Liability Issue: A Need to Find Right Balance

Ask corporate executives what troubles them most these days and likely as not they’ll answer liability risks and the increasingly difficult task of insuring against them.

For example:

- “It’ll be impossible starting next year to buy insurance against environmental damage,” Robert W. Lundeen, chairman of Dow Chemical, remarked recently.

- Lear Siegler figures that product liability insurance now averages more than $60,000 for each plane it produces, more than its direct labor cost.

- After suffering huge losses in unsuccessful satellite launches recently, insurers insisted that future coverage will be available only after satellites are operating.

In the wake of major loan losses, some banks are having problems getting liability coverage for officers and directors, and that problem spreads into other industries, as well. Some businessmen contend that they will have to pull out of some activities because liability insurance is unavailable or prohibitively expensive. Dow’s Lundeen maintains that the problem already has cut off some research in pharmaceuticals. “You can’t make enough on a product to stand those risks,” he said.

The problem stems from large damage awards and legal doctrines that have made companies, cities and other entities with big treasuries responsible for damage claims even beyond their share of the blame. This so-called “deep pockets” doctrine holds that even when some defendants don’t have the funds to meet a claim, victims can collect the full amount from those defendants who can pay.

Corporate leaders, who have witnessed major companies file for bankruptcy to protect against massive claims over damage caused by their products, argue that society must accept some measure of risk or stifle progress.

There is some precedent for controlling liability costs. Medical malpractice insurance expenses became a major issue in the 1970s and led to legislation in California limiting the amount that victims can collect beyond actual economic loss. As a result, pain and suffering awards, which doctors, businesses and government entities fear the most, have been reduced modestly for the medical profession.

The California legislation--and the general complaints about escalating insurance costs--draws strong words from those in the legal profession concerned with victims rights and society’s ability to influence businessmen to operate with adequate regard for public safety.

Lawyers argue that victims are entitled to recover losses and that huge pain and suffering awards are necessary to get the message across to major corporations. They contend that inadequate safeguards and other improper acts by businesses and others are to blame for high liability costs. They believe that such legislation as the California medical malpractice law has intimidated victims and their lawyers, discouraging legitimate claims from being filed.

Many lawyers also believe that the pressure on insurance companies is not as great as the companies contend.

Robert B. Steinberg, president of the California Trial Lawyers Assn., maintains that the dilemma for society hasn’t been accurately identified. He contends that the choice is not between letting huge damage awards hamper business or limiting victims’ right to recover. Rather, the question is whether society can find a way to provide adequate funds--through insurance or other programs--to cover the risks involved.

The debate continues to intensify. When an effort to change the deep pockets doctrine failed in the California Legislature this year, a number of industrial and governmental groups teamed to attempt to qualify an initiative for next June’s ballot that would accomplish such a change, requiring defendants to pay damages for pain and suffering only to the extent of their share of the blame. Pressure for federal legislation is also likely to grow.

The problem is broader than just the deep pockets question. The whole issue of mounting liability costs and whether they can be controlled without severely damaging victims’ rights demands more priority from policy-makers. It is a complex question and it should attract more study than it has.