Early Offers - Jeffrey O'Connell

Is there a way to improve significantly on the obvious failings of tort law while properly balancing its plural rationales? Is it possible to craft a proposal that substantially improves tort law as it applies to personal injury without undermining its effectiveness in other ways, e.g., calling to account those who injure others? (Recall how unrealistic - and unwise - is Professor Atiyah's proposal simply to abolish all tort law for personal injuries (chapter four).)

The "Early Offers" Proposal

After many years of searching for a way to generally reform personal injury law, it occurred to Jeffrey O'Connell that a law prompting defendants' "early offers" to pay injured parties their actual losses would be a form of "neo no-fault" that would work. [1]

The goal of an early offers statute would be to encourage prompt settlement of personal injury tort claims along first-party insurance lines, paying promptly for economic (but not for non-economic) damages to those whose losses outstrip all other applicable coverages. Payment for such losses will be made as they accrue. Its mechanics are simple: A defendant may at its option offer an injured claimant within the defined statutory period (e.g., within 180 days of a personal injury claim) a settlement of periodic payments sufficient to cover a claimant's net wage loss and medical expenses, including rehabilitation, plus a claimant's reasonable attorney's fee, but without any allowance for pain and suffering. Other insurance (so-called collateral) sources paid or payable from the claimants' own or public coverages are deducted in computing the amount of the early offer (unless the legislature decides otherwise on this point). No defendant is forced to make an early offer, and, if no offer is made, normal common-law tort principles apply as to both liability and damages. In making an early offer, however, the defendant triggers strong incentives for claimants: If the claimant accepts, that of course ends the matter. But a claimant who elects not to accept will face a higher burden of proof at trial, i.e., beyond a reasonable doubt [2], with the defendant also judged by a higher standard of misconduct, i.e., gross negligence.[3]

Consider a typical case to illustrate how the early offer law would work: A patient has been injured in the course of, say, medical treatment or the use of a manufactured product. If the claimant wins in court, she would be awarded $1 million, but given the risks of litigation, she has only, say, a roughly 30 percent chance of winning. Roughly calculated, the patient has a claim worth about $300,000 (a 30 percent chance at $1 million). Assume the cost of setting aside a corpus of money to pay the patient's net economic losses as they accrue is projected at about $200,000, an often realistic assumption as data presented below (chapter six) will show. The insurer of the provider of pertinent goods or services would likely make the early offer, $200,000 being clearly less than $300,000. And a patient would likely accept, given that after an early offer, the claimant will have the normally insuperable burden of not only proving the relatively rare case of gross negligence but proving it beyond a reasonable doubt.

Now assume a change in the facts: same claimant, same provider, and same possible $1 million verdict. But assume this claimant's chances of winning are only one in ten, with an expected value of $100,000 (1/10 of $1 million). Here the provider's insurer would not make an early offer - as it shouldn't, the case being very marginal with $100,000 being clearly less than $200,000. The fear of potentially higher costs to insurers under the early offer scheme is thus crucially avoided because, as emphasized, no defendants need make an offer if they would not do so without this statute. So defendants will make an offer only when it makes economic sense for them to do so, as shown in the above example.

It is vital to note that the early offer must in effect provide the claimant the equivalent of a major medical/disability policy covering the claimant's net economic losses as long as they are reasonably accrued, similar to coverage under workers' compensation. In other words, a defendant cannot make a lesser or "low ball" offer and still gain the advantages of the early offer law. In this connection, once an early offer is tendered, that can be seen as imposing discipline on offerors by the transformation of the claim into a first-party one, thus subjecting the offeror to both more regulatory supervision by state insurance departments as well as claims based on bad faith for refusal to pay benefits, compared to the situation prevailing in adversarial third-party claims. [4]

It is also important to note, though, that an early offers plan does not threaten higher costs because defendants will not likely make early offers if they increase costs. This also serves as a safeguard against possibly expensive reactions to early offers reform by the plaintiffs' bar who cannot necessarily be expected to remain completely passive in the face of early offers reform.

Note too that although injury victims tendered early offers would lose their recourse to full-scale tort litigation, they would correspondingly be paid without all those uncertainties, delays, and transaction costs they now face. Moreover, they would lose their recourse to full-scale tort litigation only when they are guaranteed prompt payment of their actual economic losses plus attorney's fees. These prompt and certain payments will, as emphasized, be especially advantageous to those severely injured patients whose losses have outstripped any other applicable coverage.

Rather than engage in often frustrating and futile litigation, with all its difficulties, delays, and costs, the injured and their alleged injurers would often do well to reach a quick settlement covering the victim's net out-of pocket losses. But this rarely happens today. Just as claimants may sometimes feel they are "clearly" in the right, defendants understandably are opposed to paying for injuries which they dispute are the result of their inadequate products or services. Some of these cases will, and perhaps should, be litigated. In the far more common debatable cases, however, where a prompt settlement may appear appropriate in light of the facts, or economically rational considering the expected transaction costs and delays of litigation, defendants and claimants are each reluctant to offer an early settlement for only economic losses. [5] This aversion is chiefly due to the war dance of distrust that likely pervades negotiations between deeply divided opponents (more on this shortly). In addition, the availability of damages for pain and suffering is based on the severity of injury, often measurable most easily by the amount of medical expenses and wage loss. This can induce claimants and their lawyers to inflate damage assessments and exaggerate actual injuries. [6] But it is only fair here to focus also on similarly questionable defenses by defendants who take advantage of all the variables under tort liability by resisting even valid claims - especially if the claimant is in financial need. In other words, if, as defense interests argue, the tort system, with its opposing parties jousting over vague criteria, encourages exaggerated and frivolous claims, it also encourages exaggerated and frivolous defenses. [7]

