Tort Liability Versus Insurance and Regulation
As noted above, tort liability is only one of the tools that society uses to try to supplement market mechanisms, such as contracts and private insurance. Other tools are regulation and public compensation programs (such as the workers’ compensation system). All of those policy tools have strengths and weaknesses—as do markets—so using them in combination may be beneficial. However, the interactions among different tools and the market can be complex and even counterproductive.15
The interplay between liability and private insurance is perhaps the most complicated. From the point of view of potential victims, tort liability acts as a partial substitute for their own insurance—the more comprehensive the set of injuries for which they receive tort damages, the fewer the injuries ultimately compensated by their own coverage. Conversely, from the perspective of potential injurers, liability increases uncertainty, leading many of them to buy liability insurance to control that uncertainty. The extensive use of such insurance makes analyzing the efficiency of tort liability more complicated, because it may undermine potential injurers’ incentives to exercise care. The degree to which it does so hinges on the precautions (if any) that insurance companies require as a condition for providing coverage and also on the thoroughness of their underwriting. The more they tailor their premiums to policyholders’ specific practices or experiences, the more incentive potential injurers still have to take cost-effective precautions.
The interactions between liability and regulation are perhaps less complex—but in that case also the two can be complements as well as substitutes.16 In particular, tort lawsuits can be used as a private mechanism for enforcing regulations, particularly when government agencies lack the resources to monitor compliance or prosecute violations themselves. Such lawsuits may be explicitly authorized by statute, as in the case of some civil rights laws. Alternatively, judges may decide that tort claims are an appropriate means by which to carry out the intent of particular statutes. For example, a court may allow a tort claim of deceit under a statute that makes it a crime to roll back an automobile’s odometer.17
As alternatives to each other, regulation is a more centralized policy tool than liability is. The centralized approach may be more or less efficient for particular classes of injuries—on the one hand, it tends to have lower transaction costs; on the other hand, the regulations it produces can only be as good as the information available to the central decisionmakers. Whereas tort claims arise after specific injuries occur, efficient regulation requires before-the-fact information about risks of injury, types of precaution, and the costs and benefits associated with particular regulatory standards. In addition, the more diverse that a given group of potential injurers is, the greater the amount of information that will be necessary to craft regulations that appropriately reflect the group’s various circumstances. In practice, the efficiency of regulations can also be lessened by political factors, such as pressure from interest groups or excessive influence from the regulated entities.
Next > The Costs of the Tort System
15. The relative use of those different policies varies significantly among countries. The United States relies more heavily on tort liability than 11 other industrialized nations do, judging from the estimated shares of gross domestic product that those countries spend on their tort systems; see Tillinghast-Towers Perrin, U.S. Tort Costs: 2000— Trends and Findings on the Costs of the U.S. Tort System (February 2002). The different policy mixes may reflect underlying differences in national conditions (such as in the homogeneity or diversity of the industrial sector) and values (such as in conceptions of equity or willingness to trade equity for efficiency).
16. For a more extensive discussion of the potential complementarities and conflicts, see Susan Rose-Ackerman, “Product Safety Regulation and the Law of Torts,” in Janet R. Hunziker and Trevor O. Jones, eds., Products Liability and Innovation: Managing Risk in an Uncertain Environment (Washington, D.C.: National Academies Press, 1994), pp. 151-158, available at www.nap.edu/openbook/0309051304/html/151.html.
17. For a discussion, see American Law Institute, Restatement of the Law Second, Torts (Philadelphia: ALI, 1979), section 874A.
