Ct.bt* ' yr/o-jM / Interagency Task Force on Product Liability PB 263 601 Mi PRODUCT LIABILITY: Final Report of the Legal Study — Volume I ITFPL-77/02 UNDER DIRECTION OF U.S. DEPARTMENT OF COMMERCE KJUl U.S. DEPARTMENT OF COMMERCE National Technical Information Service 6285 Port Royal Road Springfield, VA 22161 BIBLIOGRAPHIC DATA SHEET 1. Report No. ITFPL-77/02 3. Recipient's Accession No. PB-263 601 -Vol I 4. Title and Subtitle PRODUCT LIABILITY: LEGAL STUDY 5. Report Date January 1977 7. Author(s) The Research Group, Inc 8. Performing Organization Rept. No. :iOFBrrj3fi/Task/Worlc Unit No. ility 9. Performing Organization Name and Address The Research Group, Inc Charlottesville Virginia Interagency Tas on Product Li a.Di 11. Contract/Grant No. 6-36250 12. Sponsoring Organization Name and Address U.S. Department of Commerce Interagency Task Force on Product Liability Room 2898-C Washington D.C. 20230 13. Type of Reona & Rfri rovers r mal od Legal Study 14. 15. Supplementary Notes , ' , _ This report is section 2 of the Final Report of the Interagency Task Force on Product Liability. 16. Abstracts Seven volume legal study of product liability. Vol . 1 is Executive Summary of detailed information collected. Vol 2 & 3 discuss current stat of American Product Liabiltiy Law. Vol. 3-7 cover legal and insurance remedies or reforms which have been proposed. Extensively footnoted conclusions are based on. 1) Survey of product liability cases filed in U.S. District Courts 1974-1976. 2) Product Liability case data filed in the State of Connecticut 1974-1976. 3) Survey of over 655 reported cases in 8 key states: Az. ,Cal. , 111. , N. J. , N. Y. ,Pa. ,Tx. ,Wisc. 4) Review of all signi- ficant legal literature published from 1970-1976. 5) Cook County, Illinois Jury Verdict Survey of product Liability Cases 1970-1975. 6)Materials supplied to the contractor by industry and insurance studies. 17. Key Words and Document Analysis. 17a. Descriptors Product Liability Law - Trends Case Law Modifications of PL Law Duty to design Duty to Warn Third Party Liability PL in the Workplace Action at Federal Level Tort Reform Common Law Remedies 17b. Identifiers/Open-Ended Terms Product Liability Law Tort Law Tort Reform Standards of Responsibility Statutes of Limitation Indemnity & Contribution Hold Harmless Clauses Subrogation No-Fault Approaches Arbitration Prevention techniques Coverage thru Residual Mechanisms 17c. COSATI Field/Group 18. Availability Statement No restriction on Distribution REPRODUCED BY NATIONAL TECHNICAL INFORMATION SERVICE U. S. DEPARTMENT OF COMMERCE SPRINGFIELD. VA. 22161 19. Security Class (This Report) UNCLASSIFIED. 20. Security Class (This Page UNCLASSIFIED 21. No. of Pages 7 volumes 22. Price form NTis-as (REV. 10-73) ENDORSED BY ANSI AND UNESCO. THIS FORM MAY BE REPRODUCED USCOMM-DC 8263-' :, 74 Interagency Task force on Product Liability INDEX TO TASK FORCE REPORTS ITFPL-77/01 ITFPL-77/02 ITFPL-77/03 ITFPL-77/04 ITFPL-77/05 ITFPL-77 Final Report of the Task Force on Product Liability - 2 volumes to be published May 1977 Legal Study - 7 volumes to be published March 1977 - PB 263 601 Insurance Study - 1 volume to be published March 1977 - PB 263 600 Industry Study - 2 volumes to be published April 1977 Selected Working Papers of The Task Force and The Advisory Committee on Product Liability. To be published May 1977 Briefing Report of The Task Force on Product Liability Preliminary report published January 1977 - Request N°: P.B. 262-515 Council of Economic Advisers Department of Commerce Department of Health, Education & Welfare Department of Housing & Urban Development Department of Justice Department of Labor Department of Transportation Department of the Treasury Office of the Assistant to the President for Economic Affairs Office of Management & Budget Small Business Administration Consumer Product Safety Commission Interagency Task Force on Product Liability THIS STUDY PREPARED BY: THE RESEARCH GROUP, INC. UNDER CONTRACT TO THE U.S. DEPARTMENT OF COMMERCE - Contract No. 6-36250 - NOTE: In partial fulfillment of its charter to conduct a study of products liability problems and to make recommendations thereon, the Interagency Task Force on Product Liability, through the Department of Commerce, retained the services of independent contractors for research studies in the industry, insurance, and legal areas. This product liability legal study has been prepared by the Research Group, Inc. and is released for publication to aid in a better understanding of the overall problem. The findings, conclusions, opinions and recommendations expressed herein are those of the contractor and do not necessarily reflect the findings, conclusions, opinions or recommendations of the Task Force which are set forth in the report of the Interagency Task Force on Product Liability. Council of Economic Advisers Department of Commerce Department of Health, Education & Welfare Department of Housing & Urban Development Department of Justice Department of Labor Department of Transportation Department of the Treasury Office of the Assistant to the President for Economic Affairs Office of Management & Budget Small Business Administration Consumer Product Safety Commission PREFACE This study of products liability law was prepared for the Interagency Task Force on Product Liability, through the Department of Commerce, by The Research Group, Inc. (TRG), Charlottesville, Virginia. In conducting this study the extensive products liability and legal research experience of The Research Group was drawn upon. The report of this legal study is presented in seven volumes. Volume I contains an Executive Summary of the detailed information contained in the other volumes. Volumes II and III discuss the current state of American products liability law, and Volumes IV through VII cover legal and insurance remedies or reforms which have been proposed. Although this study was initiated partially in repsonse to claims that developments in the legal system have forced products liability insurance coverage to become either unavailable or unaffordable to many manufacturers, the detailed analysis conducted for this study has indicated that the problem is an exceedingly complex one and not sub- ject to simple solutions. While the products liability tort system requires certain adjustments to deal with specific inequities, the system is basically sound and does not necessitate a major overhaul. Despite the adoption of "strict products liability" by most American jurisdictions, the "fault" concept is, and should continue to be, the basis of liability. In assessing the present situation, adequate recognition must be given to the significance of factors outside of the products liability tort system such as the financial condition of the insurance industry and the general rise of consumer awareness and ex- pectations . Again, the complexity of the products liability question needs to be stressed. Products liability has be- come an issue of world-wide importance requiring thorough discussion and consideration. Collection of additional data and further analysis of many of the proposed reforms is strongly recommended before legislative or other cor- rective action is taken. TABLE OF CONTENTS VOLUME I EXECUTIVE SUMMARY The State of Products Liability Law Page 1. Introduction 2 2. Major Trends in Products Liability Law ....... 2 3. Survey of Products Liability Cases 14 4. Major Findings About Developments in Products Liability Law 19 Proposed Remedies for Products Liability System A. Introduction 22 1. Summary of Remedy Assessments 23 2. Recent Legislation and Legislative Proposals in the Area of Products Liability 26 B. Economic Analysis 30 C. Proposed Modification in Products Liability Law. . . 32 D. Products Liability Prevention Techniques 86 E. Proposed Insurance Residual Market Mechanisms to Provide Products Liability Coverage 88 The State of Products Liability Law VOLUME II 1. Introduction 1 2. Major Trends in Products Liability Law a. Introduction 11 b. A Manufacturer's Duty to Design Its Product Properly 16 li Page c. The Manufacturer's Duty to Warn Users or Consumers About Hazards Connected with Its Product 16 d. How the Conduct of the User or Consumer Will Affect His Claim 58 e. The Defendant's Ability to Place All or Part of Its Liability on a Third Party 130 f. Products Liability in the Workplace 177 VOLUME III 3. Surveys of Products Liability Cases a. A Survey of Secondary Sources 1 b. A Survey of Products Liability Cases in Selected States (1) Identification of Sample States 37 (2) Results of the Survey 58 4. Major Findings About Developments in Products Liability Law 113 Proposed Remedies for Products Liability System VOLUME IV A. Introduction 1 B. Economic Analysis 20 C. Proposed Modifications in Products Liability Law 1. Modifications That Retain the Tort- Litigation System a. Introduction (1) Action at the Federal Level 69 (2) Selective Implementation of Tort Reform 76 (3) Deprivation of Common Law Remedies. ... 81 b. Modifications Regarding Defenses and Presentation of Claims (1) The Basic Standard of Responsibility in Products Liability Cases 85 (2) Standards for Proper Design (a) State of the Art Defense 100 (b) Compliance with Safety Standards. . . 126 (c) Regulation of Expert Testimony. . . . 153 in VOLUME V Page (3) Defenses Based on Product Age (a) Statutes of Limitation 1 (b) Useful Life Limitation on Liability 18 (4) Defenses Based on Plaintiff's Conduct (a) Establishment of a Misuse Defense 34 (b) Comparative Fault 52 Modifications Regarding Damages (1) Attorney's Fees 74 (2) Limitations on Pain and Suffering. ... 95 (3) Punitive Damages 115 (4) Modification of the Collateral Source Rule 135 (5) Periodic Payments 155 VOLUME VI d. Modifications Regarding Third Parties (1) Introduction 1 (2) Indemnity and Contribution 9 (3) Hold Harmless Clauses 36 (4) Prohibition of Subrogation by Workers' Compensation Carriers 46 2. Modifications That Abandon the Jury Trial a. No-Fault Approaches (1) Making Workers' Compensation an Exclusive Remedy 65 (2) No-Fault 97 b. Arbitration 14 3 D. Products Liability Prevention Techniques 191 VOLUME VII Proposed Insurance Residual Market Mechanisms to Provide Products Liability Coverage 1. General Considerations a. State or Federal Action 1 b. Mandatory Products Liability Insurance. ... 10 c. Unsatisfied Judgment Funds 23 IV Page State Created Mechanisms a. Assigned Risk Plans b. Joint Underwriting Associations c. State Operated Funds Federally Created Mechanisms a. Federal Insurance b. Federal Reinsurance c. Federally Chartered Insurance A Voluntary Mechanism a. Captive Insurance Companies 2 35 34 79 108 131 184 216 EXECUTIVE SUMMARY VI VOLUME I EXECUTIVE SUMMARY Vol. I Full Text Summary Volume Page & Page The State of Products Liability Law 1. Introduction 2 II-l 2. Major Trends in Products Liability Law a. Introduction 2 11-11 b. A Manufacturer's Duty to Design Its Products Properly 3 11-16 c. The Manufacturer's Duty to Warn Users or Consumers About Hazards Connected with Its Product 5 11-58 d. How the Conduct of the User or Consumer Will Affect His Claim 7 11-87 e. The Defendant's Ability to Place All or Part of Its Liability on a Third Party. . 9 11-130 f. Products Liability in the Workplace ... 12 11-177 3. Surveys of Products Liability Cases a. A Survey of Secondary Sources 14 III-l b. A Survey of Products Liability Cases in Selected States (1) Identification of Sample States ... 15 111-37 (2) Results of the Survey 16 111-58 4. Major Findings About Developments in Products Liability Law 19 III-113 B Proposed Remedies for Product Liability System Introduction 22 1. Summary of Remedy Assessments 2 3 2. Recent Legislation and Legislative Proposals in the Area of Products Liability 26 Economic Analysis 30 IV- 1 IV- 20 VII Vol. I Full Text Summary Volume Page & Page C. Proposed Modifications in Products Liability Law 1. Modifications That Retain the Tort- Litigation System a. Introduction (1) Action at the Federal Level ... 32 IV- 6 9 (2) Selective Implementation of Tort Reform 34 IV-76 (3) Deprivation of Common Law Remedies 35 IV- 81 b. Modifications Regarding Defenses and Presentation of Claims (1) The Basic Standard of Responsi- bility in Products Liability Cases 36 IV-85 (2) Standards for Proper Design (a) State of the Art Defense. . . 38 IV-100 (b) Compliance with Safety Standards 40 IV-126 (c) Regulation of Expert Testimony 43 IV-153 (3) Defenses Based on Product Age (a) Statutes of Limitations ... 45 V-l (b) Useful Life Limitation on Liability 4 7 V-18 (4) Defenses Based on Plaintiff's Conduct (a) Establishment of a Misuse Defense 4 9 V-34 (b) Comparative Fault 52 V-52 c. Modifications Regarding Damages (1) Attorney's Fees 54 V-74 (2) Limitations on Pain and Suffering 57 V-95 (3) Punitive Damages 60 V-115 (4) Modification of the Collateral Source Rule 62 V-135 (5) Periodic Payments 64 V-155 d. Modifications Regarding Third Parties (1) Introduction 66 VI-1 (2) Indemnity and Contribution. ... 67 VI-9 (3) Hold Harmless Clauses 70 VI-36 (4) Prohibition of Subrogation by Workers' Compensation Carriers. . 72 VI-46 VI 11 Vol. I Full Text Summary Volume Page & Page 2. Modifications That Abandon the Jury- Trial a. No-Fault Approaches (1) Making Workers' Compensation an Exclusive Remedy 75 VI- 6 5 (2) No-Fault 78 VI-97 b. Arbitration 8 3 VI-14 3 D. Products Liability Prevention Techniques. . . 86 VI-191 E. Proposed Insurance Residual Market Mechanisms to Provide Products Liability Coverage 1. General Considerations a. State or Federal Action 88 VII-1 b. Mandatory Products Liability Insurance 89 VII-10 c. Unsatisfied Judgment Funds 91 VII-23 2. State Created Mechanisms a. Assigned Risk Plans 93 VII-34 b. Joint Underwriting Associations ... 96 VII-79 c. State Operated Funds 99 VII-108 3. Federally Created Mechanisms a. Federal Insurance 102 VII-131 b. Federal Reinsurance 106 VII-184 c. Federally Chartered Insurance .... 109 VII-216 4. A Voluntary Mechanism a. Captive Insurance Companies Ill VII-2 35 IX Executive Summary of The State of Product Liability Law (Volumes II & III) THE STATE OF PRODUCTS LIABILITY LAW 1. Introduction "The Fall of the Citadel," according to Dean Prosser, occurred on May 9, 1960, when the Supreme Court of New Jersey- announced the decision in Henningsen v. Bloomfield Motors, Inc. Greenman v. Yuba Power Products, Inc . , a 1963 decision of the Supreme Court of California, represents the next significant development in the evolution of a cause of action other than negligence in products liability cases. Henningsen and Greenman provided a promising beginning in establishing a new cause of action in products liability cases. Under the reason- ing of these decisions, the plaintiff was no longer required to prove negligence on the part of the manufacturer or seller in order to recover for injuries arising through the use of a defective product. Unfortunately, the developments which have occurred subsequent to this promising beginning have been somewhat disappointing. Much of the problem is attributable to a misunderstanding of strict liability. Certain corrective action that could be taken to mitigate the current uncertainty and resulting inequity in products cases is easily suggested, if not necessarily easily implemented. First, a major step which could cure many of the difficulties attendant to products decisions would be agreement upon one cause of action in products cases . Second, since products cases, even those decided on the strict liability theory, nearly always involve fault on the part of the seller, a comparative fault approach should be adopted in judging the plaintiff's conduct. 2. Major Trends in Products Liability Law a. Introduction The major trends section of the report addresses itself to five of the major issues in products liability law which courts and commentators have struggled to resolve. The focus of this section is upon the diversified manner in which the issues have been treated. While some of the state dis- tinctions are based on varying views of concepts, others are based on different views as to the relative importance of certain facts. Since the conceptual differences are derived from a more pronounced divergence of views, this section, to the extent possible, concentrates on conceptual differences in state law. The viability of a conceptual approach varies, however, in accordance with the nature of the topic that is discussed. The major trends section is meant to serve as a starting point in the pursuit of alleviating those aspects of products liability law which are most amenable to constructive change. Before changes can be made in any legal area, the deficiencies in the current state of the law must be elucidated. In turn, before the problem areas that are most troublesome can be pin-pointed, a survey of the various approaches that have been utilized in respect to a given subject area must be delineated. b. A Manufacturer's Duty to Design Its Product Properly Introduction While most courts agree that the duty of the manu- facturer is to design a product that is not "defective," no satisfactory definition of the term "defect" has been articu- lated. The term is particularly difficult to define in con- nection with cases where the alleged defect is one of design. • Defectiveness and Strict Liability In the 1963 case of Greenman v. Yuba Power Products , Inc . , where the underlying rationale of strict liability was set forth by Justice Traynor of the Supreme Court of California, it was held that a manufacturer is strictly liable where its pro- duct "proves to have a defect that causes injury to a human being. " In 1965, when the Restatement (Second) of Torts was published, it was postulated in § 402A that one who sells any product in a "defective condition unreasonably dangerous" is subject to liability for physical harm caused by the product, even though the seller exercised all possible care in preparing and selling the product. Thus, although, in the Greenman case, the court held the manufacturer liable for any product which proved to have a "defect," the Restatement used the standard of a "defective condition unreasonably dangerous." In Cronin v. J.B.E. Olson Corp . , a controversy- was created. The Cronin case attempted to analyze the two standards and found the Greenman formula to be preferable because the "unreasonably dangerous" element had the effect of introducing negligence-related considerations into a strict liability case. The approach advocated by the Cronin court — allowing the issue of defect to be decided in an "intuitive" manner has created great confusion as well as widespread resistance. The wide disparity surrounding both the definition of defect and the most desirable form of strict liability has led to unequal treatment of products cases in state courts. Strict Liability in Design Cases The process of applying strict liability in design defect cases is somewhat different from that in manufacturing defect cases. Inasmuch as strict liability was initiated to alleviate problems of the plaintiff's burden of proof, it is clear that the theory works quite well in manufacturing defect cases where the defect was not one of which the manufacturer was conscious. In design defect cases, on the other hand, the alleged defective design is the result of a conscious choice of the manufacturer to design its product in a certain manner. Thus, although strict liability shifts the focus from the con- duct of the manufacturer to the performance of the product, the way in which the product was designed resulted from a conscious human choice. Consequently, many courts have pointed out that the results in design cases seldom differ, whether the cause of action is one of negligence or of strict liability. To determine whether a product is defectively designed, the risks presented by the product must be weighed against its utility. The User ' s Conception of the Product One of the most important factors to be considered in the test of defectiveness in design cases is the user's anticipated awareness of the dangers in the product. It had long been the majority rule that the open and obvious nature of the dangerous condition barred recovery because the manu- facturer of the product had no duty to guard against, or to warn of the dangers of, an obviously dangerous condition. Although many courts continue to adhere to this view, the "open and obvious" bar has become subject to increasing criticism over the years, and more and more courts have repu- diated its rigidity. The open and obvious danger, however, should be contrasted with the commonly known danger. In the latter case, the danger of the product may be such common knowledge that the product cannot be considered to be defective. The Manufacturer's Ability To Make the Product Safer Another of the most important considerations in the test for defectiveness is the manufacturer's ability, within practical and technological limits, to improve the safety of the product. While the custom of the industry is important in determining whether the product is unreasonably dangerous, the position that conformance with industry custom is not an absolute defense is a virtually unanimous view, as many courts have real- ized that an entire industry may have been at fault in not improving its techniques. Conclusion Due to the great diversity of opinion on the issue, a uniform approach to design cases does not seem close at hand. An important first step toward reconciliation of views, however, would be the realization on the part of the courts as to the limited effect of applying strict liability in design cases. c. The Manufacturer's Duty to Warn Users or Consumers About Hazards Connected With Its Product Introduction It is beyond doubt that a manufacturer has a duty to adequately warn purchasers and users of its product, of the dangers associated with the use of that product. Liability for failure to give such a warning may be predicated on negligence, strict liability in tort, and even breach of warranty. The doctrine has wide applicability indeed, and recently it has been observed that "almost every products liability case has a po- tential issue of failure to warn." Theories of Recovery Despite the extensive litigation surrounding the duty to