U.S. Calls for Liability Suit Award Curbs

Judges and juries have been too generous in awarding damage payments to persons injured by faulty products or by medical malpractice, drastically driving up the cost of liability insurance, the Reagan Administration charged in a study issued Wednesday.

Payments for “pain and suffering” and other non-economic damages should be limited to $100,000, Assistant Atty. Gen. Richard K. Willard said at a news conference. Most of the changes in handling liability awards should be made at the state level, although the Administration is considering revisions in federal laws, he said.

Juries “have the idea they can make an award and it’s a free lunch,” said Willard, who led representatives from 10 federal agencies and the White House in preparing the report. He criticized judges for moving “legal doctrine in the wrong directions.”

‘All Sectors’ Affected

Willard said that liability insurance premiums have increased rapidly for manufacturers, small businesses, doctors and other professionals, as well as for municipal governments and school boards. “Almost all sectors of society are affected,” he said.

The crisis arose, Willard said, because the insurance industry has suffered major losses in recent years, spending far more to pay claims than it collected in premiums. Losses reached $25.2 billion last year.

However, insurance firms have another major source of income, the money earned by investing their income from customer premiums. In 1985, investments and other income totaled $32.8 billion, giving the industry a net gain of $7.6 billion, the report said. The insurance industry is making a profit, although earnings are below its historical average and “well below the profitability of most other major industries,” the report said.

The insurance “affordability crisis” is concentrated in two areas, malpractice insurance for doctors and general commercial liability, which protects manufacturers against damages caused by their products, the report said. Cities and service businesses such as day care centers also buy this liability coverage to pay for claims by injured citizens or aggrieved customers.

‘Drastic Catch-up’

“If insurance companies had been gradually raising their premiums over the last 10 years, there wouldn’t be the drastic catch-up there is today,” Willard said.

Insurance companies made large profits from their investments during the high-interest era of the late 1970s, and these earnings enabled them to keep premiums from rising, he said. Now that investment income is not climbing as fast and damage payments keep mounting, the companies are raising premiums.

The average medical malpractice award by a jury rose from $220,018 in 1975 to $1,017,716 last year, the report said. There were 71 awards for medical malpractice of more than $1 million each and 86 such awards for product damages.

Liability awards usually include compensation for the loss of income and earning power and the cost of medical bills and related expenses. In addition, juries may award money for pain and suffering, emotional trauma and other non-economic injury. There is no limit on those awards, but the Administration report calls for a $100,000 ceiling.

“Why should one person get $10,000 and another person get $10 million,” Willard said. “It depends on the jury looking at it.”

The report said that legal fees for handling liability cases should be limited to “reasonable amounts on a sliding scale.”