Wednesday, January 19, 2005

Costs of the Tort System (Redux)

On 12/28/03, we posted about a study performed by the insurance consulting firm Tillinghast-Towers Perrin, which placed the "costs of the U.S. tort system" at $233 billion for the calendar year 2002. Among other things, we discussed whether it is legitimate to reckon payments to injured claimants by tortfeasors (or their insurers) as part of the "cost" of the "tort system" (as opposed to counting injuries as a "cost" of accidents, and then discussing who should bear those costs).

Well, the good people at TTP are at it again. They have completed a similar study for the year 2003, with similar results. The TTP press release release puts the 2003 "costs" of the "tort system" at $246 billion -- a 5.4% increase that roughly matches the 4.9% growth in GDP. As before, the TTP figures include not only transaction costs, but also payments to victims.

Mind you, TTP specifically disclaims any attempt to gauge whether these "costs" are too low, too high, or just right. That is obviously a question that actuarial science, by itself, cannot answer. But never fear. Advocates of "tort reform" have stepped forward to take up the slack. These include Sebastian Mallaby, in a Washington Post column, and James R. Copland, in two posts at "Point of Law" dated 1/10/05 and 1/19/05.

All manner of points raised by Messrs. Mallaby and Copland deserve attention and comment. We are especially fascinated with Copland's idea that if the transaction costs associated with litigation are consuming an unwelcome share of our resources, maybe it's really our sentimental attachment to the adversary system that is to blame. Unfortunately, we do not have the space to explore such heady issues here. We are consoled with the thought that some conservative think tank is almost certainly at work on that project. Pending a report on its findings, we will confine ourselves to what Mr. Copland calls the "broader point," which he says is encapsulated in this paragraph from Mr. Mallaby's piece:

A tort system is a form of insurance: Consumers accept higher prices for products and services in exchange for the chance to be compensated if the product or service harms them. Outside the tort system, we have plenty of examples of people buying insurance or warranties. People insure their cars, homes, refrigerators; they want protection against financial setbacks. But people don't buy much insurance to protect themselves from pain and suffering; their revealed preference is that they don't want it. So why have a tort system that provides over $50 billion in pain-and-suffering awards annually?
Did you get that? The real problem, it now transpires, is not those pesky transaction costs after all. The broader problem is allotting $50 billion per year -- half of one percent of GDP -- to compensate accident victims for their pain and suffering. Do you think it stingy, to begrudge them such compensation? Think again, say Mallaby and Copland. The victims' own "revealed preference" is to risk uncompensated pain and suffering, rather than insure against it. If they will not shoulder the costs of insuring against the risk, why should anyone else?

We were initially puzzled that this argument should be pressed only in the context of noneconomic damages. Many Americans, after all, also decline to purchase life insurance or disability insurance. That is, their "revealed preference" is to take the risk of a catastrophic loss of income resulting from fatal or disabling injury, rather than insure against it. Of course, it is possible that their "revealed preferences" would be different, if more resources were at their disposal to spend on insurance premiums. But it is also possible that they accept the risk precisely because it may be possible to recover damages in tort, if they are seriously injured by forces over which they have no control, such as the negligence of another.

To put the point another way: Before we could take the insurance-purchasing behavior of consumers (or the lack of it) as an indication that their "revealed preference" is to bear the risk of economic loss, their behavior would have to be observed in a counterfactual world where they were indeed making an actual choice to bear that entire risk. The same is true of noneconomic harms. We do not insure against the risk that we will be libeled, or deprived of our civil rights, or fall victim to discrimination. We do not even insure against the risk that some psychotic malefactor will cripple us for life, simply for the pure joy of it. But that does not mean that our "revealed preference" is to bear that risk alone and let the harm rest where it falls. It may mean only that we rely on a tort system that will hold the injuring parties responsible.

In other words, it may mean only this: We will not sell you our physical ease, or our peace of mind, at any price. But if you proceed to take them anyway, we will hire a lawyer. It is then that our lawyer will "reveal" our "preferences" to you.

Update 1/23/05: Addressing this same point, Judge Posner says: "[Some have] suggested that pain and suffering, disfigurement, and other nonpecuniary losses imposed by medical errors are not real costs because people rarely try to buy insurance against such losses. However, the reason they do not buy insurance is not that the losses aren't real, but that insurance is designed primarily for replacing income or defraying an expense."


C.E. Petit writes ...

Of course, something else that the study fails to do is put its "failure to purchase" claims in context:

Those who do not purchase insurance are not abstractly refusing to purchase insurance, but refusing (or unable) to do so AT THE OFFERED PRICES. Given the residual discrimination built into insurance rates; those pesky transaction costs that are somehow going to be recovered in insurance premiums; and the perception that "if I am grievously injured, I (or my survivors) can sue"--that is, that insurance coverage is merely an administrative convenience, and not a substantive necessity--I don't see how one could come to the conclusions summarized here. I suppose I'd better read the whole report again to see if I missed something the first time; I didn't see anything that would meet any of these objections the first time, let alone deal with the severe methodological problem with the data set.

Bluntly, I think this study almost worthless. It's rather like calculating crop yield by comparing the weight of corn produced to the weight of cornstalks discarded and throwing in an "average" weight of the whole plant... and ignoring silly things like germination percentage, field-to-field and hybrid-to-hybrid variations in the plant's size that are not reflected in the weight of the grain, etc.

8:44 AM  

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Fed. R. Evid. 702: If scientific, technical, or other specialized knowledge will assist the trier of fact to understand the evidence or to determine a fact in issue, a witness qualified as an expert by knowledge, skill, experience, training, or education, may testify thereto in the form of an opinion or otherwise, if (1) the testimony is based upon sufficient facts or data, (2) the testimony is the product of reliable principles and methods, and (3) the witness has applied the principles and methods reliably to the facts of the case.