(.- '■>-' EXECUTIVE SUMMARY Task j^oree Product Liability Inal Report Council of Economic Advisers Office of Management &>Budget Department of Transportation Department of the Treasury Department of Labor Department of Housing & Urban Development Department of Health, Education & Welfare Small Business Administration Under Direction of The Department of Commerce ,t' ^;,V '■ Department of Justice The full 700 page report (order number PB-273-220) is available from the National Technical Information Service, 5285 Port Royal Road, Springfield, VA 22161 at $20 per copy. Please contact NTIS for bulk order discount. Consumer Product Safety Commission PB-273-220 Digitized by the Internet Archive in 2012 with funding from LYRASIS IVIembers and Sloan Foundation http://archive.org/details/executivesummaryOOunit THE UNDER SECRETARY OF COMMERCE Washington, D.C. 20230 PREFACE This report represents the culmination of over one year of effort by a Federal Interagency Task Force in the study of the topic of product liability. This endeavor has involved Federal agencies, independent contractors, private organizations, as well as con- sumers, manufacturers, distributors, retailers and insurers. While the report does not purport to answer all questions that have arisen in the field, it provides the most thorough analysis of problems in the product liability area that has been published in the United States. o It is important to emphasize the independent nature of this report. The Chairman of the Working Task Force group and his staff were not subject to any pressures "to find" in favor of one interest group or another — his basic policy guideline was to be objective, disclose the facts (or lack thereof) , and consider the competing concerns of all groups affected by the product liability problem. As Chairman of the Task Force, I wish to acknowledge the dedicated staff work at the Department of Commerce and the steadfast assis- tance given to my Department by the other member agencies. The agencies willingly gave the time of their talented personnel to this project. They assisted in the planning and development stage and reviewed and commented about drafts of each chapter. While not every comment of every agency has been incorporated, the result of the Interagency review process was to enhance the balance and objectivity of the report. While this report does not represent the views of the Administration it is submitted for its use as well as the use of Federal and state legislators, consumer, insurer and business groups and others who are interested in product liability problems. As anyone familiar with the problem knows, many solutions have been voiced by groups that have a strong self-interest in the topic. It is hoped that this report will allow all concerned to appreciate both the strengths and weaknesses of their respective positions and that it will lead to constructive solutions. EXECUTIVE SUMMARY FOR THE FINAL REPORT OF THE FEDERAL INTERAGENCY TASK FORCE ON PRODUCT LIABILITY THE NATURE OF THIS REPORT This report is the culmination of over one year of intensive study about the topic of product liability. It describes the causes, nature and scope of problems that have arisen in that area. Also, it analyzes potential cures or remedies that have been proposed as solutions for those problems. The topic of product liability deals with the full scope of how our legal and private insurance systems compensate persons who are injured by products. It defines the responsibility of retailers, distributors and manufacturers for products that cause injury. In 1975, an apparent problem arose in the field of product liability. A number of manufacturers and business periodicals alleged that product liability insurance had become unavailable or unaf fordable . After some initial investigation, a Federal Interagency Task Force was established by the White House to study the product liability problem and report back to it on or before December 15, 1976. A report based on that document, entitled "The Federal Interagency Task Force on Product Liability Briefing Report" was released to the public on January 4, 1977. The Briefing Report was based on preliminary drafts of three independent contractor studies commissioned by the Task Force as well as pre-December 1, 1976 data and information. The independent contractor reports were in the legal, insurance and industry areas. This report is based on the final versions of the contractor reports and a wide array of resources set forth at pp. 1-7 - 17. MAJOR IMPACTS OF THE PRODUCT LIABILITY PROBLEM Introduction Major impacts of the product liability problem are discussed in Chapter VI of this report. A very highly condensed summary of those findings is set forth here. The full discussion in Chapter VI shows that very little solid information is available with respect to some of these topics, e.g. , the number of product liability claims filed annually. Nevertheless, the report discusses those subjects in order to abate the growing amount of misinformation that has been set forth about product liability. Chapter III of this report sets forth detailed findings based on the industry contractor's independent survey of 337 corporations and 20 trade associations. These findings are summarized at pp. III-2 - 4. of this report and analyzed in that chapter. In Chapter II of this report we set forth our legal contractor's review of product liability data that have been derived directly from the legal system. The first section describes the very limited data that could be found about product liability claims and settlements from legal sources. See pp. II- ^3 - 47. Only the State of Connecticut and the Federal courts (both since 