An early offers program creates a way to bypass these problems. In effect, in a kind of jujitsu maneuver an early offers program uses the overweight bulk of the tort system against itself. Thus, in return for promptly offering to pay claimant's net economic damages, a defendant protects itself from the vicissitudes of non-economic damages. But the message to claimants is clear: "If you want more than what insurance normally pays, namely your economic damages, you had better be sure the defendant is not just arguably, but clearly very much, at fault."

And yet that does not mean that the early offer approach is overly favorable to those (allegedly) causing injury. First, only defendants willing to forgo obstructive defenses will be advantaged by the proposal. Second, defendants making early offers must still pay victims' net economic losses - which will usually be substantial - thereby significantly "internalizing" the cost of such accidents. The proposal could also include a minimum offer of, say, $250,000 for serious injuries (realistically defined in the statute) when actual net economic losses suffered, say, by some youngsters, homemakers, or retirees, are relatively small. So early offerors are by no means getting a "free ride." Third, if no offer is made, or if the claimant, despite an offer, goes to trial and prevails, the claimant can recover pain and suffering or even punitive damages. This would mean reserving awards of such non-economic damages to cases where liability for very wrongful conduct is quite clear or where a recalcitrant defendant unwisely declines to make an early offer. Even Professor Atiyah is careful to point to the need for special redress against "people who are seriously blameworthy."[8]

It must be emphasized that early offers will be a viable mechanism only if defendants, not claimants, are allowed to make such binding early offers. Claimants and their counsel would lack sufficient incentives to weed out frivolous or non-meritorious claims if they had the power to unilaterally bind defendants by their claims. That would result in a perverse incentive to exploit the system with marginal claims or worse which would nonetheless be binding on defendants. But defendants, as the parties making payment, when confronted with clearly meritless or very marginal claims will pay nothing and make no early offer. But when faced with potentially meritorious claims, defendants will have an incentive to explore whether the statutorily-defined early offer involves less expected cost than a full-scale tort suit with all its uncertainty and transaction costs. Thus, only defendants have the appropriate incentives to distinguish carefully between arguably valid and clearly invalid claims in order to reduce costs by promptly paying the required minimum benefits in suitable cases.

But won't insurance companies thereby just "cherry pick" claims by making lower payments to clearly deserving claimants? No. Because of the uncertainty and cost of determining both liability and pain and suffering damages under present tort law, defendants in personal injury cases will likely make prompt early offers in many cases even when liability is unclear, a point also demonstrated by data presented below (chapter six).

But why aren't early offers made now without a new law? Several factors make it unattractive for early offers to be made at present without an early offer statute. As Patrick Atiyah has said (chapter four), defendants' insurers today are often confident of at least wearing down claimants, given the difficulties and delays in proving a tort claim. The long delay before trial, as seen, often enables defendants' insurers to bargain down even patients apparently clearly entitled to tort damages because of their need for immediate money for accrued and accruing medical bills and to make up for wage loss. Furthermore, according to Atiyah defendants' insurers may fear that an early offer to settle for patients' net economic loss will be seen as simply encouraging claimants and their lawyers to seek an even larger settlement than originally sought. This mirrors the position of claimants and their lawyers, who similarly fear that an early offer to settle for only net economic loss would be deemed an admission of weakness on their side, resulting in either no payment or less than that claimed. So this vulnerability affects both sides.

There are also several reasons why damages for pain and suffering are not included in an early offer reform. In the first place, in reality, claimants relinquish only a portion of their pain and suffering damages under the early offers plan because they do not have to pay their lawyer a contingency fee of a third or more from the damages award - which now come out of pain and suffering damages. [9] Furthermore, winning pain and suffering damages in the first place is subject to all those contingencies of the current tort system. More importantly, the uncertainty of determining both liability and damages for non-economic damages is the key to understanding the inefficiencies of tort law and to framing a balanced solution that attempts to be fair to both injured parties and providers of goods and services. Pain and suffering damages are indeterminate and highly volatile. But under an early offer system, the prospect of paying pain and suffering damages still serves as a means to deter health care providers' medical mishaps. In effect, the threat of paying damages for pain and suffering, rather than actual payments, better serves injured persons as well as the public interest.

Pain and suffering damages also differ from economic damages from the standpoint of insurance generally. Consumers as a practical matter do not purchase pain and suffering insurance as part, say, of their first-party health or disability insurance. [10] Indeed, no such voluntary insurance market for payment of non-economic losses from personal injury exists. In contrast, of course, consumers routinely buy insurance coverage for their economic losses, which, of course, is the focal point of the early offer proposal. And here we reach a crucial point: Because personal injury claims alone among all other damage claims routinely entail damages for both economic and non-economic losses, defendants are uniquely positioned not only to make but to enforce by early offers socially attractive settlements for only economic loss. In non-personal injury claims (such as for breach of contract or even tortious property damage), where only economic damages are at stake, no comparably fair means are available to sanction a claimant who refuses to accept an offer of only a portion of the total losses claimed.

