Early Offers - Jeffrey O'Connell

Data

What will be the cost and other effects of an early offer program? (The statistics below should be more palatable than statistics usually are given their stunning results.)

An analysis of studies of actual court settlements and verdicts in medical malpractice cases in Texas and Florida[1] and product liability cases in Texas[2] indicates the comparative performance of the early offers program vis a vis the present tort system.

At the outset, a key to estimating the effect of early offers, as seen in chapter five, is comparing the amount a defendant's insurer in its early estimate of the value of a case its initial reserve, sets aside to pay a given personal injury claim matched against the amount that would be required to pay an early offer covering the claimant's net economic loss plus attorney's fees. If the former is greater than the latter an early offer will likely be made. (In all of the following, both as to medical and product claims the relatively few cases where punitive damages were at all involved - only 3 to 4 percent of all cases - are excluded on the ground that these are the cases involving allegation of very serious defendant misconduct where an early offer would most likely be rejected.)

Looking at Table I below, with the insurers' decision on whether to make an early offer based on whether the price they are tentatively willing to pay - their reserve - is less than the claimants' net economic losses, of the 1,938 claimants in the study suffering severe nonfatal injuries paid under tort law, 1,186 (or 60 percent) would be tendered early offers (Ia3).[3] Severe nonfatal injuries are defined as brain damage or spinal cord injuries with complications. The cost savings from paying such claimants by early offers would average $584,000 per claim (Ia3). Payment would be made on average 2.4 years faster from the time of the claim than under tort law (Ia2). Actually, because of the 180 day period for a defendant to make an early offer, claims subject to early offers will in all likelihood be made much sooner then present tort claims. Thus the 2.4 years figure is very conservative.[4] Total litigation costs on both sides would be reduced by an average of $225,200 per claim (Ia4).

TABLE I

Medical Malpractice: Severe Nonfatal Injuries (1938 of Whom Paid Under Tort)

* Number of tort payees to be paid by early offers

An important element of the cost study of early offers is that insurers' initial (or early) dollar reserve allocated to pay a typical tort claim often turns out to underestimate a claim's ultimate value. In Table I, as opposed to average savings per case of $584,000 using initial reserves as the base for calculating savings (Ia3), they would equal $1,470,000 per case using final reserves (just before a case is resolved) (Ib3) and $1,177,000 using actual ultimate payout as the base (Ic3).[5] Similarly, average litigation costs drop by $225,500 per case based on initial reserves (Ia4) versus by $334,500 and $560,500 under final reserves and payouts respectively (Ibc4). Also out of possible 1,938 cases, the number of injured patients receiving early offers grows from 1,186, based on initial reserve (Ia3) to 1,915 and to all 1,938 under final reserves and payouts respectively (I bc4). So the larger the anticipated final reserve or actual payout compared to the initial reserve, the greater the incentive for insurers to set a more realistic and therefore higher initial reserve, leading in turn to more and higher early offers plus lower litigation costs. Admittedly, insurers cannot know the amount of the later reserve or final payout at the time they are estimating the initial reserve. But with an early offer program in effect, insurers would have an incentive to analyze claims more carefully at an earlier stage. Even without adjusting upwards the initial reserve values to reflect the likely greater research that will occur in setting reserves under an early offer regime, the data indicates widespread opportunities for successful early offers in cases of severe injury.

The same pattern holds true for fatalities and for all cases, including less severe injuries.

For example, in Table III below for the 4,609 death cases the average savings per case would be $377,500 based on the early reserve and $675,500 based on the final reserve IIIab3), with average litigation costs per case reduced respectively by $107,000 and $147,000 (IIIab4).

TABLE II

Medical Malpractice: Fatal Injuries (4,609 of Whom Paid Under Tort)

Table IV below shows that for all 15,916 cases together, i.e., larger, smaller and of medium size, the average savings per case would be $241,500 based on the early reserve and $556,500 based on the final reserve (IVab3), with average litigation costs per case reduced respectively by $82,500 and $130,500 (IVab4). The same faster timing of payment holds true in all categories of cases.

TABLE III

Medical Malpractice: All Cases Combined (15,916 of Whom Paid Under Tort)

On the debit side of all this, as Table 1 also shows, based, for example, on the initial reserve, the average early offer reduces payment to such claimants by $321,500 per claim (Ia5). In addition, as will be shown below, very few claimants (3%) would receive more under an early offer than they would have under a tort claim.