197^) collect these data. The second section sets forth the results of a product liability survey undertaken by the legal contractor. The contractor surveyed 655 appellate cases from eight representative states. See pp. 11-47 - 57. The data from Chapter II have been used, where possible, in describing major impacts. SUMMARY OF MAJOR IMPACTS OF THE PRODUCT LIABILITY PROBLEM Availability of Product Liability Insurance Total Unavailability There is no widespread problem of product liability insurance being unavailable. A few companies in the Task Force's target industries and other high-risk product lines are having difficulty obtaining product liability insurance. For some others, product liability rates would appear to be unaf fordable-- it has been persuasively argued to the Task Force that this is a practical equivalent of unavailability. Partial Unavailability Policy limitations . --Policy limitations that insurance companies have been willing to offer for products coverage do not appear to have changed significantly since 1971. Thus, insurance average number of pending claims appears substantially between 1971 and 1976. to have increased Compensation Obtained _by^ Persons Injured by Products A small percentage of persons injured by products file product liability claims. There is little information available regarding the compensation obtained by claimants, although, a preliminary closed claim survey suggests that a relatively high percentage receive their medical expenses, wage losses and other out-of-pocket expenses other than legal fees. A recent Insurance Services Office closed claim survey and other data sources suggest that less than 6 percent of product liability claims are litigated to a final court verdict. Of those who litigate cases, less than 50 percent recover any damages. The Relationship Between Product Liabil ity Claims and Product Accidents Limited data collected by our Industry Study suggest that any increase in product liability claims in the majority of our target industries is not due to an increase in the number of product-related accidents. This finding appears to be firmer in regard to workplace products than consumer products. Worker Compensation Systems Some persons injured by products in the workplace are supplementing their Worker Compensation recovery by the use of product liability suits. Worker Compensation insurers and self- insuring manufacturers or distributors are able to recoup some of their injury compensation costs through subrogation in product liability claims. These claims would appear to have only a very minor impact on the Worker Compensation system. Insurers stress that workplace accidents and resultant product liability claims have been an important cause of the product liability insurance rate increases that have been generated for industrial products within our target groups. Product Liability Loss Prevention The tort-litigation system and increased insurance costs have caused many manufactur products to devote more time and resources to loss prevention; however, a number of such bus done so. Limited data show that a much hi large, as opposed to small manufacturers, product liability loss prevention programs, appear to have supplied product liability advic to large insureds than to small ones. In executives interviewed by the industry con perceive a direct correlation between the product liability loss prevention programs and insurance costs. product liability ers of high-risk product liability inesses have not gher percentage of have implemented Also, insurers e more frequently addition, company tractor did not implementation of a reduction in THE PRINCIPAL CAUSES OF THE PRODUCT LIABILITY PROBLEM AND THEIR REMEDIES Introduction The Task Force's Briefing Report identified three principal causes of the product liability problem--liabil ity insurance ratemaking procedures, the tort-litigation system, and manufacturing practices--and their remedies. Little has changed in the intervening months to alter the Task Force's perspective about the principal causes. This report does not rank these causes in a hierarchical chain; data do not permit a conclusion that one cause is more important than the other. Lesser causes include inflation, consumer and worker awareness of their legal rights, increases in the number and complexity of products, and product misuse. There is a tendency for each group that has a special interest in the product liability problem to assert that "the cause" lies in conduct unrelated to their own group. It is the view of the Task Force that the product liability problem is based on a confluence of causes and that it will only be resolved if each cause is properly addressed. For the convenience of the reader, we have summarized each cause and then remedies that may resolve it. Analysis (See pp. 1-21 - 31 ) Cause 1: Liability Insurance Ratemaking Procedures In the overwhelming majority of cases, insurance company sources did not rely on data to support premium increases that occurred in the 197^-1976 period. Nevertheless, a number of representatives from the insurance industry have stated that product liability rates were set too low in the 1971-197^ period. Insurers argue that in the early 1970's they were not aware that product liability would become a substantial problem. The Task Force's Legal Study showed that strict product liability first came into the law as an important force in 1965. By 1971 and 1972, a number of major states had adopted strict product liability theories. Nevertheless, this did not alter the product liability insurer practice of combining product liability coverages in Comprehensive General Liability packages. This factor, along with