Some Further Operational Features

When an early offer makes sense, all the defendants involved in the case, such as a surgeon and anesthesiologist, can be expected to join together in making the early offer. If not, defendants not making an early offer would be left to face a claimant now pursuing non-economic damages. Indeed such a case would be financed by payment from any other insurer's early offer, as we saw earlier (chapter four) in workers' compensation cases. As a practical matter, disputes over division of the ultimate cost to any given defendant will in all likelihood then be privately handled later through arbitration as to each defendant's share, if any.

Is the 180 day period too short a time for the defendant to decide to make an early offer? In general, insurers today already appraise a case's value and set aside amounts (in an "initial reserve") for possible payment in a much shorter period. Indeed, such preliminary settlement preparations would be accelerated by the very incentives generated by the early offer structure. As to claimants and their lawyers, they can take as long as they want (subject only to the statute of limitations) to do research to decide whether to bring a claim, as well as to respond to any early offer. Admittedly, though, claimants' counsel will realize that very few cases covered by early offers will be winners and thus not worth the inordinately wasteful time that is now routinely spent.

Court approval of the terms of an accepted early offer will no more be required than is court approval of the terms of a workers' compensation case. Courts do now routinely review settlements in minors' cases, a practice that presumably will continue.

There may be later disputes after an early offer settlement regarding what is due periodically as losses accrue in the future such as whether or how the claimant's condition has changed. But those disputes are inevitable on occasion under any major medical/disability policies extending into the future. Nor have they proved unmanageable, and certainly pale compared to litigation over fault and the economic value of noneconomic loss. Note too that workers' compensation and the Michigan no-fault auto law (chapter four) with their extensive coverages extended over time have been able to deal effectively with matters of continuing payment.

The parties also might deal with the problems of periodic payment by so-called structured settlements, i.e., agreements up front of lump sum payments, either all at once or periodically, which bypass the need for future recalculations of amounts as they are due. These are widely used today once the dimensions of a defendant's obligation to pay is established. In the case of death, the survivors would be due the amount that the decedent's earnings would have been expected to provide as support, similarly conducive to a structured settlement.

Allowing an early offeror to pay only to the extent the claimant has not already been paid by other (collateral) insurance, will not encourage people to forgo health and disability insurance. Risk of loss from accidents is so small compared to illness that it would be the height of folly to cancel one's health or disability insurance in order to (maybe) be paid from a tort claim after an accident with or without an early offer. Nor would any early offers statute allow health or disability insurers to exclude accidental losses on that basis.

As to a presumptive limit on claimant attorneys' fees to 10 percent of the value of the early offer, this percentage is based on a comparison of the almost uniform minimum of one-third of the value of a full-scale tort settlement or verdict which requires much more time and effort than under an early offer. Note further that by definition there will be no trial expenses under early settlements. Note too that the early settlement will also greatly diminish pre-trial expenses. If however the 10 percent fee is too low because of special circumstances, claimants' counsel can petition the court for an augmentation that too will be payable by the early offeror. [11]

And here we raise an issue of crucial importance: The 1999 report from the Institute of Medicine (IOM) entitled To Err is Human: Building a Safer Health Care System (chapter two) emphasized how the fear of malpractice litigation creates pernicious, widespread incentives for health care providers to hide errors rather than report them. All this, in turn, inhibits the medical community from learning from its mistakes and preventing future harm to patients. [12] The early offers scheme is designed not only to promote prompt reporting of medical errors by greatly reducing the levels of fear and anguish associated with prolonged malpractice claims but at the same time to allow victims of at least plausible medical error to receive compensation much earlier and easier than now.

Early offers will enhance public safety along the very lines urged by the IOM in To Err is Human. Particularly relevant to IOM concerns, the need to make quick offers under the plan will encourage rapid reporting of adverse events since the opportunity to make a qualifying offer can be lost if not made promptly after an adverse event. In today's medical malpractice lawsuits, the vast majority of medical injuries are not the result of "gross negligence," nor certainly of "intentional" acts but at best only some variant of carelessness. For example, as seen, the misconduct is often a series of very minor mistakes that combine to form a hurtful result. Because an early offers system provides incentives for both the claimant and defendant to agree to a binding early settlement, that, in turn, will provide a key incentive for health care providers to reveal and report any medical mistakes that might have occurred in the course of treatment. Indeed, an early offers statute might well require a provider, after an early offer is accepted, to offer to meet with claimants and/or their families to explain as fully as feasible, the circumstances surrounding the adverse result. Admittedly health care providers may fear that making an early offer under the plan would be included in the National Practitioner Data Bank, or some similar state or private depository, which, for example, list medical malpractice payments and settlements by individual practitioners. [13] But as we'll see in chapter six, the early offers program will not increase the number of settlements reported. Secondly, the early offers statute might lead to a situation such that, formally or informally, settlements made through early offers are noted in a data bank as subject to special exonerating consideration.

