Liability System

Liability System

THE TOPIC

FEBRUARY 2014

Litigiousness has become a societal problem in the United States.

U.S. consumers pay directly for the frequency and high cost of going to court through higher liability insurance premiums because liability insurance rates reflect what insurance companies pay out for their policyholders' legal defense and any judgments against them. Consumers also pay indirectly in higher prices for goods and services since businesses pass on to consumers the expenses they incur in protecting themselves against lawsuits, including the cost of insurance.

Tort law is the basis for the U.S. liability system. It is the body of law governing negligence, intentional interference and other wrongful acts that result in injury or damage for which a civil action can be brought, with the exception of breach of contract, which is covered by contract law.

Liability insurance distributes the costs of the liability, or tort, system. The tort system reflects the values of society, which through the courts and the legislative process, decides which injuries should be compensated, in what circumstances and in what amounts.

Beginning in the 1980s, in an effort to reduce litigation costs, business groups and others mounted a campaign to reform tort law. Most reforms have taken place on the state level, and during the last decade all but a handful of states passed significant tort law reforms. However, some have been overturned by the courts.

RECENT DEVELOPMENTS

  • Disparate Impact Theory: In December 2013 a case, Mt. Holly v. Mount Holly Gardens Citizens in Action, Inc., which the U.S. Supreme Court had agreed to hear, was settled out of court. The case focused on what constitutes racial discrimination in housing and lending: does it have to be intentional to be illegal or is an action that results in an unequal impact, regardless of intent, discriminatory. The settlement of this case left unanswered the question of whether and under what circumstances the “disparate impact theory” can be used.
  • When the court agreed to hear the case. insurers anticipated that the justices would clarify whether and to what extent disparate impact claims are recognized under the Fair Housing Act (FHA). In February 2013 the U.S. Department of Housing and Urban Development (HUD) ruled that the disparate impact theory applied to all housing-related practices, including homeowners insurance. In the Mount Holly case, the plaintiffs argued that a town plan to acquire properties to redevelop a high-crime area is discriminatory regardless of intent because it affects more minorities than whites and thus violates the FHA.
  • Meanwhile, two insurance trade associations, the American Insurance Association and the National Association of Mutual Insurance Companies, are challenging HUD’s ruling. The case, which was filed in the U.S. Court of Appeals for the District of Columbia Circuit, had been stayed pending the Supreme Court decision. Some observers say it is unclear whether the court of appeals will rule on insurers’ challenge because the business of insurance is regulated by the states.
  • Gun liability: The shootings at the Sandy Hook primary school in Newtown, Connecticut, in 2012 raised the level of debate about gun control and how to reduce the number of gun-related deaths. A number of states considered mandatory liability insurance for gun owners following the shootings, but currently no primary insurance company offers gun liability insurance. Excess personal liability coverage for gun owners is available through some firearms associations.
  • Advocates of mandatory liability insurance believe that requiring the coverage would create an incentive for gun owners to consider safety measures such as safety locks or to purchase less powerful weapons. But accidental deaths represent just a small fraction of gun-related fatalities. Insurance generally covers accidents and unintentional harm. No insurer offers coverage for illegal acts, which make up the bulk of the recent incidents that are spurring gun control debates.
  • Tort Liability, State Rankings: In December 2013 the American Tort Reform Association (ATRA) released its annual list of states and counties characterized as “Judicial Hellholes,” places where, ATRA says “judges systematically apply laws and court procedures in an unfair and unbalanced manner” to the extent that they have a disproportionately harmful impact on civil litigation. ATRA explains that personal injury lawyers seek out these places as targets for their efforts to expand liability and develop new opportunities for litigation. ATRA’s newest list includes five Judicial Hellholes, topped by the state of California, which had this designation in 2012 also. California has become a haven for frivolous consumer class action lawsuits, ATRA says. Second is Louisiana where claims against energy companies, in particular “fictitious” claims against BP, threaten the state’s onshore oil and gas production. Third, fourth and fifth are New York City; West Virginia; and Madison County, Illinois, no strangers to the list. New to the Hellholes list is St. Clair County, Illinois, and South Florida which has moved up from the Watch list.
  • The Watch List includes 10 jurisdictions that should draw attention because of their histories of “abusive litigation” or “troubling developments,” among them Cook County, Illinois; Baltimore, Maryland; and Philadelphia, which in recent years was on the Hellholes list. Philadelphia initiated some significant reforms and now has improved its procedures for mass tort litigation. A number of jurisdictions in ATRA’s report are cited for their handling of asbestos-related cases.
  • This year ATRA’s report again includes a positive feature, “Points of Light,” which focuses on some fair and balanced decisions in states with reputations for not being friendly to civil defendants.
  • The U.S. Chamber of Commerce has issued its 2012 ranking of state liability systems according to 10 criteria dealing with the conduct of civil trials. In its biennial survey of more than 1,100 senior attorneys in large corporations, the U.S. Chamber’s Institute for Legal Reform found that the 10 states with the best liability systems were, in descending order: Delaware, Nebraska, Wyoming, Minnesota, Kansas, Idaho, Virginia, North Dakota, Utah and Iowa. The 10 states with the lowest rankings were Florida, Oklahoma, Alabama, New Mexico, Montana, Illinois, California, Mississippi, Louisiana and West Virginia, in last place. This is the ninth year the Chamber has ranked states’ liability systems.

