Early Offers - Jeffrey O'Connell

What is it about personal injury law that creates such dysfunction? The problem is that even for relatively simple accidents, such as those from auto collisions and slip-and-falls, determining just who or what is at fault is often very complicated. Injuries that result from more complex cases involving medical treatment or malfunctioning products are much worse. Determining the cash value of pain and suffering is also very difficult and consequently contentious. Thus, three phenomena in tort law, uncertainty, delay, and high transaction costs, cause the all-too-familiar and cruelly tragic combination of waste and want.

Uncertainty over their entitlement to proper payment under a fault criterion is an unfortunate reality for deserving victims especially among the seriously injured who, must wait years, if paid at all, for recoupment of even their economic loss. Others, perhaps not so deserving especially among the less seriously injured can be paid greatly in excess of their loss. The huge delays are the inevitable result of these uncertainties, as entitlement is vigorously disputed in emotional, bitter, adversarial trials (in every sense of that last word). The downward cycle leads in turn to concomitantly high transaction costs with claimants' lawyers taking a third or more of any settlement or judgment and defense lawyers taking their own substantial cut of overhead costs culminating in legal fees of many billions of dollars annually.

Uncertainty

That judges and jurors are often presented from opposing sides conflicting and often equally persuasive (or confusing) expert testimony regarding a physician's purported negligence or lack thereof only makes matters worse.

A Harvard study also concluded that random factors influence cases:

Although the foregoing discussion has centered on the uncertainty of liability in medical malpractice, the problem is just as acute in other areas. Determining damages in personal injury cases, especially for pain and suffering, is equally, if not more, troublesome than finding fault. In most instances of tort loss, relatively accurate markets are available for determining a plaintiff's actual losses in dollars. For instance, a market is available for determining the dollar value of a particular motorcycle damaged in an accident. Likewise, in the case of personal injuries, markets are available for determining economic damages such as wage loss. In the case of pain and suffering and other psychic damages, however, no such markets are available for translating loss into a dollar value. In other words, there are no buyers and sellers of pain and suffering; instead awards are based on highly subjective and differing notions as to the economic value of intangible injury. The lack of a market in pain and suffering leaves litigants, and their lawyers, highly uncertain about how a jury will value pain and suffering arising out of specific injuries.

Delay

As already indicated, the level of complexity involved in proving fault and establishing the economic value of noneconomic pain and suffering inevitably frustrates the resolution of tort claims. It has long been recognized that one of the greatest weaknesses in traditional tort compensation stems from the length of delays involved in the typical litigation process. Parties must commonly face a wait of years before they can get to court or even settle a case. Even if one finally reaches court, defense counsel, in addition to trying to defeat the claim or at least hold down the size of any damages from an adverse verdict, may try also to get error into the record' for purposes of appeal. This allows a defendant to at least bargain down any adverse verdict pending further years of delay induced by such an appeal.

Transaction Costs

Tort law's uncertainty and complexity obviously require litigants to turn to costly assistance from lawyers and others such as expert witnesses. The delays in the resolution of tort claims ensure that litigants will have to pay such expensive help for a considerable duration. Thus, tort law is faced with its third major defect: high transaction costs.

On the plaintiff's side, ()attorneys typically charge a contingency fee under which an attorney will receive a certain percentage of any judgment or settlement recovered by the plaintiff. (If the plaintiff does not recover, the attorney will supposedly not receive attorney's fees, but attorneys are generally unlikely to undertake cases without the likelihood of at least some substantial if incomplete recovery.) Standard contingency fees in personal injury litigation, as seen, range from 33% to as high as 50% in various jurisdictions. Note too, ()these percentage fees are commonly taken off the top' based on the gross recovery, leaving the injured client to bear all the considerable expenses of expert witness fees and costly exhibits, etc. This, in turn, can result in the client receiving much less than 50% of any recovery despite a nominally lesser fee.

In sum, tort law, especially (but not only) in its application to medical malpractice and products liability, has this central defect: the huge uncertainty involved in both applying the fault principle and calculating payment for pain and suffering. This defect leads ineluctably to those two others: huge delay and forbidding transaction costs. Uncertainty breeds delay because the parties dispute their entitlements; in turn, high transaction costs follow as the parties are forced to pay highly trained expensive specialists to attempt to resolve their complex, adversarial disputes.

Early Offers

Is there a way to improve significantly on the obvious failings of tort law while properly balancing its aims? 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?

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 to make binding "early offers" to pay injured parties their actual losses would be a form of "neo no-fault" that would work.

The goal of an early offers statute iswould be to encourage prompt settlement of personal injury tort claims along health and disability 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. 1 (Not that such a rule will 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 after an accident from tort law, with or without an early offer. Nor would any early offers statute allow health or disability insurers to exclude accidental losses on that basis.) (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, with the defendant also judged by a higher standard of misconduct, i.e., gross negligence.

