[Economic Report of the President (2004)]
[Administration of George W. Bush]
[Online through the Government Printing Office, www.gpo.gov]


 
CHAPTER 11

The Tort System

Tort is the civil law through which injured individuals seek
compensation from another party alleged to have caused or contributed
to their injury. The tort system in the United States is intended
to compensate accident victims and to deter potential defendants
from putting others at risk. Expenditures in the U.S. tort system
were $233.4 billion in 2002, equal to 2.2 percent of gross domestic
product (GDP), more than twice the amount spent on new automobiles
in 2002. The expansive tort system has a considerable impact on the
U.S. economy. Tort liability leads to lower spending on research and
development, higher health care costs, and job losses. This chapter
examines the growth of the tort system, the benefits the United States
receives from it, and how alternative injury-compensation systems
compare with the present tort system in terms of costs.

The key points of the chapter are:
 The evidence is mixed on whether the tort system serves
to deter negligent behavior.
 The tort system is a costly method of providing insurance
against injuries, and has a number of adverse effects on
the economy.
 Possible ways of reducing the burden of the tort system
include limiting noneconomic damages, reforming class
action procedures, setting up trust funds for payments
to victims, and allowing parties to avoid the tort system
contractually.


The Changing Role of Tort Law

Until the 1960s, tort law covered injuries involving strangers, such
as those caused by automobile accidents. Injuries resulting from
the interaction between individuals with a prior relationship, such
as physicians and patients, were covered by contract law instead
of torts, which enabled individuals to define the terms the court
would use to resolve any injury disputes in advance. This division
between the tort system and contracts limited the courts' role to
hearing cases involving injuries in which one person had harmed
another with no predetermined specification of damages by the
parties--either because no contract existed or because the existing
contract did not cover a particular set of circumstances. In
essence, the courts' job was to decide if the defendant was liable
(at fault) and to determine compensation for the plaintiff
(the victim). An important feature of the legal environment was
that courts assigned liability for an injury by applying the
negligence standard, under which the court assessed whether the
injury had occurred because the defendant had failed to exercise
the caution of a reasonable person under the circumstances of the
accident. Changes to tort law since the 1960s have altered the
standard of care courts apply in considering claims for compensation.
Although some tort cases, such as those alleging medical liability,
still use the negligence standard, others, such as product liability,
are now generally decided using strict liability. Under this
standard, defendants are held responsible for any product-related
injuries even if they were not negligent. More injuries have become
eligible for compensation as a result of this change, thus
increasing the number of injuries litigated in the tort system.

Another change since the 1960s is that the tort system now serves
to provide insurance against harms relating to any goods or services
consumers or businesses purchase. This function is in addition to
the original purpose of punishing negligence in order to deter
future injuries. The right to sue for damages means that the tort
system today effectively obligates suppliers of goods and services
to provide this insurance along with their products. As recently
as the late 1950s, ladder manufacturers would not have been liable
for falls from ladders, doctors would not have been liable for
birth defects, and diving-board manufacturers would not have been
liable for injuries resulting from diving; in today's tort system,
they are. Courts used to presume that falls from ladders were caused
by deviations from normal use and not, as is currently the case,
that ladder manufacturers were potentially liable for not warning
consumers about the dangers of their product.


The Expansion of Tort Costs

Expenditures associated with the tort system have risen along with
its increased role in society. One estimate based on insurance
industry data finds that aggregate expenditures in the tort system
were $233.4 billion in 2002. This estimate includes the legal costs
of defending policyholders, benefits paid to parties injured by
policyholders, insurance companies' administrative costs, and
estimates of medical liability and self-insurance costs. Tort
costs as a percentage of GDP increased after 1974 and peaked in
1987 (Chart 11-1).

The number of injuries handled in the tort system has increased
along with expenditures. The number of filings per capita started
to rise in the early 1980s and peaked in the mid-1980s, at least in
the 16 states for which data on lawsuit filings are available
between 1975 and 2000 (Chart 11-2).