STATE TORT REFORM ISSUES

  • According to ATRA, although 2014 is expected to be quieter than 2013 in terms of tort reform, due to the shorter legislative sessions typical of an election year, and the fact that four states—Montana, Nevada, North Dakota and Texas—will not meet in regular session this year, comprehensive tort reform is likely to be considered in Missouri, North Carolina and South Carolina.
  • Caps Upheld: Mississippi’s $1 million cap on noneconomic damages was upheld at the end of February 2013 in an auto accident case where the jury did not specify how much of the award was for economic damages and how much for noneconomic damages, such as pain and suffering. In October 2012, the Kansas Supreme Court upheld for the second time a 25-year old cap on noneconomic damages, concluding that the cap was a “reasonable trade-off” if it held down medical malpractice insurance premiums. In Missouri a bill would reinstate a $350,000 limit on noneconomic damages in medical malpractice lawsuits. The bill seeks to re impose the cap and at the same time avoid the constitutional issue that led the Missouri Supreme Court to overturn a much broader law last year. (See below.)
  • Caps Overturned: In a ruling in June 2013 the Oklahoma State Supreme Court found that the state’s 2009 Tort Reform Act was unconstitutional in that it violated the state’s single subject rule. The law included some 90 different reforms.
  • In August 2012, in a 4-3 decision, Missouri’s Supreme Court overturned a 2005 law that capped noneconomic damages in medical malpractice cases at $350,000, saying that the limits infringed on a claimant’s right to have a jury determine the appropriate amount of compensation. Before the 2005 law was passed, the state had limits on noneconomic damages, but they were higher and applied to each defendant. In many cases there are multiple defendants.
  • In Georgia the Supreme Court struck down caps on noneconomic damages in 2010. Limits on pain and suffering and other claims for emotional damages were the centerpiece of tort reform legislation enacted in 2005 to rein in medical malpractice costs. The reform legislation in Georgia capped noneconomic damages at $350,000 for one defendant and $700,000 for multiple defendants. Chief Justice Carol Hunstein said in her decision that the existence of caps interferes with a jury’s duty to determine damages.
  • In February 2010 the Illinois Supreme Court overturned the state’s 2005 medical malpractice statute, which capped noneconomic medical malpractice awards at $500,000 in lawsuits against physicians and $1 million for hospitals. In a 4-2 decision, the court ruled that the law violated the state’s constitutional principle of separation of powers in that lawmakers had made decisions that should be made by judges and juries. The constitutionality of limits on jury awards had come before the state’s high court on two other occasions.
  • Bad Faith: Over the past few years, a number of states have considered bad faith proposals. Bad-faith lawsuits allege bad faith in the settlement of a claim. Bills were introduced in Oregon and New Jersey in 2013. Several states have enacted laws that allow first-party bad-faith lawsuits against insurers, including Washington (2007), Maryland (2007) and Minnesota (2008), and many additional states and the District of Columbia considered such legislation. (A first-party claim is one filed by the policyholder under the policyholder’s insurance policy.)
  • According to a study by the Insurance Research Council (IRC), “The Impact of Third-Party Bad-Faith Reforms on Automobile Liability Costs in West Virginia,” published in October 2011, reforms adopted by the West Virginia State Legislature in 2005 reduced insurance costs by about $200 million over the five-year period following the reforms’ enactment. The legislation eliminated the right of third-party insurance claimants to file lawsuits against the other person’s insurance company when they believed the company had treated them unfairly. Instead of turning to the courts, dissatisfied claimants can now file their complaints with the insurance commissioner, who is responsible for investigating whether an insurer has violated the state’s Unfair Trade Practices Act and imposing the appropriate fines and penalties.
  • Another IRC study published in March 2011 entitled “The Impact of First-Party Bad-Faith Litigation on Key Insurance Trends in Washington State” found a significant surge in homeowners insurance claim payments from 2006 to 2009, which it attributes to Washington’s enactment of the Insurance Fair Conduct Act in December 2007. The Act, R-67, simplified the process for dissatisfied claimants to file bad-faith lawsuits against insurers so that Washington State now has the lowest standard in the country for the filing of first-party bad faith lawsuits. According to the study’s findings, the measure could have caused as much as $190 million in higher claim costs for the years 2008 and 2009. Although average claim payments increased in other states too, the average increase in Washington was 17 percentage points greater than in the control group states.