uncertainties in insurer reserving practices, makes it almost impossible to obtain an accurate profit and loss picture for product liability insurance. Thus, we have been unable to make a finding as to whether product liability premium increases were, as a whole, justified in the 1974-1975 period. Circumstantial evidence suggests that some insurers engaged in "panic pricing." It would appear that some insureds may be paying a higher premium than data would justify, and others may be paying a lower premium. A full discussion of this cause will be found at p. 1-21. Chapter V describes, in detail, the pricing process, claims experience, and the financial situation in the insurance industry. Remedies that improve ratemaking procedures Premium, loss and claim data should be collected in a manner that is as statistically sound and reliable as possible for ratemaking and other purposes. An improved data base is an essential first step in the solution of product liability problems--it will permit examination of actual trends in product liability claims and costs to insurers. Product liability insurance rates and premiums should be more closely related to statistical assessments of product risks. Rates for most product liability insurance risks are based on subjective estimations of anticipated loss costs. Consequently, it is not possible to draw direct correlations between premiums and product risks. Nevertheless, it may be difficult to collect sufficient data for ratemaking purposes for some product classes. To overcome this problem, consideration should be given to expanding those product classes where experience is generated slowly. Product liability insurance rates and premiums should be monitored to ensure that they are fair, non- discriminatory and reasonably related to product risk. In the area of product liability insurance, consideration should be given to targeting review of those rate increases which exceed a threshold amount. Such a procedure would focus regulatory attention on those rates and premiums which have the most significant adverse effect on business. Such monitoring, would also promote greater uniformity among rates charged to firms producing products with similar risks. In order to achieve this goal, it is essential that state insurance regulators have access to a data base which includes nationwide experience on all product liability claims. 4. There is a need to promote greater financial disclosure and accountability in product liability insurance. It would be constructive if a system were devised whereby insurers would report all product liability experience as a separate line on their annual report filed with state insurance departments. This would permit examination of aggregate product liability experience of insurers. Also, it would appear to be both in the insurers' and the public interest for insurers to provide information that would enable regulators and others to get a more accurate assessment of the insurers' complete financial situation regarding claims and reserves. 5. It may be necessary to conduct further studies on reserving practices, including evaluation of methods of estimating reserves, the disposition of the excess of reserves that are not ultimately paid to claimants and related claim expenditures, and the appropriateness of existing loss development and trend factors. The basis for these conclusions and details of insurer- related remedial proposals are set forth in Chapter V of this report. Cause 2: Manufacturing Practices The data suggest that more manufacturers are giving greater attention to product liability loss prevention techniques. Nevertheless, some companies--especially some smaller ones--are unable to devote adequate resources to product liability loss prevention programs and do not receive assistance from their insurance companies in regard to this problem. In the long run, this leads to product liability claims, greater insurance and other costs for the manufacturer and the product user. Details with respect to this cause are set forth at pp. 1-24 - 26. Remed ies that address unsafe manufacturing practices 1. Any government pooling or reinsurance mechanism which allows a subsidy to individual insureds should include a provision that will provide product users with the assurance that the program's participants utilized reasonable product liability loss prevention techniques. See p. VII-175. Those charged with the responsibility of approving insurance rates should give careful consideration to developing a technique whereby insurers would build into product liability insurance rates an appropriate discount when insureds used proper product liability prevention techniques. See p. VII-177. 3. While insurers are in an excellent position to assist individual insureds in implementing sound product liability loss prevention programs, there are serious problems with making a requirement of this type mandatory. If this approach were taken, an appropriate surcharge might be added to product liability insurance which would allow a mandate of this type to be implemented. See p. VII-180. 