Council of Economic Advisers Product Liability Selected P&^pers Department of Transportation Department the Treasury Department of Labor Department of Justice Office of Management & Budget Department of Housing & Urban Development Department of Health, Education & Welfare Small Business Administration Under Direction of The Department of Commerce # ■-.. <-:>... ^%75 C0\)^' Consumer Product Safety Commission PB-278-625 Digitized by the Internet Archive in 2012 with funding from LYRASIS IVIembers and Sloan Foundation http://archive.org/details/interagencytaskOOunit Interagency Task Force on Product Liability Selected Papers U.S. DEPARTMENT OF COAAMERCE a o J ?^ o THE TASK FORCE The Task Force was chaired by Under Secretary of Commerce Sidney Harman. The other agencies participating as Task Force members were: Council of Economic Advisers Department of Health, Education and Welfare Department of Housing and Urban Development Department of Justice Department of Labor Department of Transportation Department of the Treasury Office of Management and Budget Small Business Administration Advice and assistance provided by: Consumer Product Safety Commission THE GOVERNxMENT STAFF The Working Task Force: o Victor E. Schwartz, Professor of Law o Council of Economic Advisers o Department of Commerce Department of Health, Education and Welfare Department of Housing and Urban Development o Department of Justice o Department of Labor o Department of Transportation o Department of the Treasury o Office of Management and Budget o Small Business Administration o Consumer Product Safety Commission Project Director; o Edward T. Barrett, II Chairman Susan Lepper David McNichol Samuel B. Sherwin Kenneth Gordon Peter Konijn Howard B. Clark James Brodsky Ronald Gainer Neil Peterson Robert Copeland Edward Bergin Richard Walsh Wolf Haber Dr. James Van Home Richard Sheppard Edward Clarke Maureen Glebes Edward Heiden Paul Gatons Editor Donald W. Smiegiel Assistant Editor Josephine Powe Administration Support and Secretarial Staff Carol D. Kindig Editorial Assistant Melinda J. Rossi Editorial Assistant Patricia S. Pearson Secretary to the Project Director Barbara Campbell Gladys Joseph Layout Advisor B. P. C. van der Burgh VI TABLE OF CONTENTS Page INTRODUCTION PART I: Advisory Committee on Product Liability Introduction 5 Membership 6 Meetings 7 Advisory Committee Members' Comments on Draft Final Report 4 Ralph B. Baldwin 4 3 Melvin Block 46 Judy Braiman-Lipson 58 Robert Clements 61 Vincent Graham 7 4 Frederick Juer 84 Eugene M. Kennedy 87 James H. Mack 8 8 Daniel J. McNamara 101 Staff Analysis of ISO Comments 110 Edward J. Noha 128 Judge Ned Price 147 Fred G. Secrest 164 Charles W. Stewart, Jr 166 Richard D. Wood 175 PART II: PRODUCT LIABILITY SYMPOSIUM 179 PART III: WORKING TASK FORCE MONOGRAPHS 332 Wade , Preliminary Comments on the Products- Liability "Crisis" (1976) 333 Olson, Selected Mechanisms for Insuring Product Liability (1976) 346 VII Page Oi , Products Liability and Industrial Safety (1976) 39I Bernsweig, Some Comparisons Between the Medical Malpractice and Product Liability Problems (1976) 417 PART IV: THE CONSUMER PERSPECTIVE 446 Anita Johnson 448 Ralph Nader 456 Benedicte Federspiel 466 PART V: PRODUCT LIABILITY SURVEYS — TRADE ASSOCIATIONS- • • ^77 MAPI, "Products Liability: A MAPI Survey" (August 1976) 479 MAPI, "Dimensions of the Products Liability Problem" (April 25, 1977) 522 NFIB, "NFIB Survey Report on Product Liability" (January 1977) 529 APPENDIX "Report of the Senate Select Committee on Product Liability" (December 30, 1977) to the Missouri State Senate 548 VIII SELECTED PAPERS OF THE INTERAGENCY TASK FORCE ON PRODUCT LIABILITY Introduction This volume contains selected papers utilized by the Interagency Task Force on Product Liability in its study of product liability. These materials were thought to be of value to legislators, researchers, and other persons interested in the product liability problem. They include papers which set forth the perspectives of the various interest groups concerned with and affected by the product liability problem. Also included are materials which state the views of experts of various academic and professional disciplines with respect to that problem. Most of these materials have not been published previously. This volume is divided into five parts and an appendix. The first part contains documents relating to the Product Liability Advisory Committee to the Under Secretary of Commerce. As will be described in more detail later, that Advisory Committee was formed by the Secretary of Commerce to advise and inform the Under Secretary about the product liability problem and proposed remedies to that problem. i The documents relating to the Advisory Committee are the minutes of the four Advisory Committee meetings held during the course of the Task Force's study and the written comments of individual members of the Advisory Committee regarding a draft version of the Final Report which was reviewed by them prior to that report's publication on November 1, 1977. Part II contains an edited version of the transcript of the proceedings of the Symposium on Product Liability held at the Department of Commerce in July 1976. The purpose of the Symposium was to generate new ideas and perspectives about the product liability problem. Ten of the foremost experts on product liability in the United States were present at the Symposium. They included the Reporter of the Restatement (Second) of Torts ^ an author of one of the leading casebooks and treatises on the topic of product liability, an acknow- ledged academic expert on the topic of insurance, a leading expert on no-fault compensation systems, experienced plaintiff and defense attorneys, a government economist, and professors of engineering and economics. Their names are listed in the transcript. Part III contains four monographs prepared at the request of the Working Task Force on Product Liability. The first monograph, Preliminary Comments on the Products-Liability "Crisis" (1976) , was written by John Wade, who is a Distinguished Professor of Law at the Vanderbilt Law School and Reporter of the Restatement (Second) of Torts , Professor Wade participated in the Symposium on Product Liability. The second. Selected Mechanisms for Insuring Products Liability (1976), was prepared by Douglas G. Olson, Associate Professor of Insurance at the Wharton School of Business, University of Pennsylvania. Professor Olson was also a participant in the Symposium on Product Liability and prepared his paper under contract with the Task Force. The third paper. Products Liability and Industrial Safety (1976), was written by Professor Walter Y. Oi , Chairman of the Department of Economics at the University of Rochester. Professor Oi also was a participant in the Symposium on Product Liability and is a leading expert in the area of the economics of industrial safety. The fourth monograph. Some Comparisons Between the Medical Malpractice and Product Liability Problems (1976), was prepared by Eli P. Bernzweig, then Special Assistant to the Administra- tor of the Federal Insurance Administration of the Department of Housing and Urban Development. Mr. Bernzweig was formerly the k Executive Director of the staff of the commission which studied medical malpractice at the Department of Health, Education and Welfare in 1973. Part IV contains three statements regarding product liability by representatives of U.S. and foreign consumer groups. These statements were included because of the importance of the consumer perspective to the formulation of an objective and balanced solution to the product liability problem and because they were frequently cited in the Final Report. The first statement is that of Ms. Anita Johnson, representing the Health Research Group of Public Citizen, Inc. , which she delivered at the fourth meeting of the Product Liability V Advisory Committee on June 27, 1977. Part IV also includes the statements of Mr. Ralph Nader, President of Public Citizen, Inc., and Ms. Benedicte Federspiel, Director of the Legal and Economic Division of the Danish Consumer Council, at the First World Conference on Product Liability in London, England on January 21, 19 77. ^/ Ms. Johnson is currently an attorney-advisor with the Environmental Defense Fund. Part V includes two trade association surveys on product liability which were conducted by the Machinery and Allied Products Institute and by the National Federation of Indepen- dent Business. Both surveys were previously unavailable to the Task Force for reproduction in the Final Report or the Industry Study. They were included in this volume because they were frequently cited in the Final Report. The appendix to this volume contains the text and one appen- dix of the "Report of the Senate Select Committee on Product Liability" (December 30, 1977) to the Missouri State Senate. This report was completed after the publication of the Task Force's Final Report and was therefore not utilized by the Task Force staff. It has been included, however, because it is the most recently completed state study of product liability that has come to the Task Force's attention. Part I; Advisory Conmnittee on Product Liability A. Introduction In order to gather information about product liability problems and potential solutions to them, the Secretary of Commerce formed an advisory committee on product liability comprised of various groups affected by those problems. The committee advised the Under Secretary, who provided liaison between the Task Force and his Advisory Committee and assured that there was an exchange of information between the two groups regarding product liability problems and the Task Force's study. B. Membership The committee was chaired by the Honorable Ned Price, member of the State Board of Insurance of the State of Texas. Initially it was comprised of 19 member-representatives of large and small manufacturers, distributors, retailers, insurers, insurance brokers, consumers, labor, and the prac- ticing bar. Seven additional persons were added in January 1977, including a