20 years . . . the potential for absolute devastation is there,” Hise says. “It’s the end of the American way.”
The last resort
For many who think they’ve been wronged, a lawsuit is sometimes the only means by which to obtain the compensation they think they deserve.
Randi McGinn, a lawyer on the board of directors of the New Mexico Trial Lawyers Association, says her clients, even when justified, are often embarrassed and surprised to be filing a lawsuit.
“The courtroom is the place of last resort for people to get justice,” she says.
Allegedly frivolous lawsuits are relatively rare, McGinn says, though she admits there are bad lawyers who might bring them to court.
“Most lawyers file what they believe are necessary lawsuits,” she says. “Necessary lawsuits make a difference, both in making a wrongdoer pay and making society a safer place. Even though God made the little guy and the corporation, only the jury can make them equal.”
Time for a change?
Calls for reform of the tort system – blamed for everything from rising insurance rates to a dampening of the business climate – have left McGinn concerned that those with legitimate claims may be stopped from obtaining compensation they justifiably deserve.
One such reform concerns limiting the amount of money successful plaintiffs can receive in the form of noneconomic awards, which can include pain and suffering damages and punitive damages.
But with caps on punitive damages – meant to punish an entity for alleged wrongdoing and deter others from doing the same – there is little likelihood a company or person would change egregious practices, McGinn says.
Yet a cap on punitive damages would be a “huge step” for businesses, says Garth Simms, New Mexico state director of the National Federation of Independent Business. With limited awards, companies could theoretically purchase smaller, less expensive insurance policies – and use the extra money to improve and expand their businesses.
“It lowers peoples’ cost,” Simms says. “It actually makes this a better place to do business.”
The New Mexico Restaurant Association is pushing the Common Sense Consumption Act – also known as the Right to Eat Enchiladas Act – for the next legislative session. It is primarily designed to defend against people who would sue restaurants for making them unhealthy, says Carol Wight, CEO of the association.
“We’re making businesses liable for everything,” Wight says. “At some point people have to take responsibility for their own lives.”
The Association of Commerce and Industry of New Mexico is assembling a bill for the next legislative session that would abolish prima facie tort.
“It’s often in there . . . mostly as a catch-all in case the other torts fail and it seldom makes it to the jury, yet resources are allocated toward litigating that count,” says Tom Gulley, a lawyer serving on the association’s legal reform committee.
But McGinn says prima facie tort allows people to obtain compensation in unusual cases that don’t fit into the court’s definitions of justifiable reasons for bringing a lawsuit.
“People find more and more bizarre ways of harming each other,” she says.
Another possible reform of the tort system designed to limit frivolous lawsuits – suggested by both McGinn with New Mexico Trial Lawyers Association and Bruin with the New Mexico Alliance for Legal Reform – is the enactment of a “loser pays” reform.
Such a setup would require a lawsuit’s loser to pay the legal fees of the opposition. The idea is that people would be less inclined to file a frivolous lawsuit – which is presumably more likely to lose – if they thought a loss might mean paying the expense of the opposition’s legal fees.
“As it stands now, even when you win, you lose because you have to pay your attorney and other expenses to defend against the lawsuit,” Bruin said.
Still, McGinn says her support of “loser pays” reform would depend upon how it was worded in a legislative bill, and tort reform in general will do more harm than good.
“If you imagine that the government took away David’s sling and gave it to Goliath, then you understand tort reform,” she says.
Groups offer up ideas for reform
The tort system has been blamed for everything from rising insurance costs to the driving away of businesses and doctors. Some call it justice at work and others call it justice broken.
Here are a couple of ideas for change that have been proposed by business groups:
A lawsuit’s loser pays the legal fees of the opposition. The idea is that people would be less inclined to file a frivolous lawsuit – which is presumably more likely to lose – if they thought a loss might mean paying the expense of the opposition’s legal fees.
Cap noneconomic awards
Noneconomic awards can include pain and suffering damages, and punitive damages. Economic awards generally cover necessary expenses rising from an injury, such as medical bills, lost wages and legal fees.
Currently, in certain cases not involving state entities, juries, not state law, decide the cap on how much pain and suffering, and punitive damages can be. A limit on noneconomic awards previously proposed by the Greater Albuquerque Chamber of Commerce was three times the amount of economic damages, plus allowances for legal fees.