12.3 Possible Solutions
In this section we elaborate on the following:
- Methods within the legal system of alleviating liability by limiting use and improvements of defenses or reducing incentives to sue
- Risk management for e-commerce liabilities
A number of suggestions have been made to alleviate the problems of product liability and malpractice (professional) liability. Some would limit the right to use or improve the defendant’s defenses; others would reduce the incentive to sue or provide an alternative to legal action.
In both areas, proposals would limit the compensation available to plaintiffs’ attorneys. Most plaintiffs compensate their attorneys with a percentage (typically one third) of their award, called a contingency feeA percentage (typically one third) of the award to a plaintiff, collected by the attorney only if the plaintiff prevails.. The advantage of a contingency fee system is that low-income plaintiffs are not barred from litigation because of inability to pay legal fees. A disadvantage is that lawyers have incentives to seek very large awards, even in situations that may appear only marginally appropriate for litigation. Reduced contingency fee percentages and/or caps on lawyer compensation have been recommended as partial solutions to increases in the size of liability awards and the frequency of litigation itself. Similarly, shorter statutes of limitationLaws that determine the time frame within which a claim must be filed., which determine the time frame within which a claim must be filed, have also been proposed as a means to reduce the number of liability suits.
Placing caps on the amount of damages available and eliminating the collateral source rule are recommendations that focus on the size of liability payments. Caps on damages typically limit recovery either for general damages or for punitive damages. Often, when actually awarded, general and punitive damages far exceed the special damages; thus, they dramatically increase the size of the award and can add significant uncertainty to the system.
The collateral source ruleA legal doctrine that prevents including information about a plaintiff’s financial status and/or compensation of losses from other sources in the litigation. is a legal doctrine that prevents including information about a plaintiff’s financial status and/or compensation of losses from other sources in the litigation. In a setting in which a plaintiff has available payments from workers’ compensation or health insurance, for example, the jury is not made aware of these other payments when determining an appropriate liability award. Thus, the plaintiff may receive double recovery.
Another prominent recommendation is to abolish or limit the use of joint and several liability. As previously described, joint and several liability has the potential to hold a slightly-at-fault party primarily responsible for a given loss. The extent of the use of the doctrine, however, is disputed.
Risk Management of E-Commerce Liabilities
The first step in the risk management process of e-commerce liability in particular is the development of privacy procedures. This is done to protect consumers and avoid personal injury of defamation of another person or entity.
The transfer of e-commerce liability risk is not commonly covered under the usual general liability policy, which is discussed in Chapter 1 "The Nature of Risk: Losses and Opportunities". The commercial general liability policy does not cover all of the liabilities that result from loss of electronic information. Therefore, in the risk management process, the risk manager should look into separate e-commerce policies. An e-commerce liability policy generally will include, in Section I, the definitions of claims, defense costs, the named insured, an Internet site that is noted on the declaration page, policy period, and so forth. Section II usually includes the exclusions. As would be expected, bodily injury and property damage are excluded because they are usually covered under the general liability policy. Additional exclusions are fraud, antitrust activities, breach of contract, employment practices, product liability, patent infringement, lotteries, loyalties, securities, governmental actions, prior claims, and prior pending litigation. Section III emphasizes that the coverage is the liability of only Internet-related activities. The limit of liability is set in the declaration page. The last sections of the policy include additional details relating to reporting of notice, defense and settlement, other insurance, and more.This discussion is based on Safety ‘Net Internet Liability Policy by Chubb Group of Insurance Companies and Executive Risk Indemnity, Inc.
E-commerce liability policies are not standardized. Some provide more coverage while others are more limited. The interested student can find many examples on the Internet and in E-Commerce Insurance and Risk Management by George Sutcliffe (Boston: Standard Publishing Corp., 2001).
The Medical Malpractice Crisis
The Insurance Information Institute stated in its May 2005 “Medical Malpractice” report the following:
- The cost of medical malpractice insurance is rising. This hard market began in 2000 following a long period of flat prices. Fewer insurers in the field is one of the causes of rate increases.
