Defense Costs and Insurer Reserves in Medical Malpractice and Other Personal Injury Cases: Evidence from Texas, 1988-2004

Abstract:     
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% 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 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% 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.

Keywords: defense costs, litigation, torts, medical malpractice, insurance

JEL Classifications: K13, K32, K41

Working Paper Series