warn, there is nevertheless much confusion as to the doctrinal underpinnings of the duty. Primarily, there is strong disagreement as to whether the three possible legal theories of recovery provide distinct tests for determining the existence or discharge of the duty. In the early decisions following the promulgation of § 402A of the Restatement (Second) of Torts, the courts usually concluded that the three theories provide identical standards for determining whether the duty to warn existed, and whether it was discharged in a particular case. In contrast to these holdings that the three theories of liability are identical in duty to warn cases, is a growing trend of decisions in which courts have held that the theories provide distinct criteria for analyzing the duty. These cases hold that the distinction between strict liability and negligence is that strict liability focuses on the condition of the product which is sold without a warning, while negligence relates to the reasonableness of the manufacturer's actions in selling the product without a warning. Nevertheless, it is clear that the major source of the confusion is a conceptual one. Under the present state of the law, negligence and strict liability in warning cases must be deemed to be functional equivalents. Factual Considerations Even though the legal theories upon which particular cases have been brought may differ, and even though these theories may be theoretically quite distinct, courts nevertheless appear to utilize a uniform list of factors in their analysis of failure to warn problems, regardless of the ground upon whibh these prob- lems are raised. While some of these factors are common to other types of products liability cases— — especially design cases others are unique to failure to warn situations. Conclusion Despite the growing reliance on the failure to warn as a basis for imposing liability on manufacturers for injuries which result from the use of their products, confusion still reigns as to the theoretical basis of this liability. Thus, although most courts rely on the same factors in deter- mining whether the duty has been discharged, a growing trend indicates an attempt to distinguish liability based on negligence from strict liability in the failure to warn area. The chief reason for the courts' disunity on this matter stems from a conceptual identity found in both theories. Both theories test the dangerous nature of a product which would require a warning from the point of view of the greatest degree of knowledge. Nevertheless, the factors at play under either theory remain the same. Thus, the more serious the harm, the greater the pro- ability of the harm and the less obvious the danger, the greater will be the likelihood that courts will require the manufacturer to warn of the hazards involved in the use of his product. d. How the Conduct of the User or Consumer Will Affect His Claim Introduction Products liability actions which are based on negligence have traditionally been subject to the defenses of assumption of risk and contributory negligence. These types of conduct are generally treated as affirmative defenses, and the burden of establishing them rests with the defendant. The distinction between the two is that assumption of risk concerns knowledge of the danger and acquiescence in it, while contrib- utory negligence involves a departure from the standard of conduct of a reasonable man. Another situation in which the defendant in a negligence-based products action may be excused is where the plaintiff has used the product in a manner which was unforeseeable. This type of conduct is usually character- ized as misuse or abnormal use. With the widespread acceptance of strict liability as a theory of recovery for injuries caused by defective products, interest has focused on how a plaintiff's conduct will affect an action brought under that theory. The Restatement position is that assumption of risk on the part of the plaintiff is a good defense in a strict liability action. However, conventional contributory negligence, in the sense of a failure to discover the danger presented by a product, or a failure to avoid injury by the product, is not considered a defense. Assumption of Risk The elements of the defense of assumption of risk, as stated in comment n, are knowledge of the danger or defect, and a voluntary and unreasonable encounter with.it. The plain- tiff must have actual knowledge of the particular risk in order for assumption of risk to constitute a valid defense. Courts will consider factors such as age, experience and surrounding circumstances in evaluating a plaintiff's knowledge of a defect Comment n to § 402A introduces the element of reasonableness, to the defense of assumption of risk as it applies to strict liability actions. In the conventional application of the defense, its submission to the jury is on a subjective basis, since it requires the jury to find that a plaintiff knowingly and willfully assumed the risk. The grafting of the element of reasonableness onto the defense introduces an objective standard, similar to that of con- tributory negligence, by which the conduct of the plaintiff may be judged. Thus, the defense specified in comment n is really an amalgam of elements from conventional formulations of assumption of risk and contributory negligence. Misuse That conduct on the part of the plaintiff which the courts categorize as "misuse" differs significantly from assumption of risk. Comment h to § 402A recognizes that an abnormal use or misuse of a product may defeat a claim that an injury was caused by the defective or unreasonably dangerous condition of the product. Causality, of course, is a neces- sary element of the plaintiff's case. The test for establishing whether a plaintiff's conduct in relation to a product should bar his recovery is whether the plaintiff's manner of use was foreseeable. Fore- seeability seems firmly accepted as the preferred standard for evaluating the legal consequences of a plaintiff's conduct because of the broad protection which it affords plaintiffs in comparison with other standards. However, occasional decisions apply a narrower intended-use test. The major distinction between foreseeability and intended use is the difference between an objective and subjective standard in evaluating the use of a product. Contributory Negligence Unlike misuse, there is no question but that con- tributory negligence is an affirmative defense. Comment n to § 402A, however, does not recognize the applicability of contributory negligence in its conventional form in strict liability actions. Thus, the negligent failure to discover a defective condition or failure to use reasonable care to avert injury after such discovery will not bar recovery. However, to the extent that a plaintiff proceeds negligently in the face of a known danger, his conduct will be covered by the defense of assumption of risk. Only three jurisdictions expressly reject the Restatement view that failure to discover a defect or avoid injury does not constitute a defense in a strict liability case. Comparative Fault The application of comparative fault principles to actions in strict liability is regarded as having great potential for relieving some of the inequities incurred by both plaintiffs and defendants as a result of the "all or nothing" approach to recovery presently in use. A number of jurisdictions now have decisions in which the relationship between comparative fault and strict products liability is considered. Wisconsin is the jurisdiction with the most experience in this area. A growing number of jurisdictions have expressed approval of the concept of applying comparative fault concepts to strict liability actions, even though strict liability applies where all possible care was exercised in the preparation of the product. Legal commentators have also pointed out the advantages to be derived from apportion- ing damages on the basis of fault in strict liability cases. Only one jurisdiction has departed from this trend. Thus, it seems safe to say that, although it entails certain conceptual problems, the approach of applying comparative fault principles to strict liability actions will be increas- ingly utilized in order to overcome the inequities currently involved in application of the "all or nothing" approach. e. The Defendant's Ability to Place all or Part of its Liability on a Third Party (1) Indemnity (a) Introduction Indemnity is the recovery of the full amount of one's liability from a third party. Unlike contribution, there is no division of the liability in an action for indemnity. Instead, the entire cost is shifted to another. Various formulae are used by the courts to describe when indemnity should be awarded. It has been stated, for example, that "indemnity is proper where one party has a greater liability or burden which justly requires him to bear the whole of the burden as between parties." 10 (b) Suits Against Ultimate Purchasers Manufacturers have traditionally brought indemnity actions against three classes of third party defendants in suits arising out of products liability claims. These are (1) purchasers of the finished product; (2) retailers; and (3) other manufacturers. Complaints against the first of these classes usually seek recovery on a theory that the manufacturer's negligence was passive, while that of the purchaser or owner was active. Alternatively, the manufacturer normally asserts that the owner either failed to maintain the product or altered it. In general, however, courts rarely award indemnity from those "downstream" in the stream of commerce, although the specific doctrines used to achieve this result vary. (c) Suits Against Intermediaries When a manufacturer seeks indemnity from one who is later in the stream of commerce, but who is not the final pur- chaser such as a distributor or retailer there are sound policy reasons for extending products liability to such intermediaries. This is especially true when the court has already adopted the basic goal of strict liability dis- tribution of loss on those best able to bear the loss. Such an approach, however, argues for an apportion- ment of the loss, and not a complete shifting of the loss as occurs with indemnity. While rarely discussing such policy matters directly, most courts are, in fact, reluctant to award a manufacturer indemnity from a later intermediary, such as a distributor or retailer. As in the cases concerning ul- timate purchasers, courts usually base their decisions on alleged failure to state a claim, the active and passive negli- gence distinction, or the lack of a duty to the manufacturer. (d) Suits Against Co-Manufacturers Manufacturers sometimes also attempt to obtain indemnity from those who can be called "co-manufacturers" — makers and assemblers of component parts. Courts are apparently more willing to allow indemnity claims against those earlier in the stream of commerce, than against those who are later. In addition, courts frequently consider the relative know- ledge of the two parties. Under this formulation, courts have denied indemnity to those with special experience by characterizing their failure to act as active negligence. 11 (2) Contribution (a) Introduction In part because indemnity actions have been so unsuccessful, manufacturers have also brought contribution actions against third parties in an effort to shift some of their liability to others. Traditionally, no contribu- tion among joint tortfeasors was allowed, because it was believed that the courts should not aid wrongdoers. This rule has been changed by judicial mandate in nine states, and by statute in at least seventeen others. Joint tort- feasors are thus liable for contribution. The essence of contribution is the existence of joint liability. To recover contribution, a manufacturer must show that another party was equally at fault. This is, therefore, a distincly different theory from that of indemnity, where the manufacturer must show that the other party's fault was greater and of a different quality. (b) Suits Against Employers Common liability is a prerequisite for recovering contribution. A manufacturer cannot recover contribution, therefore, from one who could not be liable to the original plaintiff. Thus, those who are immune from a suit by the original plaintiff — such as spouses and employers — are also protected from suits for contribution. Spouses are pro- tected by the doctrine of interspousal immunity. Far more important for products liability law, however, is the immunity of employers, based on workers' compensation laws. (c) Suits Against Other Parties Courts have been more inclined to grant manufacturers contribution from dealers than from users. This appears to be because courts have less difficulty in regarding manufacturers and dealers as jointly liable for defect. Because indemnity actions against co-manufacturers are relatively successful compared to similar actions brought against other defendants, the number of contribution actions against co-manufacturers has been fairly small. (d) Apportionment by Fault An integral aspect of contribution is apportionment by fault. The theory and methodology of distributing the loss according to the relative fault of the parties has already been adopted in some jurisdictions. Historically, the abro- gation of the common law prohibition against contribution between joint tortfeasors first occurred by statute. 12 (e) The New York Rule An important variation on the development of apportionment by fault can be seen in those jurisdictions which have established the doctrine entirely by judicial decree. In a products liability case, the New York Court of Appeals abandoned the traditional law doctrines and adopted a rule apportioning damages among defendants ac- cording to their relative negligence. f . Products Liability in the Workplace Introduction Many products cases involving injuries which are sustained by employees in the course of employment present issues quite different from those dealing with non-workplace injuries. Several factors appear to induce courts to apply different rules to the treatment of ' work-related product injuries than to non-work-related product injuries. These factors may be grouped into two broad categories: (1) those that are based on the injured person's status as a worker and (2) those that are based on the existence of the employer, as one who intervenes between the injured worker and the manufacturer of the injury-producing product. Status As An Employee Persons who are injured at work, of course, normally are covered by workers' compensation statutes enacted in all states. Under this system, an employee injured in the course of employment is provided benefits without regard to fault. The injured worker is entitled to benefits for physical injury (including wage loss and medical expense reimbursement) or death. Of those factors associated with the status of the injured party as a "worker," the most prevalent is his experi- ence, either as a long-term user of the specific article which caused injury or, more generally, as a member of a particular profession or occupational group. "Experience" has been a determinative, or at least an influential, factor in cases in- volving three particular issues common to products liability litigation: the manufacturer's duty to warn of hazards as- sociated with the product, the manufacturer's duty to guard against nonobvious dangers, and the establishment of the 13 defense of assumption of the risk. In respect to each of these issues, it may be asserted that the injured party's experience had the effect of making a particular hazard more obvious to him than it would have been to an inexperienced user of the product , thus resulting in imposition of dif- ferent standards in the assessment of the actions of the manufacturer and the injured party in the workplace situa- tion. This is particularly common in respect to the issue of a manufacturer's or supplier's duty to warn of product hazards. It has been held that there is no duty to warn a worker who is truly experienced, as opposed to an actually inexperienced injured employee. T he Presence of the Employer Often, a manufacturer may attempt to absolve him- self of liability by asserting that the injured person's employer was in breach of some obligation to the worker. For example, it is a tenet of products liability law that a manufacturer or supplier must warn of hazards associated with the product. If, however, a court concludes that this duty is limited to providing cautionary information only to the purchaser of the product, the employer, an employee who is injured because he was never warned about a hazard may be prevented from recovering against a manufacturer who could not escape liability if the injured party had been a non- workplace user. The Restatement approach to the problem is presented at length in the explanatory notes to comment n to § 388, which states that giving cautionary information to a third person may be insufficient to relieve the supplier from liability to the injured party. One action of an employer which may operate to de- prive an injured worker of his right to recovery against a manufacturer is the effectuation of an alteration of the product. This was expressly noted when § 402A was promul- gated. Thus, the presence of the employer is a factor to be considered in many workplace products liability cases. While the cases do not always agree as to how his actions should relate to the relationship between the injured worker and the manufacturer of a product, the employer's conduct is a factor with which the courts must frequently contend. Conclusion It cannot be denied that courts have added judicially- created factors such as experience, economic necessity and presence of employer to the statutory compensation schemes 14 enacted in all jurisdictions, to produce a phenomenon of dif- ferent treatment of workplace, as opposed to nonworkplace product injuries. 3. S urveys of Products Liability Cases a. A Survey of Secondary Sources I ntroduction Data pertaining to products liability court actions from 1970-1976 was compiled and briefly analyzed. A search of secondary sources of data for information on the impact of products liability claims on our court system was conducted. Methodology To identify relevant data, a complete library and telephone survey of potential sources was undertaken. The search was very broad, ultimately including most federal agencies, and numerous state agencies, public interest groups and trade associations. All major court data collection services were contacted. Relevant data generally fell into one of three categories: (1) existing data which was readily obtainable, (2) existing data which could not be obtained within the time frame of the project, and (3) data which is currently being developed and compiled but is not yet available. We have been able to analyze a substantial portion of the data noted in (1). Sources of Data and Analysis A primary source of data on products liability cases is the Administrative Office of the United States District Courts, which has compiled statistics on products liability since 1974. This data includes a breakdown of products liability cases by torts to property, contract actions, and personal injury torts. Recently, alleged damages have been reported, but not actual damages. Another significant data source is the Judicial Department of Connecticut, which records the numbers of products liability cases filed and disposed of, with sub-categorizations for vehicular and non-vehicular related injuries, and jury or non-jury trials. The Jury Verdict Reporters collect data on jury-tried cases in certain localities. Also the Machinery and 15 Allied Products Institute (MAPI) has recently produced a survey of the number and size of products claims and verdicts in recent years for its member companies. Although several good sources of data on products liability litigation exist, not much in the way of collection and analysis has been done to date — either by the courts or by other interested parties. This fact is due, in part, to the relatively limited interest in products liability cases in past years. It may also be associated with the fact that products liability cases continue to comprise a very small percentage of the total court cases. This fact, coupled with the difficulties inherent in the identification, collection and compilation of judicial statistics not routinely reported by the courts, has made the relative unavailability of such data very understandable. No meaningful data on court costs and actual time associated with products liability litigation have been com- piled. Some findings, however, can be made. Generally, the data obtained in the U.S. District Courts reveal that signifi- cant increases in the number of cases filed have occurred. This finding is supported by the Connecticut and the Jury Verdict reports and by the experience of the companies surveyed by MAPI. Although these trends can clearly be identified, the scope of the surveys and reports are generally limited, and the findings — especially in the context of the entire court docket — are undramatic. The data found did not fully meet the primary objective of the search. However, they do tend to confirm the need for a comprehensive and objective project to ac- cumulate such data, so that the public and private sectors may proceed toward remedies with a sound base of knowledge regarding the court system and how it is affected — and, itself affects — products liability litigation. b. A Survey of Products Liability Cases in Selected States (1) I dentification of Sample States Products liability cases from eight sample states were selected for in-depth analysis. Analysis consisted of a statistical study of all products liability decisions re- ported since 1965, in which the law of the eight selected states was applied. Both state and federal cases were in- cluded in the analysis. 