These latter figures raise a legitimate question: Even with early offers promptly covering essential losses with far lower costs, are those advantages under early offers justified? Some will clearly differ on this. But it would seem that tort law's uncertainties, with concomitant delays and high transaction costs do make the trade worth it, especially for severely injured patients, about whom after all any insurance scheme should be primarily concerned.

But, as seen in chapter five, one could lessen discrepant payments under early offers compared to payments under present law for, say, those suffering little economic loss after severe nonfatal injuries (or death). Thus as also seen (chapter five), a provision could be added to the statute requiring that an early offer entail, at the option of the payee in such a case, payment of either net economic loss or a minimum of, say, $250,000. As shown in Table II below, this floor of $250,000 would reduce the number of claimants whose compensation is lower under the early offer system, from 1,055 to 498 (IIab2), with the percentage of claimants gaining in compensation rising from that low of 3 percent mentioned above to 29 percent (IIab3). On the other hand, the higher minimum offer means that the number of severe nonfatal injury cases receiving early offers would be reduced from 1,190 to 540 (IIab4), with the remaining claimants consigned to the harrowing vicissitudes of the current tort system.

TABLE IV

$250,000 Minimum: Severe Nonfatal Injuries (1938 of Whom Paid Under Tort Law)

The pattern for all product liability claims paid under tort attracting early offers follows very closely that for medical malpractice cases such that not all the corresponding tables need be displayed here in the text. The product liability study separated claims in which workers' compensation were also paid and not thus paid. The workplace cases were fewer but larger in losses, savings and deductions from collateral sources.[7]

Some typical figures from the product liability data are set forth in Table V below for severely injured claimants not covered by workers' compensation. The average savings per case based on the final reserve were $1,055,500 (Vb3)[8]; the time saved was the same 2.4 years as for medical malpractice claims (Vb2); and litigation savings based on the initial reserve were $197,000 (Va4).[9]

TABLE V

Indeed across the board not only for severe injuries but for death and all cases combined including less severe injuries, product liability claims (both with and without workers' compensation also being paid) like medical malpractice cases provide widespread opportunities for making early offers. Thus, there are: (1) very large savings per case resulting from early offers;[10] (2) more payees and much higher savings if the comparison is based on the final reserve or actual payout;[11] (3) the same faster payment;[12] (4) much lower transaction costs;[13] and finally; (5) the high percentage of severely injured offerees (or their survivors) losing money from an early offer being greatly diminished by a minimum alternate payment of $250,000.[14] But here too this is achieved at the price of more claimants forced to face dysfunctional tort law.[15]

The Economist's View

Having been exposed to the remarkable results projected for an early offer system, one is in a position to recognize the extent to which, from the rigorous perspective of economics, the early offers plan dramatically shrinks the grounds of dispute between claimants and defendants in personal injury litigation. That difference between the parties is characterized by economists as a "Wedge." Reducing that wedge between the parties is the essence of the early offers device. Because few rational claimants will go to trial once an early offer is made, with the probability of a claimant prevailing so low and a socially adequate and binding offer open, many more cases will be settled quickly and less expensively. After all, the outcome of a post-early offer is clear to both parties.[16] Absent a rare defendant's quasi-criminal misconduct, the claimant who litigates further will almost certainly lose. Nor can the early offer itself be subject to all that much controversy; its value is largely preset by statute. The inverse of Judge Richard Posner's economic insight comes into play, namely that the more the parties are apart by a wide range of possible bargaining outcomes, the more the likelihood of prolonged litigation.[17] Early offers, by leaving relatively few if any realistic issues to bargain over, enormously reduces the likelihood of disputation.

This is in contrast to the present situation when the wedge leads to what economists in another term call a 'deadweight loss.' An analogy may help: Economists see taxation as a deadweight loss for consumers and producers in that it represents a net transfer from them to the taxing authority (plus to accountants and lawyers). Similarly the wedge created by tort law creates an even greater deadweight loss (without the benefits from taxation, dubious as the latter may seem to some) in that it results in a net transfer, not in this case from consumers and producers but, from claimants and defendants to attorneys and others (insurance companies, expert witnesses, etc.) involved in litigation. This deadweight loss is a net loss to society in that it can be seen as representing defendants who would have been willing to offer a prompt and reasonable settlement of the workers' compensation type to claimants willing to accept it. Both are prevented from doing so because the wedge drives them apart.

