Justinian Lane

Tort Reform – A mechanism for shifting business costs onto taxpayers

For many years, I’ve been pointing out that there’s no “free lunch” with tort “reform.”  Medical bills don’t disappear just because a person’s ability to sue does.  All that happens is that those bills get shifted from a responsible defendant onto private or public insurers.  And by public insurers, I mean the taxpayers.  This op-ed from a Michigan attorney (who I do not know) hits the nail on the head:

4. There are only two choices for compensation.
•The responsible party pays. The person or entity found responsible for the loss in a legal proceeding pays the person suffering the loss. In the case of a business, this may be looked at as the “cost of doing business,” where the cost of the accident is paid by the business, which in turn spreads those costs to its customers by raising the price of its product or service. In such a “mini-free market” system, lawsuits punish an irresponsible party, forcing either higher prices or even market exit, while simultaneously rewarding a more responsible competitor who, without a lawsuit, can keeps its prices low.

•The government pays. If the loss cannot be recovered from a responsible party in the legal system, then, as in the case where a household loses a breadwinner or the breadwinner suffers an irreparable injury and cannot work, the last recourse will be some government assistance program. In other words, the loss is spread not among the users of the product or service, but is spread among taxpayers.

Source: Tort reform made simple | | Detroit Free Press

Some argue that the cost of lawsuits drives up the cost of the products we buy.  To some extent, that’s an accurate statement.  Manufacturers figure the costs of litigation into the prices of their products.  If the costs of litigation drop, the seller can either (a) reduce the price of the product, or (b) keep the savings as profit.  (I believe that (b) happens far more often than (a) does.)  Yes, tort “reform” will have the effect of lowering a manufacturer’s costs of litigation.  This may lead to some drop in the price of the product.  But the savings to the manufacturer will often come at a cost to the taxpayer.  As Marcinkowski points out in his op-ed, tort “reform” just shifts those costs onto taxpayer-funded programs like Medicaid/Medicare and Social Security.

Now, I don’t know about you, but I’d rather not have my tax dollars being used to bail out manufacturers of defective products.  And that’s why it makes good financial sense to oppose tort “reform” measures.

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Posted at 12:52 PM, Apr 08, 2010 in Civil Justice
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Very good point. Tort reform does so many things- Drives up fears to buy more coverage, scares people into not using it, and closes the courthouse doors so that businesses can sue even more.

Posted by: Mike Bryant | April 8, 2010 10:52 PM

"Drives up fears to buy more coverage, scares people into not using it, and closes the courthouse doors so that businesses can sue even more."


Posted by: Adam | April 9, 2010 11:19 AM

I'm going to jump in and address Adam's comment by giving my take on what Mike raised.

1: "Drives up fears to buy more coverage." Tort reform is based upon the politics of fear. Many businesses are scared witless of being sued. So they buy tons of coverage, whether or not its likely they'll ever need it. The "reform" movement loves spreading anecdotes about bogus lawsuits, regardless of whether they're true or not.

2: "Scares people into not using it." I'm assuming this refers to people being afraid of using their insurance lest (a) their rates go up or (b) their policy gets canceled.

3: "Closes the courthouse doors..." The "closing the courthouse doors" metaphor refers to the fact that most "reform" measures make it harder for individuals to sue.

4: " that businesses can sue more." Ever notice that most "reform" measures only apply to personal injury lawsuits, and not financial injury lawsuits? So, for example, a guy paralyzed by a defective medical device might only be able to recover $250k. But if you infringe on the patent of that medical device, the manufacturer can collect $250 million.

Posted by: Justinian Lane | April 9, 2010 12:40 PM

If you are worried about the poor taxpayer, then why does the plaintiff bar fight so mightily against the concept of sovereign immunity. That concept surely protects the taxpayer.

Or, if you do pursue a claim is situations where sovereign immunity is waived or otherwise circumvented, allow the claim but limit contingency fees to 7.5% (the true value to society of the plaintiff bar's efforts)

The one thing about which I am positive in life, is that no one in the ambulance chasing community gives a flip about the taxpayer and it is absolute hypocracy to pretend otherwise

Posted by: Avenger | April 11, 2010 12:46 AM

I'm sure if you compare the amount of money recovered from litigation against the government with money recovered for the government, you'll see that taxpayers come out as overall winners.

You act as though PI attorneys aren't also taxpayers. Have you not considered the possibility that some of them don't like having their tax dollars pay for the negligence of solvent defendants? I know I for one don't like the fact that my Michigan tax dollars go to pay the medical bills of people injured by defective prescription drugs. (Michigan residents can't sue for failure to warn claims against pharmaceuticals.) Why, I dare say that making the taxpayers pay for the negligence of corporate defendants smacks a little of socialism.