4. Under existing legislation, it would be possible to ask an appropriate Federal agency to coordinate product liability risk information for a variety of agencies and make it available to manufacturers that could benefit from it. See p. VII-183. It is less certain that government personnel should engage in providing direct technical assistance to manufacturers in the area of product liability loss prevention techniques. See pp. VII-185 - 186. Cause 3: Uncertainties in the Tort-Litigation System The tort-litigation system does not, in general, impose absolute liability on manufacturers of products. In many situations, a jury is asked to balance the economic burden on the manufacturer to produce a safe product against the probability that the product may cause injuries and the severity of those injuries. On the other hand, some appellate courts do not view product liability law as a means of apportioning responsibility between parties, but as a compensation system. Some decisions from these courts come very close to holding that the tort- litigation system should provide a recovery when persons are injured by products. While these cases appear to be relatively few in number, insurers have regarded them as quite important in their pricing practices. If one state court reaches a decision of this type, others could follow it in the future. It is almost impossible to predict when courts will change product liability rules and broaden the exposure of insureds. The instability in product liability law appears to have increased defense and investigation costs . A detailed discussion of how product liability law rules vary (in five important areas) is set forth at pp. 11-1 - 43. Remed ies That May Relieve Uncertainties in the Tort-Litigation System Introduction Individual state modifications of the tort system may not alleviate the uncertainty problem. This is because most products are distributed in a large number of jurisdictions. Thus, product liability insurance rates are made on a nationwide, not on a local basis. Where product liability insurance costs are passed on in the price of a product, consumers in some jurisdictions may pay for legal interpretations that are rendered in others. Among the primary areas of uncertainty in basic product liability law are rules relating to the responsibility of the manufacturer in designing its product and warning about hazards connected with that product. See pp. II-1 - 27.. 1-24. We have concluded that this cause of the product liability problem can only be addressed by a careful review of product liability law as a whole. In Chapter VII, this report addresses a wide variety of these topics and suggests ways in which this cause of the product liability problem might be reduced or eliminated. Basic considerations that were evaluating the remedies are set forth at p Chapter VII itself is summarized at p. VII-242 et. report . utilized in VI I -2 et seq . seq of this The Task Force did not decide whether uniform rules should be formulated at the Federal or state level; rather, it has left that issue for policymakers to determine in light of this report as well as other information that is available on the topic of product liability. While uniform product liability rules should be developed, it also will be useful to engage in the further study of the utility of a no-fault compensation system. While this report does not resolve the ultimate issue of whether no-fault should or should not be used in the area of product liability, it defines the issues that must be resolved before a decision of that kind can be made. While the Task Force has not determined whether this study should be undertaken at the Federal or state level, it suggests that duplicative study costs be avoided. Major issues which must be resolved in the development of uniform product liability rules 1 . The Basic Standard of Responsibility The basic standard of responsibility for product liability should separately identify problems relating to defects in construction from defects in design and defects based on a failure to warn. Our discussion of the details of this issue are set forth at pp. VII-15 - 18 of this report. 2. Modification of Rules Relating to the Age of Products There is some merit in the suggestion that the tort- litigation system should set forth a period of time where a manufacturer's duty to product users terminates. On the other hand, fixed statutes of repose can work an unfair hardship on injured parties. This report attempts to balance the interests of consumers and manufacturers in this difficult area. The details of our conclusions are set forth on pp. VII- 18 - 28. 3. A Duty Limitation for Unavoidably Unsafe Products Some products are unavoidably unsafe in their normal use. While this report suggests that manufacturers should not be deemed liable for injuries caused by unavoidably unsafe products, shielding the manufacturer may leave a seriously injured consumer without compensation. Also, the current approach to the topic subjects manufacturers to considerable defense costs. Long-term resolutions in this topic area seem particularly suited to more major modifications in tort law. See pp. VII-29 - 32. 4. The Development of Predictable Legal Standards for Product Liability Cases a. State-of-the-art defense It would be inadvisable f / product liability law to adopt a state-of-the-art defense based on standards customarily used in an industry. On the other hand, courts that deem the technological state-of-the-art totally irrelevant fuel the uncertainty in product liability law. This report suggests an approach that would be fair to manufacturers without permitting them to control product standards used in litigation. See pp. VII- 33 - 37. b. Compliance with standards defense legislative or administrative There might be some incentive towards risk prevention if a manufacturer were given a tort law benefit on the basis of its compliance with appropriate legislative or administrative standards. Nevertheless, a loose application of that benefit might produce the opposite result. This report suggests a method whereby certain standards would be deemed to create a rebuttable presumption that a product conforming to it was reasonably safe in regard to that specific standard. See pp. VII-37 - 42. Regulation of