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Replacing Tort Liability with Private Insurance
Some academic economists favor the approach of eliminating tort liability, except perhaps for injuries between "strangers" (such as injuries from automobile accidents).(1) Potential victims would rely to a greater extent on their own insurance for protection against injury risks. In cases in which potential injurers could cost-effectively reduce those risks, they would be motivated to do so to the extent that they could gain a marketing advantage--by advertising the safety of their products or by offering injury compensation in a warranty, purchase contract, or the like.(2) Some increases in government regulation might also occur.

From the standpoint of efficiency, eliminating tort liability would have several desirable implications, although it would fall short of the ideal. It would give potential victims the incentive to take all cost-effective precautions and to obtain the optimal amount of risk spreading through insurance or other compensation contracts. And provided that the insurance and contract terms were clear enough, the amount of litigation would decline significantly, reducing both transaction costs and the inefficiencies associated with erroneous judgments. However, this approach would weaken incentives for potential injurers to exercise cost-effective forms of care (at least those not required by regulation) and could increase inefficiencies associated with imprecise or too-stringent regulation.

From the standpoint of equity, the implications of shifting primary responsibility for injury costs to victims could be considered both good and bad. Lower liability-related costs for businesses should lead to lower prices for many consumer goods and services and reduce the extent to which consumers are implicitly forced to pay for unwanted insurance for nonpecuniary damages. But victims would usually get compensation only for pecuniary losses, and those who had not bought insurance might get no compensation at all. Moreover, injurers would pay compensation only to the extent that they had contracted in advance to do so, and in cases of subtle, delayed, or indirect harm, some injurers' roles might go undetected because few, if any, plaintiffs' attorneys would be working to identify the causes of injuries.

A narrower variant of the same basic idea would eliminate liability only for those products (or features of products) that have been certified as safe by a federal body, such as the Food and Drug Administration, the National Highway Traffic Safety Administration, or the Consumer Product Safety Commission. Many of the arguments for and against completely eliminating tort liability would apply here as well, at least qualitatively. For example, the same efficiency and equity implications would follow from making consumers bear the risk of using the relevant products. The main immediate difference from the standpoint of efficiency is that focusing on products that satisfied federal safety regulations would presumably limit the extent of any increase in injury risks. From the perspective of equity, removing the threat of liability from firms whose products met federal standards might be particularly appropriate. Over time, however, this variant could result in a greatly expanded role for federal regulators--with potentially significant consequences for both efficiency and equity--as firms and industries seeking to exempt their products from liability pushed to broaden the scope of federal safety standards.

Replacing Tort Liability with Public Insurance
Another variant of the previous approach would eliminate (or greatly restrict) tort liability as described above but replace it with a public insurance system, like the present workers' compensation system or the fund for vaccine victims. In this option, victims would receive compensation from a government fund according to a fixed schedule based on the type of injury they had and other relevant factors.(3) To finance the fund, businesses would pay "experience-rated" premiums that reflected the previous record of injuries associated with their products. (Companies would ultimately pass on the costs of those premiums to their customers, workers, or investors in the form of higher prices, reduced wages, or lower returns on capital, respectively.) Depending on the details of the proposal, nonprofit organizations and state and local governments might also participate. But cost considerations would probably make it impractical to rate and collect premiums from individuals, so the injuries they caused might still be handled through the tort system.

Proponents of this variant hope that by standardizing the amount of compensation awarded for similar injuries, this approach would cap or reduce punitive damages and compensatory awards for pain, suffering, and other nonmonetary losses. The effects of reducing such nonpecuniary awards would be qualitatively similar to (though not as large as) the effects of simply eliminating tort liability. Again, potential victims would have better incentives to take efficient precautions, and risk would be distributed more efficiently (because consumers would not be implicitly paying for so much unwanted insurance for nonpecuniary damages). However, some injurers might not face sufficient penalties, and some victims might not receive full compensation for their pain and suffering.

Other implications of the public insurance approach flow from its shift away from litigation to an administrative mechanism. For example, one key argument made for the approach is that it would significantly reduce transaction costs from the 54 percent estimated under the current tort system. (However, transaction costs would probably remain higher than the 20 percent estimated for state workers' compensation programs because of higher costs for such things as determining which injuries were compensable and associating injuries with particular injurers.) Conversely, one argument against public insurance is that the schedule of damages might not do justice to individual cases. Another is that in some cases of subtle, indirect, or delayed harm--such as cancers with long latencies caused by exposure to a particular chemical-- victims might not recognize that they had suffered a compensable injury, since there would be few, if any, plaintiffs' attorneys working to identify injury causes. In addition, this option would represent a sharp departure from current practice for injuries that are judged under a negligence standard. Providers of medical care, for example, are now held liable only for injuries considered to result from negligence; but with this option, all compensable injuries to patients under their care would be reflected in their assessed premiums for the public fund.

The incentives for potential injurers to exercise care might be more or less efficient under a public insurance program than they are now. For a firm to be encouraged to take all cost-effective precautions, its assessed premiums would need to reflect all of the effects of its actions on expected future injury costs, and the experience rating would probably not be that thorough. However, even if the new incentives fell on the low side, the error could be smaller than it is now if current incentives are inefficiently high because of mistaken or excessive trial awards.

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(St. Paul, Minn.: West Group, 1999), p. 926.
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