And with respect to sovereign immunity: The taxpayers foot the bill either way. If a government actor's negligence injures someone and that person csn't sue the government, we taxpayers will pay for that person's medical care through public insurance. If they do sue the government, we taxpayers pay for the judgment. The difference is that if the government is held accountable in a court of law, it may be deterred from committing future similar acts.

I oppose contingency caps because I believe in the freedom of contract. Do you want the government sticking its nose into your contractual business? Let the market decide what an appropriate contingent fee is. Nothing prevents consumers from shopping around. But if we are going to entertain contingent fee caps, how about capping defense fees at a percentage of the plaintiff's demand?

Posted by: Justinian Lane | April 11, 2010 11:06 AM

I see very few negotiated contingency fees - the deal is alwayts 33% (40% if suit is filed) - and quite a few attorneys file suit without making any effort to negotiate a settlement so that their fee is always 40%. They prey on the ill-informed, uneducated and unintelligent - in other words, the weakest members of society. If it were truly a free market you would see the plaintiff bar advertising their fees. You never see it - every bodily injury case that isn't a so-called class action is at 33/40

Posted by: Avenger | April 11, 2010 8:27 PM

It's anecdotal evidence, but I saw a billboard for an attorney in Las Vegas who advertises 19% fees. And if you Google "20% contingency fee" you'll find an attorney who is offering that rate. When I worked at a PI firm in Texas, one gentleman negotiated us down to 15% because liability was ridiculously clear and he just wanted someone to negotiate with the insurer for him.

Do most PI attorneys charge 33/40? Yes. But some don't. In some cases, an attorney may charge 33% and receive more money than his effort was worth. But on the flip side, many senior partners charge $600 an hour or more for their time. Now, I don't know about you, but I think few attorneys are genuinely worth ten bucks a minute. Especially when it's near the end of the billing cycle and the partner decides to personally give all of his clients a ten minute "status update" phone call.

Another problem I have with contingency fee caps is they don't allow PI attorneys to take cases in which they'll have to invest a good deal of money unless liability ia super clear. Take a medmal, for example. You probably know that it's not uncommon for a PI lawyer to sink $100,000 into a complicated medmal case. Let's take your 7.5% example and bump it up to 10%. An attorney would have to get a $1 million dollar settlement to earn a fee that's just equal to his investment of money. (And that doesn't take into account the time value of money over a 3-4 year case.) Add in the opportunity cost of working on easier, cheaper cases, and the only medmals that make sense are those where either the liability can't be contested, or where the damages are astronomical. And if you add in noneconomic damage caps to the mix? Many people with meritorious cases couldn't find a lawyer, and many of them would need public assistance to pay for their medical bills. Again, I don't want my tax dollars used to subsidize another's negligence.

Anything less than 25% just doesn't work in a case where (a) liability is contested, and (b) expert witnesses are needed. I do agree that around 10% might be fair in some cases (particularly "policy limits" cases with clear liability), but there's no ex ante way to address those few cases that doesn't rely on some "one-size-fits-all" cap.

Posted by: Justinian Lane | April 11, 2010 9:13 PM

I worked for a number of years as a claim adjuster handling bodily injury claims. While I am opposed to contingnecy fees as a matter of principal (I think that they are a definite inducement to fraud), if they are to be used, they should reflect the element of risk associated with the case. Unfortunately, that is rarely case and if the plaintiff firm is one of those firms that advertise heavily on television, it is never the case. I know of one plaintiff attorney here in Central Florida who advertised a 25% contingency fee for a very brief period of time, but he no longer does and I have heard from a friend who worked as personal injury lawyer at the time (he now does defense work) that the FTLA "unofficially" leaned on the attorney to stop

Posted by: Avenger | April 12, 2010 5:31 AM

If contingency fees are an inducement to commit fraud, I'm sure you'll agree that the inducement is to generate as large as a recovery as quickly as possible.

Well, doesn't an hourly billing arrangement induce counsel to needlessly prolong the litigation in order to run up the clock? A crooked defense lawyer billing by the hour has plenty of inducement to assert frivolous defenses, to spend too much time in depositions, and to prolong the matter longer than he or she believes is in the best interest of the client.

As long as a lawyer has a financial interest in a matter, there will always be an inducement to put his or her interest ahead of the client and ahead of the interests of justice. Of course, the same thing could be said of most professions. (Some doctors push surgery not because it is in the best interest of the client, but because the doctor gets a lot of money to perform the surgery.)

For whatever problems contingency fees have, they're the only way average citizens can hire attorneys to take on "big" cases.

Posted by: Justinian Lane | April 12, 2010 12:26 PM