In keeping then, with the goal of the IOM report, implementation of the early offers system would help to lessen the often myopic and counterproductive blame culture that permeates current tort law. Early offers would work to calm the animosities of the parties in an accident claim rather than inflaming them, as the current litigation culture now does, by giving defendants a healthy incentive to promptly acknowledge any problems and even to discuss what happened. Under the current adversarial tort regime, claimants rarely receive an apology, admission of fault, or even an explanation of the adverse event.

Tort Rationals as Applied to Early Offers

How would the early offers proposal fare when judged by the crucial criteria mentioned earlier (chapter four) applied to other reform proposals? The following is only a summary of early offers as evaluated from the perspective of the tort rationales. (The proposal receives a more extended analysis in the chapters that follow.)

From a macroscopic perspective, the most salient benefit accrued by the implementation of an early offers scheme would be impressive gains in systemic efficiency. The very essence of its structure makes it predisposed to this result. Extensive disputation will be cleanly circumvented in a large percentage of cases. The court system itself would be immediately benefitted by a sharp reduction in congestion, allowing for more timely attention to remaining significant cases, including criminal prosecutions. Administrative efficiency would also be promoted with payment of losses in civil cases much less burdened by legal expenses on both sides.

In the courtroom, optimal results are supposedly attained when judges and juries are able to decide on the appropriate level of care and whether it was taken. Many economists assume that courts can make such determinations flawlessly. But as one economist has remarked, "[w]hen we drop those assumptions, . . . efficiency . . . goes with them." [14] Indeed, as seen, the misaligned outcomes produced by today's system occur far too often, as defendants are found culpable for injury when innocent (cases called false positives) or not culpable when guilty (cases called false negatives). [15]

In addition, beyond the incidence of determining liability, the calculation of non-economic damages presents its own parade of horrors for actuaries who must attempt to predict the cumulative effects of juries' subjective evaluation of damages. Not only is this process arbitrary and speculative, but the category of these damages has progressively expanded to include not only pain and suffering, grief, and loss of family comfort ("consortium") but also something called "hedonic damages" [16] - all of which are psychological losses for which there are no suitable market referents. One can't go to the Wall Street Journal to find out what aching limbs are going for.

More certainty allows not only less angst for claimants and defendants in personal injury cases, but for more confident actuarial prediction. This, in turn, allows providers of goods and services to better reflect their costs (or "internalize" them, to use the economist's term), and more accurately represent them in their prices and insurance premiums. This is especially important for providers of goods and services who engage in complex sometimes imperfect, albeit necessary, undertakings. Without some ability to accurately anticipate, and thereby absorb, liability costs, many producers in high-risk fields may be tempted to abandon or curtail the marketing of important goods and services, as is often alleged for obstetricians and pharmaceutical companies. [17]

The most common criticism of any no-fault model is that, while the reduction of full-scale tort litigation may provide for improvements in aggregate efficiency and compensation, these are supposedly outweighed by the dangers of insufficient deterrence and resultant threats to safety.

But lawyer-economist Jason Johnston has described tort law's deterrence failings as arising out of the difficultly in determining a priori the optimal standard of care for providing particular goods or services, combined with the difficultly for those deciding the case to determine whether those standards have been met in any given case. [18] Johnston argues, though, that significant improvement can be achieved by manipulating both the requisite standard of care and the burden of proof in tort suits. [19] According to Johnston, juries and even judges often can't separate careful from negligent conduct nor negligent from grossly negligent conduct. That doesn't mean, however, that they can't separate careful from grossly negligent conduct, especially if liability after an early offer is predicated on proof beyond a doubt of defendant's gross negligence. Under such criteria, when a defendant in fact takes reasonable steps, as a practical matter there will surely be no evidence beyond a reasonable doubt of his or her gross negligence. [20]

To illustrate Professor Johnston's point, as the following table shows on a scale of one to ten it is often difficult for a judge or jury to tell the difference between, say, 4 and 5 or between 8 and 9. But not so the difference between 4 and 9.

A provider of goods and services behaving within the range of 1-4, before the early offers law might well have feared being liable for conduct within, say, the 5-6 range. But after a statutory early offer of claimant's net economic loss, a provider need not fear very clear proof of conduct in the 9-10 range. Deterrence of provider's unsafe conduct is additionally served by forcing any party straying into the range of 5 or more to stand ready to pay any victim's net economic loss. And the more one drifts into the range of 5-8, the more one faces the threat of full-scale tort - and even punitive - damages.

The ability to thus discriminate between extremes will make the imposition of full-scale liability for providers of goods and services less erratic and random, greatly lessening the often counterproductive (even pernicious) effects of unpredictable litigation that looms over providers of goods and services. Even if determinations of gross misconduct and noneeconomic damages would still on occasion have to be assessed, the need to so assess would be greatly reduced since, as seen, relatively few defendants can be expected to breach the higher standard of misconduct under the early offers regime, and the efficacy of this higher standard of misconduct (e.g., gross or even intentional misconduct) is also reinforced by the need to prove it by a higher burden of proof. These 'twin peaks' of (1) gross misconduct and (2) beyond a reasonable doubt, it will be noted, mirror criminal standards. Under these quasi-criminal law standards for both misconduct and proof thereof, unjust cases of false positives whereby innocent defendants are held liable would mostly disappear, and the economically detrimental effects of overdeterrence greatly assuaged. Nevertheless, false negatives whereby guilty defendants are held not liable are also avoided by requiring defendants' to pay economic losses in order to avoid full scale liability. Indeed, early offers, by making tort law much more swift and certain, but somewhat less severe, may well enhance its deterrent effect. Deterrence is also addressed by maintenance of unrestricted liability, in the form of pain and suffering and punitive damages, for gross negligence - levels of misconduct that would expose one to such full-scale damages.

