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Monday, August 24, 2009

Jeffrey O'Connell: Tort Liability as Social Insurance

Though not often thought of this way, tort liability coverage for personal injury can be best seen as social insurance. Such a vantage invites the government to take a firm hand in shaping such coverage rather than leaving it to the market, as is largely done with other forms of private insurance whether life, health, disability or homeowners. Social insurance can be defined as insurance coverage mandated by the government for losses – coverage that is so essential to well-being that society deems it impermissible for the populace to fail to be covered for such losses. Obvious examples are workers’ compensation, medicaid, medicare, along with old age benefits and total disability insurance under social security, etc. All these are mandated by state or federal legislation. Tort liability insurance is also mandated by law – in this case by common law rather than legislation, but law nonetheless. The common law in every state mandates that those liable for causing injury by their substandard conduct (or product) pay their victims’ losses. In the case of auto accidents, liability insurance for misconduct as defined by common law is indeed expressly mandated in one form or another for motorists by legislation in every state. Furthermore, mandatory auto insurance statutes not only protect the assets of those who commit torts but impart rights to those they injure.

Admittedly, tort liability insurance is not similarly legislatively mandated for, say, medical mistakes or malfunctioning products. But as a practical matter, any party – personal or corporate – potentially liable is compelled to purchase liability insurance based on the government’s common law dictate as to the legal consequences of such misconduct. Because tort liability is required by law, it follows that it should be viewed as a form of social insurance. Especially is this so since, on the other side of the coin, all who purchase goods or services are also, of course, required to pay for the tort liability coverage accompanying such purchases.

All this leads to the propriety, indeed necessity, for any government to structure this mandated insurance such that above all it seeks to protect those who suffer real need – namely those in almost any socioeconomic class seriously injured by tortious accidents whose losses outstrip all other applicable coverages.

It thus makes sense for tort liability coverage as social insurance to (1) limit transaction costs, (2) ensure that the populace need not buy coverage that pays for non-essential coverage, for example, non-economic losses – especially when so much economic loss in our society from injury and illness is uncovered, and (3) eliminate the waste involved in double payment of any loss by both first-party and third-party insurers. With respect to that third item, it makes sense for tort liability coverage to eliminate the waste of insurance companies shifting money back and forth to prevent double payment by so-called ‘subrogation’ claims. The latter are brought against third-party liability insurers by first-party health or disability insurers to recoup amounts the latter have already paid for the victim’s medical expenses or lost wages.

In other words, these subrogation claims are brought against third-party liability insurers covering their insureds who allegedly (but only allegedly) have by their torts caused the need for earlier payment by first-party insurers to their insureds. They entail not only the waste of two insurers paying for the same lower loss but doing so at a time when more serious losses are often going unpaid from any source. Third-party liability insurance, along with first-party insurance, is very expensive and the more it is required to cover, the more expensive it is. Having liability insurers duplicate payment already made by other insurers obviously means less insurance available for those with unreimbursed losses from any source. Why? Because very little insurance (at least in the U.S.) is sold without any limits. The more coverage that is included in third-party insurance the higher the cost, the lower the limits likely to be covered, and the lower the limits covered obviously the less insurance available to the most seriously injured. Under an early offers plan paying promptly for economic losses in excess of other coverages, one could expect less expensive higher limits of coverage, or at least better use of coverage even without higher limits.

It cannot be over emphasized that the United States is a tragically underinsured country for both illness and injury – and growing more so all the time. Those with no health insurance at all ever increase in number, close to 16% in 2005. (If it is true that the young (18-24) who are healthier and therefore need less health care are disproportionately among the uninsured (c. 40%), it is those very same youngsters who are disproportionately involved in accidents leading to tort suits.) Even those with health insurance are being required by their employers to bear more and more of their health care costs through any or all of the following: higher deductions from their pay, higher deductibles applied to any healthcare service rendered, or lower overall limits of coverage. Health insurance for retirees is more and more disappearing. The cost of government supplied health insurance – primarily Medicare and Medicaid – already direly threatens state and federal budgets, threats that loom even larger in the future, dwarfing even the huge potential costs of social security’s old age coverage. The percentage of Americans with disability insurance covering wage loss is indeed even far less than for health insurance. Pensions are disappearing for many or being severely lessened by the wholesale abandonment of defined benefit plans, replaced in turn by defined contribution plans with more and more of the burden of uncertainty falling on potential pensioners.

One has to admit that the dollars involved in tort liability coverage for personal injury, large as they are, can make only a small dent in sensibly supplementing economic losses payable by America’s notoriously inadequate health and disability coverage, whether public or private. For example, the United States now spends almost $2 trillion annually on health care alone. But medical malpractice costs paid by doctors and hospitals, including self insurance, come to only about 2.5% of total health care expenditures. But still billions of dollars from liability insurance are available which if structured more sensibly could alleviate insurance shortages for many sorely in need while also substantially lessening the cost of liability insurance now misserving both an uninsured and underinsured public.

A [pdf] piece lauding "early offers" as consistent with this analysis is here:  Download Personal Injury Law as Social Insurance

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