The mid-1980s brought a crisis in availability and affordability of liability insurance that was unprecedented in its impact on our society. Doctors and other professionals, nonprofit organizations such as the Red Cross and Boy Scouts, large and small businesses and municipalities across the country found their insurance premiums skyrocketing—and in many cases coverage was unavailable at any price. Day care centers and playgrounds were closing and obstetricians were abandoning their practices. Public concern was high.
In 1984 and 1985, the property-casualty insurance industry suffered a record two-year period of enormous underwriting losses, totalling $46 billion. When all sources of investment income were factored in, the industry overall did not actually lose money but its rate of return on net worth was about 2 percent to 4 percent—well below the Fortune 500’s rate of 12 percent to 13 percent.
As we look at the situation in 1987, however, the crisis appears to have abated. Insurance is more widely available for municipalities and small businesses, and the rate of premium increases has slowed considerably. In 1986, the property-casualty insurance industry reduced its underwriting losses and posted $11.5 billion in after-tax profits for a rate of return on net worth of nearly 12 percent—close to the average rate of return for Fortune 500 companies.
Various commentators have opined that the great liability crisis is now over—but is it? If we look closely at the situation, we find that the crisis may be over but the problems persist.
My perspective comes from my responsibility as chairman of the Reagan Administration’s Tort Policy Working Group since October 1985, and as head of the Civil Division of the Justice Department. We issued a report in early 1986 which analyzed the liability crisis and recommended a comprehensive program of tort reform at both the state and federal levels. Since then we have continued to monitor the situation and collect additional data. Based on this experience, I firmly believe we cannot abandon the fight for tort reform.
Insurance Availability and Affordability
In some ways, the insurance crisis of the 1980s reminds me of the oil crisis of the 1970s. After an initial period of dislocation and gasoline station lines, our society adjusted to higher prices. The “crisis” was over, in that gas station lines disappeared and the public became accustomed to paying substantially higher prices. Similarly, insurance is now more readily available and prices have stabilized—but at much higher levels.
There are, however, other ways in which the effects of the liability crisis continue. First, it is difficult to compare liability insurance prices because the policy terms are so variable. Insurance companies have responded to the liability crisis not only by raising premiums but also by changing policy terms to exclude certain risks, reduce coverage levels, or switch from “occurrences” to “claims-made” policies. Such changes can erode the quality of an insurance policy even while the nominal premium remains the same.
Second, some of the increased availability of insurance has occurred because of new risk-pooling or self-insurance arrangements, particularly for municipalities. It remains to be seen whether these will prove actuarially sound over the long run. The experience of the “bedpan mutuals” formed by physicians in the 1970s shows that such untried arrangements should be viewed with skepticism.
Third, the overall amelioration of the insurance outlook should not obscure continuing problems for activities perceived to generate particularly high risks. A recent NAIC study reports 37 states having availability problems with environmental liability or pollution insurance. Other areas with availability problems include: directors and officers liability, medical malpractice, municipal liability and product liability (particularly for pharmaceuticals and chemicals). Recreational liability continues to be a problem, with many domestic manufacturers going out of the business of making sports equipment.
In summary, our society has largely adjusted to recent developments, and the crisis atmosphere has abated. But the high cost of liability insurance and the difficulty of insuring certain risks are continuing problems, which undermine the international competitiveness of American industry and affect our standard of living in countless ways.
The Insurance Industry’s Role
Another way the insurance crisis of the 1980s reminds me of the energy crisis of the 1970s is the effort of some to blame it on an evil conspiracy of big business. Some have contended that the insurance crisis was the result of a hoax or conspiracy by insurance companies to raise prices and gouge consumers. Their solution is increased government regulation to bring down prices and make insurance more widely available.
Of course, we now recognize that government regulation was a substantial cause of the energy crisis. The price of oil declined substantially only after President Reagan removed government price controls in 1981 as one of his first acts in office. Now the same aficionados of government regulation who did so much to exacerbate the energy crisis of the 1970s are ready with the same poisonous prescription for the insurance crisis of the 1980s.
The conspiracy theory for the insurance crisis is clearly hogwash. The property-casualty insurance industry is one of the most competitive industries in America with over a thousand companies and a very deconcentrated market structure. For those who are into technicalities, the Herfindel-Hirschman index for the property-casualty insurance industry is an incredibly low 229 out of a possible 10,000 points for a total monopoly.