expert testimony Courts might make wider use of court-appointed experts under a procedure similar to that outlined in Federal Rule 706. When experts are utilized, the court might hold a preliminary hearing to test the qualifications of experts under a procedure outlined in this report at pp. VII-42 -46. Arbitration may present the best method for regulating expert testimony. See pp. VII-229 - - 239. Modification of rules relating to conduct on the part of product users In some situations, it may be appropriate for courts to impose a duty on manufacturers to warn about potential misuses of a product. While it is just to permit manufacturers to know the exact nature and extent of this duty, there does not appear to be a readily available neutral source that could formulate that responsibility. The report shows how a comparative responsibility system might balance the interests of both consumers and manufacturers in cases of product misuse. See pp. VII-46 - 55. Proposed modifications of some basic product liability rules that relate to damages Modification of rules relating to damages have the potential of providing rationality and stability in the tort-litigation system. See pp. VII-56 - 84. a. Attorneys' Fees Defense costs, rather than the contingent fee, have directly affected the cost of product liability insurance. Remedies that foster settlement and decrease the need for litigation reduce this cost. See p. VII- 62. The contingent fee, on occasion, may tempt an attorney to bring a frivolous suit. To alleviate this problem, it may be more appropriate to penalize those specific attorneys by imposing sanctions against them, than it is to abolish the contingent fee system. See p. VII-62. The greatest potential abuse in the contingent fee system appears to arise in some high verdict cases. A sliding scale contingent fee system may correct this abuse, but it must have plasticity to account for cases where attorneys are deserving of a fee that is above the scale. See pp. VII-59 - 62. b. Regulation of Damage Awards for Pain and Suffering Value judgments abound in regard to the question of whether common law rules for damages for pain and suffering should be changed. See pp. VII-64 - 69. This report suggests that approaches that limit (rather than eliminate) damages for pain and suffering have the greatest potential for balancing the variety of considerations that must be evaluated in formulating such a change. If the change were applied in product liability alone, it should be specially justified. c. Modifications of the Collateral Source Rule Proposals to modify the collateral source rule potentially affect all of tort law. The area of product liability is one in which a selective abolition of the collateral source rule might be justified. This should occur where product liability law is not based on fault, but on principles of "risk distribution" or an "enterprise theory of liability." Very careful consideration should be given to the scope of any modification of this rule. See pp. VII-70 - 75. d. Restrictions on Awarding Punitive Damages A procedure that may mitigate unfairness regarding punitive damages in the area of product liability is to have the judge rather than the jury determine the amount of punitive damages. In making this determination, the judge could consider, among other factors, the amount of punitive damages the defendant has already paid. The jury would still determine whether the damages should be awarded. For details see pp. VII-75 - 80. e. Replacing Lump Sum Damages with a Periodic Payment System It would be useful to obtain more precise information as to whether the potential savings connected with a periodic payment system would be cancelled out by administrative costs connected with monitoring or modifying the basic fund. This system could be more easily utilized if it were adopted with arbitration or a no-fault compensation system. See VII-80 - 84. Major Issues Involving Third-Party Claims and Workplace Injuries Introduction According to the recent Insurance Services Office Closed Claim Survey, workers injured on the job are involved in 11 percent of product liability incidents resulting in claim payment. However, these incidents account for 42 percent of total bodily injury payments. Because many workplace injury claims were preceded by Worker Compensation payments to an injured party, these claims are particularly susceptible to duplication of effort and transaction costs. The Task Force considered a number of remedies that involved the potential shifting of costs among manufacturers, employers and employees. Some of the considerations in this area overlap with problems relating to cost shifting among multiple parties. In general, the report notes that the principle of contribution among defendants based on the relative responsibility of each may be a useful one. It may be inapplicable in certain situations. See pp. VII-85 - 87. Contribution and Indemnity as Applied to Injuries in the Workplace An important remedial proposal that has the potential of reducing product liability premium costs for manufacturers of industrial equipment is to allow them contribution claims against negligent employers where their negligence contributed to an employee's product-related workplace accident. While this remedy also has the potential of reducing the number of product-related workplace accidents, a negative aspect of it is that it would increase transaction costs. The remedy is a complicated one with a number of alternative approaches and implications. The reader is directed to pp. VII-89 - 95 for detailed information on the subj ect . Prohibition or Modification of Subrogation By Worker Compensation Carriers It