The wedge, in turn, is caused in significant part by what the economists, in still another term, characterize as "asymmetric information" which is just a fancy way of describing things this way: In personal injury cases today the defendant is normally the party with better information regarding its true liability to the claimant, and tries to signal no or low liability to the claimant through a low or even no settlement offer. A claimant is normally the party with better information regarding, say, her conduct and the extent of her harm, and will attempt to signal, for example, a higher level of harm with higher demands or a high counter-offer.[18] These signals, by transmitting information, may conceivably increase settlements by diminishing the disparity of expectations - if believed. Normally however, the opposing parties are inclined to discount the other's signals as "cheap talk," or exaggerated versions of true valuations. And so expectations may well diverge further.

The economist sees this asymmetry of information as a major stumbling block in litigation. Keep in mind that the adversarial nature of a lawsuit, with its inevitable disagreement between the claimant and the defendant about a trial's likely result, is exacerbated by dispute between them over any vagueness of the legal standard in dispute. The vaguer the standard, the greater the uncertainty as to any given case's outcome, and the greater the probability of extended litigation. And personal injury claims present their own special causes of disagreements because, as repeatedly seen, of the vague legal standards over who or what was at fault and the economic value of non-economic losses.

There are thus inexorable obstacles to claimants and defendants finding what each needs in the way of evidence. So asymmetries persist. The search for a solution becomes a choice between attempting: (a) to improve the signals given by each party, or (b) to find a way to bypass the signaling process. In trying (a), to improve signaling, the law through many decades of frustration in the twentieth century formulated so-called "discovery" proceedings whereby under judicial supervision each party is entitled to extract information about the other's case. But as just a further indication of the law's failures, the discovery process has simply added its own huge inadequacies to personal injury litigation, leading to "fishing expeditions" being met by tactics of "hide and seek."

In 1938, the Federal Rules of Civil Procedure (often followed by the states as well), formulated discovery rules which, as Professor Richard Epstein of the University of Chicago Law School points out, "were drafted under the influence of . . . world views which saw litigation as a collaborative search for truth instead of a regulated form of combat. Yet no matter how we sugarcoat it, all litigation constitutes a form of aggression which both sides seek to explore by devising ways [in the discovery process] to inflict heavy compliance costs on their rivals at little cost to themselves."[19] And all the while an overworked and harried trial judge (often without much success) tries to keep the peace in an adult version of schoolyard fist-a-cuffs.

But even if the discovery process could somehow work, the problem in personal injury litigation turns out not to be asymmetric information. Rather, what is involved is largely unknowable information given the uniquely unmanageable variables in such litigation (unwelcome as this may be to economists, enamored as they are with the concept of perfect information). According to a lawyer and a physician who together exhaustively examined medical malpractice litigation in New York, Colorado, and Utah, "the legal system is even more prone to error than the medical system it attempts to judge."[20]

As a result, in rejecting (a), trying to improve signaling, we turn to (b), finding a way to bypass it. This is indeed accomplished by creating such strong incentives for each party to settle via an early offer, that the parties' expectations are brought together. We are thus able to avoid the economist's asymmetric information problem with its concomitant wedge and deadweight loss without having to solve the insoluble asymmetry itself, thereby averting the largely futile task of trying to create better signaling by the opposing parties.[21]

Fittingly this discussion from an economics viewpoint is closed with the observations of two famous economists: Gordon Tullock and James J. Heckman.

Gordon Tullock is both a lawyer and an economist who has yet to win the Nobel prize he deserves. His indictment of tort law is grounded on: (1) the costly, often wasteful, and even manipulative adversarial tactics used by both plaintiffs and defendants in proving or disproving fault; (2) the system's likely errors in determining such fault; and (3) the system's consequent failures to compensate losses effectively. Tullock is also critical of those engaged in legal-economic analysis for their failure to consider the beneficial and even economically efficient effects of drastically shrinking disputes over fault and payment for noneconomic damages.[22]

James Heckman, who has won his Nobel prize, has noted that the disciplines of economics and law focus on the opposite poles of tort law, viz, efficiency (i.e., deterrence) at one end and equity (i.e., justice) at the other, thereby creating a void in the middle that neglects the role of compensation. It is precisely that void that early offers focuses on, while neglecting neither efficiency nor equity.[23]

That brings us to the next section - a broad-gauged contextual view of just why and how the early offers device focuses on compensation.