representative of the service industries. The names of the members are set forth below. Judge Ned Price (Chairperson) , Member of the State Board of Insurance of the State of Texas Ralph B. Baldwin, President, Oliver Machinery Company Melvin Block, Attorney at Law Judy Braiman-Lipson, President, Empire State Consumer Assoc. , Inc. William M. Brooks, Senior Partner, Brooks Burke Surgical Supply Co. Jacob dayman, Secretary-Treasurer, Industrial Union Depart- ment, AFL-CIO Robert Clements, Senior Vice President, Marsh & McLennan, Inc. ^/ The Under Secretary of Commerce chaired the Interagency Task Force on Product Liability. John Russell Deane III, Attorney at Law Vincent Graham, Vice President, Merchandise Admin., Sears, Roebuck & Co. Lloyd Hackler, President, American Retail Federation Dr. Clare G. Johnson, Physician Frederick Juer, President, Worth Bat Company Eugene M. Kennedy, President, Whitin Machine Works John Koch, Attorney at Law James H. Mack, Public Affairs Director, National Machine Tool Builders Association Joseph McEwen, President, Modern Handling Equipment Company Daniel J. McNamara, President, Insurance Services Office Edward J. Noha, Chairman of the Board & Chief Executive Officer, CNA Insurance Companies Paul Rheingold, Attorney at Law Fred G. Secrest, Executive Vice President, Ford Motor Company John J. Sheehan, Legislative Director, United Steelworkers of America Charles W. Stewart, Jr. , President, Machinery and Allied Products Institute William H. Wallace, Attorney at Law Edward B. Wilson II, Chairman of the Board, J. Walter Thompson Company Richard D. Wood, Chairman of the Board, Eli Lilly & Company W. Thomas York, President, AMF Inc. C. Meetings The Advisory Committee met four times during the course of the Task Force's study. The initial meeting was held on September 20, 1976. Its purpose was to gather the perspec- tives of the various interest groups concerning the product liability problem. At the second meeting, which was held on November 1, 19 76, the members were asked their views on approximately 30 remedial proposals that had been brought to the attention of the Task Force. At the January 11, 1977 meeting, the members discussed the Briefing Report, which had been published by the Task Force on January 4, 1977. The fourth meeting of the Advisory Committee was held on June 27, 1977. Its purpose was to evaluate the Task Force's three independent contractor studies in the insurance, indus- try, and legal fields. Specific questions were directed to the committee members regarding any perceived shortcomings in those studies and their views on whether the product liability problem had changed since 1976. The Task Force staff utilized the information provided by the Advisory Committee in preparing the Final Report. This is reflected by the numerous citations in the Final Report to the transcripts of the four Advisory Committee meetings described above. Although it was not practicable to reproduce V the transcripts of those meetings, the minutes of those meetings follow. _^/ The transcripts are available for inspection at the U.S Department of Commerce, Washington, D.C. 8 Minutes of the First Meetinq Advisory Committee on Product Liability Time: September 20, 197 6, 9:30Ar4 Place: New Executive Office Building Washington, D. C. Attendees: A list of the members and government attendees is attached Summary of Discussions : The Under Secretary welcomed the members. He reviewed the assertions received by the Department and other agencies that the system of allocating the cost of injuries caused by products is breaking down with increased cost of insurance or the lack of availability of insurance. The Under Secretary called on the members to comment on the specific aspect of product liability issue which had been previously sent to them and asked that they see both sides of the issue when making the presentation. Professor Victor Schwartz, Task Force Project Director, outlined the organization and purposes of the Task Force study. The purposes include: determining the cost of the product liability claims to individual manufacturers; determining the source of those costs; and making recommenda- tions as to how these costs may be reduced. Each possible solution should increase the availability of insurance at affordable premiums; expedite the reparations process; place risk prevention incentives where they would do the most good; and place the cost of the accident on the parties who are best able .in the light of all relevant factors, to distribute the cost at a product risk. Professor Schwartz discussed remedial measures that had been proposed. These include state reform of tort law including a statute of limitations based on the time of sale of the product, limitations on damages awarded for pain and suffering, an elimination or alteration of the collateral source rule, alterations in the contingent fee systems, limitations on -2- expert testimony ae. to who may qualify as an expert, 'the use ol court appointed experts, a modified system of no "ault it'S'.irance and Lae use of an assigned risk plan. Committee Chairman Price spoke about the work of the National Association of Insurance Commissioners' Task Force on Product Liability to obtain data on the extent of the product liability crisis. 'I'h^..ri each oL the memijers addressed tiie meeting. Mr. Koca poxnteti out that there are three unique aspects to product liability litigation. These are: the problem of machinery used for a long period of time; that use and misuse of a product may come from the hands of third parties, not like ordinary tort situations; and workers' compensation laws often prevent a manufacturer from being able to shift his loss onto an employer of an injured worker. Mr. Secrest noted a determination must be made about the fairness of product liability claims awards. If they are fair, then the prices of products involved would have to rise to meet the costs. If they are not reasonable, then som.e or all of the proposed remedies should be pursued. He noted that the proposals for changing the rules for products liability were of less concern to large companies than small. Large manufacturers can absorb increased costs - to a point. But he questioned the advisability of a public policy that would have different sets of rules for large and small companies. He questioned also a situation that would cause small companies to sell out to large companies in order to seek the financial strength needed to meet a problem such as products liability. Mr. Juer noted that sporting goods manufacturers are mostly small businesses. They have seen a tremendous increase in premiums which either must be passed on to consumers or profits will decline. They do not feel that the cost problem should be passed to the consumer but that other remedies must be found. Mr. McEwen discussed problems facing wholesale distributors including the rapid rise of insurance rates, the unavailability of insurance, their exposure to bankruptcy and their inability to properly defend themselves under the present system of tort litigation. Ms. Braiman, President of the Empire State Consumers Association, spoke briefly on the need for government standards for consumer products. 10 _ "> . Mr. Block stated that there is a need for data from iiisurance companies to docuraent the size of the pro.tact liability crisis. T^^ said that an Association of Trial Lawyers of America review of federal and state court dockets revealed no alarming rise in the number of complaints. The reporting system also showed no tremendous rise in the size of judgments being awarded to successful plaintiffs. Mr. Brooks gave a short discourse on the problems of small distributors. In addition to rising premiums and unavailability of insurance, many are forced to discontinue service contracts because of their possibility of increased exposure to lawsuits. Mr. Rheingold, a professor of law and a practicing plaintiff's attorney, stated that he doubted the existence of a crisis as large as has been feared. He also cautioned the members not to riash headlong into solutions that restrict or eliminate an injured consumer's right to compensation. Mr. Sheehan noted that there was a growing feeling in the labor movement toward a system that would ensure safety in the work- place. If this safety cannot be achieved by regulation , then the tort system might be an incentive to employers to provide a safe workplace. He noted also that where workers' compensation benefits were inadequate, the tort system may be used to fill the breach. Dr. Clare Johnson spoke of the need for additional data from insurance companies on the number of suits, the cost of the suits, fees paid to defend such suits, etc. Mr. Clements stated that the problems of rising premiums and inadequate availability of insurance have hurt the smaller manufacturers to a greater degree than others. He noted that part of the problem was the result of a transition in which underwriters are trying to adjust prices to reflect the awards being made in circumstances where they would not have been in the past. He noted also that there was an imbalance in supply and demand for products liability insurance which would correct itself. Mr. Baldwin stated that some small businesses were being wiped out. He suggested the use of a time of sale based statute of limitations. He also stated many companies were afraid to introduce new designs and models because of the possibility that they could be used as evidence of the older models 'lack of safety features. 