Much of the decline in filings since 1985 appears to have occurred
in California, where medical liability reforms included a $250,000
limit for noneconomic damages that was found constitutional in
1985. Although there has been a decline in cases per capita since
the 1980s, some types of tort awards have increased. For example,
between 1990 and 2001, the median award in medical liability
cases increased from about $100,000 to more than $300,000.

Expenditures in the tort system vary by the type of dispute
(Table 11-1). In auto cases plaintiffs received a median award of
$18,000 (in 57.5 percent of the cases). The most expensive cases
tended to be those in which plaintiffs and defendants had
preexisting relationships, such as product liability and medical
liability. Plaintiffs won 23.4 percent of the time in medical
liability cases and received a median award of $286,000. The median
award in asbestos cases tried in state courts was $309,000, with
56 percent of plaintiffs receiving compensation. Large awards
are relatively rare. In the 75 largest counties in the United States
in 1992, 73 percent of the 377,421 tort cases disposed in state
courts concerned auto accidents, which tend to result in relatively
small awards at trial.



The Economic Effects of the Tort System

The economic effects of the tort system go beyond their direct impact
in terms of expenditures. Resources that could be directed toward
productive uses are diverted instead to the tort system or dissipated
as firms and individuals take actions not needed for actual safety
concerns but rather to avoid exposure to tort liability. Studies
suggest that the gains to society from tort compensation and
deterrence do not make up for these losses. A study of the impact
of tort reform on productivity finds that limitations on the size
of tort claims (for example, caps on punitive damages) enacted by
states from 1972 to 1990 increased productivity by 1 to 2 percent
a year, an amount equal to $955 per worker per year in 2002 dollars. Limitations on tort awards moved some injury payments out of the
tort system so that the $955 figure represents an estimate of the
cost of the tort system over alternative systems.

The gains from limits on the tort system come about because torts
cause firms and individuals such as medical professionals to change
the way they do business. Firms choose not to sell certain products
so that they can avoid potential liability or they take costly extra
precautions in the delivery of their products and
services--precautions beyond the level that would reasonably balance
costs and benefits to society. For example, torts cause doctors to
practice defensive medicine, such as ordering extra tests that are
a waste of time and resources. Some expenditures in the tort system,
such as compensation for damages, are transfers of money from
defendants to plaintiffs and do not consume resources. Other
expenditures involve true economic costs in that the resources
involved are not available for more productive uses; attorney's
fees are an example. Additional costs include the profits and
consumer benefits forgone by society when a potential defendant
removes a product or service from the market or does not produce
it in the first place in order to avoid frivolous lawsuits.


Torts as Injury Compensation

The tort system is not the only way in which society can deter
injuries and compensate victims. There is an extensive system of
regulations to improve the safety of products, medicines, and many
other goods and services. Consumers have access to numerous
publications and Internet Web sites that offer reviews and facilitate
discussions of products. The availability of this information on
product safety provides producers with a powerful financial
incentive to make their products safer.

The question then becomes whether another system could provide the
same benefits in terms of compensation and deterrence as the tort
system but at lower cost. There is not enough evidence to determine
the answer to this broad question. Nevertheless, some evidence
indicates that in certain areas, such as product liability and
medical liability, the tort system does not deliver enough deterrence
benefits to justify the associated administrative costs (such as
legal fees, overhead to process insurance claims, and the cost of
running the tort system itself).


The Principal Injury-Compensation Methods

Injury-compensation systems can be broadly classified by the type of
act that leads to the compensation being provided. A fault-based
system compensates the injured party on the basis of negligent
action, intentional harm, or strict liability.  In contrast, a
cause-based system is one in which the specific cause of the
injury entitles an individual to compensation. The most widespread
cause-based program in the United States is workers' compensation,
which pays for many workplace injuries regardless of whether the
employer was negligent with regard to the worker's injury. Finally,
loss-based systems pay compensation based only on injury or illness.
Loss-based systems include private systems like health insurance
and public systems like Medicare.
The tort system is not the principal means by which injuries are
compensated. Private health insurance, Medicaid, and Medicare are
all substantially larger providers of compensation than the tort
system (Table 11-2). The portion of tort expenditures that covers
only economic damages such as current and future lost wages (that
is, not including noneconomic damages such as for pain and
suffering) is comparable in size to either the workers' compensation
system or payments for life insurance.