  • Under R-67, insurers can be sued for three times the amount of damages, plus attorneys’ fees. The threat of costly litigation and treble damages pushes insurers to settle more questionable claims without a full investigation and to settle for higher amounts to reduce the risk of punitive damage awards.
  • Arbitration: To keep small disputes out of the courts, insurers are increasingly turning to arbitration. In 2013 the nation’s largest arbitration provider, the nonprofit Arbitration Forums, resolved more than 533,000 inter-insurance disputes, valued at $2.4 billion. The organization’s arbitration services save about $700 million annually in litigation costs. Disputes leading to arbitration typically arise when insurance or self-insured companies believe their policyholders or employees are not at fault or due to disagreement over the percentage of liability or the amount of damages. More than 85 percent of these disputes involve auto collisions.
  • Court Filings and Awards: According to Lawyers USA, the average size of the top 10 jury verdicts rose in 2012 for the fifth consecutive year, jumping by almost $20 million, from almost $184 million to $203 million. The top award in 2012 was $716.5 million, much higher than the $482 million top award in 2011. This year’s top award involved a convenience store that sold alcohol to a teenage driver who hit another vehicle, killing its occupant. However, the next highest award was significantly lower, at $179.7 million, a sum that was awarded in a silo explosion case. Four of the top 10 were medical malpractice cases. All of this year’s top 10 verdicts were greater than $100 million. The lowest was $109 million. Lawyers USA restricts its reporting to cases involving individuals, families or small groups. The group does not include in its listings business-to-business lawsuits, class actions or consolidated cases.
  • According to Jury Verdict Research (JVR) data, in 2010 (most recent data available) the median award for all plaintiffs’ verdicts in personal injury cases combined was $33,249, down from $38,337 the previous year. The award range was also lower than in 2009 and the mean was the lowest since 1996. The recovery probability, at 48 percent, was up slightly from 47 percent in 2009 but still considerably lower than the peak of 63 percent in 1988. By state, median compensatory awards were highest in New York and New Jersey.
  • Shareholder Suits: While the number of securities class-action settlements in 2012 declined to 53, a 16-year low, the value of settlements increased by more than 100 percent, due largely to the number of mega-settlements, according to Cornerstone Research’s latest study. Mega-settlements accounted for nearly 75 percent of all settlement dollars in 2012, the highest proportion since 2006. The 2012 average reported settlement, at $54.7 million, decreased slightly from the 1996-2011 average of $55.2 million, while the median of $10.2 million in 2012 increased from $8.3 million for the same period, the report notes.
  • According to NERA Economic Consulting’s “Recent Trends in Securities Class Action Litigation: 2013 Full Year Review” report, released in January 2014, the number of securities class-action filings rose by 10 percent to 234 from 213,  compared with the average over the past five years of 224. Average amounts for “usual” settlements (those under $1 billion and excluding two specific classes of settlements) broke earlier records, hitting $55 million, an increase of 53 percent over 2012 and a 31 percent increase over the previous high in 2009. The median settlement was $9.1 million, a 26 percent decrease from 2012. NERA says large settlements were larger, driving the average settlement amount to its record high, but there were numerous small settlements, which pushed down the median amount. Nine settlements exceeded $100 million.
  • Tort Costs: Towers Watson’s “2011 Update on U.S. Tort Costs” is its 15th annual study highlighting trends and findings on the cost of the U.S. tort system. The study found that tort costs rose in 2010 due to the April 2010 Deepwater Horizon drilling rig explosion and resulting oil spill in the Gulf of Mexico. Absent that catastrophe, tort costs for 2010 would have shown an overall decrease of 2.4 percent, according to Towers Watson, following a 1.2 percent drop in 2009. Among the various types or lines of insurance, tort costs declined the most for commercial auto liability, perhaps the most sensitive economically due to a lower level of economic activity, and rose 1.1 percent for personal auto.