11 -4- Mr. Ronald Jacks , representing Edward Noha, Chairman of CNA Insurance Companies, stated that the insurance industry is working to develop figures so the exact dimensions of the product liability crisis could be accurately measured. In response to questions, Mr. Clements discussed availability of insurance and its relationship to product liability claims. He defined "bad risks" as products that did not work well enough for underwriters to insure. He indicated that if they could not be insured they probably should not be in the marketplace. Professor Schwartz, in response to a question, outlined the history and function of the American Law Institute and the Restatement of Torts. He pointed out that the Restatement was used as a guide by many judges. Mr. Block, in response to a question, explained the contingent fee system. He stated that a 1/3 fee is a fair and adequate fee. He feels that lawyers will only take sound cases under that system because of the time and effort involved. Dr. Johnson also commented on ihe contingent fee system. He felt that there should be a reduction in fees obtained by attorneys in the larger award cases. He also stated that persons with a small damage case would go uncompensated be- cause no attorney would handle it. Mr. Rheingold commented on the call for a statute of limitations based on the time of sale. He felt that products liability does not readily conform to a statute of limitations based on the time of sale, in part, because of the variety of injury- causing products and the problem of cutting off rights before an injury occurs. Messrs. Baldwin and Brooks pointed out the problems in their respective industries from suits based on defects in products made a long-time ago. Mr. Block outlined the jury system and its potential review by the judge and appellate judges. Mr. Baldwin stated that despite the review, there are serious problems with the jury system reaching decisions for the wrong reasons. The Committee will meet again on November 1, 1976. Thereupon at 2:30 P.M. the meeting was adjourned. 12 Attendees Initial Meeting Advisory Committee on Product Liability New Executive Office Building - Rm.2010 Baldwin, Ralph B. - President - Oliver Machinery Company Barnert, Douglas - Assistant Deputy Commissioner - State Board of Insurance (Texas) **Barrett, Edward T. - Product Liability Task Force - Committee Control Officer Block, Melvin - Member of Executive Committee - American Trial Lawyers' Association Braiman, Judy - President - Empire State Consumer Association, Inc. Brooks, William M. - Senior Partner - Brooks Burke Surgical Supply Company Clements, Robert - Senior Vice President - Marsh & McLennan, Inc. *Cook, Howard - American Retail Federation **Flannagan, John C. - Product Liability Task Force Staff **Glebes, Maureen C. - Small Business Administration **Gordon, Kenneth A. - Special Assistant to the Under Secretary of Commerce Ireland, Evelyn F. - NAIC Coordinator - State Board of Insurance (Texas) * Jacks, Ronald A. - General Counsel - C.N. A. Insurance Companies Johnson, Clare G. - Attorney and M.D. **Jordan, Donald - Product Liability Task Force Staff Juer, Frederick - President - Worth Bat Company Koch, John - Attorney - Covington & Burling * Madden, J.J. - Eli Lilly & Company *Representing members **Government employees 13 McEwen, Joseph - President - Modern Handling Equipment Company *Michelson, Lawrence - Sears, Roebuck & Company Price, Ned - Senior Member - State Board of Insurance (Texas) Rheingold, Paul - Attorney **Schwartz, Victor E. - Product Liability Task Force - Project Director Secrest, Fred G. - Executive Vice President - Ford Motor Company Sheehan, Jack - Legislative Director - United Steelworkers of America **van der Burgh, Charles E. - Product Liability Task Force Staff **van Lawick, Marsha L. - Product Liability Task Force Staff **Vetter, Edward 0. - Under Secretary of Commerce *Repr3senting members **Government employees 14 I'inutes of the Second Meeting Advisory Committee on Product Liability Date: November 1, 197 6 Place: Room 6802 Main Commerce Building Attendees: A list of members and government attendees is attached Summary of Discussions : Committee Chairm.an Price called the meeting to order and welcomed the members. He introduced the representatives of the contractors to the Interagency Task Force on Product Liability, Gordon Associates, McKinsey and Company, and the Research Group. Under Secretary Vetter announced the appointment of Jacob dayman. Secretary -Treasurer the Industrial Union Department, AFL/CIO, a new member of the committee. Victor Schwartz, Task Force Project Director, provided a progress report on the study. He noted that the December 15 deadline was still the target. He discussed Working Paper #2 on remedies which further develops the remedies discussed in Working Paper #1 and introduced new proposals. Because of evaluative comments included in the paper, it has been restricted to distribution amona members of the Task Force and therefore only an edited version was provided to the Advisory Committee members. The new remedies discussed are: a. The useful life concept - how can standards be established and by whom. b. Standards for expert testimony. c. Periodic payments as a more efficient method of compensation. d. Captive insurance companies - changes in laws needed to facilitate them. 15 k - 2 - The major discussion of the meeting concerned questions fjencrcted by the last meeting and issues to be addressed by the Task Force. The questions are: 1. "We would like to have a better focus on the cost of products liability insurance as a percentage of sales. Several figures were mentioned by the members and have been reported to us by others. Is there any standard "rule of thumb" that can be used? Do your trade associations have data available on current costs in your industries?" The concensus of the members seemed to be that there was no rule of thumb which was easily attainable. Most pec>ple felt that one-two percent was probably the general range of premium costs to sales, but some members alleged that the range was very broad, with particular segments of industry having a much higher percentage of premium costs . The need for specific data was continually reiterated. Mr. Block suggested that the information, if it does indeed exist, could better come from the insurance industry rather than respective manufacturers or industries. He stressed the continued lack of evidence of whether there was a bona fide insurance crisis. Professor Schwartz then reformulated question #1 to ask whether the costs of products have been measurably increased due to the increased cost of product liability insurance. Mr. Madden (for Mr. Woods) felt it fair to say that the cost of individual insurance had not been a significant item in product prices per unit. He emphasized rather the catastrophic potential of product liability and the absence of insurance experiences. Some members were concerned that there were indeed a few manufacturers that could not obtain product liability insurance at all, but that it was very difficult to come up with statistics and averages' 16 - 3 - because of the great variance between segments of industry and products themselves. Mr. Baldwin gave a tentative report on the nearly complete survey being conducted by the National Woodworking Machinery Manufacturers' Association, which substantially supported these concerns. Mr. Clements suggested that products liability premiums, as a percentage of sales, were probably on the average, much less than 1%, but stressed that this method of looking at product liability may not be representative of the true impact on the small manufacturer. He felt that the committee rather needed to look at the available capacity of the in- surance industry to take risks, and further noted that the major problem of the manufacturer is that very likely, even though he is paying less than 1% of sales, he does not have as much insurance as he would purchase if the market would make it available to him. 2. "Manufacturers often state that a major products liability problem concerns suits brought as a result of injuries suffered on very old equipment. Some data on this has been made available to us on this problem and some examples cited at the last meeting. We would like to discuss this problem more fully. Any data that is available to you would be most helpful. This general subject will be considered in our discussion of "useful life" criteria and state of the art defenses. Mr. Weisgall suggested as an alternative to a useful life standard, that if a machine is built to certain government standards, it is certified as built with the best available technology and thereby no product liability suit can be brought against it. This system is u.'^ed i.n various forms in some European countries, and Mr. Weisgall urged the necessity of looking at these European systems of dealing with product liability. Mr. Sheehan voiced concern that the useful life concept must also be looked at from the worker point of view, and it should not be forgotten that though a machine has passed the statute length, it often nevertheless still continues in operation A statute of limitations does not solve a safety problem. 17 L - 4 - Mr. Baldwin pointed out that the crucial definition of "defective product" or "defective machine" has not yet been ascertained, and that, until that has been done, the only protection an old line company has is a statute of limita- tions type of law. It was pointed out that Working Paper 2 had attempted to show the limitations on the concept of a "defective" product There were two potential limitations; (a) the unavoidably dangerous product (which the law in most states has not held the manufacturer liable, if sufficient warning is given) and (b) a useful life limitation. Mr. Baldwin then proceeded to share the National Safety Council report on work injuries with the Committee members. Mr. Weisgall, in response to the remarks from Mr. Sheehan and Mr. Baldwin, suggested that a statute of limitations might be somewhat arbitrary since it barred suit on a machine 11 years old yet allowed suit on a machine 9 years old. Rather, he suggested that the party best able to control the safety of the machine should have the responsibility for the injury. Furthermore, he suggested that the employer would be best_ able to implement accident prevention control systems. This may represent some sort of compromise between the interest of the worker and the manufacturer. Mr. Rheingold questioned whether most manufacturers would be willing to accept a useful life concept since they would have to indicate clearly when the useful life of their product ended, which may have a negative effect on sales. Mr. Sheehan summed up the response to question 2 by reiterating that a statute of limitations still does not solve the safety problem, nor are the ramifications of a useful life concept as yet fully explored. 