Administrative Costs

The tort system is one of the most expensive compensation systems
to run, with administrative costs equal to 54 percent of benefits.
Sixty-one percent of these administrative costs (about a third of
every dollar spent in the tort system) are the legal fees generated
by attorneys for plaintiffs and defendants. In 2001, administrative
costs of the health insurance industry were around 14 percent of
benefits paid. The overhead for the Social Security disability
system was around 3 percent of benefits in 2003; a study from the
mid-1980s found that workers' compensation had overhead costs of
around 20 percent of benefits. Some of the high cost of the tort
system may arise because it deals with accidents that are more
difficult to evaluate than those of other injury-compensation
mechanisms.



Compensation of Noneconomic Losses

Another way in which the tort system differs from other compensation
methods is that it forces consumers to accept not only coverage for
economic losses such as current and future lost wages and medical
costs, but also nonpecuniary losses such as pain and suffering. Of
the 46 cents of each dollar spent in the tort system that goes to
plaintiffs, on average, 22 cents compensates them for economic
losses and 24 cents compensates them for noneconomic damages.

Damages paid through the tort system are costs to firms--and higher
costs ultimately translate into higher prices for goods and
services. Tort awards can thus be seen as a form of insurance:
consumers pay ``premiums'' in the form of higher prices for goods and
services and receive compensation if injured. Torts cover only a
limited set of possible injuries, however, so a consumer seeking
comprehensive insurance against all possible economic and
noneconomic losses would still have to purchase additional
insurance. In reality, few people buy insurance against noneconomic
losses such as pain and suffering; people do buy insurance against
economic losses such as lost wages, medical expenses, or costs to
rebuild a damaged house. This suggests that insurance policies
against noneconomic losses are not worth their cost to potential
buyers.


Extent of Coverage

Despite the expansion of the tort system, torts still provide
compensation for a relatively limited number of injuries compared
to other systems such as health insurance. For example, injuries
that are the sole fault of the victim do not give rise to a legal
claim for compensation and hence do not fall under the purview of
the tort system. Many injuries are too small in economic terms to
justify litigation. The long delays inherent before the tort
system delivers monetary compensation likely also dissuade many
potential lawsuits from being filed. In tort cases resolved in
the 75 largest counties in the United States in 1992, the median
time from filing to disposition was just over two years, with
nearly one out of six cases taking more than four years. For
medical liability, the median time to resolution was nearly three
years with almost three out of ten cases taking longer than four
years.
There is evidence that the eventual compensation does not match
the injury well. In medical liability cases, the tort system appears
to overcompensate minor injuries relative to the compensation that
would have been provided by private insurance, while more serious
injuries are undercompensated. This discrepancy may exist because
factors other than the medical specifics of the injury could
affect the compensation received by the plaintiff. For example,
the location of the trial and the composition of the jury pool
appear to affect the verdicts of some tort lawsuits and the size
of the compensation. In addition, compensation may be tied more
to the ability of the defendant to pay than to the actual injury
suffered by the plaintiff. This is particularly a concern for
punitive damages (Box 11-1).
Moreover, the tort system does a poor job of identifying which
injuries are entitled to compensation and which are not. Many
injuries that would meet the legal definition of negligence are
never pursued, and the majority of those that are pursued appear
not to merit compensation. A 1984 study of the outcomes of
hospitalizations in New York City found that 3 to 4 percent of
hospitalizations gave rise to adverse events such as drug reactions,
with just over one-quarter of these due to negligent actions.
However, more than half of the medical liability claims actually
filed in the tort system arose from circumstances in which neither
negligence nor any identifiable injury was present. One-third arose
from instances in which the patient was injured but the doctor was
not negligent (for example, for injuries resulting from a
previously unknown drug allergy). Only one-sixth of the cases
identified instances of true negligence and injury. Moreover, in
this study, these claims represented a small fraction of injuries
that actually arose due to negligence. Consequently, the majority
of the compensation went to people who were not injured or were
not injured by the doctor accused of malpractice, while the majority
of those actually injured by doctor error were not compensated at
all. Only in a minority of cases did those legally entitled to
compensation receive it through the legal system.


