Workshop susAn J. forrAy and cHAd c. KArLs
illinois tort reform and the cost of medical Liability claims
In passing the 2005 law, the Illinois
legislature had attempted to limit noneconomic damage awards to $500,000
in cases involving physicians, and to
$1 million for those involving hospital
defendants.
The ruling has significant implications, as claim severities in Illinois had
been among the highest in the coun-
The ILLInoIS SUPReMe CoURT earlier this year struck down
a state law capping noneconomic (i.e., pain and suffering) dam-
age awards in medical professional liability cases. In a 4-2 decision
handed down on Feb. 4, the court upheld a 2007 circuit court ruling
that the law violated the Illinois Constitution’s separation of powers
clause by infringing upon “the inherent power of the judiciary” to
determine damage award amounts.
try. Without a cap, indemnity claim
severities for physicians are likely to
increase by approximately 23 percent,
and the average cost that insurers expend defending claims (i.e., allocated
loss adjustment expenses, or ALAE) will
increase by 10 percent (relative to what
those costs would have been had the
cap held). In total, the average increase
in claim severity (loss and ALAE combined) will be approximately 18 percent.
The impact on rates is not as clear, since
many insurers had been skeptical of the
staying power of these reforms.
What are the implications for the rest
of the country? Some 30 states have laws
limiting noneconomic damages, although
the amount of the caps, the types of cas-
es to which they are applicable, and the
mechanisms for imposing them can vary
widely. According to the American Medi-
cal Association, courts in 16 states have
upheld caps on noneconomic damages,
while 12 have rejected them. Some sup-
port for tort reform has found its way into
the recent federal health care legislation,
though Secretary of Health and Human
Services Kathleen Sebelius has said that
“this is really a state-level situation.”
This was the third time the Illinois
legislature had attempted to set a cap
on noneconomic damages and the third
time the Illinois Supreme Court had
rejected the proposal. The first cap,
passed in 1975, was overturned by the
court the next year. Twenty years lat-
er, a second tort reform act sought to
limit noneconomic damage awards to
$500,000 in “all actions involving bodi-
ly injury, death or physical damage to
property based on negligence or prod-
uct liability.” That law was overturned
in its entirety in 1997, with the court
finding it violated both the special legis-
lation and separation of powers clauses
of the Illinois Constitution.
The most recent law was more
narrowly tailored; it sought to limit
noneconomic damage awards only for
medical professional liability claims. Its
repeal leaves Illinois with among the
highest claim severities in the country.
68 continGencies JUL | AUG. 10
Projecting Potential
financial implications
As actuaries, we have no opinion on the
legal merits of the court’s decision, nor
do we take any policy position on the
advisability of imposing caps on damage
awards of any kind. Our primary objective
following the court’s repeal has been to
determine if we could devise a statistically defensible method for projecting what
the potential financial implications of the
court’s ruling might be for Illinois insurers and, ultimately, Illinois physicians.
Using publicly available loss data
from two states that require the filing of
detailed medical professional liability
damage award amounts, we created a
distributional model for economic and
noneconomic damages, as well as ALAE.
The model also incorporated the correlated relationship between these costs.
We then fit that model to Illinois claim
severity, as obtained from rate filings of
the ISMIE Mutual Insurance Co., the
largest writer of physicians’ professional
liability coverage in Illinois.
The resulting model was specific to
physicians and the $500,000 cap that
had been applicable to claims against
them. We focused on claim severities
only, as any impact on rates is less clear.
Rates for Illinois physicians, as for any
other market segment, are subject to
additional forces beyond the underlying projected loss costs. Any impact on
claim frequency would also be hard to
project—although the experience of other states indicates that claim frequency
tends to increase when tort reform is
overturned and that such an increase
can be significant.
ShUTTeRSToCk / ISToCk, Bono ToM STUDIo
overview of the model
The general approach to building our
model first required an understanding of
the components influencing Illinois physicians’ professional liability claim costs.