Tort Liability as (Inefficient) Social Insurance

A crucial point throughout this book is that, though not often thought of this way, tort liability coverage can be seen as social insurance. Such a vantage invites the government to shape 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.[24] Furthermore, mandatory auto insurance statutes not only protect the assets of those who commit torts but impart rights to those they injure.[25]

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, the subject of this book, those in almost any socioeconomic class seriously injured by tortious accidents whose losses outstrip all other applicable coverages (chapter five).

This is precisely, of course, what the early offers regime purports to accomplish and what tort law erratically - even cruelly - fails to do.

Further, it is also the obligation of every government mandating the purchase of social insurance to structure it as efficiently and economically as feasible.

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 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 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.

This brings us back to the Sharp v. Case litigation, last seen in chapter one. We'll recall Steven Sharp and that he suffered terrible injuries. There can be no doubt that no amount of money can adequately compensate loss of ones arm, as happened to Steven. But in a sense, as suggested in chapter one, it could be said that, comparatively speaking, Steven turned out to be overcompensated by society for his injuries. He was injured on the job and so, as we saw, he was covered by workers' compensation which paid for his medical bills and much of his wage loss. Before he even thought of suing Case he had thus received excellent and extensive medical treatment including prosthetic devices. He was also receiving a significant percentage of his work loss from workers' compensation, a system that, whatever its problems, is incomparably the best insurance program available across the board in our society, as seen in chapter one. It provides relatively unlimited medical expenses and very extensive wage loss protection, often unlimited in duration. While waiting long years for the outcome of his trial and then the appeals, Steven had the funds to attend college, find and work at jobs, and live in his own apartment. One gets the sense that thanks to workers' compensation, he was able to move on with his life.

Compare Steven to the person who suffers a tragically disabling injury but is not covered by workers' compensation or any other adequate health or disability insurance.

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.[26] (If it is true that the young (18-24) who are healthier and therefore need less health care are disproportionately among the uninsured (? 40%), it is those very same youngsters who are disproportionately involved in accidents leading 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 much 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 even - indeed, far less - than for health insurance (chapter four).[27] 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.

So one is prompted to ask whether, in a society thus uninsured and underinsured for the vicissitudes of illness, accidents and aging, we should be paying additional and extravagant amounts through the legendarily inefficient tort system to those accident victims already comparatively well covered for their essential losses?

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 via early offers 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 a form of insurance now misserving both an uninsured and underinsured public.

Conceivably, whenever a state or the federal government mandates health insurance, the expense for consumers of doing so could be counterbalanced at least in a measure by an early offers plan that makes better use of, while also reducing, all those liability insurance dollars now being squandered. (The cost impact of such an early offer measure would be much greater if it included auto accidents, premiums for which dwarf other liability coverages, amounting to over $110 billion annually. That doubles what is spent on workers' compensation, is over ten times the premiums for medical malpractice and is at least seven times product liability premiums. (More on this in chapter seven.)

What about the argument that to the extent that first-party health insurers are unable to recoup their payments by claims against third-party liability insurers via subrogation suits, the cost of first-party insurers will rise? In the first place, such first-party insurers' subrogation claims are re-paid only after the substantial transaction costs establishing tort liability. Those costs are not incurred when subrogation claims are simply barred. Secondly, as just seen, first-party health premiums so dwarf third-party tort liability premiums that first-party insurers' recovery from third-party insurers affect the former very little, if at all, whereas a rule against such recovery has as a much more substantial effect on third-party liability costs. As a thorough study by the prestigious American Law Institute put it:

Keep in mind too that the pursuit of subrogation claims further feeds the tragic and widespread extent that Americans overinsure themselves for relatively smaller losses and as a corollary under-insure themselves for much larger ones - exactly the opposite of sensible insurance coverage. Witness, America's pervasively low deductibles on all kinds of insurance, auto, health, disability, etc.,[29] which means insureds are paying a 'premium' (in both senses of the word) to insurers to cover losses they could better cover themselves, with concomitantly lower limits for more serious losses they cannot cover themselves.