3. "There v^as some discussion of the relationship between inadequate workers' compensation levels and the use of the tort system to achieve adequate monetary recovery from. an injury. The workers' compensation system protects a manu- facturer on one side but may expose him to additional suits on the other." 18 - 5 - There was disagreement among members as to whether increasing the level of benefits substantially without including a sole remedy provision would reduce the incentive of employees and employers to make third party claims. Mr. dayman pointed out that at the very least worker's compensation should cover the full economic loss of the employee. He felt that, at present, employers were probably often not willing to pay for full economic loss, much less the pain and suffering/ distortion of family, etc., that attach to a work injury. 4. "In comments about attorney's contingent fees, some felt they generated frivolous suits and other comments indicated they helped prevent such suits. We would like to discuss this further. While the level of those fees is relevant to the discussion, we are more interested in the concept itself and how it affects products liability suits." Mr. Block said that , as a matter of fact, most of the people who are in work-related accidents because of the defective product and injury, cannot afford the rates which other plaintiffs pay, and , as a matter of fact, the contingent fee is that- person's only access to the legal system. He also stressed that the contingent fee, because it hits manufacturers in the pocketbook ,has done more for remedial reform than has legislation and regulations. To attack the contingent fee is to keep the plaintiff out of the courtroom, and thus leading to an immunity of manufacturers for defective manufacturing processes Mr. Noha pointed out that there is a lot more to know about the contingent fee system. He wondered if contingent fees were the prevalent system and in how many instances is someone so poor that they could not use the legal system except through using the contingent fee system. He suggested that the Trial Lawyers Association set up a pool for those who cannot gain access to the courthouse, similarly to an industry setting up a pool when there is market unavailability or insurance unavailability. Professor Schwartz in response to a question said that the Task Force is attempting to find out what percentage of the premium dollar goes to legal costs, but cautioned that the figures would only be estimates because the Insurance Services Office closed claim survey would not be available by the time the study ended. 19 - 6 - Mr. dayman suggested that the whole contingent fee apparatus is a reflection of the failure of the worker's compensation system to provide equity to the worker. There are workers who cannot afford a lawyer on their own who need a contingent fee system. He further suggested that same levels of fee rates be set out to deal with the often exorbitant contingent fee. There was some discussion on what states had passed legislation dealing with contingent fees, if any, ,or what states were attempting to deal with the issue through regulation. 5. "There was comment that the insurance industry has not supplied data to support the increase in produqt liability premiums. We would like to discuss this subject more fully. Are there data available which have not been released for policy reasons, and if so, what are those policy reasons? Are there claims and loss data available to trade associa- tions that would tend to support the need for these increases? Are product liability premiums stated separately or included with general liability premiums? Have other liability premiums increased at a commensurate rate to product liability?" Mr. Block mentioned the proposed questionnaire the Trial Lawyers Association had sent to the Select Committee on Small Business, at the request of Senator Javits, that dealt with the basic data needed to answer questions about the insurance industry. He read the questionnaire for the benefit of the committee m.embers , and stated that those questions needed to be answered before the rights of injured workers could be limited. Mr. Noha pointed out that ISO was presently compiling information which would provide answers to question five, to which Professor Schwartz said that the ISO results would not be available until after the Task Force Report came out. 6. "Clearly some members feel there is an urgent need for remedial action in the short term to provide time to devise long range solutions. Others feel there is no crisis. We would like to discuss this further. We are particularly interested in determing whether there may be a genuine crisis in limited segments of the economy but not a broad problem." There was some discussion as to whether and to what extent some companies were affected by product liability. It seemed that some segments were being severely harmed while others were not. Mr. Baldwin presented some preliminary survey 20 - 7 - statistics as to the extent of the harm among woodworking manufacturers. There was an interest, however, above and beyond specifics, in dealing with the implications of product liability for the whole economy, rather than attempting to assign responsibility for the current problem to one group or another. In fact, a few members felt that whether there were specific data or not on the nature of the insurance problem was irrelevant, since the basic problem was product liability suits themselves and their excesses, while the insurance industry and other industry problems were temporary factors in the current problem at best. Some disagreement was generated. Mr. dayman stressed that it was crucial that the committee have serious credible evidence that a crisis really existed. Without such evidence, the recommendations of the committee would be nothing more than opinions based on the backgrounds and prejudices of the committee's individual members. Mr. Noha pointed out that, though as yet there was no hard evidence of a general availability crisis, there was signi- ficant evidence that some segments of the industry were having a problem. He noted the insurance companies' obvious interest in selling as much insurance at as profitable a price as the market could bear. When that price reached the point where the increased costs could no longer be passed on to the consumer, then it seemed as if an important ^problem existed that needed to be addressed. Was it an insurance industry problem, an industrial problem, or more likely, a result of the operation of the current liability system? Under Secretary Vetter responded by pointing out that ultimately the government must be concerned about unnecessary costs that are being passed on to the consumer, be they because the insurance industry is charging more than they need, or because contingent fees are higher than they should be, or because of companies making faulty products. He stressed the major concern regarding costs to the consumer. Professor Schwartz introduced the list of issues confronting the Task Force • Professor Schwartz presented the first issue, and stressed that it v/as a thesis that had been presented to the Task Force and did not represent the results of any facts which the Task Force had gleaned. 21 - 8 - 1. "Approximately five years ago the insurance industry was "overcorapeting" for large manufacturers' product liability risks in order to obtain the cash-flow inherent in large deposit premiums. The insurance companies invested a portion of these in equity markets. The excessive competition for these large risks often resulted in premiums being set too low in light of the potential liability exposure. When the equities in which the insurance com.panies had invested fell, there was corresponding reduction in policy- holders surplus. Since the financial solidity of insurers is sometimes gauged by the ratio between their premiums written and policy-holders surpluses, they had to reduce their writings in the line or lines that were most suspect from the standpoint of profitability. It is alleged that the net result of all of this is that the small, manually rated risks (which received no benefit from the earlier competition for cash flov;) sre now impacted with the heaviest burden of product liability insurance premium, increases (or inability to secure insurance) . Any comments on the validity of thesis?" Mr. Clements felt there was a fair amount of validity to the thesis, but nevertheless took issue with the statement that small manually rated risks received no benefit from the earlier competition for cash flow. In his experience in buying insurance for large and small manufacturers, the benefit received was tne same. The thesis is related, said Mr. Clements, to the available capital in the insurance industry and its ability to absorb risks. It is natural that what capital there is goes first to take risks than can be best quantified and last to the risks that are more difficult to measure. Therefore, action to make new investment in the insurance industry attractive was a reasonable method of attracting capital specifically to the writing of product liability insurance. One method was an exemption from that aspect of regulation for insurance capital that was going to be devoted specifically to the business of writing product liability insurance. Regulation occurs in 50 states and involves participation in involuntary acceptance of risk through participation in programs such as assigned risk plans and joint underwriting authorities. 22 -9- A second method would be a tax incentive for investment in an insurance venture to write this kind of insurance, with funds going to an established insurance company, or into an entirely new insurance venture. Mr. Noha added a few remarks among which was his serious doubts that small company product liability premiums were helping to subsidize large companies. 