MEDICAL MALPRACTICE

  • Reducing Medical Malpractice Lawsuits: A number of proposals are being tried in an effort to reduce the cost of the medical malpractice system. In March 2013 Oregon adopted legislation that would set up a system of out-of-court mediation to try to avoid lengthy and costly lawsuits. In Massachusetts healthcare professionals can now disclose unanticipated adverse outcome to patients, apologize and offer fair compensation. In New Hampshire a healthcare provider or its insurer can make an early settlement offer to an injured patient considering a medical malpractice lawsuit.
  • One idea that has been discussed for a while and now forms the basis for new legislation is the creation of a no-fault medical malpractice system modeled on workers compensation, the no-fault program that exists in every state to compensate workers for medical care and lost wages resulting from on-the-job injuries and, in the case of death, to compensate their families. Bills have been introduced in several states to set up special courts to deal with medical malpractice cases but Florida was the first to consider a no-fault compensation system. Georgia has also considered the creation of such a system with The Patient Injury Act.
  • The Florida bill died in the House Judicial committee in March 2012. The organization behind the bill, Patients for Fair Compensation, estimated that implementation of such a system in Florida would eliminate up to an estimated $40 billion per year in defensive medicine costs, or the one in three dollars spent on healthcare in that state that currently pays for unnecessary tests and treatments that physicians order out of fear of being sued. Data is being gathered, and a formal evaluation of the communication and resolution program and the judge-directed negotiation program is being conducted by the Harvard School of Public Health.
  • New York State received a $3 million grant in 2010 from the Department of Health and Human Services (HHS) to conduct a three-year pilot program aimed at promoting patient safety and achieving rapid settlement of medical malpractice cases wherever possible, thus reducing “transaction costs,” which are estimated to make up about 60 percent of total costs.
  • Five New York City hospitals participated in the study: four initiated safety initiatives in obstetrics and one in general surgery. The grant called for each hospital to establish an early disclosure program through which patients are notified of medical errors and offered compensation and for the state to set up a special health court with specially trained judges to handle negotiations in cases that are not settled and lead to the filing of lawsuits. Of the 20 programs funded by HHS under a federal program to encourage states to design demonstration projects that would lead to reduced costs, New York’s was the only one awarded to a court system.
  • The program is based on a model created by a New York City judge that is used for all medical malpractice cases involving the Health and Hospital Corporation, which runs New York City’s municipal hospitals. The “judge-directed negotiations” program has produced savings of up to $50 million annually in defense costs and indemnity payments.
  • Insurers commend the program but note that its usefulness is weakened because participants can opt out at any time. New York State hospitals spend more than $1 billion annually on expenses related to medical malpractice, representing 3 percent of revenues, according to the state’s health department. New York led the nation in the number of medical malpractice claims filed with the National Practitioner Data Bank for the decade ending in 2009.

BACKGROUND

Liability insurance pays for amounts paid to the claimant as compensation for injury and for the costs of defending the policyholder in court. The American civil liability system cost $25.7 billion in 2008 in direct costs and many billions more in indirect costs. Tort costs accounted for about 1.8 percent of the nation’s gross domestic product, down from a high of about 2.2 percent in the years 2002-2004 but up from 0.6 percent in 1950, according to data from Towers Perrin, an actuarial consulting firm. Looking at the data another way, tort costs equaled $838 per U.S. citizen in 2008 compared with $12 in 1950.

An earlier Tillinghast study suggests that the tort system is highly inefficient, returning less than 50 cents on the dollar to claimants. Breaking down costs, Tillinghast found that an estimated 22 cents go to litigants for their actual (economic) losses and 24 cents to compensate for pain and suffering (noneconomic losses). Of the remaining 54 cents, 19 cents pays for claimants' lawyers, 14 cents for defense costs and 21 cents for administrative costs associated with the settlement of tort claims.

There are signs that we have reached the limit of what people believe we can afford to pay for compensation, not only in terms of the number and cost of awards but also in terms of the overall impact of excessive litigation. Many legal experts believe the American civil justice system is in need of reform. Such critics cite the number of lawsuits, the size of some awards and the rise over time in the number of class action lawsuits.

Lawsuits represent only a small portion of total liability claims, however. Only 2 percent of such claims are settled by verdict and only one-third of claims become lawsuits. Nevertheless, lawsuit verdicts are important because they influence the damage amount sought by plaintiffs and the size of out of court settlements.

The law is constantly changing in response to societal needs and perceptions of justice. New legal theories or modifications of existing tort law are continually being developed. Fifty years ago reformers worked to rectify what they believed was a bias in the tort system toward defendants and business interests, making it easier for plaintiffs to receive compensation for their injuries. Now reformers are working to reduce what appears to many to be abuse of the tort system by those representing plaintiffs. Supporters of tort reform were successful in the 1980s and early 1990s in getting major legislation enacted in many states. They also set in motion a more conservative attitude toward jury awards among the public. Bills continue to be introduced in those states where major tort reform legislation was never approved or was overturned and to correct specific situations in many others.

Changes in Legal Doctrine and Other Trends: In most states prior to the 1960s, an injured person would be compensated only if the defendant was wholly responsible for the plaintiff’s injuries. As societal values changed, the doctrine of contributory negligence, under which plaintiff’s’ claims would be denied if they contributed to the injury through their own actions, gave way to the doctrine of comparative negligence, which requires damages to be apportioned based on the degree of fault. This change gradually occurred in all but a handful of states.

There are two major categories of comparative negligence: pure and modified. Under the pure form, damages are reduced by the amount of the plaintiff’s negligence. The modified form is divided into three types: the "less than" rule or 49 percent, i.e., plaintiffs may receive damages if their negligence is not as great as the defendant’s; the "not greater than" rule or 50 percent system, i.e., recovery is barred if the plaintiff’s negligence is greater than the defendant’s; and the "slight versus gross" system, where the plaintiff may receive damages if the plaintiff’s negligence was slight in comparison to the defendant’s negligence.