Admittedly early offers eliminate employers' capacity to subrogate for their workers' compensation payments when, as seen, such payments are substantially higher than other collateral sources which, for example, consist largely of less inclusive health insurance. Much more important though is the much bigger advantage accruing to producers of goods under early offers by foreclosure of tort claims against them for pain and suffering and concomitant transaction costs.

The legal fallout from 9-11 also tells us much about the tort system. Within hours of the attack on New York, Washington, and Pennsylvania, Congress saw how wildly unsatisfactory, unpredictable, wasteful and dilatory it would be to leave recompense for 9-11's victims and their survivors to the vagaries of tort law. Instead a federal compensation system was established funded by general revenues. Of course one wonders whether Congress, as it did in the 9-11 legislation, will ever again totally divorce compensation from tort law and turn over to a Czar untrammeled power to provide limited payment (compared to tort damages) from tax dollars on a no-fault basis to disaster victims. But, the immediate decision to reject tort law in a time of crisis in order to routinize payment divorced from tort law's dysfunctions tells us a lot, doesn't it, about both tort liability and the damages that should be recoverable? If tort law was so massively inappropriate for 9-11's aftermath, why should it remain appropriate for the accident/tragedies that daily plague us?[30]

The early offer scheme is similarly designed to a substantial and pragmatic extent to turn away from tort law and routinize payment, apart from tort law's frustrations. But an early offers plan does not, as the 9-11 legislation did, go so far as to use a Czar, nor tax dollars, nor avoid placing any responsibility on those who may have arguably helped cause major losses.

It must be conceded that the early offers plan by no means eliminates all the dysfunctional aspects of tort liability. But it does largely eliminate one of the principal causes of all that dysfunction - namely routine economic compensation for non-economic losses. That, as we saw in chapter three, is the principal variable that allows jurors their relatively unfettered discretion to indulge in their preconceptions - and even prejudices - in paying unequal amounts to those suffering similar and sometimes even identical injuries.

As to the second principal cause of dysfunction - finding fault - the stubborn fact remains as discussed in chapter four that a complete no-fault system is simply not feasible for the bulk of, say, medical or product injuries. But at least the early offer program encourages an evasion of extensive litigation and frustrations of finding fault even if that evasion is based on discounting, not eliminating, the fault finding process. Discounting after all is what all current settlements do - but now take much too much in time and transaction costs.

Conclusions

It might be asked if, because of early offers, far fewer trials than now will be held (with over 95% of the cases even now being settled out of court), how will defendants make the crucial decision of predicting the outcome of trials in order to decide whether to make early offers? If and when, as a result of the early offers program, insurers and self-insurers find themselves in the happy situation of too few trials (far better for everyone but lawyers), nothing will prevent defendants on occasion from refusing to make an early offer to test the litigation climate. It is, after all, a great improvement that such a tactic will be necessary very occasionally than now when prolonged litigation, even with settlements, is the norm.

It may also be that as experience builds of just when early offers make sense, society may be in a position to develop genuine no-fault definitions of adverse events for many kinds of accidents, mirroring legislative no-fault workers' compensation and auto insurance.

One very fertile ground for experimentation with the early offer device would be for personal injury claims against governmental units - federal, state or local. Providing relief for, say, corporate defendants may have less initial appeal than cutting down on the enormous waste of tax dollars involved in governmental tort liability. Indeed, former Representative Richard Gebhardt (D-MO) introduced a federal bill applying the binding early offers concept to federally funded health care recipients, i.e., from medicare, medicaid, veterans' care, military dependants, those on Indian reservations, etc.[31]

Some tort scholarship focuses exclusively on tort law as a bedrock of morality. Curiously, in the course of all the relevant rhetoric almost never is the experience of workers' compensation mentioned. Here we have a longstanding, wholesale displacement of tort law by means of social insurance administered by private enterprise that provides incomparably more generous coverage across the board for medical expense and wage loss from accidents than any other similarly widespread American scheme of first-party insurance, public or private. How can such an historic living model be ignored? Of course, workers' compensation has its faults. There can be, for example, disputes over the extent and duration of an injured employee's need for medical services. But if it is inadequate, one has to ask "compared to what?" Moreover an answer to such inadequacies should certainly not be a return through third-party suits to the tort law which workers' compensation was meant to replace as seen in chapter one. Much better would be a scheme such as early offers that supplements the inadequacies of workers' compensation with relatively prompt and efficient coverage tied to inflation, as is the case with early offers. That step mirrors to the practical extent feasible the mode of workers' compensation benefits themselves, i.e., quick payment of economic losses without counterproductive overemphasis on the parties' alleged derelictions.[32]

SUPPLEMENT TO CHAPTER SIX

TABLE VI

Product Liability - Covered by Workers' Compensation: Severe Nonfatal Injuries (607 of Whom Paid Under Tort).