2. "The problem created by variable state tort law rules is so great that some have suggested that a uniform federal law of product liability is necessary. Even if that law were plaintiff -oriented (for example, it adopted the essentials of strict liability as set forth in Section 402A of the Second Restatement of Torts) , would the uniformity it provided represent an improvement over the present system?" Responses concerning the need for federal tort law ranged from no need at the present time to a middle ground between the present situation and having the Federal government take over the entire responsibility. One suggestion was that the Federal government urge that states adopt uniform* laws defining strict liability to narrow the interpretive gaps. Some felt that such a uniform law geared towards narrowing the inconsistencies in interpretation of strict liability as a whole. Mr. Rheingold suggested that the problem really concerned a question of state common law versus a Federal statutory law, and that he preferred the "patch- work quilt" of common law. Professor Schwartz pointed out a number of reasons under- lying this question. One was that preliminary reports indicated that a modification in tort law, even if favorable, would not have an immediate impact on liability insurance until there was state uniformity. Second, realism is important to keep in mind; that is, the likelihood that Congress would pass a totally manufacturer-oriented law is probably slim. Issue #3 was not discussed since it had been dealt with in depth under the question on the useful life concept. It is included in the minutes for the record. 23 k - 10 - 3. "How could legal criteria for the useful life of a product be established and who should have the power to make that determination?" 4. "Would a no-fault system for product liability as designed by Professor O'Connell be utilized by companies if they had the legal pc\;er to do so?" Professor Schv/artz clarified the O'Connell no-fault system and noted that this plan was of interest particularly because it represented neither a consumer point of view nor a manufacturer point of view. One committee member responded that no-fault would probably be quite attractive, particularly in a durable goods industry, and pointed out that v/orker's compensation was a form of no-fault which could be improved by increased payments and getting rid of the third party action. However, he voiced concern that the manufacturer of honestly shoddy equipment gets a free ride out of no-fault, when it may be better for the industry as a whole to have that company go out of business as a result of a large product liability claim, and certainly it would be better for the consum.er. Piofessor Schwartz explained that no-fault still held the manufacturer or defendant liable for injuries caused by his product, and that he would still have to pay claims, but those claims would not be as high as presently. He also noted that Professor O'Connell has said that even under the present system the consumer does not fare very well. 5. "To what extent are small businesses going without insurance even though they may not have the necessary cash flow or capital to cover potential product liability judgments that may be rendered against them"? Mr. Baldwin presented the results tentatively reached from his association's survey. Committee Chairm.an Price opened the afternoon session of the meeting by eliciting questions from representatives of the independent contractors. Mr. Gordon of Gordon Associates was recognized, and he provided the committee with a progress report on the status of the industry study, outlined the methodology of the research, and then presented two questions for the committee's response. 24 -11- Mr Gordon asked the committee whether it saw the locus of the product liability crisis as currently divided between those products which are used in the workplace and those products sold generally in the marketplace to consumers. The second question related to the first-- whether the committee members felt that workplace products were generating most of the problems, and whether the committee saw several avenues of relief for that problem. Responses ranged from statements that the crisis was equal in both areas, to being 99% consumer-oriented, qualified by the fact that the ultimate effect on prices and in- flation of claims related the two areas closely. The latter characterization of the crisis was reiterated by several members. Mr. Noha suggested that it might be more useful to look not only at the incidence of claims but also the dollar amounts , since the heavier dollar amounts in industrial sectors may counterbalance the greater number of claims that are consumer related. Mr. Orban presented the progress report from The Research Group and outlined its procedures and goals. He had one question for the committee members which was specifically addressed to insurance company representaitves . It concerned whether, as a remedy, the shifting of the burden of loss from one defendant party (e.g., the manufacturer), to another (e.g., the employer) or some sort of comparative fault system would be of any consequence to the insurance companies. The response was generally negative, since the insurance industry deals in the aggregate, and the dollar amounts of the insurance would be the same. However, it was pointed out that though the dollar amount may be the same, the burden on the manufacturer may not be as great since conceivably the employer was bearing part of the loss. It was also pointed out that a positive effect of such a shifting of burdens could increase the incentive on the person held at fault to improve his product or safety standards, and therefore such a system was very important to risk prevention, 25 - 12 - Mr. Dutter presented the insurance industry progress report from McKinsey and Company, and reviewed the objectives of its research efforts, its present status, and asked a num.ber of questions of the committee members. Mr. Butter's initial question was rather a plea. He stated that hard information concerning unavailability was hard to come by and responses were not as specific as they could be, i.e., relatively few responses clearly identified themselves as being unable to get products liability coverage at a reasonable price. Answers were simply too general. Mr. Dutter was also interested in comments from the corrjrdttee on the use of standards, either OSHA or CPSC, as a possible defense, and particularly asked for views on the feasibility and acceptability of such an approach. Responses to the latter question were very positive, both as a state of the art-type defense, and as a boon to risk prevention. In response to Mr. Cutter's first comment, Mr. Clements suggested that statistics supporting the unavailability of insurance would be exceedingly rare. However, he felt it important that McKinsey and Company look at the amount of insurance companies were able to buy now compared to that amount in previous years, as indicative of the decreased availability of product liability insurance. Mr. Cutter's final question concerned what could be done to make it more feasible to form captives or for groups to get together to do something about the problem of avail- ability and cost of coverage. Two significant reasons were given why this alternative had not been considered as frequently as it might. _Ope was the industry ' s "fear of the unknown" ; it was difficult for companies to agree to band together, since they had little wav of assessing the results of their union in advance. More importantly, perhaps, serious antitrust problems were raised by such insurance practices, as well as difficulties involving reserves and the IRS. It was suggested that the contractor talk to the Justice Department for its views. Professor Schwartz introduced the condensed version of the revised remedies paper, which he characterized as a broad list of proposed remedies for comments and discussion by the committee members. Particular remedies were discussed. 26 - 13 - such as a federal statute of limitations, government re- insurance, state of the art defenses, etc. Mr. Secrest related the individual experience of the automobile industry with a particular type of statute of repose. The issues rapidly centralized: whether a way can be found, without denying a person legitimately injured by manufacturing and design defects, or without penalizing them, to reduce exposure, and whether compensation can be ruled out for injuries caused predominantly by the negligence of the user. The comparative fault system was mentioned frequently as an excellent method of dealing with these issues in long range terms. Less amenable to relief were items such as the cost of premiums in the short range under such legal remedies. Professor Schwartz pointed out that until new rules of law are tested and interpreted by the courts, there might be no product liability premium reduction. It was suggested that a combination of specific award limitations, and a statute of limitations may substantially reduce the overall costs of product liability, which may have a more immediate effect on the state of the industry. One member pointed out that the lack of predictability at present in product liability was a major source of the problem in the cost of premiums. Correspondingly, statutes of limitations, standard defenses, uniform laws and inter- pretations were all suggestions given as ways of increasing the predictability for the insurance industry, and thus lowering premium costs. Professor Schwartz requested comments on the impact of the unavailability of product liability insurance on large manufacturers. Responses indicated that there was little specific data that large manufacturers had at present been impacted; nevertheless* the feeling was that if product liability premium rates increase at the present rate, if claims increase as they have been, then it will not be long before large manufacturers will be affected. Professor Schwartz also specifically requested comments on the role that state or Federal Government should play in setting standards for risk prevention and safety. 