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 will show. The provider's insurer would likely make the early offer, $200,000 being clearly less than $300,000. And a claimant 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 law. So defendants will make an offer only when it makes economic sense for them to do so, as shown in the above example.

TIt 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 so-called "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 tort claims.

It is also important to note, though, that an early offers plan does not threaten higher costs because defendants, as seen, 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.) Even so, injured claimants as a class are advantaged by prompt receipt of their essential losses.

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. 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, inturnoften 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. But it is only fair here to focus also on similarly questionable defenses by defendants who can take advantage of all the variables under tort liability by resisting even valid claims especially if the claimant is in financial need.

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. TBut the message to claimants is clear: "If you want more than what insurance normally pays, that is, 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.

In this connection itIt 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. Thisat 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. Ontheotherhand,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.

Note too that although injury victims tendered early offers would lose their recourse to full-scale tort litigation, they would correspondingly be paid all without 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.

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 seen, defendants' insurers today are often confident of at least wearing down claimants, given the difficulties and delays in proving a tort claim. As also seen, the long delay before trial 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 wage loss. Furthermore, ,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 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 comes out of pain and suffering damages. Furthermore, winning pain and suffering damages in the first place is subject to all those contingencies of the current tort system. T 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. Given that pain and suffering damages are, as seen, indeterminate and highly volatile, 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, would seem to better serve 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. 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 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 often happens 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 thatcommonlyhappens today without unmanageable problemsthose disputes are inevitable on occasion under workers' compensation or any major medical /disability policiesy extending into the future. Nor have they proved widely unmanageable in health and disability insurance, and certainly pale compared to litigation over fault and the economic value of noneconomic loss. Note too that workers' compensation and the Michigan's highly regarded no-fault auto law with their extensive coverages extended over time have been able to deal effectively with matters of continuing payment.

The parties also might agree todeal with the problems of periodic payment by so-called structured settlements, i.e., present estimatesagreements up front of a 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. Note that workers' compensation and the Michigan no-fault auto law (chapter four) with their wage loss coverage extended over time have been able to deal effectively with such matters.

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.

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 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. 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. 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." According to the IOM, the misconduct is often a series of very minor mistakes that combine to form a hurtful result. ThisBecause an early offers system provides incentives for both the claimant and defendant to agree to a binding early settlement, which,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 couldarguablyrequire 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. But as we'll see below, the early offers program will not increase the number of settlements reported. Secondly, Butthe 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 Rationales as Applied to Early Offers

How would the early offers proposal fare when judged by crucial criteria?

Deterrence

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.

Tort law's deterrence failings arise 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. But significant improvement can be achieved by changing both the requisite standard of care and the burden of proof in tort suits, as is done under the early offer plan. 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 precautions, as a practical matter there will surely be no evidence beyond a reasonable doubt of his or her gross negligence.

To illustrate this 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, points 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 inducing any party straying into the range of 5 or more to stand ready to pay any victim's 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.

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.

In that connection, one drafting device that might readily fit any state law, 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.

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

Testing Early Offers

Data

What will be the cost and other effects of an early offer program? An analysis of studies of actual court settlements and verdicts in medical malpractice cases in Texas and Florida, and other liability cases in Texas, 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 earlier, ()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 other 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.)

Medical Malpractice Cases (using $dollar value as of 2002)

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). 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.) 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)

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). 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 II 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 IIab3), with average litigation costs per case reduced respectively by $107,000 and $147,000 (IIab4).

Table II

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

Table III 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 (IIIab3), with average litigation costs per case reduced respectively by $82,500 and $130,500 (IIIab4). 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, ()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, 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 IV 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 (IVab2), with the percentage of claimants gaining in compensation rising from that low of 3 percent mentioned above to 29 percent (IVab3). 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 (IVab4), 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)

General Liability Claims (using 2007)

The pattern for all general liability claims, including those for product liability, paid under tort attracting early offers follows very closely that for medical malpractice cases. The general 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.

Some typical figures from the general 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); 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).

Table V

General Liability Not Covered by Workers' Compensation: Severe Nonfatal Injuries (822 of Whom Paid Under Tort).

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; (2) more payees and much higher savings if the comparison is based on the final reserve or actual payout; (3) the same faster payment; (4) much lower transaction costs; 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. But here too this is achieved at the price of more claimants forced to face dysfunctional tort law.

Table VI

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

Table VII

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

Table VIII

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

Table IX

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

Based On	Percent of Claimants to Whom an Early Offer is Made	Time Saved Under Early Offer per Claim	Average Total Cost Savings per Claim [N]	Litigation Cost Savings per Claim [N]	Reduction in Average Payment per Claim [N]
Initial Reserve	78%	2.4 years	$65,000 [23,256]	$23,000 [23,256]	$33,500 [22,058]
Final Reserve	98%	2.4 years	$146,000 [29,266]	$38,000 [29,266]	$44,000 [29,102]
Actual Payout	100%	2.4 years	$127,000 [29,803]	$57,000 [29,803]	$45,000 [29,780]

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