TABLE VII

Product Liability - Not Covered by Workers' Compensation: Fatal Injuries (1,565 of Whom Paid Under Tort).

TABLE VIII

Product Liability - Covered by Workers' Compensation: Fatal Injuries (823 of Whom Paid Under Tort).

TABLE IX

Product Liability - Not Covered by Workers' Compensation: All Cases Combined( 29,803 of Whom Paid Under Tort).

TABLE X

Product Liability - Covered by Workers' Compensation: All Cases Combined (8,143 of Whom Paid Under Tort).

TABLE XI

$250,000 Minimum: Severe Nonfatal Injuries

Footnotes

1.   Joni Hersch, Jeffrey O'Connell & Kip Viscusi, U.S. Dept. of Health And Human Services, Evaluation of Early Offers Reform Of Medical Malpractice Claims: Final Report at http://hhs.gov/daltcp/reports2006/medmalcl.pdf; An Empirical Assessment of Early Offers Reform for Medical Malpractice, J. Legal Stud. (forthcoming); Jeffrey O'Connell, The Cost Savings and Other Advantages of an Early Offers Reform of Medical Malpractice Claims, Quin. Health L. J. (forthcoming).

2.   Jeffrey O'Connell & Patricia Born, The Cost And Other Advantages of Early Offers Reform For Product Liability Claims (forthcoming).

3.   Hersch, et al. supra note 1.

4.   Time saved is especially important for serious injured claimants with low or no health nor disability insurance. See infra, chapter six.

5.   Why are the initial reserves so much lower than the final reserves or actual payouts? There are several possible explanations. The fact that initial reserves are well below the others does not necessarily imply that insurers are under-reserving on average with their initial reserve amounts. The cases observed in the data set are the successful claims that led to insurer payouts. If, for example, the insurer reserves the same amount for claims of a particular type with this amount corresponding to the average claim costs, then the claims that are ultimately successful will be under-reserved initially, while unsuccessful claims will exhibit over-reserving. Thus, the selection of claims for inclusion in the data set could alone account for the observed pattern without any bias in the reserving practices. Moreover, as the claim matures, the insurer will learn more about the claim, distinguishing which claims in this overall claims category are those with the highest expected losses. But that there may be systematic errors in loss reserving is well documented. Weak insurers have a tendency to under-reserve to make their financial soundness appear brighter. See Kathy Ruby Petroni, Optimistic Reporting in the Property-Casualty Insurance Industry, 15 J. Of Accounting and Economics 485 (1992). In addition, the amount of reported reserves may be affected by income smoothing objectives and tax concerns. See Jennifer J. Ganer and Jeffrey Paterson, Managing Insurance Company Financial Statements to Meet Regulatory and Tax Reporting Goals, 16 Contemporary Accounting Research 207 (1999), and Elizabeth V. Grace, Property-Casualty Insurer Reserve Errors: A Theoretical and Empirical Analysis, 57 J. Of Risk and Insurance 28 (1990).

6.   O'Connell et al. supra note 2.

7.   As to the latter, we conservatively estimated that such deductions for workers' compensation would be more than twice as large (60% versus 25%) due to the comparatively generous workers' compensation benefits for medical expenses and wage loss. Twenty percent of all product liability claimants paid under tort law in the Texas sample were also paid by workers' compensation (a higher percentage than the somewhat dated figure of 10% mentioned in chapter four).

8.   Versus $1,207,000 for workplace cases. See Table VI b 3 [VIb3] infra in the Supplement to chapter six immediately following thereto, along with Tables VII through XI.

9.   Versus $227,000 for workplace cases. Id. at VI a 4.

10.   Supplement to chapter six immediately following thereto, Tables VI-X at a, b, c3.

11.   Id. Tables VI-X at a, b, c1,3.

12.   Id. Tables VI-X at a, b, c2.

13.   Id. Tables VI-X at a, b, c4.

14.   Id. Tables VI-X at a, b, c5.

15.   Id. Table XI.

16.   See generally George L. Priest & Benjamin Klein, The Selection of Disputes for Litigation, 13 J. Legal Stud. 1 (1984).