The Federal Trade Commission and the Antitrust Division of the Justice Department have concluded that there is no basis for giving any credence to the improbable allegations of collusion in the insurance industry. An advisory commission appointed last year by New York Governor Mario Cuomo reached essentially the same conclusion.
As I indicated earlier, insurance company profits have bounced back in the last year. Insurance profits are more cyclical than some other industries, although over time they average out at about the same level as others. As with other competitive industries, the best protection for insurance consumers is the free play of market forces.
There is particular attention this year to proposals to repeal or amend the McCarran-Ferguson Act, which exempts the insurance industry from certain federal antitrust laws. As I have indicated, however, this change in the law would have no impact on the availability or affordability of liability insurance, since this market is already highly competitive.
Other proposals are to increase federal or state regulation of insurance premium rates, so as to restrict the ability of companies to raise or lower prices. Such price regulation is likely to be illusory since insurance varies widely in quality and is not fungible, i.e. multipurpose, like gasoline. In any event, if prices are kept artificially low, this will simply exacerbate the problem of availability.
If insurance prices are too high, and I believe they are, we must look at the underlying cause and not blame the messenger for the bad news. Over time, the price of liability insurance basically reflects the cost of liability imposed by our civil justice system. Only by addressing that underlying cause can we achieve long-term relief.
The fact that the insurance industry alone cannot be blamed for today’s liability crisis is confirmed by the experience of self-insured entities. Mayor Edward Koch observed last year that, since New York City is totally self-insured, insurance industry practices have nothing to do with the cost of their liability payments. He noted that New York has had an “exponential growth” in its liability payments in personal injury cases—from about $24 million in 1977 to nearly $120 million in 1985, an increase of nearly 400 percent in eight years.
Mayor Koch also stated that the projected liability of the city for claims, then pending in early 1986, was $1.5 billion. I thought his estimate was a bit high until last year when a Bronx jury awarded a woman $65 million for malpractice in a city-owned hospital, of which $58 million was for “pain and suffering.” The award was later reduced by the trial court to $3.3 million, but there is a substantial in terrorem effect of such jury awards in extorting high settlements.
The Expansion of Civil Liability
There has been much controversy in recent years about the “litigation explosion” and the extent to which jury awards have escalated. Discussions of the liability crisis frequently degenerate into elaborate debates over statistical methodology. Opponents of tort reform contend that no action should be taken until comprehensive data is collected and all statistical quibbles are resolved. This is, of course, a tactic to delay action indefinitely.
The fact is that everyone knows there has been a considerable expansion of civil liability over the last 20 or 30 years. We may not know the precise amount of the increase, but no one really thinks the amount of liability has remained static.
However, we do not have to rely on common sense. The Rand Corporation’s Institute for Civil Justice has recently reported new data which indicates that the expansion of liability has been even greater than previously indicated. Rand has compiled a remarkable data base consisting of every civil jury decision in Cook County, Illinois, and San Francisco since 1960, and more recently for all of California. The Rand report confirms trends that have been previously reported in other less complete studies.
These studies show that the average inflation-adjusted jury award has increased enormously since the early 1960s. For example, the average malpractice award in Cook County in the early 1960s (adjusted for inflation) was $52,000; by the early 1980s it was over $1.1 million—an increase of 1,167 percent. The average products liability award in San Francisco in the early 1960s was $99,000; by the early 1980s it was $1.1 million—an increase of 1,016 percent. Interestingly, although there were steady increases throughout this 25-year period, the vast bulk occurred during the last 5 years.
Now, some critics say that average jury awards are misleading because they only include the cases in which plaintiffs win—not those where the defendant wins and the award is zero. But the new Rand study shows that this factor means that the use of jury award data actually understates the extent of the liability explosion. Since the early 1960s, the percentage of plaintiffs who win their cases in many categories of cases has increased substantially. In these categories, the expected award—the average award multiplied by the percentage of cases won by plaintiffs—has gone up even more than the average award. For example, in Cook County in the early 1960s the expected malpractice award (again, adjusted for inflation) was $13,000; by the early 1980s, it was $566,000—an increase of 4,254 percent.
