Craze for Liability Lawsuits Is Expensive, and We All Pay

Just as you don’t have to be an artist to know what you like and don’t like, you don’t have to be a lawyer to conclude that something is terribly wrong with the civil-justice system. Especially the personal- and product-liability branches.

The country has gone sue-crazy.

It is hard to pick up a newspaper without reading that somebody is suing somebody else for $1 million, $50 million or $1 billion. Of course filing a lawsuit is one thing, and collecting is another. But court awards of mind-boggling (and mouth-watering) size are no longer rare.

No one in his right mind would argue against the principle involved in personal- and product-liability cases. If a surgeon removes the wrong organ, he (or his insurer) should foot the bill for his carelessness. People who are injured by a defective product are entitled to collect for their pain and lost earnings.

Surely, though, there is room for common sense. Before handing out sky-is-the-limit awards, frequently on the most esoteric findings of fault, judges and juries should ponder the effect on the world outside the courtroom.

The prevailing attitude was reflected in a conversation among friends of this writer who heard an item on the evening news about a big judgment awarded to a man injured in a collision with a truck.

Everybody agreed that, based on the facts as reported, the jury seemed to have gone overboard. But, as one fellow said, “Oh, well, why not give the guy a break? The insurance company can afford it.”

Entirely overlooked is the fact that in the real world it isn’t just the insurance company that pays. We all pay in the form of higher premiums for our own insurance or, more important, in higher prices passed along by businesses whose insurance costs keep going up and up. In some cases it becomes uneconomic to provide the product or service at all.

To take an easy example, back in 1962 the cost of liability insurance and associated legal activities accounted for only 0.25% of the selling price of a small aircraft. Today, although the safety record of such airplanes is no worse than before, liability-related costs range from 10% to 30% of the sale price at Cessna. The experience of other manufacturers is similar.

One reason is that the manufacturers remain at risk for all the aircraft that they have ever built--going back to 1927 in the case of Cessna. Another is the “deep-pockets” approach to compensation that has been adopted by the courts.

Say the court finds that in the crash of a rental plane 25% of the fault was attributed to pilot error, 60% to the rental company and only 15% to the manufacturer. Yet the manufacturer may be stuck with practically the whole bill on the ground that his financial resources are greater.

The result has been thousands of lost jobs in Kansas and Florida as the price of small aircraft, swollen by the manufacturer’s higher insurance costs, soared into the stratosphere. And the same legal principles apply to manufacturers of more down-to-earth products.

It remains to be seen what the courts will decide about the chemical accident at Bhopal, which caused more than 2,000 deaths. But the fallout is already being felt by firms that have nothing to do with the case or the type of chemical involved.

The cost of liability insurance for firms that handle hazardous chemicals or wastes is up by 75%, to 500%. Many are finding it difficult to get coverage at any price.

Chemical manufacturers fear that they will be stuck for the misdeeds of industrial users of their products. As one industry expert told Industry Week, “Any lawyer will tell you that the ‘deep-pockets’ theory says that you go after the guy with the most money.” And the ultimate cost will be paid by the ordinary consumer.

Then take the medical field, where malpractice suits have mushroomed in recent years. The result is a sharp rise in liability-insurance rates, passed on to patients in most cases, plus a trend toward expensive tests and procedures conducted primarily to defend against possible malpractice charges. In New York state alone such “defensive” medicine adds an estimated $2 billion a year to health costs.

In the present climate an ordinary homeowner risks being held responsible for injuries to a burglar in the performance of his crime, or for a defect in a house that was sold years before. Any Californian who doesn’t buy the maximum available auto-liability insurance is flirting with ruin.

A Glendale judge recently ruled against a couple who accused a church of clerical malpractice because of advice given to a youth who later committed suicide. But tens of thousands of churches find it prudent to dip into the collection box to pay for insurance against such suits.

I know of no accurate figures for the total cost of the liability system as it now operates, but surely it would come to tens or even hundreds of billions of dollars.

The point is not that the personal- and product-liability system should be dismantled, but that we recognize that compassion must be balanced by concern over the price being paid in terms of higher consumer prices, constrained employment opportunities and ability of U.S. business to compete with foreign producers not similarly encumbered.

All kinds of corrective actions have been suggested, including statutory limits on injury awards, reform of the contingency-fee system that encourages lawyers to pursue even frivolous cases, and more frequent use of the judicial power to impose financial penalties on losing plaintiffs.

One suspects, though, that legislative remedies are less important than getting our heads straight.

As a people we must somehow get over the notion that the solution to every problem is a lawsuit. Not every illness has a cure. Even well-designed and well-built products will sometimes fail, particularly in the hands of a careless user. Some tragic occurrences are the fault of the people to whom they happen. There never has been, and never can be, a risk-free society.

Most fundamental of all, there is no superfund in the sky from which multimillion-dollar awards are paid. The money can come from only one place: your pocketbook and mine.