Liability Costs Hurt Small Businesses Disproportionately

It seems like not a day goes by in the United States without hearing about the high liability costs burdening businesses. That includes malpractice liability costs for doctors and hospitals.

Liability costs are impacting businesses harder each year. A Towers Perrin Study illustrates how tort costs have grown much faster against businesses than against individuals since 1990, as in this chart:

Now, don't start feeling good, thinking "liability costs are being absorbed by those huge multi-national corporations so who cares anyway?".

Consider this: small businesses bear a disproportionate amount of liability costs.

It is the small business -- perhaps a family-run business or a tech startup or a local business employing a handful of people -- that bears the biggest burden, according to another study by the Institute for Legal Reform, "Liability Costs for Small Business."

In it are these telling statistics:

• Small businesses ($10 million or less in annual revenue) bear 68% of the cost of tort liability each year in the U.S., but take in only 25% of business revenue. For a business with $10 million in annual revenue, the average tort liability cost is $150,000 per year.



• Very small businesses ($1 million or less in annual revenue) bear 26% of the business cost, but take in only 8% of business revenue. A small business with $1 million annual revenue pays about $17,000 a year in tort liability costs.

Think about the money being spent on liability insurance premiums, self-insured damage awards, defense costs, and so on. That money might be better spent to expand or improve health benefits for employees, increase their take-home pay, and reward business owners and investors for their business initiative.

And before you hastily concur with Shakespeare's line to "kill all the lawyers" remember that this is a complex, systemic problem. It's not the fault of any one group -- be it lawyers, or judges, or insurance companies or juries. There is no simple fix, and it is going to take legislative action to solve.

Technorati tags: small business; legal.