One other issue that sometimes comes up is whether average award data should be used instead of median awards. Most studies have shown that average awards have increased much more rapidly than median awards. But the reason for this differential is the advent of a relatively new phenomenon—the multi-million dollar award. Rand and other studies show that million dollar awards were very rare in the early 1960s and are now much more common, although still only accounting for 2 to 4 percent of all cases in which damages were awarded. In Cook County, million dollar awards (adjusted for inflation) accounted for 4 percent of the total damages awarded in the early 1960s; by the early 1980s they accounted for 85 percent of the total awards. In San Francisco, the figures are 14 percent and 58 percent respectively. Median verdict data effectively ignore this highly important phenomenon by focusing on the typical case, when the atypical case accounts for most of the money that is awarded.
The Causes of the Liability Explosion
We may never know all of the causes of our liability explosion. Many commentators have tried to find an explanation through psychoanalysis; Americans have become “soft” and averse to risk; people increasingly seek to blame others for their own shortcomings. One recent commentator traced the problem to “rampant strains of narcissism in America.” I suspect there may be a bit of truth in such explanations but I also doubt that human nature has changed that much in the last 20 or 30 years (if even in the last few thousand years).
Others have suggested that the jury system is to blame, and I have to agree that frequently we hear of juries doing wild and crazy things. Earlier this year, the Washington Post reported on a local case in which a man who practiced transcendental meditation for 11 years sued two transcendental meditation organizations for $9 million for alleged psychological and emotional damage resulting from his association with them. He claimed that the organizations had promised him that chanting a mantra—a single sound—twice a day would reduce stress, improve his memory, reverse the aging process, and promote good health. He also claimed they promised that he could learn to fly through a technique known as self-levitation. The suit asserted that all these claims were false and that, for example, instead of learning to fly, students learned only how to “hop with the legs folded in the lotus position.” The U.S. District Court submitted this case to a jury and the trial lasted for an entire month. The jury concluded that the transcendental meditation organizations had committed fraud and were negligent in their dealings with the plaintiff and awarded almost $138,000.
The tendency of juries to be swayed by sympathy is not a new phenomenon, and certainly cannot be the sole cause of the recent liability explosion. In my opinion, the principal cause of the liability explosion is judicial activism. Civil law, like constitutional and criminal law, has been revolutionized by a generation of judges engaged in social engineering.
The Movement to No-Fault Tort Liability
The movement to liability without fault in tort law, i.e., civil cases involving damages, is not a new trend. Legal theoreticians going back to the early years of the twentieth century have discussed the possibility of imposing tort liability without fault, no doubt inspired by the advent of worker compensation legislation. However, our courts did not adopt the new doctrine all at once, but, in a piecemeal fashion over a span of decades.
The assault on traditional fault-based tort law was led by Yale Law Professor Fleming James in the 1930s and 1940s. According to Professor George Priest, James felt that since accidents were inevitable, employers, manufacturers, and society as a whole, ought to bear the cost. They were, in effect, obligated to compensate victims regardless of who was at fault. “Social insurance,” not fault, was to be the focus of the new tort law.
The first glimmer of judicial acceptance of Fleming James’ theory of no-fault tort liability was provided in 1944 by Chief Justice Roger Traynor’s famous concurring opinion in Escola v. Coca-Cola Bottling Company—the exploding coke bottle case.
Other cases followed which abolished contributory negligence and assumption of risk as considerations, yet most courts have clung to the illusion of a fault-based system.
Five recent decisions by the California and New Jersey Supreme Courts illustrate how far the trend towards de facto no-fault liability has advanced. We will see from these cases that, although the court still speaks the language of fault, the meaning is altogether different.
The Telephone Booth Case
The first case is Bigbee v. Pacific Telephone. In this case an apparently intoxicated driver lost control of her car, veered off the road, jumped a curb, crossed the sidewalk, went into a parking lot and hit a telephone booth 15 feet away from the roadway. It is not surprising that a man who was standing in the booth and was injured filed a lawsuit, but you might be surprised to know who he sued: the companies responsible for the design, installation and maintenance of the telephone booth. The California Supreme Court, in an opinion by Chief Justice Rose Bird, found that the risk someone might veer off the road and crash into this particular phone booth was foreseeable and, therefore, a jury would be permitted to find the defendants liable. She found it was of no consequence that the harm to the plaintiff came about primarily through the reckless or negligent acts of the intoxicated driver. And in a concluding footnote she states, “there are no policy considerations which weigh against imposition of liability…even though the defendant’s conduct may have been without moral blame,” and then goes on to refer specifically to “the probable availability of insurance for these types of accidents.’