16 The first criterion for the selection of the sample states was that the particular state must have generated a substantial number of post-1965 reported decisions in which injuries were alleged to have been sustained as a result of a defective product. Other more substantive criteria were also considered, however: (1) States were chosen which together reflected the most extensive variety of legal theories and approaches to products liability issues; and (2) An effort was made to balance the list of selected states be- tween industrial and less industrial jurisdictions, since work- related injuries were to receive separate treatment in the s tudy . Based upon these criteria, eight states were selected for in-depth analysis: Arizona New York California Pennsylvania Illinois Texas New Jersey Wisconsin (2) R esults of the Survey Introduction Federal and state products liability cases in the eight sample states were compiled and reviewed. The data ob- tained provides an information base for analysis of trends in products liability litigation. Summary data and comparisons are generally consistent with the common belief that products liability cases are increasing in number. More importantly, the data provides additional insight into the factors within the court system which influence this trend. Methodology All products liability decisions involving personal injury cases for the eight samples states were compiled from state supreme courts, appellate courts and in one case, Pennsylvania, from county courts. The case- finding process relied primarily on key number identification and a subsequent search of appropriate digests. Key numbers were narrowed down to 19 relevant topics in addition to "products liability." These numbers were then applied to the search for cases in the seven other states. 17 The validity of the data is limited primarily by the inconsistencies within digests from state to state and the fact that the cases represent appellate decisions rather than original filings. When a case was located, the information was broken down and categorized on a data collection workform (see Appendix A) . The data collected included whether the forum was a federal or state court; the product class; the identities of various parties in the suit; the year of product manufacture, injury and decision; whether the injury was work-related; whether the trial was jury or non-jury; the type of product defect; the disposition; whether a statute limited the amount of recovery; the total damages; and whether the damages were at issue on appeal. Minor problems encountered in data collection resulted primarily from the difficulties in neatly cate- gorizing every unique situation while preserving a workable format for data compilations. In addition, not all case opinions included all the information which was sought. Findings It was found that with one exception — Pennsylvania — the large majority of cases (75%) were brought in state courts. It was also found that one-third of all cases involved the automobile — followed in frequency by assembly line and other industrial machinery or components. A significantly larger number of products liability decisions were rendered in the last five years than in the first five. The plaintiff in the majority of cases was an injured party and the defendant was a product manufacturer. Third-party plaintiffs were most frequently the manufacturer (76 cases out of 198) or the retailer (35 cases) . Third- party defendants were most frequently either employers or manufacturers . It was also found that one half of the products involved in litigation were manufactured between 1959-1966. Less than 10% of the products were over 20 years old, less than 4% over 25. Half the injuries occurred between 1964 and 1969. Half the final decisions reviewe fell between 1969 and 1974. The data also revealed that a large percentage of products liability injuries were work-related. The alleged basis of liability in the sample was most often design defects 18 (39%) followed by manufacturing defects (37%), and failure to warn defects (21%). Manufacturing, design, and inspection defects tended to occur in automobiles. Allegations per- taining to inherently unsafe products and failure to warn occurred mostly in chemical products. Plaintiffs and defendants generally shared equally in prevailing on the merits, although the plaintiff generally won more jury trials and the defendant won more non-jury trials. Plaintiffs, also, usually won more cases involving a failure to inspect, and defendants usually won more cases involving the allegation that a product was unavoidably unsafe Damages increased significantly over the past several years — both in numbers of awards, as well as in amounts. The average for 6 years prior to 1971 was $104,000, the average since has been $222,000. 19 MAJOR FINDINGS ABOUT DEVELOPMENTS IN PRODUCT LIABILITY LAW I. Introduction An important initial inquiry raised in this study is whether and to what extent existing tort doctrines unreason- ably subject the manufacturer to liability, or conversely, unreasonably deprive a person who is injured by a product of the right to recover. The legal analysis involved in answer- ing that question raises, in turn, the further question of the possible connection between the state of existing tort law and the alleged insurance problem. II. Inequities Under The Existing Tort System A thorough analysis of possible inequities in the tort system prompts the conclusion that the existing system is basically sound and any modifications attempted should be in the nature of refinements rather than a major over-haul. From the perspective of the manufacturer, perhaps the most pervasive inequity stems from the general confusion and inconsistency in present product liability law. A second generic inequity under existing law is that the manufacturer may be forced to bear the entire burden of liability even though other parties, particularly employers, may have been partly at fault. Other specific doctrines in varying degrees may also impact treasonably upon the product liability defendant. As for inequities suffered by plaintiffs, the problem essentially revolves around the "all or nothing" doctrines which fail to apply principles of comparative responsibility. These can be corrected within the frame- work of comparative fault principles. A continuing practi- cal concern, however, is the adequacy of the safety level of products. 20 III. Relationship of Tort Law Inequities to the Alleged Insurance Problem Although specific tort doctrines adopted by some courts can be considered inequitable to either plaintiffs or defendants in specific cases, the total impact of such rules on product liability claims is insufficient directly to cause an insurance crisis of the magnitude claimed even though cer- tain indirect connections between the two can be hypothesized. In short, even immediate changes in existing tort law would likely have little if any immediate impact on the availability or af fordability of product liability insurance. Rather than ascribing current insurance difficulties to a doctrinal breakdown in the tort system, more attention should be focused on essentially non-legal phenomenon which arguably have a more direct causal relationship to the al- leged insurance problem. These include recent adverse de- velopments in the insurance industry which have proceeded quite apart from developments in product liability, the statis- tically documented increase in the volume and size of product liability claims which compels insurers to raise premiums or reduce exposure, and the uncertainty and confusion within the insurance industry as to the probable future course of product liability law. What emerges, therefore, from The Research Group's statistical analysis and over-all study of existing tort rules is a judgment that the unavailability of insurance is not necessarily the result of inequities in the existing system, nor that existing inequities inevitably give rise to higher insurance costs. Using certain legal devices not causally linked to the insurance problem may, however, assist in ameliorating the insurance situation. 21 Executive Summary of Proposed Remedies for Product Liability System (Volumes IV, V, VI & VII) 22 INTRODUCTION The foregoing analysis distinguished between those characteristics of the existing tort system chiefly respon- sible for insurance unavailability, and those which result in inequitable treatment of the parties involved in litigation. The proposed remedies are considered with respect to both re- sults. They are not distinct and isolated proposals but are a complex network of interrelated measures. The in-depth analyses of the proposed remedies are organized according to the following categories: (1) Modifications in products liability law (a) Modifications that retain the tort- litigation system (b) Modifications that abandon the jury trial (2) Products liability prevention techniques (3) Insurance residual market mechanisms to pro- vide products liability coverage. To gain additional perspectives on the nature and im- pact of the proposed remedies, they can be reorganized into various different functional categories: (1) Functional analysis of proposed modifications of state tort law (2) Proposed modifications of state tort law which extend beyond the products liability field (3) Proposed remedies which apply to workplace injuries (4) Incentives and disincentives to product safety (5) Effect of proposed remedies on plaintiff. 23 3 o -H c p C c CD o rd o p O •H i-H •H •H rd C -P 3 P P P X! 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Eh H Q fa Eh D CO 2 D Cm" i CO H U CO fa 2 s 2 a w H N H g Cm O j J PI H Eh W s 9 g 2 S W w H Eh H < Q Q a Cm o Eh W W u a *-) CO fa fa fa u 30 ECONOMIC ANALYSIS The economic analysis of the present liability system, as it relates to products liability and accidents "caused" by both consumer and industrial products, suggests that there are two primary functions and purposes of the system: (1) the payment of compensation to the victims of the cost of the accident; (2) the creation of a set of economic incentives among the parties to accident producing interactions, such that these parties will undertake the economically efficient level of accident prevention. The latter objective has been couched in terms that the sum of accident costs and accident avoidance costs is minimized. It is at this point that the economically correct amount of resources are being devoted to safety, on the part of both manufacturers and consumers and users of products. The general economic analysis of the present liability system, as well as several alternative systems suggests that: (1) Under certain conditions, the selection of liability assignment rules does not make any difference with respect to resource allocation, but does clearly make a difference with respect to wealth distribution. (2) The corollary of this fact is that, in the context of an economic analysis, it does not matter who bears the attendant costs of an accident, nor do such normative notions as which party is at "fault," or which party "ought" to pay and bear the economic burden of the accident have any relevance. (3) Incorporating more realistic circumstances into the analysis — in particular, positive transactions costs, product information costs and uncertainty — changes the above described results. The particular liability assignment rules imposed do matter, and do have both resource allocative as well as wealth distributive effects . 31 (4) Which rule is imposed by the liability system is likely to affect the allocation of resources related to safety, the safety characteristics and prices of consumer and industrial goods, and the level of safety and the incidence of accidents in the economy. (5) From a resource allocative point of view, liability assignment rules which impose the economic costs of product related accidents on the most efficient, at the least cost, accident-avoider are the most appropriate standards . 32 ACTION AT THE FEDERAL LEVEL I. Introduction Manufacturers of products which are sold and used in several states object to the fact that their product's per- formance is assessed differently from jurisdiction to juris- diction. It is also asserted that the lack of uniformity in products liability law has led insurers to establish premiums on the basis of the broadest possible theory of liability. The lack of uniformity is, in turn, a contributing factor to the cost of obtaining products liability insurance. If uniformity of standards is a desirable goal, Congress could enact a federal law of products liability that would establish uniform standards. II. Assessment A federal law of products liability would establish uniformity more expeditiously than would promulgation and adoption of a uniform state act, although Congressional ac- tion of this type would be an unusual departure from customary practices . III. Models It would certainly be constitutionally permissible for Congress to enact such legislation as an exercise of the power to regulate interstate commerce. An example of the use of the commerce clause power to intrude into an area of law normally reserved to state courts was the enactment of the Federal Employers' Liability Act , which achieved a measure of uniformity in tort law as pertaining to a particular type of injury. As for due process considerations, a due process challenge to the F.E.L.A . was, in fact, rejected by the Supreme Court. On the other hand, Congress has, in practice, exhibited great deference to state control or rights and remedies under common law, and its deep-rooted respect for principles of federalism has generally dissuaded it from usurping state 33 authority in the area of tort remedies. The disinclination of Congress to go beyond establishing safety standards by creating broad federal causes of action indicates that the prospects of adoption of a federal act may be slim. Thus, while Congress could assume the responsibility for changing chaos into certainty, any proposal for legislative action at the federal level is beset with problems that are perhaps too insurmountable for a uniform law to ever achieve fruition 34 SELECTIVE IMPLEMENTATION OF TORT REFORM I. Introduction Selective legislative modifications to the law of products liability may well be subject to constitutional chal- lenge on equal protection grounds by those who suffer the loss of rights, remedies or defenses. II. Assessment Such modifications as limitations on attorneys' fees, changes in statutes of limitation, restricting damage recoveries or modifying the collateral source rule will likely be subject to challenge if accomplished strictly in reference to product liability litigation alone. There are indications that this problem can be avoided by implementing change "across the board" to all personal injury tort law, though in this context other practical problems may arise which have nothing to do with constitutional considerations. 35 DEPRIVATION OF COMMON LAW REMEDIES I. Introduction Proposed modifications of product liability law which alter rights, remedies or defenses presently available in the common law tort system may give rise to constitutional due process problems. There is some judicial support for the proposition that due process requires that abrogated common law rights be replaced by some equivalent benefit under the new legislation, i.e., a quid pro quo. II. Assessment Any proposed remedy — whether it be a. complete replacement of the existing tort system with a comprehensive products liability no-fault system or a more limited change - will more likely withstand due process scrutiny if some substitute benefit is provided to compensate for abrogated common law rights . 36 THE BASIC STANDARD OF RESPONSIBILITY IN PRODUCTS LIABILITY CASES: A CRISIS OF CONFUSION Introduction The law of products liability is caught in a crisis of confusion concerning the basic standard of responsibility of manufacturers and sellers of products. Although products liability law is essentially negligence law based on fault con- cepts, imprecise terminology is being used to describe the basis for such decisions. The confusion is magnified by the use of three supposedly separate theories of recovery — warranty, tra- ditional negligence, and strict liability — in weighing the lia- bility of the manufacturer. The situation is exacerbated by the fact that the concepts of risk spreading, enterprise liabilty and absolute liability are sometimes given lip service, but are consistently rejected by most courts. This crisis of confusion is aggravated further on a national scale by the various statements of the law within each of the 50 states. II. Assessment To counteract the confusion, strong action must be taken to adopt a single cause of action and to clarify the standard of responsibility* Since products liability law — even strict products liability — is essentially negligence law, it should be recognized as such, either through reformulation of § 402A of the Restatement (Second) of Torts or through state legislative action. Such a "return to negligence" would not involve a re- jection of the concept of strict liability, but simply a recog- nition that negligence and fault concepts have not been aban- doned. This new hybrid cause of action should be based upon Dean Wade's concept that "selling a product which is not duly safe is negligence...." III. Models A. Negligence vs. Strict Liability The key to an understanding of products liability *See note, page i. 37 law is a realization that the term "strict liability" is not the equivalent of absolute liability. Rather, in design defect cases and duty to warn cases, strict liability is vir- tually identical with negligence. The significance of strict liability is that in manufacturing defect cases the proof con- siderations for the plaintiff are shifted from the conduct of the manufacturer to the performance of the product, thus making it easier for the plaintiff to recover. Liability, though, still rests on "fault," since the product must be "defective" or "unreasonably dangerous." Also, under strict liability, knowledge of the dangerous propensities of the product is attributed to the manufacturer, while under negligence principles evidence of this knowledge is part of the plaintiff's burden of proof. B. One Cause of Action Since most products cases are tried on the basis of more than one theory of recovery, the standard of responsibility is, for most juries, essentially incomprehensible. Therefore, there should be a single cause of action in products cases based upon the appropriate duty.* Unfortunately, there has been no generally agreed upon definition of duty in products cases. IV. The Proposed Remedy One solution to this crisis of confusion is reformu- lation of § 402A of the Restatement or state legislative enact- ment of a single cause of action for products liability. It should be explicitly recognized that this cause of action is rooted primarily within negligence and fault concepts. The cause of action would essentially be one of negligence except that (1) the proof process in manufacturing defect cases would be shifted to focus on the product, and (2) intermediate sellers would be held liable even if they themselves were not directly negligent. The standard of responsibility which comes closest to expressing these objectives is that developed by Dean Wade. He has stated that "one who supplies a product which is not duly safe is negligent per se " and that "selling a product which is not duly safe is negligence within itself." The product would be considered "not duly safe" if a "reasonably prudent manufacturer, who had actual knowledge of its harmful character would not place it on the market. " The harm, however, should be reasonably foreseeable or scientifically discoverable. r See note, page i. 38 STATE OF THE ART DEFENSE I. Introduction Many groups of manufacturers have complained that courts have judged the danger of their products according to the current state of technology and knowledge, even if the product was as safe as others at the time of sale. Although the courts normally admit evidence of industry custom with respect to a product, it is not a final determinant of the issue of proper design, since an entire industry may be remiss in its designs. II. Assessment There is a problem concerning injuries arising out of the use of older industrial products , which have sometimes caused injuries. A better approach to rectify this situation is to apply a concept of a "useful life" , after which no liability for defects would attach, rather than to institute a state of the art defense. III. The Model A state of the art defense providing an absolute bar when a product conformed with prevailing customs would benefit manufacturers and could lower insurance rates . With the exception of Illinois, which follows the rule that state of the art evidence is irrelevant, all states appear to agree that the feasibility of alternative designs is an important factor to be considered in determining whether a product was defectively designed at the time it was marketed. Many courts have allowed testimony that is, in effect, a hindsight assessment of feasibility, but only for limited purposes. The overwhelming majority of courts have evaluated the product on the basis of what dangers could have been known at the time of marketing by the manufacturer, an expert in its field. 39 IV. The Proposed Remedy Institution of a state of the art defense when the product conformed to industry standards even if the standards were negligent, is untenable. All courts that have considered the issue have rejected it as a defense. In fact, such a defense would tend to prolong dangerous industry practices by substantially lowerina the incentive to change. V. Economic Impact Making a state of the art defense "absolute" would appear to aggravate the situation where the industry level of safety may be less than economically efficient. The incurrence of accident costs should spur the manufacturers to invest in product safety research, thus keeping the level of safety closer to the economically efficient level. 