Changes in the area of municipal liability brought about a large increase in the number of suits. Prior to the 1960s, in all but a few states public entities were not liable for civil wrongs and were protected against personal injury actions by a common law doctrine known as sovereign or governmental immunity. However, as state and local governments began to provide a growing array of services that were also available in the private sector, from paving roads to managing recreational programs, the idea that governments were not subject to the same legal standards as private citizens and corporations carrying out the same activities offended the public’s sense of justice. Today government entities can be sued for false arrest, failure to arrest and failure to meet certain standards of care in almost every aspect of governmental activity.

Class Actions: Class actions settle in a single lawsuit the rights and liabilities of people who have similar claims. In order for claims to be consolidated in a single suit, the court must certify that the case meets Federal Rule of Civil Procedure 23, which sets out the requirements for claims to be eligible for class-action status.

Several factors distinguish class actions from other kinds of lawsuits such as automobile accident cases. In class actions, there are a large numbers of claimants who have suffered a common set of injuries incurred in the same or similar circumstances and most plaintiffs are represented by a small number of law firms, each of which may represent hundreds or thousands of claimants.

There are many different types of class actions, including shareholder and civil rights suits. In the 1980s and 1990s, lawyers began to use the class-action lawsuit to settle what became known as "mass torts"—personal injury cases involving medical devices, toxic substances such as asbestos, and new pharmaceutical products where many people sustained injuries from the same product. Although class actions have been certified in many personal injury cases, the lawyers and judges who wrote the federal class-action rule adopted in 1966 said that a "mass accident" is ordinarily not appropriate for a class action because of the conflicts among state laws and the differences in the claimants’ injuries. Nevertheless, they said, a class action may be brought if the legal and factual issues in common outweigh the differences. As a practical matter, some judges certify mass torts because the individual cases would overwhelm the courts.

Although this kind of litigation is not new, the number of class actions appears to have grown in recent years. It is difficult to ascertain the number of cases because state courts, where the majority are filed, publish little data on this subject. From the viewpoint of the claimant, class actions have some advantages. First, they prevent the defendant’s assets from being depleted by the first judgment so that little remains for any subsequent claimant. Second, they allow a group of injured citizens to obtain redress without incurring huge legal fees. However, some public policy observers believe that the publicity surrounding class actions is beginning to lead to abuse of the legal system. At their worst, critics say, class actions can amount to legalized blackmail for defendants; a sell-out for claimants, who may receive little compensation for their injuries; and a get-rich scheme for lawyers who receive a percentage of the total settlement.

A newer form of class actions are the cases brought by state attorneys general against private industries, claiming compensation for the cost of injuries caused by their products to the state. Examples include the cost of treating diseases caused by smoking tobacco; mental retardation among children resulting from ingestion of lead, primarily lead paint; and medical care for victims of gun injuries. In such cases, trial lawyers are hired at no cost to the state because they work on a contingency fee basis. But because there is no expenditure of taxpayer monies there is also no legislative oversight. The lawyers may be hired with little or no competitive bidding or public scrutiny. Some public policy observers go beyond criticizing the contracting process. They see these class actions as a subversion of the tort system, a form of regulation through litigation in that attorneys general not only seek payments for government programs that help those who have been injured but also seek changes in the business practices of the industries being sued. In 1998, forty-six states agreed to settle lawsuits against tobacco companies over public-health costs linked to smoking. The $246 billion deal, which eliminated the uncertainty of settling the lawsuits state by state, was the largest civil settlement in U.S. history.

In a study on class action lawsuits, “Class Action Dilemmas: Pursuing Public Goals for Private Gain,” the RAND Institute for Civil Justice lends its support to some tort reform legislation such as limiting forum shopping. But the study’s authors also say that the key to improving outcomes and limiting abuse in class-action litigation over money damages is increased regulation of settlements and fee awards by judges. Judges should reward class-action attorneys only for lawsuits that actually accomplish something of value to class members and society.

Restoring the Balance between Plaintiffs and Defendants: Over time there have been swings in the balance between plaintiffs’ and defendant’s rights. It became increasingly apparent in the 1980s that in the attempt to make up for past imbalances the law had swung too far in favor of plaintiffs. For example, in most states, under the doctrine of joint and several liability, if two or more persons have a part in causing a plaintiff’s injury, they are joint wrongdoers and are jointly and severally liable. They are, therefore, responsible for the whole amount a plaintiff may recover for his or her injuries, regardless of each defendant’s share of fault. The change to comparative negligence in the 1960s and 1970s greatly affected the equity of the joint and several liability rule. It meant that a plaintiff who was 45 percent at fault may collect the whole award payment from a defendant much less to blame for the accident than the plaintiff himself. In such cases, defendants with "deep pockets"—corporations and municipalities seen as having an almost unlimited power to raise money through taxes—often ended up footing the bill. In the mid-1980s states began to modify this rule to make the tort system more equitable. Some abolished joint and several liability altogether, making each party responsible for its share of blame. Some abolished it for defendants 50 percent or less liable or restricted its application.