Some have tried to defend Chief Justice Bird’s opinion in this case by pointing out an allegation that the phone booth door jammed shut, thus preventing the plaintiff’s escape from the oncoming car. It is important to realize, however, that her opinion was not limited to the sticky door, which was mentioned only in passing. Her primary rationale was that liability could be based on the fact that the phone booth was located only 15 feet away from a busy roadway. As Justice Kroninger’s partial dissent points out in this case, “public telephones have, in fact, long been maintained adjacent to public streets and highways for the convenience of the public…” and it is unreasonable to regard such locations as a basis for imposing liability.
The California Supreme Court’s approach of allowing liability to be based upon foreseeability is a prescription for virtually unlimited liability, since with the benefit of 20/20 hindsight almost every accident is foreseeable. Indeed, as I think we shall see in these following cases, the possibilities of this foreseeability doctrine are endless.
The Attacker in the Bushes Case
The second case is Peterson v. San Francisco Community College District. The plaintiff in this case was a college student who was assaulted in broad daylight by someone who had been hiding in some overgrown bushes near a stairway in the school’s parking lot. The student sued the school. The California Supreme Court unanimously concluded, in an opinion by Justice Allen Broussard, that a jury could find the school liable on the basis that the school was aware of criminal conduct in the area, and “failed to take reasonable protective measures including trimming the foliage, or warning the student of the danger, thus creating a foreseeable risk of injury from criminal conduct.”
The Hospital Mugging Case
In Isaacs v. Huntington Memorial Hospital, a doctor was attacked and shot one evening in the hospital’s parking lot. Since the gunman was never apprehended, the doctor sued the hospital. The California Supreme Court, in another opinion by Chief Justice Bird, held that the hospital’s alleged failure to provide adequate lighting and other security measures in a high crime area would allow a jury to find the hospital liable for the assault. And her opinion in this case, which by the way, liberally cites the Bigbee opinion, treats the issue in the case as one solely of foreseeability. And, even though no such attack had previously occurred in the parking lot, she held that a jury could find this attack foreseeable, citing Fleming James for the proposition that “forseeability is an elastic factor.’
The Trespassing Diver Case
The fourth case, O’Brien v. Muskin Corp., was tried in the New Jersey Supreme Court. In this case, a trespasser was severely injured when he dove into three and a half feet of water in an above-ground swimming pool located at a private residence. It is unclear whether the man dove from the platform beside the pool or from the roof of an adjacent garage. Nevertheless, he alleged that his injuries resulted when his outstretched hands hit the vinyl-lined pool bottom and slid apart, allowing him to strike his head. The man sued the manufacturer of the pool on the grounds that it was liable for having failed to warn him of the risks of diving into the pool, and that the pool was defectively designed because its bottom had been lined with vinyl.
Evidence introduced at trial showed that the pool bore a warning on the outer wall that read “DO NOT DIVE:’ However, the defective design claim was not allowed to be presented to the jury, since even the injured man’s attorney admitted that he knew of no liner material in above-ground pools other than vinyl that could safely be used.
The New Jersey Supreme Court, in reversing the trial court’s decision on the defective design claim, held that even though the plaintiff could not show that the pool could be designed more safely, he could still prevail if he could convince a jury that the “risk posed by the pool outweighed its utility.” One factor the court stated should be considered in their “risk-utility analysis” is “[t]he feasibility, on the part of the manufacturer, of spreading the loss by setting the price of the product or carrying liability insurance.’
The Modified Die-Casting Machine Case
The fifth and last case, also from the New Jersey Supreme Court, is Soler v. Castmaster. In this case, a man was seriously injured while operating a die-casting machine. The machine was designed to accomplish its function in two cycles that were manually started by the operator. The first cycle was supposed to start when an electrical button was pressed, closing two halves of a mold into which hot metal was injected. By pushing another button, the second cycle started, causing the metal casting to cool and then drop from the mold.
Sometime after the machine left the manufacturer’s control, the employer altered it by adding a trip wire that, when hit by a falling casting, automatically triggered the start of the next cycle, resulting in a continuous operation of the two cycles. The employer also added a safety gate which, when opened, shut off all power to the machine.
The employee’s injury occurred when he attempted to dislodge a finished product that had failed to drop from the mold. With his arm somehow under the safety gate, the man dislodged the casting, causing it to fall onto the trip wire. The machine suddenly started up, and the two parts of the mold closed on his hand.