40 COMPLIANCE WITH SAFETY STANDARDS I. Introduction Although many legislative and administrative codes set safety standards for products to meet, the fact that a product meets those standards does not necessarily relieve its manufacturer from liability. Under existing tort law, compliance with product safety standards is not a conclusive defense for the manufacturer. One proposed remedy is to make the compliance defense a conclusive one. The purpose of mandatory safety standards is to reduce or eliminate unreasonable dangers associated with the use of a product. The standards are set, in part, by public opinion which is not necessarily attuned to economic efficiency. The standard, however, does not affect the court's view on specific con- troversies before it, so that any attempt to link tort liability to the standard must be made cautiously. Compliance with the standard tends to prove the absence of negligence or defect, but does not constitute a conclusive defense. It is this proposition that is challenged by the proposal considered here. II. Assessment One may cautiously predict that the proposal will reduce the cost of products liability insurance to some extent It is questionable, however, whether fair mandatory standards can be established, or for that matter, whether the standards could comprehend every circumstance in which the product may be dangerous in normal use. III . Models A. Majority Rule . The majority and, indeed, almost universal position which courts have taken is that compliance with a mandatory 41 safety standard is not a conclusive defense, but is evidence in the defendant's favor. The justification for the rule is that the standard is only a minimum and courts should be free to adopt higher standards, if warranted by the circumstances The issue of whether the defendant provided adequate warning of the dangerous qualities of his product also arises. In other cases, the holding that compliance is not a conclusive defense seems to reflect the court's tacit conclusion that the safety standard itself was inadequate or deficient. Because standards become outdated as they fail to reflect advances in the state of the art and the drafters of the standards cannot foresee all circumstances, the courts reject the argument that compliance should be a conclusive defense. B. Minority Rule The number of cases in which compliance has been accepted as a complete defense is exceedingly small. Thus, it is an overstatement to characterize this position as even a "minority rule." Of the three reported decisions expressing this rule, two resulted in a judgment for the plaintiff anyway, and the third was expressly overruled by a later decision. One decision further illustrates the point that compliance with the standards is only a partial defense at best, since the defendant may have been negligent - or the product defective - in some other respect. C. Compliance with Federal Safety Regulations Defense The Consumer Products Safety Act (CPSA) is a repre- sentative example of a federal statute which enacts or provides for the promulgation of product safety standards. All such statutes have in common the fact that compliance with those standards is not, under existing law, a conclusive defense in a products liability action. The legislative history of CPSA indicates that Congress gave considerable thought to the matter before rejecting the federal compliance defense. At the same time, Congress served notice that it did not intend to change the common law rule that evidence of compliance is admissible. IV. E conomic Impact There is no way of really knowing whether the imposi- tion of product safety standards would be, or is, economically efficient. If there is, in fact, too little safety in the 42 market system, then government intervention through product safety standards would be helpful in terms of economic effi- ciency; if not, then safety standards in excess of those al- ready in effect would lead to economic inefficiencies. 43 REGULATION OF EXPERT TESTIMONY I. Introduction Expert witnesses, who are indispensable in most products liability cases, have been the subject of allegations of abuse, incompetence and waste. A major complaint is that partisan selection of witnesses leads to non-objective expert testimony, as well as extreme views that may represent a distortion on the subject. Judicial review of the qualifications of expert witnesses has been said to be ineffective, since it relies on a review of their paper credentials, and not, as it should, upon an evaluation of the appropriateness of their testimony on the particular issues and their comprehension of the legal incorporation of technical information. Often, the expert testimony of each party cancels out, so that the jury is left to concoct its own theory. II. Assessment The trial court should have the discretion to appoint impartial experts in products liability cases. The availability of an objective expert will assure the jury of much needed guidance in resolving conflicts in expert testimony. Any system of court appointment, however, must in- clude a mechanism for payment to the experts. III. Models One possible corrective scheme is to limit expert witnesses to those appointed by the court or a neutral body. An alternative reform, contained in the Federal Rules of Evidence allows the court to appoint an impartial expert witness either on its own motion or on the motion of one of the parties. Limiting expert opinion to responses only to hypothetical questions is not necessary. A third reform would be more sophisticated pre-trial screening of the qualifications of expert witnesses. Additionally, the 44 expert witness would have to satisfy the court that he understood the legal significance of the technical information involved in the case. A fourth corrective measure could entail licensing of all products liability expert witnesses. IV. The Proposed Remedy An exclusively court-appointed expert witness system has serious drawbacks in the products liability area. There would be cost advantages to such a system, but it would entail the loss of the partisan watchdog. The plan of exclusive appointment of experts could also conflict with the constitutional guarantees of a jury trial and due process of the law. While no decisions have dealt with the validity of the exclusive plan, where the trial judge appointed an impartial expert witness, the right of the parties to call their own expert witnesses has been preserved. Court appointments of impartial expert witnesses to aid the fact finder in resolving technical issues have generally been upheld. Under impartial medical plans/ the objectivity of expert testimony was markedly increased when the court appointed impartial medical experts; reaction was mixed on settlement rates and overall cost effectiveness. There is some question whether there would be any similar gains in the products liability field. V. Economic Analysis It is difficult to estimate or even engage in speculation on the economic impact of the systems, but, in any case, the general economic effects would be similar to those described and analyzed in connection with the mandatory arbitration proposal. 45 STATUTES OF LIMITATIONS I. Introduction The statute of limitations for strict liability actions, resting on a tort theory, does not begin to run until an injury has occurred. Thus, the duration of a manufacturer's potential liability is often unlimited. Liability for defective products has, in a few jurisdictions, been viewed under a warranty theory, and thus the statute of limitations has been computed from the time of the sale of a product. This view, however, is largely discredited. II. Assessment Radical changes in the nature of statutes of limitations cannot be recommended, because some meritorious claims would be barred even before the injury occurred or even before the user purchased the product. Limiting the duration of time for which a manufacturer can be liable would reduce the number of claims and eliminate much uncertainty, but it seems that the "useful life" approach would be a more equitable way of limiting claims. III. Models Two premises underlying statutes of limitations are the questionable reliability of proof after a product has been in use for a long time, and the need for a fixed point in time beyond which a defendant will no longer be subject to protracted liability. An obvious model for a limitation statute is the four-year provision in Article 2 of the Uniform Commercial Code , but most jurisdictions have not favored this approach. Oregon has placed a ten-year limit on the manufac- turer's liability, while Connecticut places an eight-year limit on products liability actions. With mixed reaction from the courts, some states have passed statutes of repose for archi- tects and builders. Without violating equal protection, legis- latures may not be able to limit the duration of liability only 46 with respect to the manufacturers of capital goods. At the same time, there seems to be no reason why a redefinition of a plaintiff's right to recover for a product-related injury may not be constitutionally accomplished. However, because of possible due process problems, it seems best to include, in any statute of limitations modification, a provision that ensures that, once an injury has occurred within the limitations period, the normal statute of limitations for personal injuries is to be applied. Because an unyielding time limit would be unfair, particularly in drug related cases, it may be that the best approach in changing the statute of limitations from a time of injury to a time of sale basis would be to limit it to certain types of products, or to assign different lengths of time to different categories of products. 47 USEFUL LIFE LIMITATION ON LIABILITY I. Introduction One serious problem manufacturers have with regard to products liability insurance is that the products for which they are held liable are designed to be in use for many years. II. Assessment One measure that may be helpful would limit a manufacturer's liability for product-connected injuries to a certain number of years after the product was sold - "a useful life." The best way to approach the problem of deter- mining a product's useful life may be through the manufacturer's use of warnings or disclaimers, though disclaimers are not favored in the law. III. Models Where there is sufficient evidence to raise the inference that the product was defective when sold, the manufacturer is, of course, liable. The courts have, in fact, recognized a sort of useful life in the adage that " [a] manufacturer or seller is not required, under the law, to produce or sell a product that will never wear out." The courts have also refused to impose liability where the evidence indicates that the accident in question was caused by normal wear and tear of the product. However, the useful lives of some products are often difficult to evaluate by a jury, even with expert testimony. Thus, the institution of a "useful life" defense has been suggested. Under such a defense, a manufacturer would incur no liability after the product's useful like had expired. 48 IV. The Proposed Remedy One problem in the useful life approach concerns the issue of who would be responsible for determining the duration of a useful life. If only manufacturers were responsible for these determinations, there would be the problem of lack of incentive to improve industry standards. Because the issue of proper warnings in products cases is a difficult one, Professor Wade has suggested the use of dis- claimers to put users on notice that the manufacturer will not be responsible for the performance of a product after a certain period of time. Though the use of disclaimers is not favored in the law, the New York Court of Appeals has in- dicated that, if the user is aware of, and agrees to, the limitation of liability in a disclaimer, a manufacturer can make use of such a disclaimer to defeat an action in negligence or strict liability. One advantage of the disclaimer method is that it would require neither legislative action nor the establishment of an independent body to set standards. The disclaimer approach seems preferable to the modification of the statute of limitations defense, because it seems more equitable to ensure that the employee or consumer knows that he is using the product at his own risk and that there will be no recovery against the manufacturer. If such disclaimers were put into use on any widespread basis, it may well be that manufacturers would prevail in more cases. Whether this would lower the cost of insurance is doubtful, however, as the use of disclaimers would give rise to litigable issues surrounding their adequacy and ef fectivenss. 49 ESTABLISHMENT OF A MISUSE DEFENSE I. Introduction The focus of the misuse defense, where a defendant can demonstrate that the plaintiff used the product in a manner which could not have been anticipated, is not on the plaintiff's conduct, but rather on the issue of the foresee- ability of that conduct. The problem with utilizing foresee- ability in this way is the difficulty in applying it with any predictability, because guidelines for its evaluation are unsatisfactory, and wide latitude is afforded juries. One alternative is to allow the defense to be governed by the standard of a manufacturer's intended use of a product, though this technique has not been favored by the courts in recent years because it has been seen as too restrictive of the interests of injured persons. II. Assessment It is difficult to ignore the concept of foresee- ability in constructing a new misuse defense, even if it may produce inconsistent results in some cases. Any alternative approach whereby permissible uses are articulated seems unwork- able. III. Models A. Warnings One situation in which it can be plausibly argued that product misuse should bar recovery in a products liability suit is where the plaintiff has violated or failed to heed instructions or warnings which accompany the product. Warnings can be regarded as a foundation of a misuse defense, in that 50 they define the limits of proper product use. In fact, failure to heed warnings often constitutes a successful misuse defense. The crucial issue is when a warning should be given and, thus, foreseeability is a crucial consideration. In some instances, it may be that whether a duty to warn exists depends on the knowledge and experience of the expected users of a product. In other instances, the failure to warn itself may be regarded as a defect in the product. Also, the adequacy of the warning has been a difficult issue for the courts and, of course, warn- ings have not always precluded recovery where the product is dangerous, or has been misused. B. Alterations A second situation where misuse of a product should often bar recovery is where the product has been altered by a user. A manufacturer will not be held liable merely because a safety device can be removed from the product or because the product is capable of being altered in some way to make it un- safe. A Kansas proposal establishes, in effect, a bar to the plaintiff's recovery where the alteration of a product contra- dicts a manufacturer's intended use for it. While the problems of foreseeability are avoided under such a rule, injured persons may be unreasonably deprived of recovery. C. Articulation of Permissible Uses The problems associated with foreseeability could also be avoided if it were possible to articulate all permissible uses of a product. However, it is simply not possible to in- corporate all instances of permissible product use into stan- dardized form. IV. The Proposed Remedy Strengthening the misuse defense with respect to the failure to heed warnings would change the results in some products liability claims in which recovery is now granted, but the ex- tent of the impact of such a change is unclear. A blanket statutory institution of the alteration defense presents problems, in that the injured user would often be without recourse due to the workers ' compensation laws . The adoption of standards governing the specific uses permitted the user seems unworkable, 51 because in some cases it would be a nearly impossible task to define all the legitimate uses. V. Economic Impact From a resource allocative and economic efficiency point of view, it is difficult to know where to draw the line between the consumer's and the manufacturer's anticipation of the possible misuse of a product. Only unforseeable misuses of products should be allowed as a defense, because the related, unexpected costs of prevention are in turn unforeseeable. 52 COMPARATIVE FAULT I. Introduction The institution of a comparative fault system would abolish the "all or nothing" approach which is currently used in evaluating plaintiffs' conduct. In its place, fault would be apportioned between the plaintiff and the defendant. II. Assessment It is unclear what the effect of a comparative fault system would have on products liability insurance rates. In automobile liability insurance rates, the effect was minimal. However, it may expedite the reparations process by encouraging the parties to settle. Moreover, because it allocates losses to the parties who are responsible for them, and because it is consistent with the current posture of tort law, adoption of a comparative fault system is recommended.* III. The Proposed Remedy A. Types of Comparative Negligence The major criticism of contributory negligence has been that it totally bars a plaintiff's recovery, even where his negligence is slight in comparison to that of the defendant. There are three types of comparative negligence currently in use: (1) a "pure" system, where the plaintiff's recovery is simply reduced by the degree of his own fault — this system is preferred by most legal commentators; (2) a "50%" system, in which the plaintiff may recover only when his own negligence does not equal or exceed that of the defendant; and (3) a system where the damages are apportioned when the negligence of the plaintiff is "slight." See note, page i 53 B. Comparative Fault in Strict Liability Actions Most jurisdictions refuse to recognize conventional contributory negligence as a defense to strict liability actions. While the theoretical consistency of applying compar- ative negligence principles to actions in strict liability may be questionable, courts faced with the issue have not hesitated to do so. It seems likely that one effect of the institution of a comparative fault system will be that conduct traditionally recognized as "contributory negligence" will assume new relevancy in strict liability cases. Adoption of comparative fault, more- over, would logically result in assumption of risk being considered only in mitigation of a plaintiff's damages. Also, misuse of a product might constitute culpable conduct which would diminish a plaintiff's recovery. C. The Relationship of Comparative Fault to Contribution Of the different types of comparative fault systems, the pure type seems most consistent with the equitable nature of apportionment. The 50% rule not only sometimes insulate? defendants who are partially responsible for the plaintiff's injury, but can also lead to gross inequities in multiple defen- dant cases. The problems in choosing an appropriate contribu- tion rule could be avoided if joint and several liability were abolished in comparative fault cases, though this might increase the likelihood of a plaintiff * s failing to recover the full amount of damages suffered. The doctrine of indemnity is not necessarily affected by the adoption of comparative fault. IV. Economic Impact The strict application of comparative fault may result in economically inefficient changes in either manufac- turers' or consumers' behavior or both. In some instances, application of such a test will not result in an optimal allo- cation of resources. Although a shift from a standard of con- tributory negligence to one of comparative negligence may appear to be moving the liability in the proper — economically efficient- direction, this may not always be the case, for an amount of resources greater than the potential damages may be devoted to accident prevention and avoidance. 