would appear reasonable to reduce subrogation claims by the amount an employer was at fault in causing an injury to a worker. For a discussion of the variety of considerations involved with regard to the benefits and shortcomings of this remedy and how it might be implemented, the reader is directed to p. VII-95 - 99. Validation of Hold Harmless Agreements It might be appropriate to legislatively validate hold harmless clauses where the buyer of the product requested that it be delivered without safety features, altered it or failed to maintain it properly. On the other hand, hold harmless clauses can be abused and rules regarding them should take this factor into account. Assuming both parties who sign the clause are insured, legislative validation of hold harmless clauses will have little effect on product liability rates unless insurer procedures take the existence of hold harmless clauses into account. For details about the benefits and shortcomings of proposals connected with hold harmless clauses, see pp. VII-99 - IO3. Worker Compensation As A Sole Source Of Recovery-- Abolishing the Worker's Third-Party Claim The cost effectiveness and potential impact of Worker Compensation as a sole source for product liability recovery have made it an attractive one for those considering product liability reform. It would appear that it should be considered along with more general Worker Compensation legislative reform. In that context, estimates can be made about the overall cost of this proposal . If this reform is implemented, the worker must receive an appropriate benefit for foregoing his third-party claim. Also, the manufacturer of a defective product should contribute to the worker's award. A procedure for accomplishing this goal is post- accident arbitration. Very careful thought must be given to developing the details of that procedure. This overall remedy is a complex one with many competing considerations, and the reader is directed to pp. VII-103 - 112 for a discussion of the subject. Alternative Methods for Compensating Consumer Product Injuries : No-Fault Compensation Systems and Arbitration No-Fault Compensation Systems Unless the tort-litigation system can be stabilized, pressures toward developing a no-fault compensation system in the area of product liability will continue. These pressures may accelerate if Worker Compensation is made an exclusive remedy for product-related injuries that occur in the workplace. Nevertheless, pure or modified no-fault plans do not represent an immediate solution to the product liability problem, and these pressures may be directed toward a practical impossibility. On the one hand, modified no-fault plans do not appear to be responsive to those pressures because they leave too much to chance. On the other hand, it is uncertain whether a practical pure no-fault first-party system can be developed -- a system both large and small private insurers would be willing to underwrite and service at insurance rates that would be available and affordable for large and small businesses. It would be useful to conduct additional research to determine whether a practical working model could be developed that would : (1) (2) (3) (4) Resolve problems related to coverage. Resolve problems of causation and other individualized issues that have a special importance in the area of product liability. Resolve whether a practical product liability no-fault system could be formulated that did not require the formation of an independent government agency. Resolve how the system could place proper incentives for risk prevention on manufacturers whose defective products caused injury. No-fault systems in product liability present a very complex topic. For a discussion of the topic and an explanation of these specific issues, see pp. VII-202 - 239. Arbitration Arbitration of product liability is a remedy worth further consideration. Of the variety of forms of arbitration, preliminary indications suggest that compulsory non-binding arbitration is the most appropriate for product liability cases. Preliminary indications also suggest that product liability arbitration is likely to bring an overall reduction of insurance costs only if larger as well as small claims are included within its scope of coverage. Difficult value judgments arise in this area because a fundamental of American jurisprudence, the jury, is being supplanted by a smaller and more specialized group. At this time, there is no conclusive proof that the process would be more predictable, reduce costs, or expedite the judicial process. Nevertheless, our analysis indicates that a properly constructed arbitration program has an excellent potential for achieving these goals. See pp. VII-229 - 239. NON CAUSE-RELATED REMEDIAL PROPOSALS MODIFICATION OF PRODUCT LIABILITY INSURANCE MECHANISMS Introduction It has been alleged that certain modifications of product liability insurance mechanisms will allow the tort-litigation system to function reasonably well and eliminate or modify the need to enact tort law modifications that would reduce the liability exposure of defendants. These mechanisms do not always deliver what they promise, and the reader is directed to our detailed discussion of this entire subject beginning at p. VII- 115. Residual Level? Insurance Market Mechanisms -- At The State or Federal While it might be worthwhile to have a variety of product liability residual insurance market mechanisms explored at the state level where their viability could be tested (the need for such mechanisms may also vary in different states), the Task Force's contractor reports strongly suggested that the very nature of product liability insurance indicates that