Court Cases Or Social Programs?
Comparing International Liability Systems
By Professor Joan T. Schmit
For at least the past 25 years, the tort system in the United States has been subject to extensive debate and derision as being excessive and wasteful. The topic has become so mainstream that during the 2004 presidential campaign, medical liability reform was a key focus of health care cost containment discussions. Since the election, President Bush has made placing limitations on medical malpractice litigation one of his administration’s priority areas.
Arguments in favor of modifying the U.S. tort system often rely on reports of relative liability costs across national boundaries, most prominently periodic studies by Tillinghast, a business of Towers Perrin, that reports on the U.S. “tort tax.” Its most recent edition indicates that the U.S. spends $233 billion on the tort system, more than $800 per person and 2 percent of GDP. For 1998, the year with the latest available data, Tillinghast reported that Denmark, U.K., France, Japan, Canada and Switzerland all had tort costs as a percent of GDP less than half the size of the U.S.
In a Manhattan Institute study in 2002, Stephen Presser argued that U.S.-based firms are at a competitive disadvantage in part because of the extensive reliance on litigation to compensate injured parties in the U.S. He suggested that European liability systems demonstrate greater stability than the U.S. despite increasing use of strict liability standards because “there are no damages” due to the availability of national health insurance and government-sponsored plans that protect against lost earnings.
Outside of the U.S., particularly in Western Europe, immediate economic concern seems to rest more with the size and viability of social security and welfare systems than with liability. While social programs receive significant attention in the U.S., just as liability systems receive attention outside of the U.S., the rhetoric about these two areas appear to mirror each other across the ocean.
Concerns over liability compensation schemes in the European Union focus primarily on environmental liabilities and efforts to prevent extensions of U.S.-like litigation trends. Most other liability efforts are directed toward consistent regulation of safety rather than consistent payment plans. In motor vehicle liability, primary initiatives in the EU have been to assure consistent insurance availability and claims handling.
We need to study the relationship between the size of government programs and private tort liability as a first step in understanding the relationship between these two differing approaches to injury compensation. Such formal testing requires a strong understanding of global governmental and liability systems as well as collection of appropriate data.
In 2004, I participated in a pilot study that was reported to the International Insurance Society at its annual meeting in London. My co-authors were School of Business alumni Dana Kerr, Ph.D. ’02 and Yu-Luen Ma, Ph.D. ’99. We developed a model of automobile liability insurance premiums as a function of the level of governmental contributions to social security, welfare and health programs, form of liability system, accident frequency and severity and economic and cultural characteristics. Our data covered nine years for 20 countries.
We found a negative relationship between the size of government social programs and automobile liability premiums, as predicted. We also found a significant statistical relationship between automobile liability premiums per capita and the form of legal system, the number of automobile accidents, educational level and extent of urbanization. Even though the data employed in this pilot were insufficient to be conclusive, industry members were intrigued and indicated they had not considered the problem from this perspective.
I look forward to becoming better informed about differing legal and social programs around the globe in order to begin answering these questions. My hope is to work with knowledgeable scholars about international legal and social systems to collect data and contribute to the public discourse on this important topic.
Joan T. Schmit is American Family Insurance Professor of Risk Management and Insurance. She is the former president of the American Risk and Insurance Association. Tort reform is a major focus of her research, and she will work on a sabbatical research project on that topic next year at Switzerland’s St. Gallen University.
Necessity Or Myth?
By David Walsh
The American public is being bombarded with outrageous exaggerations and anecdotal evidence by both sides of the “tort reform” debate. Proponents of tort reform cite the horrors of a civil justice system they claim has spiraled out of control —multi-billion dollar verdicts result in a windfall for lawyers, a chilling effect on the business climate and doctors being forced to stop practicing in the face of the soaring cost of malpractice insurance. Those opposed to tort reform argue that the civil justice system is functioning as it is should and that tort reform is simply code for the efforts of big business and insurance companies to fatten profits by restricting the ability of individuals to seek redress for wrongs in court. The truth probably lies somewhere in the middle.
On both sides of the debate, positions are being staked out by the parties with the most to gain or lose.
Until a few years ago, the term “tort” was the province of first-year law students. In legal vernacular, a “tort” is any civil wrong for which a damaged victim can seek redress from the party who caused the harm. Generally, liability and/or damage are determined by a jury of one’s peers. Injuries or harms include, but are not limited to, automobile accidents, medical malpractice, violation of civil rights, discrimination and product liability.
