CLEMSON, SC, August 20, 2011—With Texas Governor Rick Perry in the GOP race, tort reform may once again be cast into the national spotlight.
Perry recently signed into law a tort-reform bill designed to eliminate frivolous lawsuits in Texas. Tort reform, once a very popular topic of political debate, has faded into the background of the nation’s economic problems.
Many mistakenly believe that Tort Reform is too complicated to understand.
Imagine this: Emily, whose right kidney has failed, goes to the hospital for a transplant. Instead of replacing her right kidney, the surgeons mistakenly replace her left kidney. Left with her failed kidney and an uncertain transplant, Emily sues for medical malpractice. After months of costly litigation, Emily’s original damage claims are swallowed up by the cost of her legal fees.
Should she, the injured party, bear the costs of litigation?
This example demonstrates the problem of the “American Rule,” which is nearly universal in the American legal system with regard to torts. The American Rule requires each party to pay its own litigation costs, regardless of outcome. Most other Western democracies use the “English Rule,” or “loser pays,” which quite literally means that the loser pays the costs of litigation for all involved parties.
The American Rule has created a very dangerous economic environment for businesses and industries. It has promoted a dynamic in which companies are threatened with lawsuits by “greedy” individuals in unfounded “nuisance” or “frivolous” cases. If it goes to court, the company will win, but at the cost of hundreds of thousands in lawyers’ fees. Defendants who win frivolous lawsuits end up “losing” anyway, because of the costs associated with defending themselves. Consequently, companies often settle frivolous lawsuits out of court to avoid these costs.
Because of this dynamic, it is argued by loser-pays proponents that frivolous lawsuits not only “clog up the system,” producing longer lines and litigation periods for everyone else, but also cost businesses billions every year. Indeed, US tort costs are far higher than those of other countries. According to several sources, Americans spend less on new vehicles every year than they do on the indirect costs of tort litigation.
Alaska, unlike the other states, has been under a type of loser-pays system since its inception. Alaska has nearly half the national average number of tort cases per capita.
If instituted, loser pays would drastically reduce the number of frivolous cases. It would also be fairer to those with legitimate cases: They would be reimbursed for their litigation costs. Because individuals with strong cases who may not have been willing to pay litigation costs would now be able to file suit, it would provide an additional incentive for businesses to be honest, careful, and safe.
If someone is genuinely harmed and needs legal help to collect damages, shouldn’t that cost be the injurer’s responsibility? Shouldn’t the tort system, with its goal of restoring injured parties to their pre-injury state, actually restore them? This argument makes a lot of sense.
Though it seems the fairest option, there are a few reasons why loser pays has not been implemented throughout the US.
Opponents of loser pays frequently pose the question, “How many frivolous cases are there, actually?” There is no clear answer to this, as defining an “unmerited” or “frivolous” lawsuit isn’t easy. In addition, determining the number of frivolous cases or threats of suit that are settled out of court is nearly impossible.
Skeptics assert that loser pays can actually backfire by restricting court access to lower-income individuals. They claim that a loser-pays policy would decrease both frivolous and meritorious cases. This is an especially strong argument when we consider some of the more “unfair” rulings of US courts: If the verdict isn’t guaranteed, the injured plaintiff could end up paying hundreds of thousands in court costs, due to legal facts that could come to light later, the whims of the court, or new judicial precedents. In the words of attorney H. Christopher Coburn, “Only the extremely poor or extremely rich could run the risk of going to trial in many cases if there were (Loser Pays), whereas insurers could roll the dice every time.”
Could litigation insurance be the answer? Most of the arguments against loser pays are theoretical. Some answers are being provided by observing nations in which loser pays is already the rule. According to the Wall Street Journal, for instance, “Canada, the U.K. and Germany use a system of insuring legal expenses so that those with modest resources can still sue. Individuals can buy such insurance as an add-on to their homeowners’ policies.”
With “after the event” insurance, a plaintiff purchases coverage at a higher premium after the incident has occurred. This type of insurance could give insurance companies the power to be “gatekeepers” to the courts. However, insurance companies would likely only refuse insurance when plaintiffs are likely to lose, thus reinforcing the original intent of the loser pays system: curbing frivolous lawsuits. According to Richard Nagareda, a Vanderbilt University Law School Professor, “Insurance definitely strengthens the argument for loser pays.”
The outcome of the “loser pays,” or “English Rule” debate in the United States will have a substantial impact on tort cases. In my opinion, coupled with litigation insurance, the pros of such a system would outweigh the cons. Loser pays makes sense, will improve the efficiency of tort law, and promises fairer outcomes in tort cases. Under loser pays, if Emily won, she would actually be compensated for all of damages inflicted by her physicians. If she lost, all of her litigation costs, and those of the defendants, would be covered by her insurance.
Will Perry, after having signed loser pays in Texas, push for federal tort reform? If so, what role will State’s Rights play in the debate?
John Paul Cassil studies Management/Entrepreneurship and Political Science at Clemson University. A former U.S. House of Representatives Page, Cassil has since worked on conservative campaigns and in Congress for Congresswoman Foxx.
Cassil is the Managing Editor of the Tiger Town Observer, Clemson’s Conservative Journal of News and Opinion. He regularly speaks about activism at national conservative conferences.
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