Making Economic Sense
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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