The early offer configuration is in fact a two-tiered model of tort liability that retains non-economic damages at the rarer upper, or punitive, level of personal injury law, while most often eliminating them at the much more commonplace lower, or compensatory, level. Accordingly, it is therefore a hybrid system that seeks, as stated above, to compensate in a manner consistent with first-party no-fault coverage, but nevertheless maintains the third-party fault-based system in modified, but much more effective, form. For the first time, first and third party insurance will be effectively coordinated far better than for current tort claims: There will be neither wasteful double payment to claimants nor wasteful claims by first-party insurers seeking to recoup their payments to their own insureds via tort claims against the third-party insurers of those who injured the first-party insureds.

By retaining a crucial quantum of tort's most potent weapon of non-economic damages, the early offers system also generates an enormous torque capable of promoting deterrence. Although overall uncertainty is greatly reduced, the threat of an uncertain measure of damages for gross misconduct continues to serve as a coiled threat which encourages safe, cost-effective behavior. In addition, providers of goods and services who avoid the threat of tort law's most extreme penalties by early offers must internalize their adverse results by those very early offers. Meanwhile, patients and consumers, protected with full tort rights in the event of clearly egregious conduct, will be much more likely to receive prompt and suitable compensation through early offers in the much more common cases of injury caused by ordinary mishap.

Another big advantage of requiring proof of gross negligence beyond a reasonable doubt for egregious cases is the much greater control both trial and appellate judges will have over aberrant jury verdicts. A trial judge will find it much easier to spot evidence that fails to meet such criteria compared to the much more beclouded tests of only ordinary negligence proven only by preponderance of evidence. In a situation where, say, the claimant rejects an early offer and his case indicates, but not conclusively, only some evidence of wrongdoing, judges will be in a much better position early on to grant a summary judgement, or later to direct a verdict, or still later to render a judgment notwithstanding a jury's misguided verdict, or later still to reverse on appeal a verdict based on insufficient evidence.

This whole discussion illustrates why the standard of gross negligence beyond a reasonable doubt will better serve an early offer program than, say, proof of ordinary negligence or even by 'clear and convincing evidence.' Years of experience have indicated that even judges have acute problems distinguishing between ordinary and gross negligence, [21] but requiring such misconduct provable beyond a reasonable doubt renders decision-making much more manageable. [22]

But to pursue the possible alternative of using a standard of "clear and convincing evidence" (now required for punitive damages in most states), it stands between a test of preponderance of evidence at one end versus "beyond a reasonable doubt" at the other. As such, the clear and convincing test can be seen as a confusing hybrid. Given jurors' general confusion over the law's various gradations of proof, the intermediate standard of clear and convincing evidence arguably fails to clarify matters sufficiently. Even so, such a test would still be far preferable for cases where an early offer is declined than the even much vaguer test of a preponderance of evidence. (One anonymous lawyer once characterized the preponderance test as 50 percent plus a feather.)

In that connection, one drafting device that might readily fit any state law, especially those with a clear and convincing test for punitive damages, would be a provision that imposes on offerees declining an early offer the requirement that they simply must prove a case sufficient to warrant the award of punitive damages under applicable state law. (That would be especially appropriate in Colorado where proof of misconduct beyond a reasonable doubt is a prerequisite for an award of punitive damages.)

Both sides in today's debate over tort reform between claimant and defense interests neglect to acknowledge tort law's failure as a compensatory device. As seen, caps on damage awards arbitrarily shift more of the societal burden for accident costs from defendants to victims without any reciprocal measures promoting compensation. Trial lawyers and other champions of the status quo, on the other hand, propose not only retention but expansion of the current tort system: Although quick to emphasize poignant stories of claimant victimization supposedly vindicated by a tort claim (chapter one), they overlook tort law's glaring insufficiencies. Forcing everyone to depend on - and pay for with everything they buy - the current "litigation lottery" in which recompense is much too uncertain, delayed, expensive, as well as emotionally draining, is scarcely wise policy.

One could argue that under early offers more victims will seek quick settlements - raising insurance premiums and, ultimately, the costs of goods and services. But by having the initial choice, defendants, as seen, would only make an early offer when cost-justified. By foreclosing suits for pain and suffering awards and, by avoiding double payment as well as subrogation claims, early offers would not be used, as are present first-party proceeds (chapter two), to subsidize further litigation. Moreover, the two-tiered liability bulwark would deal effectively with wasteful cases when economic losses have already been completely or largely compensated, because such claims, dominated by noneconomic damages, will either not be pursued or relatively inexpensively dealt with by early offers. (Note these are cases most likely pursued under present law, i.e., in third-party tort claims by recipients of workers' compensation (chapter four).) All things considered, not only would precious insurance dollars be far better used to compensate victims with the greatest need of such dollars but this is done without raising - indeed greatly reducing (chapter six) - insurance premiums.

