“A Lot Off the Top”: Jury Verdict Haircuts
*This post was previously incorrectly posted under a different author’s name.
Jury verdicts hold center stage in policy debates over the tort system. This is unsurprising. They are public events, they are easy to collect, and some verdicts are even large enough to catch the attention of readers dulled by repeated exposure to sensational news stories. But trials also are rare, occurring in only 3% of state court cases and 2% of federal lawsuits. Settlements are far more numerous and account for the vast majority of the dollars that change hands. Why, then, do trials receive so much attention? Why care about them at all?
The knee-jerk answer is that trials matter because verdicts drive settlements and insurance premiums in turn. As Texas Rep. Lamar Smith put it, “The obvious cause of skyrocketing medical liability premiums is escalating jury verdicts.” Smith is a Republican strongly in favor of tort reform.
Probably, there is a dose of truth in this. It would be surprising to learn that there was zero connection between jury verdicts and insurance premiums. But the inquiry can’t stop there. One must also assess the strength of the connection, assuming it exists. A 10% increase in verdicts could predict a tiny .1% increase in premiums. It could also predict a massive 50% increase. Without careful analysis, it’s impossible to know.
A study forthcoming in the Journal of Empirical Legal Studies offers an important reason for thinking that the connection between verdicts and premiums is weak. According to the study, of which I am an author, actual payments in tried cases often deviate from pro-plaintiff jury verdicts significantly. To see this, answer the following question.
After a long and expensive journey culminating in a trial in a Texas court, a medical malpractice victim wins a $1 million jury award. The defendant, a doctor, has malpractice insurance. How much will the defendant and his insurer probably pay to resolve this claim?
A. $1.4 million because Texas, a pro-plaintiff state, entitles victims to recover prejudgment and postjudgment interest.
B. $1 million.
C. Slightly less than $1 million because by settling the patient avoids the cost of an appeal.
D. $575,000, because large verdicts routinely receive “haircuts.”
The correct answer is D. After winning $1 million at trial, the patient can expect to suffer a haircut of 42%. This finding is based on an analysis of 306 medical malpractice cases that produced plaintiff verdicts in Texas from 1988 to 2003.
Had the patient been more severely injured, presumably he or she would have won a larger verdict. The haircut would then have been even worse, both in absolute dollars and as a percentage of the verdict. A $10 million jury verdict has an associated payment of $3.4 million, meaning that 66% of the verdict simply disappears. In raw dollars, the $6.6 million haircut on the $10 million verdict is 15 times as great as the $425,000 reduction on the $1 million verdict.
How strange is that? Research shows that the biggest verdicts go to the people whose injuries are the worst. (Death is an exception. A deceased patient will receive a smaller award than a patient who suffers a severe but non-fatal injury requiring long-term care.) Yet, the tort system requires the neediest patients to give up the most. Suppose a barber employed the same approach when serving a balding accountant and a long-haired hippie freak. Instead of giving the accountant a careful trim and going at the hippie with a weed whacker, the Texas tort barber scalps the balding accountant and cleans up the hippie’s split ends.
The probability of suffering a haircut also rises with verdict size. Of 55 plaintiffs who won verdicts in the $100,000-$250,000 range (in constant 1988 dollars), 60% suffered haircuts. That’s a lot, but consider what happened to patients whose verdicts were larger. Of 53 plaintiffs who won $1 million to $2.5 million (also in constant dollars), 92% suffered haircuts! Plaintiffs whose verdicts exceeded $2.5 million were treated even more roughly. The biggest verdicts were almost never fully paid. In the Texas tort barbershop, some hippy freaks avoid haircuts, but no balding accountants are missed.
What causes these discounts? Statutory caps on punitive damages and on damages in wrongful death cases play a role. So does judicial review of jury awards for excessiveness. But the most important factor by far appears to be the amount of liability coverage purchased by health care providers. If a doctor has $500,000 in coverage and a jury awards a patient $1.5 million, the $1 million difference usually goes uncollected. Policy limits insufficient to cover jury verdicts account for 73%-87% of observed haircuts, with the precise figure depending on how the analysis is configured. A Texan would be right to say that when a jury awards more money than a doctor’s insurance policy covers, the portion of the verdict above the policy limits ain’t worth diddly-squat.
The frequency of haircuts and their size show that jury verdicts are noisy signals. A $1 million malpractice verdict does not predict a $1 million payment even in the case where the verdict is won. How strongly if predicts payments in other cases or affects insurance premiums can only be guessed—and a guess of “no effect” cannot be dismissed out of hand. The same may be true for so-called “blockbuster” verdicts that pop up occasionally. Lawyers and insurers surely recognize blockbusters as outliers and also know they are discounted heavily. The impact of blockbuster verdicts on premiums may also be small.
Higher verdicts do predict higher payments, however. In our study, a 1% increase in verdict size predicted a 0.76% payment increase. This might tempt one to infer that rising average verdicts predict rising insurance costs. The inference may be mistaken, however, absent a control for changes in the case mix. Despite being a big state, Texas averages only 19 pro-plaintiff med mal verdicts per year. Because the number of verdicts is so small, a slight change in the case mix (such as a doubling of the number of cases involving brain damaged newborns from one year to the next) can cause the average verdict to shoot up wildly. (Halving the number of “bad baby” cases could have the opposite result.) Presumably, mix-driven changes in average verdicts don’t affect insurance rates because they do not indicate changes in case valuations.
A rise in the average pro-plaintiff verdict is even compatible with a drop in overall insurance costs, and might even be the relationship one should expect in states that adopt tort reforms. Many reforms knock smaller cases out of the med mal system by raising litigation costs and making them unprofitable. When these cases disappear, the ones that remain in the med mal litigation pipeline will be larger and will cause average verdicts and payments to rise. This would, however, be a statistical artifact and would convey no useful information about insurers’ actual costs.
Finally, a word about the size of doctors’ liability policies. In med mal cases, insurance drives the train. The single biggest cause of haircuts on jury verdicts is an insurance policy with low limits. When a doctor carries only $250,000 in coverage—a common level in Texas—$250,000 is the most a patient can realistically hope to win. Like many other states, Texas has no financial responsibility requirement, and many health care providers maintain too little insurance to cover patients’ losses. This issue should be added to the tort reform debate. In a world where victims’ damages are capped, it might be reasonable to insist that all doctors carry enough insurance to cover victims’ allowable damages in full.