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Box 11-1: Punitive Damages
Compensatory damages are intended to ``make the plaintiff whole'' by
offsetting an injured victim's losses. Punitive damages, on the other
hand, are intended to punish the party whose negligent action caused
the injury. Defendants may be liable for punitive damages if a jury
finds that their actions were malicious, oppressive, gross, willful
and wanton, or fraudulent. The Department of Justice studied civil
trial cases in the country's 75 largest counties and found that
punitive damages were awarded in 4.5 percent of cases that plaintiffs
won (or 2.3 percent of all cases), but represented 21 percent of all
damages awarded to plaintiffs. The median punitive award was $40,000
in those cases in which the plaintiff received an award. The threat
posed by large punitive damages is that they may encourage more
frequent and larger settlements.
Some are concerned that punitive damages are awarded against
companies because they have deep pockets rather than because they
have behaved egregiously. Indeed, the Supreme Court has expressed
unease over the fact that the size of certain punitive awards has
seemed out of proportion to the wrongfulness of the defendant's
actions. This capriciousness also has implications for the deterrence
effect of punitive damages, because a deterrence effect can be
realized only if firms are able to take specific actions to avoid
liability. If firms cannot tell which actions will likely incur
liability, they cannot avoid them. Anecdotal evidence suggests that
punitive-damage awards can indeed be unpredictable. Two identical
allegations of fraud against BMW were heard in the same Alabama
court and before the same judge. One purchaser was awarded
$4 million in punitive damages; the second purchaser received no
punitive damages.
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Torts As Deterrence

The threat of a lawsuit can create and enforce appropriate standards
of behavior. If the tort system made products and services in the
United States safer, fewer accidents would occur and the higher
administrative cost of torts would provide benefits to society
in terms of reduced injury rates and associated health care costs.
For example, the move by a number of states to no-fault automobile
insurance in the 1970s appears to have led to as much as a
15 percent increase in the highway fatality rate. Such no-fault auto
insurance laws eliminate or restrict liability for auto accidents so
that each driver's own insurer typically pays for his or her own
accident costs regardless of how the accident happened. Drivers who
know that they will not be financially liable for other drivers'
injuries in the event of an accident might be expected to take fewer
safety precautions than if they were responsible for the financial
consequences of their actions. In other areas of tort law such as
medical liability and product liability, there is not consistent
evidence that deterrence effects are large enough to justify the
considerable administrative costs of the tort system. This suggests
that alternatives to the tort system provide deterrence. For example,
the possibility of losing a medical license could provide an
adequate incentive for doctors to take steps to avoid negligence
beyond the steps doctors take in the interests of their patients.


General Aviation and Deterrence

The experience of the general aviation industry over the past
several decades provides an example of the role of tort liability
in affecting product safety, firm profits, and the availability
of goods to consumers. General aviation is the segment of the
aviation industry composed of all civil aircraft not flown by
commercial airlines or the military. General aviation manufacturers
were the targets of a large volume of litigation in the 1970s and
1980s.

The general aviation accident rate has been declining for 50 years
(Chart 11-3). In 1963, court rulings made lawsuits alleging
manufacturing defects in the design of private and commercial
aircraft subject to strict liability. In the most extreme cases,
this meant that firms were responsible for accidents even if the
accidents were caused by product defects that were not known or
knowable at the time of manufacture. By the mid-1970s, this change
in the law had led to a sharp rise in the number of product-liability
cases and increased liability costs for the general aviation
industry, with liability awards increasing nearly ninefold from
1977 to 1985.

The merits of these product-liability claims against airplane
manufacturers were subject to question. A study of a sample of
general aviation lawsuits filed between 1983 and 1986 showed that
none of the accidents that led to lawsuits was caused by a design
or manufacturing defect, as each suit had claimed. Thus, these
lawsuits did not give manufacturers any additional incentives to
produce safer aircraft, since the allegations of design defects
appear to have been specious in the first place.