It is important to emphasize in this connection that a key premise of an early offers regime is to make better use of tort liability dollars now being expended, not to increase them. This is based on the understandable popular perception that tort liability costs are already more than high enough. Although others often call for higher premiums in order to pay the many smaller claims not now being pursued due to high litigation costs, [23] that is a much vaster undertaking than the early offers proposal, entailing unknown new costs.

Corrective justice is retained as an important feature of tort law under an early offers regime. Pursuant to early offers, the polestar for determining liability remains the fault system. In determining whether to make an early offer, defendants are guided by how they might ultimately fare in a common law tort suit. With an early offer made which the claimant is likely to accept, any moral imbalance between the parties is acknowledged. Unlike abolishing tort law under a complete first-party regime as urged by Professor Atiyah (chapter four), the rectification process takes place between the two affected parties: injured and injurer. Even if an insurance company is the actual source of the payment, that of course is no different than corrective justice under the current tort system. Furthermore, the threat of full-scale pain and suffering, as well as possibly punitive, damages under the early offers plan would be restricted to manifestly anti-social behavior, where there really is a moral imbalance and for which corrective justice is much more appropriate. And, if no early offer is tendered, the complete fault-based tort system remains the dispute resolution mechanism.

Admittedly to the extent pain and suffering damages are seen as necessary to fully correct any moral imbalance between the parties, early offers does not as completely comport with the ideal of corrective justice supposedly served by the existing tort system. But, the arbitrary way in which tort law actually provides pain and suffering damages, based, as seen in chapter two, on the unpredictable criterion of determining fault and on factors such as poverty, race, sex, and method of judicial selection, is scarcely consistent with corrective justice either. The peculiar design of the present tort system also wreaks a discriminatory effect upon those injured who are either retired, poor, or both. [24] Because recovery for non-economic damages can often be based on economic damages, claimants in lower income brackets are often unable to collect as much for pain and suffering as would similarly injured claimants with higher incomes and medical expenses. [25] More importantly, economically disadvantaged and older claimants feel the sting of uncertainty and delayed compensation much more than other claimants. An early offers law, on the other hand, would have a real leveling effect by diminishing (but admittedly not eliminating) wild disparities in outcomes across overall classes of injury victims.

Conclusion

The foregoing raises a crucial point: An early offers law, in addition to lowering liability insurance costs, clearly redistributes resources from those now eligible for double payment (in some states) and payment for noneconomic losses (in all states) in order to assure prompter, less cumbersome payment to those with unreimbursed economic losses. The justification for any such transfer derives from the economist's theory of diminishing marginal utility with its concomitant use of "interpersonal utility comparisons."

The theory of interpersonal utility comparisons is of course highly controversial. Its critics deny that policies designed to redistribute income increase public welfare. They argue that if people have different net incomes, whether induced by accidents or not, a transfer which redistributes income does not make things better than before the transfer. To take an extreme example, even if by a transfer, A, a collector, loses his chance to buy a fifth antique chair of a particular type so that B, a quadriplegic, can earlier on buy a wheelchair, there is supposedly no way to establish that A does not need his new chair just acutely as B needs his, i.e., there can be no interpersonal utility comparison between A and B. According to such a view, no scientific basis exits for concluding that a redistribution from A to B leads to net improvement. [26] Similarly, opponents of interpersonal utility comparisons would generally argue that there is no justification for taking from those eligible for reimbursement from collateral sources and payments for noneconomic losses to facilitate payment for other accident victims' unreimbursed economic losses.

Nonetheless, the early offers plan is premised on the admittedly controversial proposition that public welfare is advanced when insurance thus diverts dollars from, say, payment to some for noneconomic losses to render more expeditious and efficient payment to others for serious economic losses. Economic losses of substantial magnitude while unreimbursed can lead not only to lack of medical care, rehabilitation, and essential wages but to destitution. Note that even the affluent can be economically devastated by severe accidents, finding themselves in dire need from huge unmet losses. Such losses are in the realm of what Lord Keynes called "absolute" needs, "in the sense that we feel them whatever the situation of our fellow human beings may be." [27] Granted that defining "absolute" needs can be difficult and that redistribution of income may be justified only for such absolute needs, succor in the form of otherwise long delayed payment for medical services and wage losses to seriously injured and needy accident victims would seem clearly to fall within that category. If many victims of what can be seen as morally neutral events, namely accidents, are now paid much more than their economic losses, great or small, whereas other accident victims face huge barriers to prompt payment of their great economic losses, causing grave hardship, here, if anywhere, seems a situation calling for interpersonal utility comparisons.[28]

In this connection, admittedly the intractable problem of defining "the deserving poor" who merit society's help has plagued disputes about redistribution of resources for centuries. But accident victims can be seen as different from many other redistributive claimants. Generally speaking, accidents, by definition, unlike other misfortunes, happen suddenly, and victims of such mishaps are much less likely to be seen as undeserving. Just as importantly, redistribution to the most needy of tort victims is also uniquely justified in that, unlike other misfortunes, from, say, the typical illness, there are now large pools of (liability) insurance dollars available to redistribute to them.