Members of Congress have also taken up tort reform fights in an attempt to create more uniform liability laws and extend successful measures to all jurisdictions. Over the years pro-reform lawmakers have pushed for products liability, class-action, medical malpractice liability and asbestos reform, among others.

There is also the issue of punitive damages. People who bring suits may ask for punitive damages in addition to compensation. Intended to "punish" a defendant’s outrageous conduct, punitive damages can amount to millions of dollars, although many initially large awards are significantly reduced on appeal. Many believe that the prospect of receiving a big "bonus" brings into court cases that otherwise could be settled without a judge or jury, especially where the dispute is relatively minor. Some argue that if serious wrongs have been committed as opposed to common negligence, wrongdoers should be punished by criminal, not civil, courts. Others believe that punitive damages belong within the domain of civil law but that the fully compensated winning party should not be the beneficiary (the punitive award should go to the state or to charity) and the size of punitive damages should bear some relationship to the award for compensatory damages. (Since the 1980s a small minority of states has passed legislation that sets aside a percentage of punitive damage awards for the state, but in a few states these laws have been repealed.) And in products liability suits, a single defendant should not be "punished" over and over again for the same defect each time a new case goes to trial.

One problem caused by multiple punitive damage awards is that the first few plaintiffs to bring suit may receive large awards, leaving the defendant with barely sufficient funds to pay subsequent plaintiffs’ out-of-pocket expenses. Fear of using up all available funds to pay punitive damage awards was one of the reasons Manville Corporation, the asbestos manufacturer; A.H. Robins, maker of the Dalkon Shield contraceptive device; and Dow Corning, maker of silicone breast implants, filed for bankruptcy.

The issue of punitive damages and their constitutionality has been brought before the U.S. Supreme Court. In the first case designed to guide lower courts on the imposition of punitive damage awards, Pacific Mutual Life Insurance Co. v. Haslip in 1991, the court ruled that the punitive damages awarded did not violate due process. The court stated that the judicial procedures, designed to ensure that punitive damages were not egregiously out of proportion to compensatory damages, were followed in the case. Punitive damages were four times greater than compensatory damages, which the court acknowledged were high, but they did not cross the line into the area of constitutional impropriety, it said.

More recently, the Court moved closer to determining when punitive damages may be excessive in a State Farm case involving a bad faith award. The ruling was handed down in April 2003. However, the high court has yet to rule in a case that involves physical harm. In the State Farm case, State Farm v. Campbell, the high court overturned a $145 million punitive damage award (145 times the compensatory damage verdict) imposed by a Utah jury. The court ruled that juries should generally not be allowed to consider a defendant’s wealth when setting a punitive damage award. This was the first time the court had addressed this common but controversial practice directly in a majority opinion. The court also characterized the ratio of the compensatory damages to the punitive damages as unreasonable. However, when the Utah court again reviewed the case, it lowered the punitive damage award to $9 million, an amount that still exceeds the guidelines issued by the nation’s highest court. The U.S Supreme Court declined to review its decision, letting the Utah Supreme Court ruling stand.

In State Farm v. Campbell, the high court elaborated on an earlier 1996 decision in an Alabama case, BMW of North America, Inc. v. Gore, which set out three guidelines to determine when punitive damage awards are constitutional. Justice John Paul Stevens, writing for the majority, described the three-part fairness test: the degree of reprehensibility of the defendant’s conduct; the ratio of punitive to compensatory damages or actual harm to the plaintiff; and the difference between the award and comparable penalties under the law. Applying these precepts to the BMW case, Justice Stevens said that BMW had not acted in bad faith and had caused only minor economic loss (as opposed to personal injury); that the ratio of punitive damages to actual harm was 500 to 1; and that under Alabama’s Deceptive Trade Practices Act, the defendant would have paid a $2,000 penalty, a tiny fraction of the award, and lesser amounts in some other states.

While punitive damages are awarded nationally to a small percentage of plaintiffs, about 4 percent according to a 2002 study by Cornell University professors, in some jurisdictions the percentage of punitive damage awards can be exceedingly high. A 1997 study conducted by Cornell University and the National Center for State Courts found that in one Georgia court punitive damages were awarded in 25.8 percent of cases in which plaintiffs prevailed. Because without clear limits there can be dramatic exceptions to the norm, fear of an irrational punitive damages award still influences settlements, tort reform advocates note.

Scientific Evidence: The U.S. Supreme Court ruled in 1993 on the admissibility of scientific theories as evidence in federal courts. The decision in the case, Daubert v. Merrell Dow Pharmaceuticals Inc., focused on the use of "junk science" in personal injury trials. A federal district court upheld a ruling that the evidence the plaintiffs used was "sub-standard"—it had never been published, nor had it gone through a "normal peer-review process." The federal court ruled that such a process was necessary to prove the general acceptance rule of evidence.