these mechanisms must be implemented at the Federal level. This decision, while rooted in practicality, has very serious policy implications and the reader is directed to p. VII-115 - 118 for a detailed consideration of this issue. Residual Insurance Market Mechanisms -- Under What Circumstances Should They Be Subsidized? As a short-range remedy, residual product liability insurance market mechanisms might have to be subsidized if they are to have any substantial effect on product liability insurance rates. It is important to limit subsidization to insureds who face unavailability or major unaf fordabil ity problems. Otherwise, the program may establish a precedent for providing government assistance to anyone who suffers from high insurance costs. If it is necessary to subsidize residual product liability mechanisms, it would seem preferable to use public funds rather than compel stronger liability lines to support weaker ones. Our discussion about the details and the circumstances as to whether a subsidy is justified is set forth at p. VII-119. Assigned Risk Plans The fact that classic assigned risk plans do not include loss-pooling mechanisms, plus problems relating to eligibility of insureds and allocations of assignments to insurers, seriously compromise the potential value of this remedy in the area of product liability. See pp. VII-127 - 130. Pooling Mechanisms It is worthwhile to explore whether a voluntary pooling mechanism would be practicable before utilizing any mandatory pooling system. Private insurers should give further consideration to the formation of voluntary pools, and appropriate government agencies might consider developing guidelines to assist in that process. Our discussion outlines some of the major issues that persons forming a mandatory product liability pool must resolve. The lack of specific data about the effectiveness of such a device in the area of product liability made a complete evaluation of this remedy difficult. The topic of pooling is a very complex one, and the reader should consult pp. VII-132 - 142. Federal Insurance and Reinsurance It would be better to attack the causes of the overall product liability problem than to establish a program where the Federal government markets and sets rates in the area of product liability insurance. See p. VII-I43. The product liability problem is a fluid one, and the need for such a program could arise in the future. The National Swine Flu Immunization program does not appear to be an apt analogy for industries suffering particularly severe insurance af fordability problems. Federal reinsurance is preferable to direct Federal insurance -- reinsurance would involve less government activity in an area currently being handled by the private insurance industry. Since Federal funds would have to be used to subsidize this mechanism (or at least be put at risk), strong policy reasons would have to support the implementation of such a program. See p. VII-II9. The issues of Federal insurance and reinsurance are extremely complex, and the reader is directed to p. VII-143 - 153. Captive Insurance Companies Captive insurance companies provide a potential means of relieving availability and af fordab il ity problems for some product liability insureds. A basic unanswered question is whether the device can be utilized by businesses that are suffering these difficulties. The answer to this question depends, in part, on trade associations' willingness and ability to develop captives that would meet basic insurance regulatory requirements. Charter requirements could be drafted that would encourage the formation of adequately capitalized small business requirements regarding Federal income tax deductions for parent corporations that utilize captive insurance companies. Details on this complex subject appear at p. VII-154 - 167. Structured Self-Insurance Programs Tax incentives that encourage the development of structured self-insurance programs may benefit small businesses which have insufficient capital to form captive insurance companies. Self- insurance programs also may encourage product liability loss prevention, increase the capacity of the insurance industry to provide product liability coverage, and prevent situations from arising where a viable product liability claim against an uninsured small business cannot be enforced. On the other hand, the mechanics of the remedy must be carefully designed in order that it will not be subject to abuse. It may be appropriate for the Department of the Treasury to undertake a full tax evaluation of alternative forms for this particular remedy. Details about this remedy appear at p. VII-167. Remedies Designed to Eliminate Unsatisfied Judgments Our data do not show that product liability judgments are highly likely to go unsatisfied. Therefore, neither mandatory product liability laws nor unsatisfied judgment funds may be necessary at this time. See p. VII-172 - 187. If there were relatively few cases where judgments against product manufacturers were defaulted, an unsatisfied judgment fund would be preferable to a mandatory product liability insurance law. If the problem of default judgments in the product liability area became more widespread, mandatory product liability insurance would have to be given greater consideration. From the point of view of the consumer, it is unreasonable to permit a manufacturer to sell products when he is unable to respond in damages if those products prove defective and injure product users. For a discussion of the problems relating to both unsatisfied judgment funds and mandatory product liability insurance, see pp. VII-175 - 187. PENN STATE UNIVERSITY LIBRARIES ^^B llltlllllliilili ■