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Advancing Austrian Economics, Liberty, and Peace

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Making Economic Sense
by Murray Rothbard
(Contents by Publication Date)

Chapter 19
Roots of The Insurance Crisis

The latest large-scale assault upon property rights and the free market comes from the insurance industry and its associated incurrers of liability: particularly groups of manufacturers and the organized medical profession. They charge that runaway juries have been awarding skyrocketing increases in liability payments, thereby threatening to bankrupt the insurance industry as well as impose higher costs upon, or deprive of liability insurance, those industries and occupations that juries have adjudged to be guilty. 

In response, the insurance and allied industries have demanded legal caps, or maxima, on jury awards, as well as maximum limits on or even elimination of, legal fees, especially contingency fees paid to lawyers by plaintiffs out of their awarded damages.

Before analyzing these measures, it must be pointed out that there may well be no crisis. Critics of the insurance industry have pointed out that insurance companies have refused to reveal the figures on verdicts and settlements from year to year, or to break them down by industry or occupation. Instead, the insurance industry has relied solely on colorful anecdotes about bizarre individual awards--something they would scarcely do in running their own business.

Also, the critics have demonstrated that average insurance payments have not advanced, in the last twenty-five years, much beyond the rate of inflation. So there may well be no insurance crisis at all, and the entire hysteria may be trumped-up to gain benefits for the insurance industry at the expense of victims of injury to person or property who are entitled to just compensation.

But let us assume for the sake of argument that the insurance crisis is every bit as dramatic as the industry says it is. Why are the rest of us supposed to bail them out? Insurance companies, like other business firms, are entrepreneurial. As entrepreneurs, they take risks; when they do well and forecast correctly, they properly make profits; when they forecast badly, they make losses. That is the way it should be. They should be honored when they make profits, and suffer the consequences when they make losses. In the case of insurance, companies charge premiums so as to cover, with a profit, the liabilities they expect to pay. If they suffer losses because their entrepreneurship is poor, and payments are higher than premiums, they should expect no sympathy, let alone bailout, from the long-suffering consuming and taxpaying public.

It is particularly outrageous that the insurance companies are trying to place maximum limits on jury awards and on legal fees. It is everyone's right as a free person to hire lawyers for whatever fee they both agree upon, and it is no one's right to interfere with private property and the freedom to make such contracts. Lawyers, after all, are our shield and buckler against unjust laws and torts committed against us, and we must not be deprived of the right to hire them.

Furthermore, the much abused contingency fee is actually a marvelous instrument which enables the poorest among us to hire able lawyers. And the fact that the attorney depends for his fee on his "investment" in the case, gives him the incentive to fight all the harder on behalf of his clients. Outlawing contingency fees would leave attorneys only in service to the rich, and would deprive the average person of his day in court. Is that what the insurance industry really wants?

As for jury awards, do the insurance industry and organized medicine really wish to destroy the Anglo-American jury system, which for all its faults and inefficiencies, has long been a bulwark of our liberties against the State? And if they wish to destroy it, what would they replace it with--rule by government? As long as we keep the jury system as the arbitrator of civil and criminal cases, we must not hobble its dispensing of justice--especially by senseless quantitative caps that simply proclaim that justice may only be dispensed in small, but not adequate, amounts.

None of this means that tort law itself is in no need of reform. The problem is not really quantitative but qualitative: who should be liable for what damages? In particular, we must put an end to the theory of"vicarious liability," i.e., that people or groups are liable, not because their actions incurred damages, but simply because they happened to be nearby and are conveniently wealthy, i.e., in the apt if inelegant legal phrase, they happily possess "deep pockets."

Thus, if we bought a product from a retailer and the product is defective, it is the retailer that should be liable and not the manufacturer, since we did not make a contract with the manufacturer (unless he placed an explicit warranty upon the product). It is the retailer's business to sue the wholesaler, the latter the manufacturer, etc., provided the latter really did break his contract by providing a defective product.

Similarly, if a corporate manager committed a wrong and damaged the person or property of others, there is no reason but "deep pockets" to make the stockholders pay, provided that the latter were innocent and did not order the manager to engage in these tortious actions. 

To the extent, then, that cries about an insurance crisis reflect an increased propensity by juries to sock it to "soul-less corporations," i.e., to the stockholders, then the remedy is to take that right away from them by changing tort law to make liable only those actually committing wrongful acts.

Let liability, in short, be full and complete; but let it rest only upon those at fault, i.e., those actually damaging the persons and property of others.

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