27 - 14 - Discussion thereon revealed that, at present, the government did provide standards, through OoHA, CPSC, as did some insurance companies and the American National Standards Institute. Professor Schwartz noted that the Task Force is studying the extent of the risk prevention services provided by the insurance companies. Discussion and questions by the members of the Committee in response to the revised rem>edies paper touched on quality control versus defective design problems, whether dealer-retailer negligence increased suits against manu- facturers, the risk distribution concept, and "unavoidably unsafe" products under the Restatement 402A. The last item, on the meeting's agenda invited public comment on the discussions and problems that had occurred at the day's mceetings. An ISO representative noted for the record that m.any of the issues involved at today's meetings would be answered by its document which would be available "soon". Mr. Orban mentioned that impact of changes in the law, such as mandatory insurance, no fault, captive trade associations or insurance companies on foreign importers and exporters. He questioned whether these remedies would be open to such people, and whether the possible effect that these remedies would become non-tariff barriers to foreign trade and thus have an im.pact on foreign relations, had been considered by the Task Force. Other comments highlighted the differences between quality control, quality assessment, quality assurance, and the possibility of professional liability of the assessors or validators. Professor Schwartz informed the public that some of the issues and areas mentioned would not be covered by the Task Force, and the specific scope was outlined in the Scope of the Research statement in the Federal Register. 28 ATTENDEES ADVISORY COMMITTEE ON PRODUCT LIABILITY Members Mr. Ned Price, Chairman Mr. W. Thomas York Mr. Fred G. Secrest Mr. Ralph B. Baldwin Mr. Frederick Juer Mr. Jerome Madden for Mr. Richard D. Wood Mr. Loyd Hackler Mr. Vincent Graham Mr. Jonathan Weisgull for Mr. John Koch Mr. Melvin Block Mr. Paul Rheingold Mr. Robert Clements Mr. Edward J. Noha Mr. Jack Sheehan Dr. Clare G. Johnson Government Employees Edward O. Vetter Victor E. Schwartz Kenneth E. Gordon Edward T. Barrett Contractors Jerry Gordon Gordon Assoc. Philip Dutter McKinsey & Company Frank Orban The Research Group 29 Minutes of the Third Meeting Advisory Conuriittee on Product Liability DATE: January 11, 19 7 7 PLACE: Room 4 8 30 Main Commerce Building TIME: 1:00 p.m. A^T-EIjDEZS : A list attached Summary of Discussions: The Under Secretary opened the meeting, stating that he would be Chairman pro-tem because Chairman Price had been delayed in Memphis, Tennessee and would be unable to attend. He reviewed the background leading to the publication of the Briefing Report of the Interagency Task Force on Product Liability, the subject of discussion for this meeting. Professor Schwartz spoke about the Briefing Report. He explained that it is preliminary in nature and does not utilize all of the information that will be included in the Task Force's Final Report. Furthermore, the Briefing Report is a highly condensed summary of the information analyzed by the Task Force. The Final Report will be much _ more substantial in nature and cover topics not mentioned in the Briefing Report. Professor Schwartz emphasized that the Report does not represent any interest group's point-of-view. Rather, it is an objective report that balances the views of competing interest groups. He noted his belief that the value of the Report is enhanced by its objectivity. Professor Schwartz emphasized that the Report is not the voice of the Commerce Department, but rather the work and views of several agencies which took an active role in the preparation of the Report. Finally, he pointed out that the Report contains suggestions that have the potential of providing product liability relief to those who need it without compromising the right of injured consumers or workers to receive just compensation. Professor Schwartz then discussed some of the findings of the Task Force. Among these were substantial increases in product liability premiums from 1974-76. The most severely affected industries were industrial machinery and chemicals, pharma- ceuticals, automotive parts, medical devices, sporting goods and ladder manufacturers. However, the Task Force received 30 -2- very little correspondence regarding unavailability of insurance coverage. The Task Force found a severe problem for a limited number of groups, but not a broad-scale pro- blem which affected everyone. Professor Schwartz noted that there were several factors that contributed to the product liability problem which the Task Force felt had to be considered unalterable as far as the Task Force was concerned. These included inflation and in- creasing consumer awareness of their right to sue. Professor Schwartz then outlined the causes of the product liability problem which the Task Force addressed. The first cause is that product liability insurance ratemaking procedures make it very difficult to get accurate information on insurance company profit and loss. The second cause is uncertainty in product liability law. The third cause is that a few manu- facturers are not making product safety and quality control a high priority item. He noted that this attitude is changing with the increased attention on product liability claims. Among the short-range remedies outlined by the Task Force for further attention were a national product liability insurance voluntary pooling mechanism, captive insurance companies, and a Federal standby reinsurance mechanism, although the latter recommendation is somewhat hedged. Possible long-range solutions were divided into consumer and workplace categories. In the workplace category, the first remedy is to permit a contribution claim by a product manu- facturer against an employer whose negligence contributed to the employee's injury. The second possible remedy would be to make workers' compensation the exclusive source of recovery for employees injured in the course of employment. Professor Schwartz also mentioned a no-fault compensation system as a possible option that must be investigated. Mr. Clements of Marsh McLennan said that he was surprised that the high cost of the tort system did not receive more attention. He also emphasized that the means of establishing product liability insurance rates have good and valid reasons and that perhaps a better way to rate tort liability of a manufacturer is to rate all of the liability of the business. He voiced skepticism about the concept of a Federal insurance pool as pooling mechanisms tend to produce a self-perpetuating artificial cost. Finally, he said that the correlation between adequate workers' compensation benefits and the frequency of claims received only minimal attention in the report whereas Marsh and McLennan 's study indicates that inadequate workers' 31 -3- compensation benefits are a cause of tort claims against manu- facturers. Professor Schwartz asked that any information regarding a correlation between low worker compensation payments and the number of claims brought by injured workers be provided to the Task Force. Mr. Ralph Baldwin of Oliver Machinery Company observed that he would not expect suits to stop with hiaher workers' compensation payments because you are dealing in a sense with human cupidity. A worker sees a chance to get additional money for himself through a lawsuit without any loss to himself. Mr. Baldwin also stated that he was disappointed that more specific recommendations were not made to help out the indus- trial concerns threatened with real problems in 1977. Mr. Graham of Sears, Roebuck and Company complimented the Task Force for its work. He added that the difficulty of collecting data relating to product liability makes it dif- ficult to quantify the problem. Mr. McEwen of Modern Handling Equipment Company stated that one cannot minimize the effect of capital goods manufacturers on the economy. He also stated that his product liability rates as a wholesaler rose one percent (of the amount of goods distributed) . This is in addition to the cost of the manu- facturers' product liability insurance. He also expressed fear that domestic manufacturers are being penalized and that foreign manufacturers may be picking up that business . Professor Schwartz noted that foreign manufacturers that send goods into this country are subject to liability the same as domestic manufacturers. Mr. John Koch, an attorney who represents the National Machine Tool Builders Association, said that product liability, not- withstanding the fact that it is not a crisis, is a problem that is deserving of high priority attention. He emphasized the effect of uncertainty on manufacturers. He stated that making workers' compensation the sole recovery for workplace injuries would eliminate a great deal of uncertainty. He felt that the concurrent problems that would come with this suggestion would not be insurmountable. He also said that a defendant should be able to implead employers so that a court could cancel out liability related to the respective fault of the parties. 