Tort system costs are defined as costs that go to pay liability claims and to defend those claims, as well as costs to administer the system--insurance companies' operating expenses, Russ Sutter, survey leader and Tillinghast principal, explained.

"We thought that 2001 was going to show a significant increase from 2000. But I was surprised by the magnitude of the increase. It was the largest increase percentage-wise since 1986. In dollar terms, it's the largest increase in the past 50 years," Mr. Sutter told National Underwriter.

Last year his company put the cost at $179.7 billion. Mr. Sutter said that a quickening pace of the tort cost increase was the main reason Tillinghast decided to update its findings after only one year.

The study found that at the current level, U.S. tort costs amount to a five-percent tax on wages and $721 per each U.S. citizen, Tillinghast said in its report, "U.S. Tort Costs: 2002 Update."

Mr. Sutter said Tillinghast issued a report on tort costs in 2002, but prior to that the company hadn't written on the subject since 1995.

"The study that was published last year included data through 2000, which showed no increase over 1999 in terms of tort costs-to-GDP ratios. But at the time we were doing the study, which was during the fall of 2001, all signs indicated that the costs were going up significantly," Mr. Sutter said.

"So, it made sense to do the study for this year even though it was only one year removed from the previous study. We will consider whether it makes sense to update them more frequently from now on since trends are changing fairly quickly these days," he said.

The study found that the largest single contributing factor in the rise of tort costs was a significant reassessment of liabilities related to asbestos claims, which accounted for $6 billion of the $26 billion tort cost increase from 2000 to 2001.

Another important factor is medical malpractice costs, which have risen an average of 11.6 percent per year since 1975, compared to an average annual increase of 9.4 percent for overall tort costs, according to Tillinghast.

Other significant factors include: class action lawsuits and large claim awards; an increase in the number and size of shareholder lawsuits against corporate board directors; and a jump in medical cost inflation leading to higher costs of personal injury claims.

The Tillinghast study called the U.S. tort system an inefficient method of compensating injured parties. The system, the study noted, returns less than 50 cents on the dollar to people it is designed to help and returns only 22 cents to compensate for actual economic loss.

While the cost of the U.S. tort system has skyrocketed one hundred fold over the past 50 years, gross domestic product has grown by a factor of only 34, Tillinghast pointed out.

"These trends continued and became even more pronounced in 2002, with large charges for upward revisions of asbestos liability and a jump in the number of directors' and officers' (D&O) liability lawsuits," said Mr. Sutter.

"Additionally, we believe 2002 data will begin to show the impact of 9/11-related lawsuits. Absent sweeping tort reform measures, we expect most of these trends to continue in 2003 and beyond," Mr. Sutter stated.

He added that he has also been seeing mold damage claims begin to emerge as an important liability issue, "so this could be the start of something new. And we will be picking them up in future studies."

"We haven't seen any hard numbers. But from what we have seen in partial numbers, the tort costs will be up in a seven-to-11-percent range for 2002," Mr. Sutter said.

Tillinghast forecasts annual increases in tort costs in a seven-to-11-percent range for the next several years. At this rate of increase, tort costs could amount to $1000 per each U.S. citizen by 2005, the firm said.

The study also stated it expects the insurance industry to place further limits in policies as it did in the mid-1980s with the elimination of pollution coverage.

"That will be a natural reaction by insurance companies as they look to improve profitability. Insurance companies have not made much money in the last couple of years. One way to attack that situation is to provide less coverage," Mr. Sutter said.

Mr. Sutter also added that some carriers will withdraw completely from certain lines of business and markets, as is happening now in the medical malpractice market. "The most notable was St. Paul exiting the medical malpractice market in 2001. You also have the situation in a number of states where doctors are protesting the high cost of medical malpractice insurance through work stoppages," he noted.

Eric Speer, Tillinghast region manager for the Americas, said the firm believes corporations will continue to shift toward self-insurance as they attempt to gain more control over costs and as insurance prices continue to rise. "Rising tort costs, combined with the right congressional environment, will likely create more pressure for tort reform--particularly asbestos reform," he added.