Constitutionality

Without getting lost in all the formidable technicalities of federal, not to mention state, constitutional law, perhaps it will suffice, in addition to providing some citations, to briefly point out that, by making such better use of liability dollars, the social utility of an early offers' statute will serve to blunt the plaintiffs' bar inevitable challenge to it as unconstitutional.[29] In this connection, judges may find themselves embarrassed by a comparison of their holding themselves totally immune from any liability for their own negligence in any of their decision-making. Nor do they, unlike early offerors, have to earn such immunity by any payment at all to those suffering damage from judicial errors.[30] The same is true of the business judgment rule, fashioned by those same judges whereby corporate directors are held totally immune from any liability for their erroneous decisions if made in good faith. They too need not earn that advantage by paying anything at all for the ensuing losses to those damaged by their errors.[31]

Next we take up statistical studies showing how early offers will work costwise and otherwise.

Footnotes

1.  Jeffrey O'Connell, Offers That Can't Be Refused: Foreclosure of Personal Injury Claims by Defendants' Prompt Tender of Claimants' Net Economic Losses, 77 Nw. U. L. Rev. 489 (1982).

2.  Conceivably the legislation implementing an early offers plan could require proof by clear and convincing evidence. See notes 21-22 infra and accompanying text.

3.  A federal bill sponsored by Senator Mitch McConnell (R., Ky) authorized early offers for all personal injury cases except for auto accidents. S. 1861, 104th Cong. (1996). For a full discussion of the Early Offer reform and its effects on medical malpractice claims, see Joni Hersch, Jeffrey O'Connell, & Kip Viscusi, Evaluation Of Early Offer Reform Of Medical Malpractice Claims: Final Report (U.S. Dept. of Health and Human Services. Available at http://aspe.hhs.gov/daltcp2006/medmalcl.pdf, Id., An Empirical Assessment of Early Offer Reform for Medical Malpractice, 32 J. Legal Stud. (forthcoming): For a similar study, see Jeffrey O'Connell & Patricia Born,

4.  The California Supreme Court in Mordi-Shalal v. Fireman's Fund Insurance Co., 758 P.2d 58 (1988) abolished a third-party bad faith doctrine, overruling Royal Globe Fire Insurance Co. V. Superior Court, 592 P.2d 229 (1979). But as to dangers of increased claimant fraud from excessive demands on first-party insurers under auto no-fault claims see Robert E. Hoyt, David B. Mustard, & Lawrence B. Powell, The Effectiveness of State Regulation in Mitigating Moral Hazard: Evidence From Automobile Insurance, XLIX(2) J.L. & Econ. 427, 437 (Oct. 2006).

5.  Patrick S. Atiyah, The Damages Lottery 142-43 (1997).

6.  See Jeffrey O'Connell & Ralph M. Muoio, The Beam in Thine Eye: Judicial Attitudes Toward "Early Offer" Tort Reform, 1997 U. Ill. L. Rev. 491, 495 (1997); see also H. Laurence Ross, Settled Out of Court: The Social Process of Insurance Claims Adjustment 151-63 (1970) (discussing claimants' incentives to "build" their claims).

7.  See Michael Horowitz, Making Ethics Real, Making Ethics Work: A Proposal for Contingency Fee Reform, 44 Emory L.J. 175, 184-86 (1995); see also Jeffrey O'Connell, Ending Insult To Injury 4-7, 16-18 (1975); Jeffrey O'Connell, The injury Industry 64-65 (1971).

8.  Atiyah, supra note 1, at 143. Early offers reform has been criticized, for example, as overly favorable to defendants because it does not limit health care providers to making early offers only within, say, 180 days of the injury, not the claim. But that would entail substantial risks of higher costs, precisely what early offers reform seeks to avoid. Cf., David M. Studdert, et al., Disclosures of Medical Injury to Patients: An Improbable Risk Management Strategy 26 Health Aft. 215, 225 (2007). It would also invidiously treat health care providers compared to other potential offerors since providers of goods could not realistically be subject to such a rule, in that typically they hear of an injury only by a claim.

9.  Clarence Morris, Liability for Pain & Suffering, 59 Colum. L. Rev. 476, 477 (1959); h. l. ross, settled out of court, 108 (1970).

10.  See W. Kip Viscusi, Pain and Suffering: Damages in Search of a Sounder Rationale, 1 Mich. L. & Pol'y Rev. 141 (1996).

11.  As to the defense legal expenses, not all of these will be saved if an early offer is accepted. Some costs will have to be incurred to decide whether to make an early offer. The normal claimant's attorney's legal fee is assumed to be one-third of any tort payment. Thus the presumed early offers payment of 10 percent of net economic loss as a claimant's legal costs makes for payment of 10/33 of the tort contingency fee included in the early offer. Using this calculation, it is assumed the fraction 10/33 of defense legal expenses will be incurred in deciding to make the early offer. If the insurer decides not to make an early offer but to litigate the claim, this 10/33 fraction of defense costs plus the remaining 23/33 fraction will be incurred. But if the claim is settled by an early offer, the insurer is assumed to save the 23/33 fraction of legal expenses.

12.  Comm. On Quality Health Care In America, Inst. Of Medicine, To Err Is Human: Building A Safer Health Care System 9-10 (Linda T. Cohn et al. eds., 2000).