Despite the fact that this particular accident would not have occurred had the employer not modified the machine by adding a trip wire, the court concluded that the manufacturer could be held liable because the machine, as originally designed, had no safety gate. Moreover, the court also concluded that a jury could find that it was indeed foreseeable that the machine would be altered or misused by the employer. In discussing the possibility that the machine was defectively designed, the court applied the same “risk-utility” standard adopted in the O’Brien case and held that “evidence was sufficient…to demonstrate that, as designed, the risk of danger inherent in the machine outweighed its usefulness.”
There is a common thread in the five cases just summarized. In each case, there was a real wrongdoer—the drunk driver, the assailant in the foliage and the mugger in the parking lot, the employer who installed the trip wire—or in the swimming pool case, the trespassing plaintiff himself. And, in each of these cases, the California and New Jersey Supreme Courts held that someone other than the real wrongdoer could be held liable for the damages caused. Obviously in these cases, the real wrongdoer didn’t have a very “deep pocket” or could not be found, or, in the case of the employer, could not be sued because of worker compensation laws, so the court engaged in a search for a surrogate wrongdoer who had the resources or the insurance coverage to pay a damage claim.
In reaching these results, the courts distort traditional doctrines that require liability to be based upon fault. The real wrongdoers are scarcely mentioned. To read some of these opinions you would think that crime is primarily caused by inadequate lighting or overgrown foliage instead of by evil or erring human beings. If you think I am exaggerating, look closely at the language of the Huntington Memorial Hospital case. In rejecting the argument that the attack was unforeseeable because no similar attack had occurred, Chief Justice Bird stated: “Surely, a landowner should not get one free assault before he can be held liable for criminal attacks which occur on his property.” Thus the court’s subtly anthropomorphic language speaks as if the hospital and not the criminal had committed the assault.
The Role of the Jury
I should digress for a moment to comment on the fact that in each of these five cases the state supreme courts remanded for a jury trial and did not itself impose liability. In fact, in several of these cases, the courts emphasized that the issues in the case should be decided by the jury rather than the court. This approach is, in fact, part of the classic strategy for achieving no-fault liability, employing, according to Priest, the jury’s discretion instead of rigid legal rules. He notes that James was fully in favor of this because he believed juries were more inclined to grant judgments to plaintiffs. Add to this Louis Jaffe’s contention that Justice Hugo Black, like others on the bench denied their power to control juries, even to instruct them whether negligence was a necessary predicate for recovery, and I think you will find that juries, ultimately, are not to blame for the explosion of tort liability. It is the function of judges—not juries—to decide questions of law and to control, by well-established techniques, the fact-finding function performed by the jurors. The explosion of liability is the result of activist judges whose penchant for social engineering has distorted beyond recognition the common law of torts.
Social Engineering and the Common Law
There is, however, a more fundamental problem with the judical activists’ experiment besides the fact that they were wrong as a matter of social policy. They were even more wrong to hijack the common law system and devote it to a particular vision of social policy. I have no particular objection to worker compensation legislation or to no-fault automobile insurance legislation, but that is because the legislators, not the courts, are entrusted with the task of enacting social policy.
This is not to say I reject the common law system in favor of a legislative civil code. Far from it. Common law is essential to our scheme of government. It is not hard to see that the wholesale reordering of the entire law of torts in pursuit of the peculiar social policy envisioned by the likes of Fleming James and Roger Traynor has nothing to do with the common law tradition.
Risk-Spreading as Social Policy
Even as a matter of social policy, the no-fault conception of tort law is demonstrably wrong. A growing body of academic literature over the last decade—by law professors like George Priest, Richard Epstein and others—documents the fallacy of the breezy assumption that unlimited tort liability can be accommodated through insurance markets. The recent liability insurance crisis provides a graphic lesson of the practical cost of a tort system run amok.
The social costs are clearly apparent: Important goods and services become excessively costly or unavailable, including obstetrics, day care centers, lifesaving vaccines, and hazardous waste cleanup. And the economic impact of risk-spreading is regressive: High-income plaintiffs get the highest damage awards, while costs are passed on evenly to all purchasers of a product or service. Moreover, transaction costs of litigation are enormous. The Rand Corporation has calculated that well over half the money is paid to lawyers and other legal costs; less than half trickles down in net compensation to plaintiffs.
In response to these social problems, the Reagan administration has supported tort reform legislation to rein in some of the excessive liability now imposed by our civil justice system. I am gratified that in the last year alone, some 37 states have adopted some kind of tort reform legislation. Although many of these measures were watered down, the progress in such a short time has been remarkable, and more is in store for 1987-88.