Indeed, the rise in tort claims had no discernible effect on the
accident rate. An examination of the trends in the accident rate
calculated over various periods shows that the steepest decline
in general aviation accidents occurred between 1950 and 1969--before
the dramatic rise in tort costs in the 1970s and 1980s (Chart 11-4).
If liability exposure were driving the general aviation industry to
build safer products, accident rates would have declined more rapidly
as the increased likelihood of tort litigation pushed aircraft
manufacturers to add safety features to their aircraft.



The rise in liability expenses did, however, cause great harm to the
general aviation industry. During the period of expanding liability
costs from 1977 to 1985, the financial health of the general aviation
industry deteriorated markedly, with a number of firms shutting
down production lines and one going bankrupt. As a result,
small-aircraft production fell precipitously (Chart 11-5). By
discouraging the production of new planes, tort law has created a
situation in which the mix of planes in use actually presents a
higher risk than would have been the case had older planes been
retired and replaced by new ones. The General Aviation Revitalization
Act of 1994, which exempted some general aviation aircraft older
than 18 years from product-liability claims, appears to have led
to a small resurgence in the industry.




Other Evidence on Deterrence

It is difficult to find deterrence effects in other contexts. For
example, studies examining injury rates for consumers and workers
as well as death rates from workplace injuries show that such
injuries did not decline more rapidly following a steep increase
in litigation. Other research has examined the deterrence effect
of medical liability by estimating the impact on treatment outcomes
of state-imposed limits on damage awards at trial (such as
California's $250,000 limit on noneconomic damages). Studies have
found no appreciable impact on treatment outcomes--the lower threat
of torts did not lead to more medical injuries. These findings
suggest that there is at best limited deterrence from such cases.


The Limits of Tort Deterrence

Why does the tort system appear to be ineffective in improving
product safety? One major reason is that market incentives already
provide an important form of deterrence against unsafe products. Firms
whose products cause injuries lose customers and suffer economic
losses. In addition, many products and services face government
regulation. The producers of such items are required to undertake
investments in safety, and the tort system may have no incremental
effect on safety. Similarly, medical services also face market
incentives and regulation by governmental and professional bodies.

The current tort system makes it hard to predict which actions will
be deemed negligent during litigation. Thus, the system does not
provide much deterrence because people do not know what steps to
take to avoid a lawsuit or an adverse judgment.


Potential Tort Reforms

One way to consider the effects of changes in the U.S. tort system
is to compare the U.S. system with those in other advanced economies,
such as Canada, Japan and the United Kingdom. Like the United States,
many of these countries use a negligence standard for medical
liability and strict liability for product-related injuries, yet
they expend fewer resources in their tort systems than the
United States (Chart 11-6). Possible explanations for this
divergence are discussed in the following sections.




Limiting Noneconomic Damages and Other Potential Reforms

One important reason for the divergence in tort costs between the
United States and other countries is that awards for noneconomic
damages, such as pain and suffering, appear to be much higher in
the United States. Noneconomic damages account for half of all
compensation awarded in the United States, but in other countries
are either capped (as in Canada) or otherwise restricted (as in
Germany). Reforms aimed at reducing or eliminating pain and
suffering awards, such as the President's proposed $250,000
limitation on noneconomic damages in health-related cases, have
the potential to reduce the cost of the U.S. tort system.

Several other differences appear to be less important in
explaining the divergence than compensation for noneconomic
damages. One difference is that in other countries, judges decide
the vast majority of tort claims, while juries typically decide
cases in the United States. Empirical evidence suggests that U.S.
judges and juries decide cases in approximately the same way,
suggesting this is not a major factor in explaining the divergence.
Another difference is that in the United States each side pays
its own legal costs, whereas in many other nations the losing side
pays both sides' legal costs. A study of Florida's temporary use
of a ``loser-pays'' method in medical liability cases found that when
the losing side paid legal expenses, plaintiffs were more likely
to receive compensation either at trial or in a settlement.
Furthermore, the compensation was higher. This finding suggests
that apportioning legal costs to the losers discourages plaintiffs
from pursuing low-quality (nuisance) cases because they would have
to pay all legal costs if the case went against them.