In the past, federal courts had relied on two measures of acceptancy for scientific evidence. The first, used in this case, is known as the Frye rule, after a 1923 case in which the judge refused to allow the results of an early lie detector on the grounds that the results of lie detector tests were not generally accepted by scientists and others in the field as reliable. A less stringent rule was adopted in 1975 by Congress as one of the Federal Rules of Evidence. That rule (702) says that experts who are qualified in their field may present their ideas as evidence to a jury, even if their ideas do not represent a consensus of their colleagues, as long as the evidence is relevant to the case and may help a jury to reach a verdict.

In a unanimous decision, the Supreme Court said that the newer rule should be used to determine the admissibility of evidence. In addition, the high court said that federal judges must act as gatekeepers, excluding testimony that is not relevant or reliable. Writing for the majority, Justice Harry A. Blackmun said that federal judges possess the capacity to determine whether the reasoning or methodology underlying the testimony is scientifically valid and to decide what evidence the jury should hear.

In December 1997, further defining its 1993 decision in Daubert vs. Dow, the U.S. Supreme Court ruled that trial judges may not only act as gatekeepers to ensure scientific testimony is relevant and reliable, but also that their decisions should be upheld unless found to be manifestly erroneous. Then, in March 1999, broadening the scope of the 1993 ruling, the high court said in the case of Kumho Tire Co. v. Carmichael that a judge’s gate keeping powers were not limited to scientific matters. The Kumho case, which involved the failure of a minivan tire on a cross country trip, centered on the testimony of a mechanical engineer who had worked in the field of tire design for 10 years.

Growth in Delays: Compounding the problem of growth in the volume of lawsuits is growth in the time it takes to move a case through the trial process, resulting in backlog and delay. Just a few decades ago, the protracted lawsuit was a rarity. Today, as a result of budget cuts and a system not designed to handle so many cases, their disposition may take months and even years. In 1950 only 20 civil trials in federal courts lasted longer than 20 days. By 1981 the number of comparably lengthy trials had multiplied ninefold. The National Center for State Courts, in the most comprehensive study of court delay ever undertaken, found that median processing time in 1989 for all tort cases in the 25 urban trial courts studied was 441 days. Median times for tort cases varied greatly, ranging from 215 days in Wichita to 953 days in Boston. Median times in civil cases disposed of by jury trial ranged from 356 days in Fairfax, Virginia, to almost five years in Providence. The study also found that there is no statistical correlation between the size of a judge’s caseload and case processing time. According to Jury Verdict Research, in 2009 the median time from filing a medical malpractice case to trial date was 31 months, three months less than in 2008 but three months more than in 2003.

One avenue being explored to lessen delay is known as alternative dispute resolution (ADR), which includes arbitration, where disputants agree to be bound by the decision of an independent third party, and mediation, where a third party is used to try to arrange a settlement between the contending parties. ADR is being used successfully by many insurance companies to resolve disagreements among parties to auto accidents and by many businesses although it has yet to gain universal acceptance. Property insurers may also use ADR to resolve disagreements between claimants and their insurers about catastrophe damage claims. Meanwhile, both lawyers and organizations that use ADR are investigating ways of qualifying mediators and setting other guidelines to govern the legal process, including class action suits.

State Reform Measures:
The large number and size of awards, the belief that the pendulum has swung too far in favor of plaintiffs and the realization that the costs of the civil justice system are borne by individuals in the form of higher insurance premiums, directly or indirectly, has led to a groundswell of support for civil justice reforms. Tort reform advocates believe changes are necessary in four key areas to help restore fairness to the civil justice system: modification of the joint and several liability rule, revision of the collateral source rule, a cap on noneconomic damages, restrictions on punitive damage awards and reinstatement of the state-of-the-art defense. Since the tort reform effort began in earnest in the mid-1980s, hundreds of reform measures have been passed, although some have been challenged and some overturned.  Reform measures may completely abolish a rule or modify it by limiting its application.

The collateral source rule refers to a rule of evidence that bars the introduction of any information indicating a person has been compensated or reimbursed by any source other than the defendant. Approaches taken by modifying legislation include permitting consideration of compensation or payments received from some or all collateral sources and requiring that any award be offset by the amount of collateral source payments.

The concept of capping noneconomic damages has been endorsed by many states.  In some states, laws now limit the liability of defendants in liability suits in one of several ways: by limiting recovery of a particular type of damages (usually noneconomic damages, such as pain and suffering); by limiting the total amount of damages recoverable; or by placing an absolute cap on liability, as in wrongful death cases. Reform measures may apply to all tort suits or only to specific types, such as medical malpractice.