So what is wrong with this system and why the demand for tort reform? The jury system, a hallmark of our constitutional rights, is certainly not the issue. Nor is the concept of holding those responsible for the harm accountable. The tort system has generated significant positive social change, such as taking asbestos out of the marketplace when the EPA would not, forcing dangerous and unhealthy products out of the stream of commerce, such as the Ford Pinto and thalidomide, and requiring higher standards of care from professional service providers. Yet, today, Congress is considering a number of “tort reform” initiatives including:
- The establishment of a national no-fault auto insurance system which eliminates the concept of fault (by not having to prove it) but reduces recovery for injuries
- Significant changes to the rights of plaintiffs to bring class-action lawsuits
- Caps on non-economic (pain and suffering) damages at $250,000
- Limits on attorneys’ fees, whether in settlement or judgmen
- Legal immunity for drug companies, nursing homes, medical device manufacturers
and HMO - Restrictions on punitive damage awards
If the system works, what is the rationale for reform? Proponents argue that the American litigation system is broken because it is clogged with junk and frivolous lawsuits that, along with massive damage awards, are driving up the cost of doing business by forcing companies to pay excessive legal expenses to fight off or settle often baseless suits.
Those seeking “tort reform” place blame squarely on the shoulders of trial lawyers, particularly those specializing in class-action lawsuits. The other side, of course, responds that the suits are not frivolous, the awards are fair and jury decisions bring important accountability to the market place.
Both sides exaggerate their position, often citing the same disputed studies and statistics in furtherance of their claims. Proponents for reform focus on large verdicts delivered by “runaway juries.” Those defending the system point to the need for accountability and the importance of compensating injured parties.
The staunchest supporters of tort reform include insurance and manufacturing industries, tobacco interests and the medical profession, all led by highly paid lobbyists and politicians beholden to political donors. Those vigorously opposing tort reform? Trial lawyers, highly paid lobbyists and politicians who are also beholden to political donors. On both sides of the debate, positions are being staked out by the parties with the most to gain or lose, making compromise difficult.
Before both sides can try to compromise, they must understand three important concepts.
First, despite the unrelenting claims and hyperbole of proponents of reform, the civil justice system is not damaged beyond repair. Likewise, the current system is not above reproach, as many on the other side of the debate would have you believe. Rather, most Americans would agree that steps are necessary to curb abuses to an otherwise effective system. For example, multi-million dollar class action settlements for defective products which result in a pittance to each of the injured plaintiffs but millions to their attorneys, is a problem that demands attention.
Second, both sides need to recognize that “tort reform” is not a novel concept. Reform to encourage litigation and accountability has been evolving for a number of years. The adoption of comparative negligence by most states and the development of strict liability sent a strong message that the manufacture or sale of defective products would not be condoned. On the other hand, the creation of the workers’ compensation insurance system that eliminated the concept of fault in employment injuries but significantly reduced damage awards for scheduled injuries, reflected a strong social and public policy that benefited both the employee and employer in industrial accidents. Congress recently passed legislation known as the Class Action Fairness Act, which among other things moves many class action cases from the state courts to the federal courts. All of these legislative initiatives, while not perfect, are reasonable responses and modifications to a tort system that has proven adaptable to change.
Third, whatever additional reforms are considered must recognize that an individual is entitled to compensation for an injury and, whenever possible, the arbitrator of liability and damages should be a jury of one’s peers.
The civil jury system has stood the test of time. It is a vibrant form of democratic accountability. A determination of liability and an award of compensation affects the behavior of potential defendants. The system determines or apportions responsibility, compensates the wrongly injured and encourages safe behavior and accountability, such as the manufacture of safe products and delivery of non-negligent services. Any tort reform must consider these objectives. Anecdotal evidence and outrageous claims cited by both sides of the debate need to be replaced by reliable statistics, thoughtful dialogue and well-crafted proposals that address the very real problems facing our civil justice system.
David Walsh earned his BBA from the UW-Madison School of Business and his law degree from Harvard. He is a partner in the national law firm of Foley and Lardner, based in Madison. Walsh has chaired the Dean’s Advisory Board of the School of Business and is a current member of the University of Wisconsin Board of Regents. He received the Distinguished Business Alumnus Award in 1997. Brian Bauman, BBA ’98, an associate with Foley and Lardner, contributed to this article.