54 ATTORNEY'S FEES I. Introduction In question here is the use of the "contingent fees" in personal injury actions. The contingent fee is a contractual arrangement whereby the lawyer is paid for his services only if there is a recovery and the size of the fee is contingent, in turn, on the amount of recovery. Usually lawyers charge a flat percentage of the recovery - typically 33 1/3% - though some will use a graduated scale (decreasing percentage with increasing size of recovery) , and others use a system wherein their percentage increases as the prosecution process progresses. In fact, a recent estimate indicates that the great majority of all claims are settled, and any change in the contingent fee system must, therefore, take the settlement process into consideration. There are various arguments for and against the system, the principal one in favor being that a great many persons with meritorious claims would be unable to afford a lawyer and, thus, would be denied access to the courts, particularly in products liability claims where the costs for investigation and trial are extremely high. Furthermore, the simple justice of "no recovery, no fee" appeals to the layman. Opponents argue that because the lawyer has a strong financial interest in the claim, conflicts of interest will inevitably arise, and that the interests of the lawyer will prevail. Contingent fees are also said to encourage the prosecution of small claims. In those claims that reach a verdict, it is argued that the jury tacitly adds in the lawyer's fees to the award, but there is no way of estimating the extent to which this happens. II. Assessment There are various proposals to change the contingent fee system: eliminate the contingent fee altogether, place limits on the contingent fee as a percentage of recovery, limit fees to a single flat rate, or establish a graduated fee schedule as in New Jersey. In the final analysis, fee limitations do not 55 significantly help the products liability defendant until they become so stringent that the plaintiff's lawyer loses his incentive and the volume of the claims begins to dwindle III. Models The proposed remedy is to limit contingent fees, with the expectation that this would help to reduce the costs of products liability insurance. However, if the proposed limitation of contingent fees were applied only in products liability cases, it might be unconstitutional as a violation of equal protection. If the limitation were applied to personal injury cases generally it would be constitutionally valid. A. Limitations on Contingent Fees The simplest approach to limiting lawyers' fees is that taken by the Federal Tort Claims Act , which prohibits lawyers from demanding or receiving fees in excess of 25% of any judgment recovered pursuant to the act. In a more sophisticated approach, court rules in New York and New Jersey have established graduated fee schedules which limit fees to decreasing percentages as the amount of recovery increases. The New Jersey model has much greater impact because the maximum fee declines toward 10% as the amount of recovery increases. The danger is that it might unduly discourage plaintiffs' lawyers from taking personal injury cases. B. Elimination of Contingent Fees Critics of the contingent fee system have proposed that (1) the contingent fee in its present form be abolished, (2) the successful plaintiff be permitted to recover, as an element of damages, a reasonable lawyer's fee, and (3) the award for pain and suffering be abolished or strictly limited. Proponents of the plan claim that it would eliminate the worst elements of the contingent fee and the pain and suffering award in one stroke, and reduce the cost of products liability insurance. Flaws in this proposal include the fact that it would be anathema to the plaintiff's lawyers, that it would deprive the injured party of his most effective bargaining weapon, the pain and suffering award, and it would, finally , 56 contradict the long-established principle of American juris- prudence that each party must pay his own lawyer's fee, regardless of the outcome. V. Economic Impact There is no sound empirical evidence on the question of whether the existence of legal fees, in principle, increases the pain and suffering award. Whether a fixed charge or a contingent charge has a greater effect on the size of awards for pain and suffering is also not determinable empirically. However, it is arithmetically quite possible that a "fixed" legal expense system results in a higher proportion of a plantiff's total damage award going to legal expenses than under a contingent fee system. 57 LIMITATIONS ON PAIN AND SUFFERING I. Introduction In personal injury actions, the amount of the pain and suffering award frequently exceeds the aggregate award for all pecuniary losses. Generally speaking, a limitation on the size or number of awards for pain and suffering may be expected to reduce substantially the grand total of jury- awarded damages in personal injury cases and, hence, to reduce the cost of products liability insurance. Any such limitation would be open to attack, however, on constitutional grounds . II. Assessment Whether to limit pain and suffering damages is a complex legal issue, and any legislative attempt to do so will encounter serious constitutional obstacles. From an economic standpoint, reduction of pain and suffering awards would probably reduce the cost of products liability insurance, though it would not necessarily be economically more efficient. III. Models A. Damage Ceilings The functional purpose of imposing an upper limit on pain and suffering awards is simply to eliminate "astronomical" jury verdicts, and thereby reduce the cost of products liability insurance. Damage ceilings have taken several forms. Some statutes for medical malpractice actions place absolute limitations on the amount recoverable from the negligent physician, while others limit the liability of health care providers to one figure and set a somewhat higher limit on recoveries from patient compensation funds. 58 B. Threshold Limits If the necessity of controlling pain and suffering awards is conceded, but the effect of damage ceilings on the victims of catastrophic harm is not justified, a more palatable solution may be the imposition of threshold limits below which no recovery would be allowed for pain and suffering. The purpose of this solution is to eliminate the "nuisance" claims for pain and suffering damages arising out of minor injuries, which account for a disproportionate share of the total dollars awarded. The elimination of such claims could reduce the cost of liability insurance. Yet* this may give manufacturers an undeserved benefit, because it would effectively eliminate the small claims. There are various types of thresholds that could be applied, with merits and drawbacks in each. However, before adopting a measure which is, by its very nature, quite arbitrary, it would be helpful to have statistical evidence supporting the need for these remedies. IV. The Proposed Remedy The pain and suffering award has been both thoroughly defended and criticized. The prevalence of liability insurance now blunts the punitive effects of the award, and the deterrent effect is hard to measure, if not questionable. Given that the injured party has suffered a nonpecuniary loss, the question has been much debated whether it is appropriate to compensate that loss with money damages. Proposals to eliminate pain and suffering have also been criticized for sacrificing the victim's "personality and uniqueness," thus having a "dehumanizing effect on society." In addition, defenders of the present system argue that the award is necessary to offset litigation costs and is an effective threat in forcing settlements. Irrespective of these arguments, any statute enacting a limitation is bound to encounter constitutional objections. There could be due process as well as equal pro- tection problems in a pain and suffering limitation. 59 Moreover, several state constitutions contain provisions which expressly prohibit the legislative enactment of limitations on the recovery of damages, and unless the courts can develop some legal fiction to avoid them, they will be serious obstacles to the enactment of limitations in those states. V. Economic Impact It is not clear that manufacturers would, in any direct way, benefit from such limits and ceilings. A benefit would only be derived if it could be shown that the prevailing level of damage awards exceeded the true economic costs of the accident victims. 60 PUNITIVE DAMAGES I. Introduction Punitive damages are awarded as an addition to compensatory damages in actions in which the defendant's conduct manifests intentional or reckless disregard of the rights of the plaintiff. The basic purposes behind the award are to punish a malefactor and to deter him and others similarly situated from engaging in such conduct in the future . II. Assessment A restriction on punitive damages may have little effect on the total amount of damages awarded in product suits. Nevertheless, state law changes to restrict punitive damages may be warranted in order to diminish the likelihood that a manufacturer would be subjected to excessive punitive damages by either a single judgment or by cumulative verdicts in multiple litigation. Most suitable would be adoption of the "complicity rule," and a procedural change in which the amount of damages would be fixed by the judge. III. Models The most direct method of limiting punitive damage recoveries would be the imposition of a uniformly narrow rule of manufacturer liability, such as the "complicity rule". This rule allows punitive damages to be imposed upon a corporation only where there is proof that a superior officer has ordered, participated in, or ratified the misconduct of a lower level employee. Thus, the shareholders of a corporation are not held liable for the malicious acts of a lower level employee. The main virtue of this rule is its flexibility, so that the plaintiff's burden of proving management complicity may be increased where the prospect of massive punitive damages is present. However, its potential for limiting punitive damage awards is necessarily circumscribed by the factual situations presented in 61 individual products liability cases. The responsibility for measurement of punitive damage awards should be shifted from the jury to the judge who, with his experience and training, could render a more objective decision, particularly with re- gard to the defendant's financial status. While the award of such damages should not be precluded in product cases, it has been suggested that they be paid to the state or to charity, rather than to the plaintiff. IV. Economic Impact The manufacturer's incentive to incur accident avoidance costs, which exceed the accident cost, due to the imposition of punitive damages, is clearly inefficient from a resource allocative point of view. Because the purpose of punitive damages is to induce manufacturers to produce safer products, it makes no difference to whom the damages are awarded. Resource allocative efficiency is served so long as damages are assessed to the manufacturer. 62 MODIFICATION OF THE COLLATERAL SOURCE RULE I. Introduction The "collateral source rule" is a principle of tort law by which, in computing damages against a tortfeasor, no reduction is allowed for benefits received by the injured party from sources unrelated to the tortfeasor, even though these may have partially or wholly mitigated his loss. The plaintiff, then, may recover certain kinds of damages from two sources. In practice, the collateral source rule operates as an evidentiary rule, by which evidence offered by the defense to show that the plaintiff has already recovered compensation for his loss is excluded. The collateral source rule developed out of an attempt by the courts of the 19th century to satisfy several basic goals: (1) compensation of the injured party; (2) punishment of the tortfeasor for his wrongdoing; and (3) mitigation of damages. Tort law was, at that time, seen as a peaceful substitute for revenge. Despite changes in the socioeconomic and legal contexts in which the collateral source rule was developed, the American Law Institute has confirmed the continued application of the rule. In contrast to the 19th century, today there is more often than not some collateral benefit received, and thus, a more uniform system may well be devised to allocate the overlap. At the same time, it is felt that the tortfeasor should pay all damages arising out of his act, even though the reception of collateral benefits may result in a windfall to the plaintiff. Though compensation for the injured party may by no means be "full," the collateral source rule seems an inadequate and inconsistent approach to the problem. With respect to insurance benefits, the courts continue to hold that "one who has invested years of insurance premiums to assure his medical care should receive the benefits of his thrift." The collateral source rule may be most strongly criticized in products liability cases, for although the law had undertaken to maximize efficiency in resource allocation, under the collateral source rule an injured party may nevertheless recover twice his actual loss. This is, in fact, inefficient. It seems that there is even less 63 justification for continued application of the rule in the products liability sphere than in other areas of tort law, and that some change in present practice is warranted. II. Assessment Modification of the collateral source rule is a feasible remedy. Useful models may be found in recent medical malpractice legislation, where, by statute, the defendant has been allowed to introduce evidence of collateral source benefits or, in the alternative, a reduction in allowable damages has been mandated. To the extent that predictability is a goal, the latter choice is preferable. From a legal point of view, there is little difference between the two choices. III. Models No uniform proposal for modifying the collateral source rule has emerged, but recently several states have modified the rule, either calling for deduction of some, or all, collateral benefits from the award, or by making changes in the evidentiary rules. In terms of predictability and consistency in allocation of collateral benefits, the statutorily-mandated deduction method employed by Iowa, Ohio, Pennsylvania and Tennessee seems preferable to the evidentiary rule changes of California and New York. There is some question as to how a modification of the rule would fare in court, and the issue remains open to analysis. Yet, given the equal protection standard currently applied, it is quite likely, although not certain, that the courts would bow to an exercise of legislative judgment of the need for such legislation in the products liability field. IV. Economic Impact Elimination of the collateral source rule would lead to a reduction in the incentives, on the manufacturer's part, to engage in accident prevention. Elimination of the private in- surance means of dealing with this risk is likely to lead to higher prices for products, and correspondingly less demand by consumers and less production by manufacturers. 64 PERIODIC PAYMENTS x . Introduction When the plaintiff prevails in a personal injury case, the trier of fact must make a lump sum award of damages at the time of trial, for loss of earning capacity, medical expenses in- curred, and losses resulting from pain and suffering. If the effects of the injury are more than temporary, the plaintiff may suffer losses in the future and these must be estimated at the time of trial. This exercise requires a considerable utiliza- tion of expert testimony and much conjecture, and can be arbi- trary and speculative. Considering the understandable jury confusion which this process creates, and the imprecise nature of the factors employed in the computation, the entire procedure is subject to uncertainty and abuse. II. Assessment A system of periodic payments, modeled after the benefit allowance provisions of workers' compensation, would have the effect of providing compensation which more accurately mirrors actual loss. However, such a system can be seen as providing a windfall to wrongdoers and as penalizing injured plaintiffs. Moreover, the implementation of this proposal may well create practical and administrative burdens upon the already heavily burdened court system. III. Model Workers ' compensation laws were enacted at the beginning of the 20th century to remedy the shortcomings of common law handling of work-related injuries. When an employee suffers personal injury from an accident, his disability is classified into one of four classifications, depending on the seriousness of the impairment. In recognition of the fact that the initial determination of disability is based on conjecture, all states 65 make some provision for reopening and modifying the awards. Since the award is in the form of periodic payments, the com- mission responsible can alter the payments according to the employee's changed condition at any time. Practical problems with such a system include administrative file keeping, dif- ficulties of proof, and the need for insurance companies to maintain reserves. In view of these difficulties, most states have established severe limitations on the power to reopen cases. This system does, however, greatly reduce the proba- bility that such awards will be inaccurate. IV. The Proposed Remedy The procedure followed in workers' compensation cases can arguably be employed in personal injury cases to produce more accurate awards. The periodic payment of damages could be secured on the basis of the defendant's liability insur- ance. However, such a system would require, besides time limitations on adjustment of awards, an adjudicative body in the judicial branch. If the plaintiff does not fulfill his calculated life expectancy, his dependents would not receive the same amount of damages under the system. Such philosophical considerations may well be considered so important as to out- weigh the practical advantages of the proposal. V. Economic Impact Lump sum damage awards are preferable to periodic pay- ments for two reasons: (1) The administrative costs related to periodic payments are clearly much higher, and, thus, this system would be economically less efficient. (2) A periodic payment system would, in effect, levy a 100% tax on earned income. Moreover, the periodic payment system does not ne- cessarily eliminate the estimation or calculation problems. 66 MODIFICATIONS REGARDING THIRD PARTIES INTRODUCTION Many work-related injuries are, in part, due to the actions of employers. Nevertheless, the immunity granted the employer in workers ' compensation statutes means that the manufacturer of a product associated with a worker's injury may be held liable for sums for beyond what can be traced to the product's defect. At the same time, employers can modify products used in the workplace by removing safety devices to speed production without exposing themselves to potential liability. Under present law, incentives for risk prevention are not always placed on the proper parties. Mechanisms which force negligent employers to share liability to injured workers are required. The only legal theories a manufacturer has avail- able to shift all, or part, of its liability onto an employer are "indemnity" and "contribution." However, the courts have allowed manufacturers' claims in only a few instances, in part because the employer's immunity from suit precludes it from being considered a joint tortfeasor. One remedy to this problem is, by statutory amendment, to allow the manu- facturer to shift at least part of its liability to the negligent employer, apportioning damages according to rela- tive fault . 67 INDEMNITY AND CONTRIBUTION I. Introduction The only legal theories a manufacturer has avail- able to shift all, or part, of its liability onto an employer are "indemnity" and "contribution." However, the courts have allowed manufacturers' claims in only a few instances, in part because the employer's immunity from suit precludes it from being considered a joint tortfeasor. One remedy to this problem is, by statutory amendment, to allow the manufacturer to shift at least part of its liability to the negligent employer, apportioning damages according to relative fault. II. Assessment Although there have been complex modifications in the contribution and indemnity rules in Pennsylvania and California, and although there are pending bills in Congress for altering the rules of contribution, the best remedy appears to be the law developed in New York. Despite the requirement of two judicial determinations, the New York rule is simpler and allows manufacturers to recover from employers that proportion of the damages that the employer partially caused. Absent any other change in the law, a similar legislatively sanctioned contribution rule is recommended.* III. Models A. The Pennsylvania Rule on Comp ensation Pennsylvania has forged a pragmatic compromise by allowing third-party actions against the employer for contribution, r See note, page i. 68 but only up to the amount of the employer's workers' compensation liability. Thus, the employer does not pay more as a joint tortfeasor than he would if he were solely liable. California in a more direct way holds the negligent employer liable for a portion of the loss, but in products liability cases the manufacturer is to bear the full loss from injuries attributable to defective products, and the employer's negligence cannot be raised as a partial defense. A combination of the Pennsylvania and the California law might provide a worthy model if it shifted enough of the loss from the manufacturer to the employer. B. Federal Legislation - 94th Congress 1. The Industrial Safety Encourage - ment Act (S. 3317 and H.R. 13624) The "Taft bill" states that, when an employer fails to comply with OSHA's standards for health and safety, and when this failure "caused or contributed to" the injury of an employee, the employer will no longer be shielded from an action of contribution or indemnification, brought by a third party who suffered economic injury as a result of the employer's misconduct. The bill leaves open the possibility of a great deal of diversity among the various states and would not standardize the law on contribution and indemnity. Furthermore, OSHA standards tend to lag behind fast-paced technological change, so that the bill would not be technically effective. 2. Amendments to S . 2018 The Taft bill amendments would be a compromise which allow a third party to seek contribution or indemnity from the employer, but limit that recovery to the level of the employer's workers' compensation liability. While maintaining an absolute limit on an employer's liability, it would provide manufacturers with some relief. C. The Dole Rule in New York In Dole v. Dow Chemical Co . , the court of appeals ruled that the manufacturer could recover damages from the employer in an action to determine apportionment of responsibility 69 for negligence. The Dole rule has since been given legislative approval so that settlements will presumably be encouraged. It is by far the simplest of the models, although there is no evidence for success or failure of this approach. D. Equitable Credit Under equitable credit, the manufacturer pays damages according to his degree of negligence and the employer pays only up to his liability as set by the applicable compensation scheme. Any additional loss to the worker goes uncompensated. 70 HOLD HARMLESS CLAUSES I. Introduction "Hold harmless" clauses in machine tool sales con- tracts state that the employer will reimburse the manufacturer for any liability arising out of the use of the tool. II. Assessment A statute validating a contract between an employer and a manufacturer which shifts the burden of liability to the employer would be a desirable enactment. Validation of hold harmless clauses in the limited context of machine tools sales contracts would avoid concerns about inequities which might befall the non -commercial consumer under a blanket rule of validation. III. The Proposed Remedy The courts are generally reluctant to enforce hold harmless clauses, reserving their strictest standards for enforc- ing them. There seems to be no valid reason not to allow manu- facturers to arrange contractually for payment of strict liability judgments, since the doctrine of strict products liability was intended to protect the consumer. Nevertheless, three federal courts of appeals have failed to enforce disclaimers of liability. There are two possible undesirable effects of hold harmless 71 clauses: (1) Imposition of the clauses by sellers with monopoly power. This could be controlled through the courts. (2) With the entire burden of accident prevention placed on the employer, manufacturers would have less incentive to produce safe machines. If the existing ruJes of contribution are not altered to allocate costs of an injury to both manufacturer and employer, hold harmless clauses in machine tool sales contract should certainly be validated. 