August 31, 2006
What Caps Do
In an AP piece in the Insurance Journal (also picked up elsewhere), we hear about the effects of a damage cap in Mississippi law on a tragic case in which a woman bystander was injured by an allegedly negligent police officer on a motorcycle in a parade.
The little known act, Alabama Code Section 11-93-2, caps dollar awards in lawsuits against local governments at $100,000 per plaintiff and $300,000 per incident, while preventing suits against individual employees.
The story is pitched as "the other side of tort reform," and it is indeed a fine example of the fact that damage caps do have bad effects on individuals, which, one hopes, is not a surprise to anyone, including advocates of caps.
Probably more interesting, it's a good example of the perhaps-unintended consequences of failing to index caps to inflation. The $100,000/$300,000 caps were adopted nearly thirty years ago, when $100,000 and $300,000 covered substantially more, especially in medical expenses.
There's also an interesting bit about the relationship (or lack thereof) between damage caps and insurance premiums for cities:
"I don't know that anyone can authoritatively comment at this point on the real impact of tort caps,'' said Harold Pumford, executive director of the Association of Governmental Risk Pools.
There just isn't enough information available to tell, he said.
Until recently, most of the data on the subject has been gathered by insurance companies and trial lawyers, who keep the information guarded for business purposes. When legislatures consider tort reform bills, they rely on these groups for their facts. Furthermore, most companies keep track only of regional statistics.
A project to create the first national database is just now under way. The group undertaking it, called the Public Entity Risk Institute, was created with money from a class-action suit brought by 20 state attorneys general against several insurance companies. The group is compiling tort claims data from across the country to answer questions such as just what caps do to insurance rates.
With about 10 percent of cities reporting so far, the institute has found most lawsuits fall well below even Alabama's $100,000-per-person and $300,000-per-incident limit. The average claim paid by a city for a wrongful police action was $43,622. The average for a government vehicle accident was $9,278.
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The caps work as an anchor, showing what the most horrendous negligent action would be worth.
If the caps had been indexed, I would bet that the average claim would surpass the current caps.
That the current average claim is below the cap does not show that the caps should not be indexed to inflation.
Posted by: michael webster | Aug 31, 2006 8:12:16 AM