Injuries have many causes, including economic activities: consumers are injured or killed by defective products, workers are hurt on the job, train passengers are injured by derailments, and patients are harmed by medical errors. Markets provide broad incentives to control the number and costs of such injuries. For example, employers can save on wage costs by making jobs less hazardous; drivers with good safety records pay lower insurance premiums; and enhanced safety features can give a product a marketing advantage over its competitors. In addition, the insurance market responds to people’s desire to reduce the financial uncertainty associated with potential injuries.
Society uses three tools to augment the safety incentives and insurance opportunities provided by the market: regulation, public compensation programs, and tort liability. In particular, the U.S. tort liability system is intended to reduce the number of injuries—by providing incentives for individuals and firms to take appropriate care—and to compensate those who are harmed.1
“Tort” is defined very broadly in law as an injury to “one’s person, reputation or feelings” or damage to “real or personal property.”2 Tort liability is the court-enforced obligation of a “tortfeasor” (injurer) to pay for a victim’s losses. The concept of tort liability evolved as a generalization of various specific types of injuries—including trespass, deceit, slander, and assault and battery—some of which generally occur outside the context of economic activity. Even today, tort law’s diverse origins are reflected in a complex and heterogeneous body of common law. One example of that complexity is the boundary line between tort law and contract law. Notwithstanding the broad definition of a tort, injuries caused by a breach of contract are generally addressed under contract law—with the exception of injuries involving medical malpractice or defective or dangerous products, which are addressed as torts even when the parties have an explicit contract.
Tort law is almost exclusively contained in state law, and the large majority of tort cases are filed in state courts. Not surprisingly, therefore, most past efforts to reform the tort liability system in the United States have taken place at the state level. In particular, most states have adopted one or more reforms favoring defendants during the past 30 years—especially in 1986, when a perceived insurance crisis led to 41 new state laws.3 The courts have also taken action at various times: recently, for example, the U.S. Supreme Court reiterated an earlier ruling that the Due Process Clause of the Constitution establishes limits on punitive damages.4
Still, many critics of the current tort system say that additional federal action is needed for several reasons. At the general level, they argue that the system’s costs are too high, particularly because of excessive “transaction costs” (mainly compensation to plaintiffs’ and defendants’ attorneys) as well as excessive and arbitrary awards for noneconomic losses (“pain and suffering”) and for punitive damages. Such high costs sometimes have perverse negative effects on safety, they argue—for example, by discouraging firms from conducting safety research that could create a legal “paper trail” or by raising the prices of risk-reducing goods and services, such as medical care. Critics also contend that plaintiffs frequently bring frivolous lawsuits when they know that the defendant is inclined to settle out of court to avoid the costs of litigation.
The tort system’s critics also take issue with specific types of cases. They argue that medical malpractice claims are contributing to a crisis in the cost and availability of certain health care services, that claims for exposure to asbestos by people who show no evidence of illness are burdening the courts and pushing firms into bankruptcy, and that misuse of the class-action mechanism is allowing local judges and juries who are biased against distant corporate defendants to bring verdicts that have damaging national implications.
Supporters of the current tort system question the factual basis of some of those criticisms. They note that the number of tort cases filed nationwide has been falling since 1996. Moreover, they say, large awards for punitive damages are rare and are often reduced before payment is made. They further argue that the costs of the tort system are worthwhile given the system’s contributions to the social goals of compensating victims, holding injurers responsible for their actions, and improving safety. Supporters of the present system also maintain that proposed reforms are generally too broad and that fewer negative consequences would occur if the Congress allowed the states and the judiciary to address any real problems that exist.
The Congress has modified tort law several times in the past, although its actions have generally focused on torts that spring from a particular cause or affect specific indus-tries. For example, the General Aviation Revitalization Act of 1994 exempted manufacturers of small planes from liability for crashes if the planes are more than 18 years old and not used in scheduled service. In addition, federal compensation programs that have been created for victims of vaccine injuries and the September 11 terrorist attacks limit the ability of people receiving compensation to sue for damages.5
This primer looks at the tort system from an economic perspective: it discusses the factors that influence whether tort liability improves or reduces economic efficiency and analyzes, in qualitative terms, the likely effects of some reform initiatives. In principle, tort liability can provide incentives for potential injurers and victims to take precautions, thus reducing injury rates. In practice, however, implementation problems can reduce the strength and value of those incentives to the point that liability decreases efficiency and may even have net negative effects on safety. Although available evidence about the tort system is too limited to support many firm conclusions, it does indicate that the system is more costly than other methods of compensating victims. Thus, an economic perspective suggests that changes to the system should focus on improving the incentives it provides, lowering its costs, or both.
1. The aims of the tort system are sometimes also said to include providing a forum for the less privileged to be heard and punishing egregious behavior.
2. Bryan A. Garner, ed., Black’s Law Dictionary, 7th ed. (St. Paul, Minn.: West Group, 1999), pp. 1496-1497.
3. Those reforms included limits on nonpecuniary damages, reductions in the scope of joint-and-several liability, and offsets for benefits from collateral sources (which are discussed in Chapter 5).
4. The Court held that punitive damages must be “both reasonable and proportionate to the amount of harm to the plaintiff and to the general damages recovered.” It also alluded to rough limits on the ratio of punitive damages to compensatory damages in cases involving only economic losses. State Farm Mut. Automobile Ins. Co. v. Campbell, 538 U.S. ___ (2003).
5. For a summary of some federal tort reform laws, see Henry Cohen, Federal Tort Reform Legislation: Constitutionality and Summaries of Selected Statutes, CRS Report for Congress 95-797A (Congressional Research Service, updated May 2, 2003).