32 -4- His one criticism of the report was that it failed to come out and affirmatively endorse a limited and interim solution. Jack Martin of Ford Motor Company (for Mr. Secrest) asked Professor Schwartz to explain liability without fault. Professor Schwartz commented on strict liability and said that the matter would be discussed fully in the Final report. Fredrick Juer of Worth Bat Company, referring to the 1% of -sales cost of insurance, warned the committee against being misled by averages as certain segments of the economy are being hard hit, specifically smaller companies. Professor Schwartz stated that Chapter 3 of the Final report will present these variables in detail so that no one is misled by average figures. Mr. William Brooks of Brooks-Burke Surgical Supply Company said he was very disturbed that at no point in the report was the plight of wholesale distributors discussed. Mr. Melvin Block of American Trial Lawyers' Association stated that the report gave a fair view of the product lia- bility problem. He emphasized aspects of the report which said that the- tort liability system induces manufacturers to produce safe products. He noted that business opposed federal intervention in many areas but called for federal laws to remove tort victims 'rights . Mr. Juer observed that manufacturers recognize that a person injured should be compensated when the manufacturer is at fault. Mr. Noha of C.N. A. Insurance Companies emphasized that a pooling arrangement will not change the cost of product liability insurance. Merely shifting product liability costs to the workers' compensation system would be inadequate. He felt that the real problem was the lack of predictibility in the present system. Professor Schwartz emphasized the point made in the Briefing Report that it was not feasible to cut off the workers' rights without giving something in return. Secondly, with workers' compensation as a sole remedy, there would be some saving of transaction costs. Two problems would have to be resolved if this remedy was pursued. First, the benefits would have to be increased. Second, manufacturers of defective products would have to contribute to the workers if their products caused the injury. 33 I -5- Mr. Sheehan of the United Steelworkers of America was concerned about the suggestions of making workers' compen- sation the exclusive remedy. He said that workers' compensation has not been an inducement to safety in the workplace. He also stated that he felt that organized labor will never feel that the workers ' compensation rates are high enough to constitute an exclusive remedy for the injured worker. He noted also that workers want a safe workplace and the current liability system may be an inducement for that. Mr. Richard Wood of Eli Lilly and Company stated that he feared our legal system has moved closer to absolute liability. He mentioned that one side effect of this has been that some manufacturers have chosen to forego or delay the introduction of. new products. He noted also that there was no mention in the report of the legal fee system or legal ethics. Mr. McEwen said that the problem was a multi-faceted problem which had to be handled at the state level. He asked that recommendations of the National Wholesale Distributors Association be entered in the record. Recommended State actions are: strict liability, a state of the art defense, a statute of limitations, a limitation on contingent fees, a limitation on punitive damages, a Product Liability Review Panel, and Workers' Compensation as an exclusive remedy. Mr. Clements noted Mr. Woods comment on the absence of dis- cussion of the legal fee system. He asked if it would be discussed in the final report. Professor Schwartz said that the final report will include ISO data on product liability costs which states that of every dollar paid out, 42 cents goes for total defense 85% of that is for legal defense costs. The available infor- mation will be developed in the Final report. During the time allotted for public comment, Tom Fahey of Associated Industries of New York State said that several organizations within his association had experienced very large increases in their product liability premium rates making it unaf f ordable for some manufacturers . Charles Stewart of the Machinery and Allied Products Institute felt that the deadlines imposed on the Task Force were too extreme for a proper study of a problem as complex as product liability. Chairman Vetter then adjourned the meeting at 4:00 p.m. 34 ADVISORY COMMITTEE ATTENDEES AND ALTERNATES Mr. W. Thomas York Mr. Ralph B. Baldwin Mr. Jack Martin For Mr. Fred G. Secrest Mr. Frederick Juer Mr. Richard D. Wood Mr. Joseph McEwen Mr. William M. Brooks Mr. Don White For Mr. Loyd Hackler Mr. Vincent Graham Mr. John Koch Mr. Melvin Block Mr. Robert Clements Mr. Edward J. Noha Mr. Ned Price Mr. Jack Sheehan Dr. Clare G. Johnson 35 Minutes of the Fourth Meeting Advisory Committee on Product Liability Date: Place : Time : Attendees : June 27, 1977 Main Commerce Building (Room 6802) 9:30 a.m. See attached list SUMMARY OF DISCUSSION: There was a slight shift from over a year ago in the members' attitude about the need for federal legislation in the area of product liability. As a group, the members seemed more positive about it. The main opposition to a federal approach would appear to come from some insurance companies, the National Association of Insurance Commissioners, and the Defense Bar. Of course, Fred Secrest of Ford Motor Company probably reflected the view of many others when he remarked that he could endorse a federal approach if he knew what it said. In sum, both the fact that product liability rates are formulated on a nationwide basis and the variance in state legislative reaction to the product liability problem appear to have created the greater interest in a federal approach. In general, the group did not challenge any of the basic findings of our Industry Report. This is important because the industry telephone survey was not conducted on a scienti- fic basis. In particular, the sample size was too small to produce statistically reliable data regarding the target product categories or business in general. It would appear that major criticism of the Industry Report came from Joseph McEwen, who represents distributors. Product distributors were not included in the industry telephone survey, Apparently our staff attempted to have data collected by the National Association of Wholesaler-Distributors, but that 36 - 2 - group did not carry out our suggestions. Professor Schwartz indicated that the Working Task Force would try to include some information in the Final Report as to how the product liability problem has affected distributors. Apparently, although they are successful in litigation, they are made to bear substantial defense costs. There was relatively little criticism of our Insurance Study. This contrasts with the view of some members of Congress- man LaFalce's subcommittee (Capital, Investment and Business Opportunities) who have suggested that the report was not totally objective. The basis for this suggestion appears to be the failure of the Task Force's insurance contractor to conduct a careful critical evaluation of insurance companies' rate-making practices and their profit and loss statements. Representatives from the machine tool industry indicated that limited data available to them show that insurance rates are continuing to rise at a substantial rate^ as are claims and the cost of claims. Nevertheless, they have conducted no new major studies about these issues. A surprising number of the Advisory Committee members were interested in a federal remedy that would allow companies (under limited conditions) to create a tax-exempt reserve for potential product liability claims. Although our con- tractor studies did not develop this remedy, we anticipated that there might be some interest in it and will present a discussion of it in the Final Report. The Department of the Treasury might have suggestions about this remedy. Therefore, we have sought an ^informal opinion about that remedy from that Department's Working Task Force representative. A number of members believed that the federal government could help the product liability problem by supplying product safety information to small businesses which have been unable to obtain it. It was also suggested that the Insurance Services Office supply such data to businesses. Whereas insurers and some businesses stressed "data gathering" at the beginning of our study, they now suggest that past data can only give a glimpse of the future. In that connection, they stress that uncertainty in the legal system leads insurance underwriters to "fear the worst" and raise rates substantially. This indicates the need for careful thinking about stabilizing the system. 37 - 3 - Ms. Anita Johnson (of the Health Research Group of Public Citizen, Inc.) warned the Advisory Committee that measures that would adversely affect the consumer were no way to solve the product liability problem. She suggested that manufacturers were just now facing up to their responsi- bilities for hazards caused by their products. Her statements were probably helpful to the group in re- emphasizing the political realities with respect to some of the measures they have proposed to the Task Force. We have kept consumer (and labor) interests in mind in our discussions of remedies, but this does not sit well with some manufacturing interests who want swift and certain curtailments placed in the tort system. The representative from the Insurance Services Office stressed the significance of the National Association of Insurance Commis- sioners' new voluntary product liability insurance placement program. He suggested that this will help resolve the product liability problem. A number of Advisory Committee members noted, however, that the program only addresses the problem of the availability of product liability insurance, not problems of af fordability . Our data show that af fordability situations are the more important part of the product liability problem. 