Commonwealth of Virginia vs. State of Maryland
Tuesday, May 30, 2006
By Lawrence McQuillan and Hovannes Abramyan
It’s hard to pick up the paper these days without reading about an over-the-top lawsuit. Whether it’s the woman who claimed she found a finger in a bowl of fast food chili; the plant safety director who sued for wrongful termination after showing up for work with cocaine in his blood; or the student who sued to end summer homework.
Has our entire nation gone litigation-mad?
Well, maybe. But the situation is a lot worse in some states than others. And perhaps nowhere is the difference more striking than in the D.C. metro area — specifically in the contrast between Maryland and Virginia.
These two states are separated only by a small stretch of the Potomac. If it’s warm in Arlington, chances are it’s warm in Bethesda. But Maryland and Virginia are worlds apart when it comes to their legal climates.
Our new study, the U.S. Tort Liability Index, ranks states’ performances in creating a healthy tort system. On our list, Virginia ranks eighth, while Maryland came in at a dismal 46th.
Consider this: In 2003, Marylanders filed 17,679 civil cases per 100,000 residents. Virginians weren’t angels in this regard, filing 13,822. But they beat Marylanders handily — by 22 percentage points. And that’s just one of many statistical examples.
If you’re a business with substantial liability risk trying to decide whether to set up shop in Arlington or Chevy Chase, you have a pretty strong legal incentive to choose Virginia.
When looking for a place to do business — or expand an existing one — CEOs have traditionally looked at a variety of factors: tax rates and regulation, for example. They’re increasingly adding legal climate to that list.
Few companies want to do business in states where they’ll be on the hook for millions if a phony lawsuit gains traction.
It’s one major reason why the “Northern Virginia Corridor” has become famous for attracting new businesses. And it’s also why you don’t often hear of companies relocating to southern Maryland.
An improved legal climate can also result in millions of dollars in state coffers. A recent study by scholars Todd Buchholz and Robert Hahn found that per-capita Gross State Product increased by 0.75 percent for every 10 percent improvement in a state’s legal ranking — improving the opportunities for wage growth.
That’s why states that act on tort reform are improving their economies, while those that ignore the problem are encouraging the outflow of business, capital and people. Unsurprisingly, the state that leads the nation in tort reform, Texas, has more than tripled the job growth rate of the state that comes in last, Vermont.
Of course, tort law serves an important purpose — to compensate the victims of misbehavior for their losses.
Over the years, though, tort law has been twisted into a system that not only punishes the accused, but often punishes for actions only remotely related to the victim’s injuries, and in amounts that are wildly disproportionate to the harm caused.
Who wins?
The lawyers.
In 2002, the U.S. tort system returned less than 50 cents of every tort-cost dollar to injured claimants themselves.
Everybody else ends up paying the costs of tort excesses.
Liability insurance to protect against lawsuit costs is an ever-increasing operating expense for businesses. And the more a business spends each year on insurance, the less it has to spend on research, wages and health care. Prices go up, too.
In 2000, the President’s Council of Economic Advisers estimated that the excessive costs of the tort system nationwide were $136 billion — equivalent to a 2-percent tax on consumption, a 3-percent tax on wages, or a 5-percent tax on capital. Using their methodology, excessive costs would today exceed $198 billion, representing a yearly tax of $2,654 on a family of four.
So what accounts for Maryland’s discouraging showing and Virginia’s success?
Virginia lawmakers have simply been more aggressive in enacting tort reform than their counterparts in Maryland.
One important reform is capping the amount a jury can award in non-economic and punitive damages, which are designed to compensate plaintiffs for hard-to-quantify costs like “pain and suffering.” Studies have found that damage caps lower both insurance costs and litigation rates.
In Virginia, punitive damages are limited to $350,000. The state has also imposed limits on total damages that can be recuperated in medical liability cases. Maryland hasn’t.
By ignoring tort reform, Maryland leaders are letting jobs disappear. Virginia leaders, on the other hand, are luring businesses and jobs, creating a stronger state economy for the next generation.
Virginia and Maryland lawmakers may not be able to stop every lawsuit over a scalding pickle, like the one brought against McDonald’s in 2000. But they can reduce significantly the incentives to file meritless cases and improve their state’s business climate in the process.
Lawrence J. McQuillan is director of Business and Economic Studies at the Pacific Research Institute and Hovannes Abramyan is a policy fellow at PRI. They are co-authors of the Tort Liability Index: 2006 Report.
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