Injury and Accident Law

Controlling Nonpecuniary Damages

As noted above, one goal of people who advocate public insurance as an alternative to tort liability is to control nonpecuniary damages. That goal can be achieved in other ways, however—most directly, through statutory limits or bans on those damages. Many states impose such restrictions, either in general or for particular types of torts. In addition, several federal bills considered in recent years have proposed limits in specific contexts. Examples from the current Congress include the Asbestos Compensation Fairness Act of 2003 (H.R. 1586), which would prohibit punitive damages in asbestos cases, and the HEALTH Act of 2003 (H.R. 5) and the Common Sense Medical Malpractice Reform Act of 2003 (H.R. 321), which would limit noneconomic compensation in medical malpractice cases to $250,000 and punitive damages to twice the economic damages or $250,000, whichever was greater.

A second, less centralized way to reduce nonpecuniary damages would be to allow producers of goods and services to specify in advance the extent of damages they would pay in the event of an injury. Products carrying limits on damages could be offered at lower prices (because their expected costs would be lower), and the forces of supply and demand would determine the options available in the market. That approach could lead to the elimination of nonpecuniary damages for risky products—if, as argued in Chapter 3, consumers would rather have lower prices than actuarially fair insurance for such damages. In principle, the courts could implement this option on their own, without legislation, by enforcing damage-limitation contracts in injury cases. They have not done so up to now, however (which is why producers today cannot offer consumers lower prices in exchange for reduced liability). Moreover, Congressional action could allow a faster and clearer transition to the new system.4

Table 3.

The Primary Effects of Some Broad Options for Tort Reform

Effects on Efficiency
Option Positive Negative Effects on Equity
Control Nonpecuniary

Cap or prohibit nonpecuniary damages

Improves allocation of risk (by reducing implicit over-insurance); may reduce distortions of safety incentives if current damages are excessive or arbitrary

May undermine incentives for care and encourage excessive consumption of risky products if current damages are appropriate

Consumers are not forced to buy as much bundled insurance for non-pecuniary losses; depending on the character of existing damages, lower payments by injurers may reduce excessive judgments or punish injurers inadequately, and lower awards to victims may represent inadequate compensation or smaller windfalls

Allow buyers and sellers to agree in advance to limit liability damages

Same as above

Same as above

Same as above, except that incomplete compensation to victims may be viewed as equitable if it follows voluntary, informed choices by consumers

Allow unlimited insurance subrogation

Improves allocation of risk (by reducing implicit over-insurance) and incentives for care by consumers

No major negative effects

Consumers can effectively undo the bundled insurance for nonpecuniary losses; injurers still pay such damages, but the payments go to victims’ insurance companies rather than to victims

Control Attorneys’ Fees

Cap contingent fees

Reduces nuisance suits

Makes it harder for some victims with difficult claims to find representation

Defendants face fewer claims for both legitimate and nuisance suits; some victims receive cheaper representation but others cannot find representation

Promote early offers and limit fees when such offers are made and accepted

Reduces transaction costs for some cases; may reduce nuisance suits

May indirectly make it harder for some victims (though fewer than above) to find representation if attorneys cannot subsidize difficult cases with profits from easy cases

Defendants may face fewer nuisance suits and perhaps fewer legitimate suits; some victims receive cheaper representation but others(though fewer than above) cannot find representation

Restrict or
Eliminate Joint-

May reduce transaction costs if the inability to target injurers with deep pockets discourages some suits; may make incentives for care more or less efficient

May increase transaction costs if plaintiffs pursue larger numbers of defendants; may make incentives for care more or less efficient

Injurers with deep pockets pay lower damages and transaction costs; victims get less compensation and may pay higher transaction costs

Offset Payments
from Collateral

>May reduce erroneous findings of liability if some verdicts are motivated by concern that plaintiffs need money for their injuries (such as for medical care)

Reduces incentives for care to the extent that potential injurers expect losses to be covered by other sources

Injurers pay lower damages; victims are not doubly compensated, nor are victims’ insurance companies and other collateral sources reimbursed for the benefits they provide

Source: Congressional Budget Office.

The efficiency effects of letting producers and consumers limit tort liability damages through contracts would be similar to those of capping or prohibiting damages by statute. Again, to the extent that nonpecuniary damages were reduced, uncertainty would be distributed more efficiently, but lower prices for risky products would probably lead to inefficiently high consumption unless consumers took the risks into account in their decisions about purchases.

The equity implications of the two approaches would differ, however. According to some conceptions of equity, limiting victims’ access to compensation for pain and suffering is problematic if it is done by legislative fiat but not if it results from the victims’ own choices (provided those choices are adequately informed and voluntary).

A third option focusing on nonpecuniary damages— known as unlimited insurance subrogation (or substitution)—would allow insurance policies to specify that the insurance company would collect all of a liability award or settlement paid by an injurer for an injury covered by the victim’s policy.5 In contrast, the limited subrogation allowed under current law lets a company receive only the portion of an award that is necessary to reimburse it for benefits paid under its policy.

Assuming that consumers continued to insure themselves only for pecuniary losses, the result of this option would be that insurance companies could collect more than they paid out whenever one of their policyholders was awarded punitive damages or compensation for pain and suffering (or pecuniary damages in excess of the policy’s benefits). The expected value to insurers of the net proceeds from such cases would reduce their costs, and in a competitive market, they would pass on the savings to consumers through the premiums they charged. In principle, the result for the average consumer would be to exactly undo the inefficient “bundled” coverage for nonpecuniary damages that is implicitly included in the prices of risky goods and services. Taking into account their savings on premiums and their restricted compensation in the event of an injury, consumers would be paying for and receiving coverage only for pecuniary damages.

Like the previous two options, unlimited subrogation would reduce the inefficiency associated with bundled insurance for nonpecuniary damages at the cost of reducing the compensation received by victims. Indeed, it would probably go farther than proposals that merely cap such damages, by eliminating them for injuries covered under most, if not all, insurance policies. But unlike the previous options, it would leave injurers liable for such damages— the difference being that the awards and settlements would go to insurance companies rather than to victims.6 Thus, potential injurers would still have an incentive to consider the full social costs of their risk-related actions, and consumers would continue to see those total costs reflected in the prices of products. In short, the unlimited-subrogation approach would not only allocate consumers’ wealth more efficiently between the uninjured and injured states (again, by reducing or eliminating overinsurance for nonpecuniary damages) but would also maintain efficient incentives in product markets.

Next > Controlling Attorneys’ Fees

4. Rubin, Tort Reform by Contract.

5. See David Rosenberg, Deregulating Insurance Subrogation: Toward an Ex Ante Market in Tort Claims, Discussion Paper 395 (Cambridge, Mass.: Harvard Law School, John M. Olin Center for Law, Economics, and Business, undated).

6. This approach assumes that insurance companies could secure the cooperation of their injured policyholders at trial. For a discussion of that issue, see ibid., footnote 22.