17.   Richard A. Posner, Economic Analysis Of Law S. 21.5, at 253 (3d ed. 1986).

18.   Andrew F. Daughety & Jennifer Reinganum, Asymmetric Information Acquisition and Behavior in Role Choice Models: An Endogenously Generated Signaling Game, 35 Int'l Econ. Rev. 795, 795-97 (1994).

19.   Richard A. Epstein, Legal Sanity 'Discovered', Wall St. J., May 24, 2007, at A17.

20.   Jeffrey O'Connell & Andrew S. Boutros, Treating Medical Malpractice Claims Under a Variant of the Business Judgment Rule, 77 Notre Dame L. Rev. 373, 375 (2002) (citing Howard Hiatt & Paul Weiler, No-Fault Medical Coverage Would Cure Many Ills, Boston Globe, Nov. 5, 1999, at A27).

21.   For an economic model of how early offers can shrink the wedge and reduce deadweight losses, see infra Appendix.

22.   Gordon Tullock Welfare and the Law, 2 Int'l Rev. L & Econ. 151, 153-54 (1982); Negligence Again, 1 Int'l Rev. L & Econ. 51, 59 (1981).

23.   James B. Heckman, The Intellectual Roots of The Law and Economics Movement, 15 Law & Hist. Rev. 327, 332 (1997); see also Jeffrey O'Connell & Christopher J. Robinette, The Role of Compensation in Personal Injury Tort Law, 32 Conn. L. Rev. 137 (1999).

24.   Jeffrey O'Connell et. al., The Comparative Costs of Allowing Consumer Choice for Auto Insurance in All Fifty States, 55 Md. L. Rev. 160, 214 (App. C), (1996).

25.   E.g., Mass. Gen. Laws Ann., Ch. 175, S. 113 ACS).

26.   U.S. Census Bureau, Health Insurance Coverage: 2005, http://www.census.gov/hhes/www/hlthins/hlthin05/hlth05asc.html.

27.   See also, U.S. Dept. Labor, Bureau of Labor Statistics, National Compensation Survey: Employee Benefits in Private Industry in the United States, March 2004.

28.   II American Law Institute, Reporters' Study On Enterprise Responsibility For Personal Injury 173 (1991).

29.   David M. Cutler & Richard Zeckhauser, Extending the Theory to Meet the Practice of Insurance in Brookings-Wharton Papers On Financial Services (Robert E. Litan & Richard Herring, eds., 2004).

30.   See generally Robert L. Rabin, The September 11th Compensation Fund, 53 DePaul L. Rev. 769 (2003). It should be noted that families of the victims of the Virginia Tech massacre by a mentally deranged student in the spring of 2007 are attempting to follow the 9-11 aftermath, with the Commonwealth of Virginia considering the creation of a multimillion dollar fund to compensate the families for the losses suffered. The lawyer for the families . . . argued that the creation of such a fund would keep the state and Virginia Tech from having to face a series of lawsuits from relatives of the victims. "Litigation is an option but litigation is where everybody loses". Tim Craig, Va. Tech Relatives Seeking Payment, Wash. Post, July 18, 2007, at B1, B4.

31.   H.R. 3084, 99th Cong. (1985).

32.   Here we reach too the issue of claimant fault. As seen in chapter three, if it is unwise in the extreme to focus inordinately on slight slips by defendants. They often impose huge damages on those same defendants. At least those damages are almost universally redistributed through insurance. But what of the relatively modest mistakes of claimants which result in tens or hundreds of thousands - or even millions - of dollar losses because of the injured party's contributory or comparative fault? Surely here is a draconian punishment unimaginable under even the most unforgiving criminal law. Unfortunately, under early offers - unlike workers' compensation or no-fault auto benefits - claimant fault does remain a factor in calculating the feasibility of an early offer. A remedy here might be to negate the defense of contributory or comparative fault (unless of gross proportions provable beyond reasonable doubt) when a defendant fails to make an early offer. This would also serve as a counter-balancing advantage for claimants against those who find an early offer scheme overly favorable to defendants as a class. Such a provision leads to greater uncertainty as to the predictable costs of an early offers program and may well thus impede its immanent acceptance. But at least such a change in an early offers program might well be considered.