American Law and Economics Review Advance Access originally published online on October 24, 2008
American Law and Economics Review 2008 10(2):185-245; doi:10.1093/aler/ahn014
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Defense Costs and Insurer Reserves in Medical Malpractice and Other Personal Injury Cases: Evidence from Texas, 1988–2004
University of Texas
University of Illinois
University of Texas
University of Texas
Send correspondence to: Bernard Black, Professor of Law, University of Texas Law School, 727 East Dean Keeton St., Austin, TX 78705, USA; E-mail: bblack{at}law.utexas.edu.
JEL Classification: K13, K32, K41
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Abstract |
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We study defense costs for commercially insured personal injury tort claims in Texas over 1988–2004, and insurer reserves for those costs. We rely on detailed case-level data on defense legal fees and expenses, and Texas state bar data on lawyers’ hourly rates. We study medical malpractice ("med mal") cases in detail, and other types of cases in less detail. Controlling for payouts, real defense costs in med mal cases rise by 4.6 percent per year, roughly doubling over this period. The rate of increase is similar for legal fees and for other expenses. Real hourly rates for personal injury defense counsel are flat. Defense costs in med mal cases correlate strongly with payouts, both in ordinary least squares (OLS) and in an instrumental variable analysis. They also correlate with the stage at which a case is resolved, and case duration. Mean duration declined over time. Med mal insurers predominantly use outside counsel. Case-level variation in initial expense reserves predicts a small fraction of actual defense costs. In other areas of tort litigation (auto, general commercial, multi-peril, and other professional liability), defense costs rose by 2.2 percent per year. Defense costs in these cases are predicted by the same factors as in med mal cases, plus the presence of multiple defendants.
Insurer reserving practices raise some puzzles. Med mal insurers did not react to the sustained rise in defense costs by adjusting their expense reserves, either in real dollars or relative to reserves for payouts. Thus, expense reserves declined substantially relative to defense costs. In other litigation areas, expense reserves rose along with defense costs.
We owe special thanks to Hyun Kim, Myungho Paik, and Fang Zhang for research assistance, and to Vicky Knox, Ken McDaniel, Clare Pramuk, and Brian Ryder at the Texas Department of Insurance for patiently answering our many questions. We thank David Studdert and Michelle Mello for providing data on defense costs from their research (Studdert et al., 2006). For comments and suggestions, we thank Richard Anderson, Tom Baker, Randy Bovjberg, Frank Chmielewski, Martin Grace, Jon Klick, Kate Litvak, and Howard Marcus and participants in workshops at the American Enterprise Institute, University of Southern California Law Center, and University of Texas Law School. Funding for this study was provided by the Center on Lawyers, Civil Justice, and the Media at the University of Texas School of Law, and the Jon David and Elizabeth A. Epstein Program in Health Law and Policy at the University of Illinois College of Law.
This paper can be downloaded without charge from the Social Science Research Network electronic library at: http://ssrn.com/abstract=979163.