Risk: Who should pay for it?
America is widely regarded as an increasingly litigious society. We're sue-happy, and lots of people are discovering that the system can be (ab)used to win jackpots. While some consider this trend an unredeemable negative, I view this as a reflection on the desires of the community to shift risk around. This may be stupid and short-sighted, but the market normally can correct for it. I divide lawsuits into three categories:
- A justified suit where the plaintiff believes he has been wronged and seeks equitable compensation
- A frivolous suit where the plaintiff does not believe he has been wronged, but seeks to win a jackpot by settling the case
- A justified suit where the plaintiff believes he has been wronged and seeks to get as much money as possible, above and beyond equitable compensation
No matter what reforms are proposed, we must not prevent those falling into the first category from getting what they deserve.
The second category is clear-cut as well. When insurance companies are paying for the cost of a defense, they look at the economics first. If it looks like it will cost you $100,000 to defend a lawsuit, and the plaintiff would be willing to walk away if you gave them $50,000 cash, you'll save $50,000 by settling, even if you're certain you would win the case. There is frequently no economic/legal incentive in the US to avoid these situations (such as a "loser pays" system common in other countries), so there will always be people willing to try.
The third category (the basis for most of the rest of my post) arises because people are greedy, and juries frequently base their decisions on emotional factors rather than strictly rational ones. They may award millions of dollars for claims of pain and suffering, or punitive damages to "send a message". There is an incentive, then, for plaintiffs to lie, exaggerate or mislead so as to maximize their potential profit.
But more importantly, there is an economic incentive here for people to avoid personal responsibility in the first place. You don't win as much money if you admit that you could have exercised some common sense to avoid the harm in the first place.
Juries are supposed to be representative of the community. If a jury claims that someone should have anticipated a certain risk and done more to prevent the harm it caused, that's effectively setting policy for that community. It is impossible to be completely free from risk. All you can do is draw a line somewhere and devote some percentage of your resources to mitigating it. Where that line gets drawn is entirely a cultural thing, and there's no correct place to draw it.
Guiding philosophies
On one side, you have the conservative buzzword of "personal responsibility". Pay attention to what you're doing, and when you make a mistake, learn from your mistake and move on. The costs of mistakes should be borne by those that make them, giving them an incentive to be more responsible, lowering risk-related costs for society and punishing those that fail to do so.
On the other side, you have the more liberal stance that people should be protected from their own stupidity and incompetence. People should feel safe and secure at all times and the people making my life riskier should be responsible for mitigating that. These costs should be borne by those creating the risk, giving them an incentive to make the lives of everyone safe and secure.
In the "personal responsibility" camp, the costs of errors are not shared uniformly. Those that are less educated or less capable will make more mistakes. A consequence of being less educated and less capable is that these people probably make less money and are less able to pay for the costs of those mistakes. This exaggerates income disparity and decreases the quality of life for those on the lower end of the socioeconomic spectrum.
In the more liberal camp, the costs of errors are shared more uniformly among the community. A jury may think they're doing the right thing by inflating an award for damages to send a message, but what they've in fact done is tell everyone that their community places more of the responsibility for risk on the part of the businesses, and less on the part of the individual. Insurance companies will react immediately to these developments by increasing their liability/malpractice premiums in that community, and businesses will have to raise their prices to compensate (or go out of business). There's no such thing as a free lunch, and there will always be economic costs associated with risks.
Though I identify more as a liberal than a conservative, I tend to side more with the conservative viewpoint here. We do not grow as individuals by pointing fingers at someone else when we fail to use our common sense. This gives stupid people license to be stupid, and potentially smart people license to remain children for the rest of their lives. If the costs of my stupidity are going to be borne by society, what incentive do I have to not do stupid things? If I have good common sense and know how to avoid unnecessary risk, why should I have to pay for those that don't?
On the other hand, I'll acknowledge that this is more of a cultural issue than one that can be decided by the numbers. Is it necessarily bad that a community wants to spread out the cost of risks? Help the little guy at the expense of everyone else? That's not all bad, is it, if that's how the community (via their juries) wants to spend its resources?
Medical malpractice in particular
I've spoken about medical malpractice in particular before. The goal (ostensibly) of the civil court system is to compensate people for harm caused by a doctor's errors. All doctors will make errors, and given the nature of their work, the harm caused by those errors, on average, will be staggering. Doctors (or their insurance companies) should be paying out settlements or judgments all the time. That's not a bad thing; it's a cost of doing business. Medicine is inherently risky.
Generally speaking, the market should always compensate for cultural shifts involving responsibility for risk. If juries start deciding to require that their businesses assume liability for more of these risks, the costs of doing business in that community should go up, and prices should go up correspondingly. On the other hand, if juries decide that individuals should assume more of these risks, the consumers end up having to pay more when those risks are realized. Note that the consumer normally pays either way, just from completely different directions, with costs distributed differently.
Unfortunately, with some industries, the market is not allowed to correct for these shifts. Most seekers of medical care are doing so with health insurance. Health insurance companies (including the federal government) negotiate fixed reimbursement rates for health care services. In communities with plaintiff-friendly juries, the health care industry is squeezed from both sides. They have communities pushing doctors to assume more risk-associated costs, with health insurance providers preventing doctors from increasing prices to compensate.
The result? The doctors simply stop practicing, switch to a low-risk specialty, or move someplace else. Your community can no longer sustain the same level of health care that your neighbors can. If you find your community is shifting risk around (by way of civil judgments), you have to pay attention to the effects and do something about them.