13.  Sandra G. Boodman, The Right to Know Still Trying to Open Database on Doctors, Wash. Post, May 7, 2000, health (Section), at 13; see also Ann Scott Tyson, Doctors Rated but Can't Get a Second Opinion, Wash. Post, Jul. 25, 2007, A1.

14.  David Friedman, Book Review, 97 J. Pol. Econ. 497, 500 (1989) (reviewing Steven Shavell, Economic Analysis of Accident Law (1987) (Friedman is the son of the late Milton Friedman, the Nobel laureate in economics)).

15.  See Jeffrey O'Connell, Two-Tier Tort Law: Neo-No-Fault & Quasi-Criminal Liability, 27 Wake Forest L. Rev. 871 (1992).

16.  Hedonic damages are a relatively new category of non-economic damages, awarded to a tort victim for the loss of enjoyment of life or for the value of life itself as measured separately from other tort damages. See generally Erin A. O'Hara, Hedonic Damages for Wrongful Death: Are Tortfeasors Getting Away with Murder?, 78 Geo. L.J. 1687 (1990)(explaining and discussing hedonic damages); Victor E. Schwartz & Cary Silverman, Hedonic Damages: The Rapidly Bubbling Cauldron, 69 Brook. L. Rev. 1037 (2004)(criticizing the growing use of hedonic damage awards).

17.  For a discussion of compelled market reduction, see Jeffrey O'Connell & C. Brian Kelly, The Blame Game 105 (1987). But see David Hyman & Charles Silver, Believing Six Improbable Things: Medical Malpractice and "Legal Fear," 28 Harv. J.L. & Pub. Pol'y 108, 114-15 (2005).

18.  Jason S. Johnston, Punitive Liability: A New Paradigm of Efficiency in Tort Law, 87 Colum. L. Rev. 1385, 1399 (1987).

19.  Id. at 1411-12.

20.  Id. at 1411-12 (citing Burk Royalty Co. v. Walls, 616 SW2d 911, 918-19 (Tex. 1981).)

21.   E.g., Hering v. Hilton, 147 N.E.2d 311, 313-14 (Ill. 1958); Srajer v. Schwartzman, 188 P.2d 971, 9875-76 (Kan. 1948); Elliott v. Peters, 185 P.2d 139, 142-43 (Kan. 1947); Helleren v. Dixon, 86 N.E.2d 777, 780 (Ohio 1949).

22.   See e.g., Colo. Rev. Stat. Ann S. 13-25-172(2) (West 1999). For a discussion of the legal concepts of higher degrees of misconduct, e.g., gross negligence or wanton misconduct, and higher burdens of proof, e.g., beyond a reasonable doubt, see Jeffrey O'Connell and Andrew S. Boutros, Treating Medical Malpractice Claims

23.   E.g., Tom Baker, The Medical Malpractice Myth 172-79 (2005). See also supra note 8.

24.   Peter A. Bell & Jeffrey O'Connell, Accidental Justice 66 (1997).

25.   Id. at 66-67.

26.   For an attack on programs based on the principle of the diminishing marginal utility of money, see Richard A. Posner, Economic Analysis Of Law 344-46 (2d ed. 1977). For a defense of such programs, see Paul Samuelson, Economics 425-29 (10th ed. 1976), and Julian Simon, Interpersonal Welfare Comparisons Can Be Made - and Used for Redistribution Decisions, 27 Int'l Rev. soc. sci. 63 (1974). For an attempt to use John Rawls's seminal if controversial theories to focus tort law on those suffering serious accidental losses which overtax any resources available to them, see Gregory C. Keating, Rawlsian Fairness and Regional Choice in the Law of Accidents, lxxii Fordham L. Rev. 1857 (2004).

27.   John Maynard Keynes, Economic Possibilities for Our Grandchildren (1930), in 9 The Collected Writings Of John Maynard Keynes: Essays In Persuasion 321, 326 (1972); John Maynard Keynes, Economic Possibilities for Our Grandchildren, in Essays In Persuasion 358-73 (1963), available at http://www.eco.utexas.edu/Homepages/Faculty/Cleaver/368keynesgrandchildren.html; Friedrich A. Hayek, The Non Sequitur of the "Dependence Effect," at http://www.mises.org/etexts/HayNonseq.pdf (quoting John Maynard Keynes).

28.  For an indication that pain and suffering damages were historically limited to egregious conduct in much the way the early offers plan limits them, see generally Jeffrey O'Connell, A Proposal to Abolish Defendants' Payment For Pain and Suffering in Return For Payment of Claimants' Attorneys' Fees, 1981 U. Ill. L. Rev. 333, 367.

29.  For an extended discussion of the constitutionality of a different but arguably analogous statutory proposal for displacing tort liability for personal injury with lesser but more expeditious payment, see Jeffrey O'Connell and James E. Soulks, Is It Constitutional? in Jeffrey O'Connell, Ending Insult To Injury: No-Fault Insurance For Products And Services, app v. at 204-75 (1975).

30.  Jeffrey O'Connell and Ralph Muoio, The Beam in Thine Eye: Judicial Attitudes Toward "Early Offers" Tort Reform, 1997 Univ. Ill. L. Rev. 491.

31.  Jeffrey O'Connell and Andrew S. Boutros, Treating Medical Malpractice Under a Variant of the Business Judgment Rules, 77 Notre Dame L. Rev. 373 (2002).