Originally designed to punish defendants who showed a wanton disregard for safety, punitive damage awards no longer are limited to such cases and may substantially exceed the amount of compensatory damages awarded. More than half the states have passed laws that limit the imposition of such damages. Reform measures may require punitive damage awards to be paid to the state; set limits on the amount that may be awarded in total or relative to compensatory damages; limit the type of case in which they may be awarded; or require hearings to establish a case for punitive damages before they may be sought in court. Some states have never had provisions for punitive damages.

Bad Faith: Over the past few years there has been an increase in so-called “bad faith” legislation introduced states legislatures. Bad faith is a legal term used to denote the kind of complaint that may be filed against an insurance company for alleged unfair claim settling practices.  

All states have laws that give the insurance commissioner power to regulate unfair claims settlement practices, such unreasonable denials or delays in settling claims. Regulations are based on the Unfair Claims Settlement Practices Model Act created by the National Association of Insurance Commissioners in the 1990s. Insurers that violate state laws based on the act can be fined or have their licenses revoked. In cases of egregious bad faith, punitive damages may be awarded against the insurer, enabling the plaintiff to recover an amount larger than the face value of the insurance policy.  

There are no provisions in the act for a tort lawsuit to be filed directly against an insurance company either by a first-party (a policyholder who has a property insurance claim) or by a third-party claimant (an individual who is filing a liability claim against the policyholder). However, over time, some states have modified their versions of the Model Act to allow first-party lawsuits and expanded the act’s provisions in other ways. The bad faith legislation introduced in various states would expand existing law. Depending on the state, such legislation would to allow third-party claimants to file lawsuits against an insurer, extend definitions of unreasonable settlement practices to very specific and narrow situations or enable lawsuits to be filed for a single infraction, rather than for a pattern of questionable business practices. Insurers support consumer protections but fear that the expansion of existing regulations being sought in some states will lead to higher insurance premiums. Companies may be pushed into settling claims, even those that may be frivolous or fraudulent, under the threat of lawsuits for failure to deal with claimants in good faith.

Towers Perrin’s “2010 Update on U.S. Tort Costs,” is its 14th annual study highlighting trends and findings on the cost of the U.S. tort system. The study found that tort costs decreased 2.7 percent in 2009, compared with a 1.1. percent increase in 2008 and a 2.1 percent increase in 2007. The 2.7 percent drop is greater than the year’s overall average annual economic decline. GDP decreased 1.3 percent. The ratio of tort costs to gross domestic product grew smaller in 2009, as it has for six consecutive years.  Opportunities for tort actions, decreased with the slower economy, Towers Perrin reports, most notably in commercial auto, which is perhaps the most economically sensitive insurance coverage with a tort component, a fewer goods were shipped during the recession.  The study predicts annual tort costs will show an increase in 2010 due largely to the BP oil rig explosion. Excluding this catastrophic event, Towers Perrin researchers expect tort costs to be relatively stable.

Effects of Tort Reform: Between February 1986 and May 1987 the General Accountability Office issued five reports on medical malpractice. The third, published in December 1986, "Medical Malpractice: Six State Case Studies Show Claims and Insurance Costs Still Rise Despite Reforms," singled out the reforms enacted in California in 1975 as among the most effective in moderating increases in the cost of malpractice insurance and the size of awards.

A 2004 study conducted by the RAND Corp.’s Institute of Civil Justice in Santa Monica, California, confirmed the success of California’s tort reform initiative. It found that the 1975 California Medical Injury Compensation Reform Act (MICRA) has reduced the damages that doctors and their insurers are ordered to pay in medical malpractice lawsuits by 30 percent. MICRA limits jury awards for pain and suffering to $250,000 and also limits attorney fees. The study, which reviewed 257 plaintiff verdicts, also showed that compensation to injured patients declined by 15 percent while the fees for plaintiffs’ attorneys fell by 60 percent. Caps on noneconomic damages were imposed in 45 percent of trials that ended in a victory for plaintiffs. Those with the highest percentage loss as a result of caps on noneconomic awards were often those with injuries that caused relatively little economic loss but a significantly lower quality of life, according to the study. A major effect of the law was to make plaintiffs’ lawyers accept more of the cost of the litigation. The law, which was enacted when California was facing an insurance crisis, has been considered as a model for medical malpractice reform in other states.

More recently, in 2003, Texas voters approved Proposition 12, which gave the legislature the power to adopt a $250,000 cap on most medical malpractice noneconomic damage awards. Since the passage of reforms, more doctors have moved to the state, including rural areas, thus improving access to medical care, and competition among medical malpractice insurers has increased as the number of medical malpractice insurance companies doing business in the state has grown. According to the state’s medical association, all major physician liability insurers cut their rates once the caps were in place, most by double digits. By January 2010 the number of claims and lawsuits in most Texas counties had been cut in half and roughly half of the state’s doctors were paying lower liability premiums than they were in 2001.

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