- Rate increases led the medical community to lobby for limits on noneconomic damages and other reforms.
How did the situation get so bad? Doctors blame insurance companies for skyrocketing premiums. Insurers blame personal-injury attorneys who work on contingency. The American Medical Association blames jurors who award exorbitant punitive damages. In fact, much of the problem can be traced to ordinary business cycles and a bit of coincidence. Some studies in no way attribute lawsuits to the premium increases. The 1970s saw sweeping changes in both medicine and jurisprudence; broader liability rulings and rapid advances in medical technologies coparented a rash of record-breaking lawsuits. Insurers raised premiums, and when lawsuits declined in the 1980s, malpractice insurance again became a profit center for insurers—so much so that by the mid-1990s, the field became very competitive. The competition among insurers led to price wars, but lowering premiums depleted the insurers’ reserves just as malpractice lawsuits began escalating again.
Horror stories abound of frivolous lawsuits on the plaintiff’s side, appalling negligence on the defendant’s, and exorbitant jury awards in the middle. As in the 1970s, many think the answer lies in legislative reform. Twenty states now have medical malpractice caps on jury awards. West Virginia is proposing a state-managed liability plan. Pennsylvania has banned “forum shopping,” in which lawyers file their suits in jurisdictions where juries tend to award huge damages; lawsuits now must be tried in the county where the malpractice took place. Mississippi, too, has recently instituted sweeping medical malpractice reform law, including a provision against forum shopping. The Bush administration urged Congress to pass a bill that would limit noneconomic damage awards to $250,000, limit punitive damage awards, place limits on the time allowed for injured patients to file a lawsuit, and establish a fee schedule for lawyers’ contingency fees. A provision would also provide liability protection for pharmaceutical firms. In May 2005, the American Medical Association (AMA) reported a decline in medical malpractice claims and improved physician recruitment and retention resulting from some states’ tort reforms.
Sources: The Insurance Information Institute is a good source for special timely reports. In addition, see Joseph B. Treaster, “Rise in Insurance Forces Hospitals to Shutter Wards,” New York Times, August 25, 2002; Steven Brostoff, “Medical Malpractice Reform Bill Draws Praise From Insurers,” National Underwriter, Property & Casualty/Risk & Benefits Management Edition, October 7, 2002; Rachel Zimmerman and Christopher Oster, “Insurers’ Price Wars Contributed to Doctors Facing Soaring Costs,” Wall Street Journal, June 24, 2002; Lori Chordas, “A Downward Spiral: Medical Malpractice Insurance Is Losing Its Place as a Top Performing Line of Business in the Property/Casualty Industry,” Best’s Review, August 2001; “Report: Suits Don’t Cause Higher Med Mal Premiums” National Underwriter Online News Service, March 11, 2005, accessed March 16, 2009, http://www.propertyandcasualtyinsurancenews.com/cms/NUPC/Breaking%20News/2005/03/11-Report%20Suits%20 Dont%20Cause%20Higher%20Med%20Mal%20Premiums? searchfor=suits%20cause%20higher%20premiums; Arthur D. Postal and Matt Brady, “President To Unveil Tort Reform Proposals,” National Underwriter Online News Service, January 4, 2005, accessed March 16, 2009, http://www.propertyandcasualtyinsurancenews.com/cms/NUPC/Breaking%20News/2005/01/05-President%20To%20 Unveil%20Tort%20Reform%20Proposals?searchfor=tort%20reform%20proposals.
In this section you studied suggestions for reducing liability losses from legal and risk management perspectives:
- Reduction in attorneys’ contingency fees would reduce the financial incentive of trying liability suits
- Shorter statutes of limitation on claims would reduce the overall number of liability cases
- Placing caps on the amount of damages and eliminating the collateral source rule are efforts designed to limit award amounts
- In e-commerce liability, privacy procedures should first be developed
- Risk can be transferred through special e-commerce liability policies
- How might elimination of the collateral source rule and a shortened statute of limitations affect the availability and affordability of liability insurance?
- How does the contingency fee system work?
- How might the contingency fee system affect the frequency and severity of liability exposures?