72 PROHIBITION OF SUBROGATION BY WORKERS' COMPENSATION CARRIERS Introduction Subrogation is the right of a party who has paid the losses of an injured person to sue, or otherwise be reimbursed by, a third party who is primarily answerable for the wrong. In the field of workers' compensation and products liability, it is the right of the employer, who has paid workers' compensation benefits to the employee injured by a defective product, to sue, or otherwise be reimbursed by, the manufacturer. The mechanics of subrogation vary among the states, but the ultimate result is the same: reimbursement of the employer who pays compensation. There are six basic categories into which the subrogation statutes of nearly all 50 states can be placed: absolute subrogation, subrogation and direct action coexistent, employee priority, subrogee priority, limited assignment, and no subrogation. II. Assessment Subrogation of workers* compensation claims is dif- ficult to justify in the case of a negligent employer and a non-negligent, strictly liable product manufacturer. The prohibition of subrogation by negligent employers would be desirable, provided that the workers' compensation premiums paid by such employers can be experience-rated. III. Models A. The "No Subrogation" States One possible model is to prohibit subrogation by the employer absolutely, though this seems an overly broad approach and not based on sound social policy considerations 73 The most important reason why the example of the "no sub- rogation" states is of no aid to resolving the products liability dilemma is that it provides no relief whatever to the third-party tortfeasor, for the employee may still sue the manufacturer. B. The Illinois Approach In 1956, Illinois courts adopted a novel approach to the situation. The employer's right of subrogation to recover the workers' compensation benefits it had paid was limited to actions asserting liability against third parties based on negligence and excluded strict liability action. However, on the basis of a continued inability of the courts to discern a sound basis for the rule, it was ultimately abandoned and overruled in a recent case. The experience of the Illinois courts makes it clear that allowing or prohibiting subrogation on a distinction between negligence and strict liability is unworkable and irrational. C. Federal Legislation The proposed Industrial Safety Encouragement Act of 1976 would, in unqualified language, prohibit any state from preventing the defendant in such a third-party action from raising as a defense the employer's contributory fault, where such fault involves a failure to comply with OSHA or any state requirement relating to industrial safety. The Act is vague, however, in respect to the scope of the defense - whether it is a total defense, which leaves the employee with only workers' compensation benefits, or a partial defense. The chief intent of the Act is to promote industrial safety, by theoretically resulting in a negligent employer paying higher premiums for workers' compensation insurance. However, this would only occur with employers who are experience-rated or self-insured, and only a quarter of all firms are experience-rated. The Act would be a detri- ment to employers as a class, then, but it would not neces- arily fix added financial loss specifically on negligent employers. D. Interrelationship of Possible Alternatives A proposal for prohibition of subrogation in workers' compensation cases could either abolish the employer's right of subrogation in all cases, or it could merely abolish the right of negligent employers' to subrogation. 74 The former proposal has hardly any legal precedent. If it were coupled with creating a right of indemnity or contribution in the third party, that would be the equivalent of eliminating third-party actions altogether. Besides being rather speculative and ignoring fundamental aspects of risk prevention, it would leave the injured employee with only the compensation award as his recovery. The latter proposal is supposed, in theory, to increase risk prevention on the part of employers, but indications that workers' compensation insurance premiums are not experience-rated, according to the number of claims made against a particular employer, suggest that this proposal would not make the negligent employer suffer added financial loss. 75 MAKING WORKERS 1 COMPENSATION AN EXCLUSIVE REMEDY I. Introduction The costs and damages of products liability suits arising out of workplace accidents are often borne by the manufacturer alone because, not only must he pay damages to the injured worker, but he must also typically pay the subrogated claims of workers 1 compensation carriers. Even if both the employer and the manufacturer are partly responsible for the injury, existing tort law does not generally permit the manufacturer to obtain contribution from the employer. One method suggested by manufacturers to alleviate this problem is simply to abolish the employee's right to sue the manu- facturer and to make workers' compensation the sole remedy available to an injured worker. This idea has primary, if not sole, appeal for the manufacturers. Obviously, the injured worker would be left with workers' compensation as his exclusive remedy, while the employer would bear the added costs of workers' compensation to adjust for the loss of damages for the worker. Therefore, it seems necessary to provide a mechanism whereby manufacturers would contribute to the cost of the increased workers' compensation. II. Assessment Although making workers' compensation an exclusive remedy would lower product liability premiums, statistics indicate that the imposition of such a system bears no pragmatic relation- ship to safety incentives. Moreover, such a scheme would have serious constitutional problems, as well as legislative ones in its structure and scope. Professor O'Connell's collective bargaining approach also seems riddled with substantial diffi- culties. III. Models A. Policy Considerations Disinterested commentators overwhelmingly oppose the abolition of the injured worker's right to bring a tort action against third parties. Sporadic attempts to extend 76 the scope of immunity from tort action beyond that for the employer have been met with objections, either legislative or judicial. B. Constitutional Considerations An attempt to deprive an injured employee of the right to sue the manufacturer may be challenged on constitutional grounds. Of course, under appropriate circumstances, a legislative body may, without offending the Constitution, abrogate common law actions or defenses, provided that the abrogation of certain common law rights was offset by reciprocal compensating advantages. Moreover, workers' compensation acts are intended to affect common law rights only as between employers and their employees - not third parties, such as manufacturers. Thus, it appears that the proposed remedy would encounter serious constitutional objections. First, to the extent that no reasonable substitute is provided for the injured worker's cause of action against the manufacturer, there is almost certainly a deprivation of due process. Second, even if that objection were met, there may remain equal protection and due process problems. IV. The Proposed Remedy A. Legislative Amendments of Workers' Compensation Acts A legislative approach may result in a system where the supplier or manufacturer would contribute to the cost of workers' compensation insurance, in return for immunity from tort liability and limited liability according to a fixed compensation schedule. There are several serious difficulties with this plan: (1) it may be difficult to determine which manufacturers ought to participate in the plan; (2) it would require a manufacturer to contribute in each state in which its workplace product was sold; and (3) the cost to the manufacturers of the compensation benefits would be just as "unaf fordable" as the existing cost of products liability insurance. B. The Collective Bargaining Proposal . Professor Jeffrey O'Connell has proposed that the abolition of an employee's right to sue the manufacturer could 77 best be accomplished by contract, specifically through collective bargaining between the employer and the union. There are numerous substantive problems with this proposal, not the least of which is the possibility that the courts would not uphold these contractual waivers of employees' rights . 78 NO-FAULT I. Introduction Tort litigation, in its present form, is a cumber- some, unsatisfactory and, at times, costly mechanism for providing compensation to the victims of products-related accidents. It has been proposed that a "no-fault" system of reparation be instituted, in which a person suffering an injury arising out of his use of a given product would be entitled to compensation for a substantial part of his loss from the product's manufacturer or its insurer. This right to compensation would arise, whether or not the product was defective, and regardless of the manufacturer's conduct. A no-fault system is said to be preferable to the tort system because it saves the expense of litigating, eliminates attorneys' fees, and gets money into the hands of accident victims promptly. II. Assessment Products no-fault must be regarded as a long-term response to the products liability problem and not as a short- term solution to the alleged products liability "crisis." Beyond some very serious social policy considerations, there are practical problems in instrumenting any of the no-fault models that have been proposed. No-fault in the absence of legislation is of doubtful legal viability and would require, at the very least, years of judicial construction to be fully developed. Until a number of states enact no-fault, there would be little incentive to make use of an elective no-fault plan. Moreover, no-fault proponents have not yet explained what classes of events will be made compensable. Compulsory no-fault would be less economical than - and probably inferior to - a New Zealand-type plan. Also, elective no-fault will do relatively little to increase the percentage of accident losses currently being spread by insurance. The benefits of elective no-fault do not appear to be worth the "justice" costs of the bizarre irregularities of treatment for accident victims that it will inevitably entail. 79 III. Models A. Analogous Models From Other Fields 1 . No-Fault Automobile Insurance Unlike workers' compensation/ no- fault automobile insurance has not yet been in existence long enough to permit a confident assessment of its accomplishments and failures. Automobile no-fault plans were aimed at eliminating small pain and suffering awards, while still leaving all serious injuries to the old tort system. Great variations in the different state automobile no-fault plans make it difficult to generalize about their merits. 2 . Difference between Workers ' Compensation , No-Fault Automobile Insurance, and a No-Fault Approach to Products Liability . The products no-fault problem differs from the workers' compensation one, and from the automobile no-fault one, in a number of important ways. Automobile no-fault plans are aimed at small claims. The "crisis" in the products field revolves about the large, spectacular claims. Auto- mobile no-fault is first party insurance. Products no-fault would be third-party insurance. Because the statistics on expected loss experience are not good, products no-fault is much more of a leap into the unknown. Great geographic dispersion of claimants may make claim servicing more costly in products cases. The scope of no-fault products liability, unlike the others, is not as susceptible to clear definition. 80 There is a good deal of confusion in the private insurance coverage scheme as to which insurer will do the paying, and this would have to be resolved either prospectively, by extremely detailed coverage exclusions or retroactively, in the course of litigation. The evidentiary problems, moreover, in no-fault products cases may be somewhat higher than in workers' compensation or automobile no-fault cases. Elective products no- fault would, also, raise problems of public acceptance. B. Models in the Field of Products Liability . 1. New Zealand's Accident Compensation Plan . In 1974, New Zealand abolished workers' compensation and tort actions for personal injuries arising from all accidents - not just those arising from products - and sub- stituted a government-run system of reparations payments. It is too early, however, to appraise the operation of the New Zealand experiment, or to comment upon the reasons why it could or could not be transplanted here, though prior criticisms of the tort system there are similar to those of American advocates of private no-fault insurance. 2. The O'Connell Elective No-Fault Proposal . In contrast to a government plan, Professor Jeffrey O'Connell has recently suggested that manufacturers be permitted, though not required, to immunize themselves from tort liability caused by their products, and to accept, instead, a duty to make limited payments, without regard to fault of any kind, to persons injured by the use of such products. The victim, in such a plan, retains his tort right to sue for pain and suffering and economic loss, though both would be limited by the no-fault ceiling. Such no-fault plans would be a sort of warranty and would be enforced by the courts as reasonable contractual modifications of tort liability. Contractual no-fault may be an interesting theoretical solution to the products liability problem, but it is unlikely to gain acceptance. 3. The Freedman Elective No-Fault Proposal New York attorney Warren Freedman proposes that manufacturers offer consumers, via warranty announcements 81 on packages, an option to sue in tort, or to accept up to $5,000 in reparations. Where losses exceeded $5,000, awards for pain and suffering would be made. C. Economic Evaluation of a No-Fault System in the Products Liability Field . 1. No-Fault's Effect on Accident Avoidance by the Product Manufacturer . Under a no-fault plan the incentive to increase the safety of the product would not be as strong. Attention to engineering features for safety would be reduced as the amount of damages were reduced. . 2. The User's Incentive to Avoid Accidents . Insofar as product users are concerned, it is difficult to believe that no-fault coverage will make them more diligent in avoiding injuries. 3. No-Fault's Impact on Accident Costs and Loss-Spreading . The no-fault plan will clearly spread the loss of some accidents whose cost is now borne largely by the victims themselves. 4. The Transfer Cost Savings of No-Fault A no-fault system would alleviate some of the difficulties associated with the cumbersome litigation re- quirements of the present system. However, there are a number of reasons to expect that no-fault would be less successful in this reqard than workers' compensation systems. D. The Legal Implementation of Products No-Fault . The legal uncertainties surrounding contractual no- fault in the absence of enabling statutes are great, and these would rule out contractual no-fault as a quick solution to the products liability crisis. It may be said with some confidence, however, that legislation obliging or enabling manufacturers to substitute no-fault for tort liability under common law would be held constitutional. The precedent of automobile no-fault argues strongly that products no-fault will survive due process and equal protection challenges, as well as right to jury issues. However, if the states passed different compulsory no-fault laws, the courts might strike down all or some of the schemes as creating nondiscriminatory, yet nevertheless unendurable, burdens upon commerce. 82 IV. Economic Impact No-fault plans do not address themselves to the question of how to create the proper economic incentives for efficient accident avoidance. Furthermore, they will necessarily result in the significant undercompensation of many accident victims. 83 ARBITRATION I. Introduction The primary benefit to be derived from any arbitration procedure is its cost-effectiveness. It is assumed that arbi- trations will achieve resolutions at least as equitable as civil trials. Although direct cost comparisons are hazardous, it appears that arbitration compares favorably with civil litigation as a mechanism for resolving products liability disputes. Although not a perfect comparison, medical malpractice cases offer the best model for evaluating a proposal for products liability arbitration. Issues of causation, technical and expert evidence and informed consent are present in both cases. Further- more, in both areas social and financial responsibility are deter- mined, so that the differences in the nature of the claims is not as great as it would first appear. II. Assessment The limited data now available indicate tentatively that arbitration is an efficient alternative to litigation in the medical malpractice area assuming a substantial success rate in disposing of cases without leading to trials. The efficiency in resolving disputes and the speedier handling of claims should theoretically reduce the cost of premiums and increase the avail- ability of insurance. It should be noted that this has not been the case in the area of medical malpractice insurance probably because malpractice insurance rates have been calculated region- ally rather thaxi on a statewide basis as have products liability rates. It seems fair to conclude that some form of compulsory arbitration should be implemented at the earliest possible time. III. Models There is only one study comparing arbitration and liti- gation of medical malpractice cases. Duane Heintz analyzed data on medical malpractice claims at California hospitals and found 84 that the hospitals with arbitration had fewer claim filings, a more expeditious resolution of claims, and a lower rate of in- crease in the amount of the settlements. The lower rate of in- crease was attributed to the speed of the process as the costs for legal defense were lowered. The lower defense costs will permit reduced premiums and, quite possibly, bring more stability to prognostications of the future costs of insurance , thus reducing the amount of reserves against fluctuations in future costs. Consequently, more insurance should become available as a stable profit will be assured. A. Compulsory Arbitration Only a few of the many medico-legal mediation and arbi- tration plans have been tested for constitutional violations. The Pennsylvania Supreme Court ruled that compulsory arbitration is permissible provided that the litigant has the right to a trial de novo where the panel's recommendations are admissible as non-conclusive evidence. The right of trial by jury is pre- served intact, while the Pennsylvania court held that the crowded court calendar justified compulsory arbitration of small claims. In New York, the court has approved compulsory arbitration as an acceptable procedure to relieve congested court calendars, yet at the same time finding the admission into evidence of the review panel's recommendations to be a denial of plaintiff's right to a meaningful jury trial. An Illinois court found the delegation of judicial functions to a medical review panel to be unconstitu- tional as they made conclusions of law and fact. Where the arbi- trator's decision is non-binding and access to the courts has not been barred, the compulsory medical malpractice arbitration panels have achieved a measure of approval. Also, voluntary, non-binding medical mediation panels have not been challenged. B. Contractual Arbitration Contractual arbitration occurs when parties agree to submit future disputes to binding arbitration. These have been uniformly upheld by the courts unless the resisting party could show a contract defense, the most prevalent being one of uncon- scionability . In general, the courts have been supportive of arbitration agreements in hospital admission forms, which have for the most part been accepted by the patients themselves. There has also been a decrease in arbitration requests where in this instance a quick and inexpensive means of claim resolution was available. 85 IV. The Proposed Remedy The lower administrative and procedural costs asso- ciated with arbitration may be cited as one reason for its utilization in the products liability area, although it is by no means proven that arbitration would be less expensive than litigation. While usual trial costs would not be incurred, there would be the cost of expert witnesses, the salaries of the arbitrators and other expenses. Yet the stabilization of the amount of the rewards through the more uniform and knowledge- able awards of a panel of experts should provide a lowering of the insurance companies' reserves, thus providing more money for insurance. Also, the presence of experts on the panel should minimize the need for expert witnesses and would provide a more efficient fact-finding staff. In turn, there would be better quality control through speedier determinations and thus defective products would be pulled off the market more quickly. Confidentiality of trade secrets would also be insured. In the instance of compulsory arbitration, it would only be effective if there were few appeals and that is by no means certain. At the same time there is a real question if the courts would accept the notion that there is an insurance crisis allowing for the application of state police power. V. Economic Impact A system of mandatory arbitration of products claims would reduce both administrative costs and estimates of the economic cost of pain and suffering. To the extent that arbi- tration panels could more accurately estimate the true economic costs of accidents, an arbitration system would be preferable to the current system. 