Procedural Reforms

Some of the costs of the tort system arise because there are
incentives that encourage state judges and juries to extract
financial compensation from out-of-town defendants. The vast majority
of tort cases are litigated in state courts. Tort cases tried before
elected state judges have been found to result in higher awards when
the defendant is a corporation headquartered outside of the state
than when the defendant is local. By removing national class action
suits from state courts, the Federal government could reduce the
ability of entrepreneurial lawyers to forum shop, that is, to file
cases in a sympathetic state court. Some evidence on asbestos tort
litigation suggests that forum shopping is indeed a problem.
Research also suggests that certain small counties tend to be
magnets for national class actions in the sense that they attract
many more cases than would be expected on the basis of their
populations.
The Class Action Fairness Act of 2003 would allow removal of some
class actions to Federal court if any plaintiff is from a different
state than any defendant (Box 11-2). Under current law, a
plaintiff's attorney who does not like a particular judge's
limitations in a class action can seek a less restrictive judge
in a different jurisdiction. The proposed Act would make this more
difficult by reducing the ability of plaintiffs' attorneys to file
national class actions in state court.


Limiting the Scope of Tort Compensation

An alternative approach to the current system would be to resolve
disputes and compensate victims outside the tort system. An example
of this approach is the case of compensation for individuals exposed
to asbestos. The proposed Fairness in Asbestos Injury Resolution Act
of 2003 would create a trust fund to compensate those injured by
asbestos exposure. Disbursements from the fund would be restricted
to those who are actually suffering from asbestos-related illnesses.
The use of asbestos has been all but abandoned in the United States,
so the focus in resolving claims is now appropriately placed on
compensating injured workers rather than deterring new instances
of future liability (Box 11-3).


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Box 11-2: The Role of Class Actions in the Tort System
A class action is a legal procedure in which individuals are joined
together to litigate a single case (the class refers to the group of
such individuals). Class actions are used in a variety of contexts,
including cases involving securities fraud, consumer protection,
employment, civil rights, and exposure to toxic chemicals or
other pollutants. Class actions are intended to secure
compensation in cases that involve substantial aggregate losses
but relatively small individual losses. In practice, private
attorneys often initiate these cases, each one in effect becoming
a ``Private Attorney General.'' In this role, lawyers identify both
the legal violations and a number of individuals harmed by the
violations and bring an action on these individuals' behalf. To
induce attorneys to take on this role, they are compensated out
of the settlement fund. In many cases, this compensation is based
on a contingent fee, a percentage of the settlement or award.
An important concern about class action suits is that many of them
are filed more for the benefit of the plaintiffs' attorneys than for
the plaintiffs. In individual litigation, plaintiffs enter a contract
with an attorney and have an incentive to monitor the attorney's
effort to ensure a favorable outcome. In class action suits, most
individual plaintiffs have only a small stake in the case's outcome
and thus have little incentive to monitor the activities of their
lawyers. In principle, judges are expected to monitor payments
to plaintiffs' attorneys and the nature of settlements. With
growing caseloads, however, many judges face pressure to clear
their dockets as rapidly as possible. Accepting a settlement and
associated attorneys' fees is one way to accomplish this.
Without the active scrutiny of clients or judges, plaintiffs'
lawyers have an incentive to collude with defendants to set higher
attorney's fees in exchange for lower overall payouts from
defendants to plaintiffs. One study of a small number of class
action cases found that in a substantial fraction of them, class
counsel received more in fees and expenses than all of the
plaintiffs combined.
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Box 11-3: Asbestos and the Tort System