86 PRODUCT LIABILITY PREVENTION TECHNIQUES I. Introduction Four methods by which manufacturers' efforts to make their products safer may be facilitated or encouraged by governmental action include: (1) to require manufacturers to enhance product safety as a condition for participation in assigned risk plans, joint underwriting associations, or insurance contracts to be reinsured by government agencies; (2) to require insurers to build into their products liability rates differentials which reflect manufacturers' safety proce- dures; (3) to require insurers to assist the loss prevention activities of manufacturers; and (4) to gather injury data and disseminate it, alone or accompanied by engineering advice, to the pertinent manufacturers. II. Assessment Of the four, the last seems the most likely to achieve success in loss prevention, although it is already done to a certain extent in this fashion by the Consumer Product Safety Commission. The next best suggestion in this group is to require insurers to experience-rate manufacturers with significant differentials in premium cost. The first and the third, though they have theoretical appeal, seem very unlikely to succeed. III. Models A. Requiring Manufacturers to Adopt Product Safety Programs as a Condition to Participation in Insurance Programs It appears that the legal power of the states to adopt this scheme is incontestable. However, its potential for success is questionable, because it seems that those participating in the scheme — small businesses — would be put at an economic disadvantage as compared to larger manufacturers 87 many of whom could acquire insurance elsewhere or self-insure. Ambitious safety upgrading should be enforced by direct safety regulations on all manufacturers, not just those in a special insurance program. B. Requiring Insurers to Build Differentials into Their Products Liability Rates While there seem to be no major legal obstacles to effectuating such a plan, if insurers and manufacturers are slow to implement economically- justified safety measures, legislative mandating of rate differentials seems to be a roundabout way of getting those measures put into practice. However, with a truly elastic premium rate structure, it seems it could work. C. Requiring Insurers to Assist the Loss-Prevention Activities of Manufacturers Professor Herbert Denenberg has proposed that, since insurers have access to a large amount of statistical data on the loss experience of manufacturers, the insurers could provide counsel to the insureds on loss prevention. This proposal may be unrealistic, however, in expecting insurers to cooperate in reducing their long-range premium flow. It may also seriously overvalue the expertise and manpower available to insurers and, particularly, to smaller insurers. It may well be that such loss prevention counseling could be better performed by private counsulting firms or the government, D. Assigning to a Government Agency the Task of Collecting Data on Injuries Information regarding product-related injuries is already being collected by the Consumer Product Safety Commission and separately under 0. S.H. A . This activity, the collection and dissemination on a national scale of technical information concerning specific products, seems likely to result in safer products and the prevention of loss. What is perhaps needed most at the present time is not simply the development of more expertise in consumer products safety, but rather the development of a clearinghouse mechanism to more effectively channel that expertise. A recommendation along those lines might involve the training of "safety" engineers with combined expertise in all phases of consumer product safety. 88 INSURANCE MECHANISMS STATE OR FEDERAL ACTION There do not appear to be any serious legal or prac- tical problems in effectively instituting, at the state level, insurance mechanisms aimed solely at curing insurance un- availability. Though any pooling device would be only state- wide, its insurers could make use of nationwide underwriting experience. However, it should be recognized that proposals to use such insurance mechanisms to promote loss prevention, or to make products liability coverage compulsory, may well require federal implementation. 89 MANDATORY PRODUCTS LIABILITY INSURANCE I. Introduction Mandatory insurance merely means requiring, by statute, that all manufacturers, distributors and sellers who put products into the stream of commerce carry products lia- bility insurance of certain limits. There is a rising fear that, with the problem of rising costs and unavailability of products liability insurance, manufacturers will be "finan- cially irresponsible," and victims will go uncompensated. In the automobile area, statutes to guarantee the financial secur- ity of all motorists have either been compulsory for all motorists or merely for those who have demonstrated some finan- cial irresponsibility. Either model could be applied to pro- ducts liability insurance, with the added feature of compul- sory insurance for manufacturers with products that are es- pecially hazardous. II. Assessment Mandatory products liability insurance is probably not a very good remedy in itself. Though it is almost certainly constitutional, it presents many practical problems in its ef- fective implementation. III. Models A. Constitutionality In view of past decisions upholding the power of the state to impose compulsory automobile insurance, it appears that a mandatory products liability scheme would also withstand constitutional attacks on due process and interference with interstate commerce grounds. If many innocent products victims are going uncompensated, and some products can be characterized as "dangerous instrumentalities," these facts further justify this regulatory legislation. 90 B. Relationship to No-Fault Insurance A compulsory products liability insurance law may be combined with the present tort liability systems or with a no-fault compensation system. In either case, with the enactment of a products financial responsibility or compulsory insurance law, the need for the creation of a residual insurance market would become even greater. There seems to be no real authority to support the notion that the widespread use of liability insurance eliminates the deterrent effects of the fault system, and thus leads to careless behavior. In fact, soaring pre- miums might have a deterrent effect in themselves. C. Some Practical Considerations Assuming that a mandatory products liability law would apply to companies incorporated outside a particular state, but "doing business" in that state, some definition of what constitutes "doing business" in a state would have to be made, perhaps along with varied coverage requirements to correlate with the varied volumes of business done in state by those foreign corporations. Furthermore, besides requiring a large bureaucratic apparatus to administer such an act, effective enforcement would seem very difficult and ex- pensive to achieve. To guarantee full coverage to products victims, mandatory insurance would seemingly have to be in- stituted in all the states. 91 UNSATISFIED JUDGMENT FUNDS I. Introduction An unsatisfied judgment fund is a public fund which is available to injured plaintiffs who cannot collect on an otherwise enforceable judgment. These funds are limited to a certain dollar limit and to injuries resulting from a particular risk. So far, they have appar- ently only been utilized in connection with automobile accidents. II. Assessment Unsatisfied judgment funds can only be justified as an emergency measure but, as such, they would probably have some advantages over a mere mandatory insurance or financial responsibility law. III. Models A. Payment Unsatisfied judgment funds, in the context of auto- mobile injuries, generally provide compensation for losses to claimants unable to recover against uninsured or unidentifiable drivers. The limits of liability of existing funds are set at the minimum amounts required under the states ' financial responsibility laws. In a products injuries context, setting the limit of liability of such a fund would depend on two factors: (1) the method of financing the fund; and (2) the average expected individual loss. There seems to be no prob- lem in imposing maximum limits of recovery from such a fund. Indeed, such limits would be essential for the funds to re- main solvent. A modification of the collateral source rule would also help to preserve fund resources. B. Funding The major problem in implementing an unsatisfied judgment fund in the products context is in choosing a source for fund monies. The five existing funds for automobile 92 accident victims derive their assets from various sources, including extra fees for motorists and assessments on insurers. Problems could arise, however, with the assess- ment of private insurers to support such a fund for product injuries. Assessing a fee on all manufacturers would run into problems with foreign businesses selling products in a state. The simplest and most equitable means of support- ing such a fund would be from the state treasury. This, of course, would require a policy decision by a state to use its taxing power to pay for all uncompensated product injuries C. Comparison With a Mandatory Insurance or Financial Responsibility Law Remedy Mandatory insurance and unsatisfied judgment funds are really very similar remedies, though it appears that an unsatisfied judgment fund would, if properly funded, more efficiently serve to protect against uninsured and insolvent businesses. 93 ASSIGNED RISK PLANS I. Introduction Assigned risk plans are designed to provide insurance for persons who have been rejected by the voluntary market. The applicant sent to an assigned risk plan is placed in a pool and, from this pool, is assigned to an individual carrier. Each carrier assumes only the risks assigned to it. II. Models A. The Michigan Automobile Insurance Placement Facility Though assigned risk plans were originally adopted to serve a relatively small, residual market of drivers who could not otherwise obtain insurance, the growth of the number of drivers insured has in some states been spectacular to the point where the assigned risk plan is the largest writer of insurance. The plans are designed to apportion undesirable risks to companies based on the amount of voluntary automobile insurance each insurer writes in the state. Prices generally include a base rate, in excess of voluntary market averages, plus some form of surcharge. In some states, the assigned risk rates are being subsidized by the voluntary market. Assigned risk plans have become more of a substitute market than a mere market of last resoit. Because the plans often generate losses and costs in excess of premium volume, their rates should be raised, but this would run counter to the avowed purpose of the plans to provide "maximum availability at relatively low rates." Thus, a legislative compromise is warranted. Under the Michigan plan, when a driver is rejected by a voluntary market agent, the agent must offer to place him through the facility. It also provides for reinsurance of facilitated risks. Generally, insurers have preferred assigned risk plans over other plans because of the control that they retain. For the insureds, problems with the plan have been substantial, due to failure of sufficient accessibility and inadequate coverage. The 94 latter problem could be cured, in part, by reinsurance of coverage. Poor marketing arrangements and the stigma attached to being an involuntary risk are also problems to be dealt with. There appears to be no constitutional problem with the concept of assigned risk plans, as the U.S. Supreme Court upheld a state assigned risk plan on the basis of a state's broad powers to regulate the insurance business in the public interest. B. The Massachusetts and Connecticut Proposals The application of assigned risk mechanisms to the products liability insurance crisis is an idea which has recently provoked considerable interest, and proposed to be modelled after the Massachusetts FAIR plan, which operates through the Urban Area Placement Facility. The FAIR plan was a response to the unavailability of property insurance, and it was felt that products liability insurance might be more analogous to property insurance than to any other. The bills provide that all insurance companies licensed within the state must organize a products liability insurance placement facility, from which risks would be placed or assigned. Under the provision for product inspection, some manufacturers would still not be able to secure coverage through the facility. However, there are no existing state standards for product safety or design to serve as criteria for product inspection. Furthermore, those products already marketed would not be affected. This provision for product inspection as an attempt for promo- tion of product safety appears to conflict with the other purpose of the plan, which is to increase accessibility of insurance. Finally, the proposals set a rather vague stan- dard for limits of coverage. While the constitutionality of assigned risk plans has been established, the provision for a medical malpractice insurance placement facility was found unconstitutional in Hartford Accident ana Indemnity Co. v. Ingram . The North Carolina court stated that it was outside the province of the legislature to "conscript" insurers who were not writing medical malpractice coverage to supply the need at their own risk or expense. The court emphasized that the mere obtaining of a license to write insurance against liability for property damage or personal injury was not a voluntary undertaking by the 95 licensee to write policies insuring against liability for medical malpractice. The court noted further that this was a burden, entailing high loss potential, that com- panies should not be forced to assume. It is clear that the products liability insurance bills are certainly con- stitutionally vulnerable under the court's analysis. How- ever, federal courts would not be likely to apply the stan- dard of review employed by the North Carolina court. Thus, the models considered here would probably face serious constitutional difficulties only in those states where the courts persist in applying substantive economic due process theories under their state constitutions. III. The Proposed Remedy It appears that if an assigned risk plan is to be established, it should have some form of subsidy from either the voluntary market or the government, a mechanism whereby truly dangerous products could be kept out of commerce, some form of premium financing, and a provision for reinsurance of high risks. There is some question whether assigned risk plans are viable given the variety of the products and the resulting variety of the risks. Also, the "tail" effects of products liability, where a manufacturer may be liable for products manufactured many years ago, will inevitably lead insurers to opt out of the plan, as would the soaring amounts of recovery from the rapidly rising incidence of litigation. Therefore, it would have to compel participation by all insurers writing any general liability and casualty insurance in the state, and not just those writing the particular line of products liability insurance, which would, in turn, lead it into the constitutional difficulties suggested by Ingram . Thus, even the best-drafted and most carefully constructed plan will necessarily involve both constitutional and practical difficulties. 96 JOINT UNDERWRITING ASSOCIATIONS I. Introduction A JUA is an organization of all insurers writing certain kinds of insurance on a state level. Usually created by law, JUA's are a response to a situation of either insurance unavailability or availability only at prohibitively high prices. Each member is required to "participate" by bearing a portion of the operating expenses and losses sustained. JUA's pool the premiums to spread the losses evenly. The business of the JUA is often handled by one designated insurance company or "servicing carrier". If a JUA were to be applied to the products liability insurance field, it would be necessary to compel participation by all insurers, in order to insure a large enough pool and to have servicing carriers experienced in the specialized area of products liability insurance handle the association's business . II. Assessment The JUA appears to present a good vehicle for solving the availability problem in products liability insurance. Provisions for recoupment of deficit shares by member insurers should solve the constitutional problems. The NAIC model for medical malpractice JUA's provides a framework to be copied, but 'the most promising system is the Florida plan, with its merger of JUA and self -insurance features . III. A. Constitutionality The concept of service carriers in JUA's goes a long way towards remedying the constitutional problems 97 raised by the North Carolina Supreme Court in Hartford Acci - dent & Indemnity Co. v. Ingram . It seems that the court principally based its holding of unconstitutionality on the ground that it required inexperienced insurers to share in the losses involuntarily underwritten by them. Thus, JUA provisions for insurer participation in deficits may be in question. Since a products liability JUA would compel participation of all insurers writing liability and casual- ty insurance in a state, it would be of questionable validity under the Ingram analysis, unless some clear assurance were given that the participating insurers could recoup their losses. Many of the health care JUA's have provided such assurance. The stated purpose of the malpractice JUA's is to provide a temporary market in malpractice insurance "on a self-supporting basis without subsidy from its members" until other remedial efforts take effect. The model legis- lation for malpractice JUA's provides the means for member insurers to recoup their share of any deficit incurred by the JUA, and this should be sufficient to insure these plans' constitutionality. It may be desirable that any products liability JUA proposal incorporate the feature of recoupment in order to insure its constitutionality under all state constitutions. B. Intended Duration JUA's can be created as temporary stopgap mea- sures like the malpractice JUA's, or as permanent mechanisms. If temporary, policies might have to be written on an "occur- rence" basis, whereas a "claims-made" basis has been pro- posed as a preferable method of lowering products liability premiums. The proponents of claims-made insurance believe it would eliminate some of the speculative element in rate- setting. C. Sole Source of Coverage It appears desirable to retain a voluntary market for those manufacturers still able to obtain insurance, so that the JUA ought to be non-exclusive. Yet, if rates were lower in the voluntary market, the JUA would be left with all the high risk manufacturers and would thus incur losses . 98 D. Combined JUA and Self Insurance Florida's medical malpractice JUA provides not only for a non-exclusive JUA but also for self-insurance pools by groups of health care providers that operate like traditional JUA's, with some different funding arrangements. In the case of a deficit, each policyholder is assessed additionally up to one-third the amount of the premium, as a "premium contingency assessment." A "Patients Compensation Fund" was also established to cover settlements over $100,000. The problem in evaluating the Florida plan is that it has only been in operation since 1975. Yet, it seems that some form of self-insurance JUA would be advantageous to the products liability insurance field, since it might stimulate self-policing of dangerous products by a group of manufacturers Furthermore, familiarity with the nature of the particular industry would facilitate reasonable ratesetting. The Florida plan should thus be seriously considered as a model for remedying the products liability insurance problem. 99 STATE-OPERATED FUNDS I. Introduction By means of state-operated funds, some states have chosen to create an insurance market for those risks that have been rejected by at least two insurers. Controlled and operated by the state itself, the funds sometimes appoint a company to act as a servicing carrier. II. Assessment Theoretically, a state -operated fund would provide a remedy for the products liability insurance problem. However, whether such a scheme would be more successful than a joint underwriting association is questionable, particularly as it may run into financial difficulties requiring legislative remodeling Though experience with patient compensation funds is limited, they may be a useful analogy for the products liability problem, in that they establish maximum claims on insurers and thus en- courage increased insurance availability. III. Models A. Workers' Compensation State insurance funds first came into use in the area of workers' compensation law, where statutory provisions required all employers to "secure compensation" for all their employees. Thus, assurance of full insurance availability was necessary. Generally, such funds have expense ratios somewhat lower than those of private insurers, due to centralization of a large number of risks with one servicing organization, and they are certainly attractive in terms of permitting lower premium rates. The major criticism at least with respect to some funds in workers' compensation has been inefficient, inadequate service. 100 B. Automobile In Maryland, a fund was set up by assessments on premiums collected by other insurers writing automobile insur- ance, in response to dissatisfaction with automobile assigned risk plans. Though such a general assessment scheme might assist in avoiding unavailability of insurance for products liability, there are serious questions concerning its constitutionality and it seems of questionable value. C. Medical Malpractice 1. Michigan In Michigan, the "Brown-McNeely Insurance Fund," a malpractice fund recently established by the legislature, pro- vides a good model of how a state fund for products liability could operate. Provision for a public hearing to find that a class of providers cannot readily obtain insurance would insure that there really is an unavailability problem. Since assess- ments are only levied on insurers writing malpractice policies in the state, and since they may be passed on by those insurers to policyholders, there would be no constitutional problem. Since the fund is subsidized in part through assessments of providers who can obtain insurance in the voluntary market, rates for those insured through the fund become more "affordable." Theoretically, the fund should assure the availability of ade- quate liability coverage. 2 . Indiana and Louisiana Indiana and Louisiana have established identical systems whereby the state provides malpractice insurance to those unable to obtain it from other insurers. A qualified health worker is not liable in excess of $100,000, but will pay an annual surcharge to a Patients* Compensation Fund to cover all such claims in excess of $100,000. Both statutes impose a flat limit on recovery for any malpractice claim of $500,000. These acts have certain theoretical advantages, in that availability of insurance would be guaranteed and private insurers would be encouraged to stay in the market, due to the limits on liability. The major problem is the possibility of insolvency, since the provisions creating the authorities do not anticipate losses so that the authority would require high premiums and attract only the high risks. Also, with respect to the patients' compensation funds, there is no assurance that an injured claimant will ever receive full compensation, and no provision for the total insolvency of the funds. 101 3. Florida/ Oregon , Pennsylvania, and Wisconsin These four states have established patients' com- pensation funds in various forms, and some have taken steps to remedy the insolvency problems seemingly inherent in the Indiana and Louisiana funds. Oregon, for example, will pay no more than 10% of a total judgment in any one year, while Wisconsin would only spread the payment of claims in the event the fund incurs liability exceeding $1,000,000 to any person under a single claim. The statutes of Florida and Wisconsin provide for unlimited deficit assessments to meet fund defi- ciencies, and this would certainly work well in the products liability field . 4. New York New York's Medical Malpractice Act provides for an exclusive state medical and hospital malpractice fund in the event the JUA is unconstitutional or becomes insolvent. It is a contingency or last resort measure for guaranteeing the continued availability of medical malpractice insurance. Whether such a drastic remedy is necessary in the products liability field is certainly open to question. 102 FEDERAL INSURANCE I. Introduction One of the most basic concepts in insurance is the "pooling mechanism" whereby risks are spread over as great a number of insureds as possible. The simplest method of creating a nationwide federal pooling device is through federal insurance. It is a mechanism whereby the federal government becomes an insurer and makes insurance available to certain high risk insureds. Losses are paid by this federal insurer out of premiums collected, as well as out of general revenues. Generally, the federal government provides insurance in areas where losses are, or could be, great. In the past, it has acted in areas where, without insurance, the taxpayer would end up paying for the losses through govern- ment assistance to the victims. Thus, the government bears the risk of an enterprise that the private market considers too risky to insure. II. Assessment The federal government is theoretically best suited to establish the largest possible pool of products liability insureds and thereby create the cheapest possible products liability insurance. However, there are many practical prob- lems with this theory. Federal insurance would be expensive, and it would not be an easy program to terminate. Furthermore, if the insurance mechanism is to be used to promote and reward risk prevention, the federal insurer would be responsible for a massive effort of individualized underwritings. III. Models A. Crop Insurance The Federal Crop Insurance Corporation was created in 19 38 with the authority to insure producers of wheat on a national basis against loss of yield. Insurance is granted 103 on a county-by-county basis, rather than nationally. Though some may view it as "special interest" legislation, the general public is at least a secondary beneficiary, just as it would be through an improved economy if there was federal products liability insurance. The crop insurance program took years of experimentation, and there is a real question as to whether the government can afford that type of experimentation with a form of liability insurance. The maximum losses possibly incurred by a crop insurance program are, at least, ascertainable — the value of the individual crops insured. However, the losses possibly incurred by a fori of liability insurance may be virtually unlimited. Furtnermore, the nation's general tax revenues subsidize the administrative costs of the crop program, and might have to in a products program. B. Flood Insurance The National Flood Insurance Program makes insurance available in flood-prone areas and fosters local flood plain management measures to reduce flood losses. Because of the high risks and the lack of underwriting standards, the private insurance industry was not writing flood insurance. The facil- ities of the private insurance industry are fully utilized in carrying out the program. The program is now specifically intended as a substitute and eventual replacement for federal disaster relief from floods. In comparing federal flood insurance to a possible federal products liability insurance program, it can be seen that product-related injuries are cer- tainly preventable to a much greater degree than are floods. While the federal government bore a substantial financial burden in the form of disaster relief for flood victims before the enactment of flood insurance, it has no such involvement at the present time in the products liability area. C. Crime Insurance The Federal Crime Insurance Program is designed to make crime insurance available to both residents and businesses at affordable rates in states where it is not otherwise avail- able. Wherever crime rates are prohibitive, direct federal insurance is offered to the extent necessary to solve the crime insurance problem at whatever rates the Secretary of HUD deems appropriate. A provision in the law requires the Secretary to promulgate regulations establishing minimum standards for the use of protective devices. However, it is significant to note that policies are not cancelled because of losses. While the new program does not have as its goal the replacement of the private property insurance agency, it does empower the federal government to write insurance on the 104 terms and conditions the Secretary establishes and to pay for needed industry services on a cost-plus basis. In comparing this program to a possible federal products liability insurance program, both programs insure against an unpredictable economic loss generated by a complex modern society. The administrative advantages of limiting the area covered to high crime districts would be lost under federal products liability insurance since product liability claims cannot be grouped geographically. D. Nuclear Energy Liability Insurance The Price-Anderson Act was designed to protect the public and the nuclear energy industry by assuring the avail- ability of funds for the payment of claims and by protecting the nuclear industry against unlimited liability in the event of a catastrophic nuclear accident. It provides federal excess insurance for nuclear accidents. Initially, Congress had the government assume an indemnity of $500 million and fixed the maximum amount of liability for any nuclear incident at the sum of $560 million. As the amount of available private insurance increases, the government's indemnity under the law decreases. If the trend toward increased private insurance continues, the government's indemnity should eventually shrink to nothing. The cost of the program has so far been minimal since no nuclear catastrophes have occurred. Since the government's indemnity of the industry has never been tapped, it is extremely difficult to judge the success of the mechanism Congress established. The major difference between nuclear insurance and federal products liability insurance is in the nature of the risk. While a nuclear incident covered by the program has never occurred, annually there are thousands of product-related injuries. Also, the Price- Anderson plan has established a gross aggregate loss potential limit, while a federal products liability program could not do that. E. Swine Flu Immunization Program Strictly speaking, the National Swine Flu Immuniza- tion Program of 1976 is not a federal insurance program, although it is a response to a problem of insurance avail- ability. The program provides that an action against the United States under the Federal Tort Claims Act be the exclusive remedy for "personal injury or death arising out of the administration of the swine flu vaccine." The United 105 States then has the right to recover damages it pays which are attributable to negligent acts or omissions on the part of any program participant. As for its applicability to federal products liability insurance, several influential members of Congress made statements that indicate that this is not the type of legislation which is likely to be repeated to solve any other problems of availability. 106 FEDERAL REINSURANCE I. Introduction Federal reinsurance is a program in which the federal government bears some losses to encourage private insurance companies to write coverage in high risk areas. Because the federal government does not suffer from a "capacity crutch" and definite guidelines govern the availability of reinsurance, the program is not subject to market inhibitions and fluctuations which might deter private reinsurers. Two programs, riot reinsurance and the proposed medical malpractice reinsurance, appear to be the most valuable models to study. The former has been in effect for eight years, while the latter was not enacted. II. Assessment There is certainly no major constitutional problem posed by any federal reinsurance program for products liability as to whether reinsurance would increase the availability of affordable insurance or reduce the costs of products liability insurance, particularly if inspections were included as part of a policy of risk prevention. Furthermore, such a program would be somewhat speculative, due to the absence of reliable statistical data available in the products liability insurance field. There are, then, strong indications that a federal products liability reinsurance mechanism would do little, in itself, to solve all the present problems in the field. III. Models A. Riot Reinsurance 1. Description Due to urban disturbances and "redlining," there was an insurance crisis in the nation's 107 cities that Congress responded to with a program of federal reinsurance in 19 68, in order to assure city property owners "fair access to insurance requirements." Under this program, FAIR plans employ pooling arrangements so that the risks and losses are spread in a manner independent of the reinsurance aspect, which applies only to riot-caused damages. Only after insurance companies in a state, and then the states themselves, cover a set proportion of loss, computed on the basis of premiums collected, would HUD then step in with loans from the U. S. Treasury to be repaid by future reinsurance premiums. The program seems "viable and of significant value, " accord- ing to the House Banking, Currency and Housing Committee. 2. Comparison Federal reinsurance should only be viewed as a tem- porary remedy in response to aberrationally high insurance losses. The success of a federal reinsurance program would depend upon a return to normalcy in the products liability insurance field. Since statistical data is not yet credible, there would be problems in monitoring a reinsurance program in the products liability field. If the program were voluntary, those insureds covered by the federal program could get inequitable treatment as "second class risks." Furthermore, there would be diseconomies if such insurance were not part of the general liability packages now being used. However, federal reinsurance for whole general liability packages seems inappropriate if availability is only a problem with respect to products liability coverage. B. Proposed Medical Malpractice Reinsurance 1. Description The Federal Medical Malpractice Insurance Act , S.18 8, proposed in the 9 4th Congress would provide insurance companies with reinsurance coverage to indemnities above $2 5,000, and would only be available in those states that passed enabling legislation establishing a nonbinding arbitration mechanism. A House of Representatives bill featured reinsurance for indemnities above $200,000 in those states establishing a binding arbitration mechanism. Opinion was divided on the advisability of federal reinsurance, and neither bill was passed. 108 2 . Comparison The Congressional attitude toward federal reinsurance programs is a classic "carrot and stick" approach of effectuating federal policy in the private sector, but the absence of reliable statistical data and the need to avoid an arbitrary coverage figure would create difficulties in a federal products liability reinsurance program. Furthermore, as Secretary Weinberger suggested, federal reinsurance is no guarantee of improved availability or reduced cost of insurance. In fact, it is difficult to estimate the proper cost of reinsurance premiums initially, and this could jeopardize the plan. Finally, medical malpractice seems to be more susceptible to a state-by-state solution than would products liability insurance which involves products in the stream of commerce. 109 FEDERALLY CHARTERED INSURANCE I. Introduction Recently, there was a proposal for the federal govern- ment to issue charters to corporations for the purpose of carrying on the business of insurance. The individual states currently serve this function. While there is much written on the concept of federal chartering of corporations in general, little attention has been paid to how federal chartering might affect corporations engaged in the business of insurance. II. Assessment A model of legislation describing the type of chartering and regulatory authority necessary to make federally chartered insurance companies alleviate the insurance problems of product manufacturers does not exist. Presumably, once the government decided on a particular plan of action to solve the products liability insurance dilemma, it could use the threat of charter revocation as a spur to gain the ac- tive participation of all federally chartered insurers. However, in balance, it seems an overreaction to create an entirely new system of federal chartering without knowing what the particular plan of action would be. III. Models The idea of federal chartering for all major corpora- tions has several contemporary advocates. While such legislation would clearly encompass federal chartering for insurance com- panies, if it difficult to speculate how it would affect the current dilemma in the field of products liability insurance. Conceivably, the regulatory authority that would accompany federal chartering could be used in the area of accumulating data, publicizing abuses or standardizing policy provisions. However, the primary goal of the advocates of federal chartering for all major corporations is to increase the social responsibility of corporations. \110 2. The Proposed Federal Insurance Act of 1976 In the 94th Congress, recently a bill was forwarded before the Senate to authorize the Federal Insurance Admin- istrator to issue charters to corporations for carrying on the business of insurance. However, this was not introduced as a solution relevant to the current dilemma in products liability insurance. It was prompted by concern over the possibility of insurance company insolvencies. As may be expected of a proposal which was not intended as a remedy in the products liability field, this proposal would do little to alleviate the problems of product manufacturers who are now faced with the unavailability or unaf fordability of insurance coverage. Ill CAPTIVE INSURANCE COMPANIE S I. Introduction With products liability insurance becoming increas- ingly more difficult and costly to obtain, the response of some manufacturers has been to self-insure by means of a captive insurance company — an insurance company organized by a single manufacturer or a group to insure risks of that concern or group. The true captive is a wholly owned subsidiary that insures only the risks of its parent. There are basically three major objectives of captive insurance companies: (1) to insure hard-to-place or uninsurable risks; (2) to effect savings in premiums and taxes; and (3) to develop profits in areas of both direct insurance and reinsurance. There are many off- shore captives, but now Colorado has made it possible to have domestic captives as well. II. Assessment Captive insurance companies appear to be a desirable alternative to private insurance, or even residual market mechanisms and state funds, because: (1) they are flexible in allowing for individually tailored insurance coverage and plans; (2) they can result in substantial savings in taxes, premiums and other expenses; (3) they may defend claims more knowledgeably than unaffiliated insurance companies; (4) they foster greater product safety. Although problems may exist with respect to the effective regulation of offshore cap- tives, Internal Revenue Service standards and scrutiny should help insure that these companies are sufficiently funded. III. Models A. Harvard Hospitals Plan Eleven Harvard-affiliated hospitals and health centers set up CRICO, an offshore captive insurance company, because their malpractice claims record was so good, they were paying premiums that "dwarfed" their claims losses. Under the plan, 11 institutions are issued primary insurance through a fronting 112 company in Massachusetts, which reinsures its exposure through CRICO, a wholly-owned corporation of the Harvard affiliates. CRICO has switched from "occurrence" to claims -made policies, and it is hoped that eventually savings of greater than 40% of JUA rates will be enjoyed. The risk of the group's losses' exceeding the captive's aggregate coverage is considered minimal, due to the quality of personnel employed and the programs of quality control exercised by participants . There is some concern that foreign captives such as CRICO may be free from state regulation but, up to this time, the Massachusetts State Insurance Department has declined to take action with respect to this particular venture. B. The Colorado Captive Insurance Company Act This Act is designed to enable, and thus to encourage captives to be organized domestically. It provides for the establishment of both "pure" captives and "association captives," and thus allows smaller corporations to combine and take advantage of the captive form. In order to guard against abuse, the Act provides that a corporation wishing to establish a captive demonstrate: (1) that adequate insurance markets are not available, or that costs are prohibitively high; and (2) that the total coverage necessary to insure all risks would develop gross annual premiums of at least $500,000 for a pure captive and $1,000,000 for an association captive. Once established, Colorado captives are subject to all Colorado insurance laws except where such laws conflict with the Act, and their dealings are closely and continually scrutinized by the state insurance commissioner. Under the Act, captives must also meet certain capital and surplus requirements which, however, are less demanding than those imposed on other domestic insurance companies . IV. The Proposed Remedy In a products liability context, captives can be ad- vantageous, particularly in their assurance that the most hazar- dous risks are adequately covered. With the advantage of corporate management input in developing an insurance contract, and the elimination of the overhead and profit of an outside insurer, a captive can handle the risks of its parent both more efficiently and more inexpensively than an outside insurer, 113 Economic advantages resulting from the use of captives include those in the area of taxes, where Colorado captives, for example, pay reduced state taxes and offshore captives generally pay no taxes, on either profits or pre- miums, to the host country. Offshore captives are, however, subject to federal income tax on profits where the amount of premiums on domestic risks exceeds five percent of the total, and to a federal excise tax on premiums received for the coverage of domestic risks, and are thus most economically advantageous where substantial foreign risks are involved. Other savings in the use of captives are obtained from federal income tax deductions available to the parent from premiums paid the captive, and from the savings on broker fees in reinsurance negotiations. Furthermore, a captive can be used as either a moneysaver or moneymaker, depending on the wishes of the parent corporation. Finally, a captive can better promote loss prevention plans in its parent, leading to additional savings in the parent's cost of in- surance and, at the same time, fostering greater product safety. Several minor disadvantages of captives have been recognized and discounted by at least one commentator. 1JU.S. GOVERNMENT PRINTING OFFICE: 1977-240-848/77 PENN STATE UNIVERSITY LIBRARIES ADD0D7D' 5572T