The tort system's treatment of asbestos cases demonstrates how the
system can fall short of its purported objectives of deterring
harmful behavior and funding compensation. Beginning in the 1970s,
increased public awareness and concern about the health effects of
asbestos led to regulations limiting exposure to asbestos. By 1989,
all new uses were banned, and strict regulations have limited
remaining asbestos use. Between 1973 and 2001, asbestos use in the
United States fell by 98 percent. With extensive regulations in
place and minimal use, the tort system's role in deterring harmful
behavior has been substantially reduced simply because there is
little activity to deter.
Yet even as the use of asbestos declined, the number of claims rose
substantially. The total number of claimants is estimated to have
grown from 21,000 in 1982 to over 600,000 by the end of 2000. To be
sure, some additional claims are warranted because cancers caused
by asbestos can take years to develop. An estimated 90 percent of
the new claims, however, are by people who have no cancers and may
never develop cancer. Claims by individuals without a diagnosed
asbestos-related cancer account for almost all of the growth in
asbestos case loads during the 1990s and most of the compensation
received by claimants goes to those without malignant cancers. Only
43 percent of the money spent on asbestos litigation is recovered
by claimants--the rest goes to lawyers and administrative costs. In
short, the current system neither achieves deterrence in the use
of this dangerous substance nor directs appropriate compensation
to its victims.
Instead, asbestos litigation has imposed costs on workers,
shareholders, and those who in the future will become ill from
their previous exposure to asbestos. Estimates suggest that roughly
60 companies entangled in asbestos litigation have gone bankrupt
primarily because of asbestos liabilities, with most of the
bankruptcies occurring since 1990. One study estimated that between
52,000 and 60,000 workers were displaced because of these
bankruptcies. Moreover, bankruptcy results in a shrinking pool of
money to be divided up among future claimants. The growing number
of bankruptcies raises concerns that those who become ill in the
future will receive little or no compensation.
----------------------------------------------------------------------


For other injuries, a possible approach to compensating accident
victims would be a system akin to workers' compensation, in which
compensation would be provided by an insurance system. New Zealand
has replaced the personal injury and medical liability aspects of
its tort system with a government-run compensation system. Such a
system, however, can increase the prevalence of accidents because
fully-insured individuals may not take sufficient care against a
loss. This is not a concern in cases where accidents have already
occurred, such as asbestos exposure. In other cases, such as product
liability or medical liability, the effect of changes in the system
on the behavior of potential victims is an important consideration.
Moreover, like the tort system, workers' compensation systems tend
to be costly to administer and may encourage frivolous claims.
Replacing the tort system with a more general workers' compensation
system could well mean replacing one costly and inefficient system
with another.


Avoiding the Tort System

Recontractualization is an alternative approach to reform that has
been the subject of considerable academic discussion. According to
this idea, individuals and firms would be allowed to specify by
contract the types of damages for which injurers would be liable. For
example, consumers or their insurers could determine individual caps
on damages in exchange for lower prices for goods and services. In
principle, potential defendants would enter into such contracts if
they reduced the expected costs of dealing with injuries. Such a
system would be voluntary, so that individuals could refuse to
participate if offered a contract by a potential defendant that
was inferior to the insurance associated with the tort system.

A possible drawback to this approach is that the courts currently
view contracts limiting damages or defining negligence with
suspicion. Courts have held that warranties that limit liability are
not enforceable because they are contracts of adhesion--agreements
that the purchaser of a product or service has no choice but to accept.
Hence, it is likely that any steps toward recontractualization would
require substantial institutional and legal changes. This could
explain why this approach has not received much attention from
policy makers.


Conclusion

The tort system has expanded in the last 30 years. By expanding the
number of accidents for which accident victims receive compensation,
the current tort system in effect requires the suppliers of goods and
services to provide insurance to their customers. This tort-based
insurance against accidents appears to be more expensive than other
methods of compensating victims. At least in the cases of product
liability and medical liability, the expansion of the tort system
does not appear to have had an appreciable effect in deterring
negligent behavior.
The President has proposed several initiatives to reduce the burden
of torts on the economy. These include placing limits on noneconomic
damages, reforming class action procedures, and finding alternative
methods to compensate injuries such as those that have been proposed
for people suffering from asbestos-related ailments. These steps
would focus the tort system on those cases it can deal with most
effectively and lessen the costs to society of frivolous lawsuits and
awards.