38 ADVISORY COMMITTEE ATTENDEES AND ALTERNATES Mr. Ned Price Mr. Robert Clements Mr. John R. Deane III Mr. Charles Derr for Mr. Charles Stewart Mr. Vincent Graham Mr. Ronald A. Jacks for Mr. Edward J. Noha Dr. Clare G. Johnson Mr. James H. Mack Mr. Joseph McEwen Mr. Daniel McNamara Mr. Paul Rheingold Mr. Fred G. Secrest Mr. Stephen A. Stitle for Mr. Richard D. Wood Mr. William H. Wallace Mr. Edward B. Wilson II 39 D. Advisory Committee Members' Comments on Draft Final Report In addition to participating in the four meetings described above, the Advisory Committee members were asked by the Under Secretary of Commerce to review and comment on a draft version of the Final Report of the Interagency Task Force on Product Liability. That draft had already been reviewed and approved by the member agencies of the Task Force. The Advisory Committee was not chartered to, and did not, approve or disapprove of the contents of the Final Report. Therefore, the pre-publication review of the draft by the Advisory Committee was limited to eliminating any factual errors identified by the members. They were very helpful in that regard. The Under Secretary also asked the Advisory Committee members to set forth in writing their views about the conclusions and opinions expressed in the Final Report, stating that the Department would print those views in a separate volume to be issued at a later date. Fourteen members availed themselves of this opportunity. Their unedited written statements are set forth below in alphabetical order by author. 40 Ralph B. Baldwin , President, Oliver Machinery Company, represented small capital goods manufacturers. Melvin Block , attorney at law, was a member of the Execu- tive Committee of the American Trial Lawyers' Association, which represents the plaintiff's bar. Mr. Block's state- ,ment was concurred in by Mr. Paul Rheingold, who is also an attorney representative of the plaintiff's bar. Judy Braiman-Lipson , President, Empire State Consumer Association, Inc., represented consumers. Robert Clements is an Executive Vice President of Marsh & McLennan, Inc., one of the nation's largest insurance brokerage firms. Vincent Graham, Vice President for Merchandise Adminis- tration at Sears, Roebuck and Company, represented large retailers. Eugene M. Kennedy , President of Whitin Machine Works, represented large .capital goods manufacturers. James H. Mack is the Public Affairs Director for the National Machine Tool Builders Association. Daniel J. McNamara is the President of the Insurance Services Office (ISO) . ISO is an unincorporated association of insurance companies which provides statistical, ratemaking, and research services for the property-liability insurance industry. (The page numbers referred to in Mr. McNamara 's commentary are those of the draft version of the Final Report. Because of the detailed nature of that commentary, the corresponding page numbers in the Final Report are indicated parenthetically after each comment.) 41 Edward J. Noha is the Chairman of the Board and Chief Executive Officer of the CNA Insurance Companies. Judge Ned Price , member of the State Board of Insurance of the State of Texas, served as the Chairman of the Advisory Committee. Judge Price represented the National Association of Insurance Commissioners. Fred G. Secrest, Executive Vice President of Ford Motor Company, represented large consumer product manufacturers. Charles W. Stewart, Jr . is the President of the Machinery and Allied Products Institute, an association of capital goods manufacturers. That association conducted a product liability survey of some of its member companies which is reproduced in Part V of this volume. (See p. Richard D. Wood, Chairman of the Board of Eli Lilly & Co., represented large consumer product manufacturers. 42 OLIVER MACHINERY CO GRAND RAPIDS. MICHIGAN, U SA 49504 AREA CODE 616 4561591 • TELEX 226483 October 21, 1977 I Mr. Edward T. Barrett, II Project Director Interagency Task Force on Product Liability Room 5412 United States Department of Commerce Washington, D. C. 20230 Dear Mr. Barrett: I have had only parts of two days to skim through the draft of the final report of the Interagency Task Force on Product Liability. Consequently I cannot give a detailed analysis of its strengths and weaknesses; however, from what I have seen and what has appeared in preliminary drafts and the multi-volume reports of con- tractors, I have reached certain definite conclusions. The Interagency Task Force was given an impossible deadline and was inadequately funded. The report is based upon telephone contacts made with individuals represent- ing only 337 companies plus personal interviews with 20 selected firms in high risk industries and reviews of product liability surveys from 20 national trade associa- tions . These data are woefully inadequate to outline the product liability problem and, in particular, the continuing evolution of the problem. They are already obsolete. Consequently, it is improbable that a really meaningful report could be developed. Most of the information received by the Task Force had an effective date in the middle of 1976. Many things have happened since that time and in some ways the picture has become substantially worse. Let me illustrate with only two examples. In the middle of 1976 there were 13 companies manufacturing football helmets. Today there are only three. Some of the 10 have gone out of business. Most have been absorbed by larger companies. Similarly, information was furnished the Advisory Committee that of the 97 members of the Woodworking Machinery Manufacturers of America, 4 had gone out of business while 10 others were going bare and that many others did still have insurance at rates ranging up to at least 107o of their sales volume. As far as I can tell, none of this information reached the final draft. The- Briefing Report and the three studies and the final draft treat the product liability issue much more as a concern of the manufacturing sector than as a problem affecting wholesaler-distributors and other non-manufacturer sellers. I believe the emphasis should be more nearly equal. While the matter is mentioned, I find no place in any of the publications where the real effect of the cost of product liability insurance, plus the costs within individual companies, are related properly to the net profits of the myriads of companies affected by product liability insurance. Such costs not only threaten 43 OLIVER IMACHINERV CO. Mr. Edward T. Barrett, II Page 2 October 21, 1977 the existence of many companies but represent a significant cause of inflation as as these costs are compounded down the distribution chain. This economic impact is felt on all levels of manufacture and distribution. It is, however, highly erratic in that two quite similar companies may have widely differing costs due to product liability, and this makes it extremely difficult for the higher cost company to compete. With the exception of one sentence which says that perhaps 957o of product liability suits are settled before going to trial, I have found no evidence of a real appre- ciation of the fact that the great majority of product liability suits are frivolous and due exclusively to the negligence of the injured party, often aided and abetted by the negligence of his employer. Elliot Rosenberg has called this "the sue and settle syndrome" and it represents a very substantial portion of the costs of product liability today. There is no real appreciation in the final draft that the way we are handling the product liability situation in the United States flaunts common sense and equity. Similarly, the draft discusses on page II-5 et seq. the difficulties inherent in determining what constitutes a defect. The sentence in Section 402A of the 1965 Restatement of Torts that defines strict liability does so by the use of a term "defective product unreasonably dangerous" and this term is so thoroughly misunder- stood that courts and juries find themselves free to interpret it according to their emotions , There is no real appreciation that the lawyers of this country, both plaintiff and defense, have built up a multi-billion dollar industry which they are not about to relinquish. The best figures I have been able to find indicate that more of the money that changes hands in product liability matters goes to the plaintiff and defense lawyers than it does to injured parties. There is little evidence in the report that old line firms whose products have been in the field for many years are unduly penalized relative to younger firms making similar products. There is no place in the draft that points out that the product liability crisis is not an insurance crisis but is an ethical crisis. No manufacturer or distributor I know will claim immunity from liability if he is responsible fully for the accident, but under any concept of ethics with which I am familiar, it is wrong to force a manufacturer or distributor to pay for the negligence of someone else. If society as a whole wants an injured person to be recompensed for injury from any cause, then society as a whole must pay the costs under some form of general taxation. It is clearly evident that the American society will be severely damaged if it endeavors to implement this philosophy by having specific private companies carry the load. 44 OLIVER MACHINERY CO. Mr. Edward T. Barrett, II Page 3 October 21, 1977 In my opinion the issuance, nearly a year ago, of the preliminary report, has done irreparable harm to American industry. The issuance of the final draft in its present form will compound this injury. The Task Force itself, composed largely of lawyers, has tried so hard to outline various points of view concerning the product liability situation that its impact can only be negative and will not help in solving a very real problem. In my opinion the final draft is superior to the preliminary draft, particularly since it eliminates the sentence in the latter that emphasized that there was no crisis. The preliminary report should be completely withdrawn from circulation. The final draft discusses numerous suggested remedies without making specific recommendations. The impression will thus be spread widely, by those who have a vested interest in the present situation, that there really is no problem. This report will not help America solve a growing problem. Sincerely, ■■< W ■ . ■' Ralph B. Baldwin President RBBrmo 45 STATEMENT OF MELVIN BLOCK, Member of the Advisory Committe to the Inter- Agency Task Force on Product Liability, U. S. Department of Commerce The confrontation continues between those who desire laws, rules and regulations which allow people to live in good health and those who wish for laws, rules and regulations which allow special interests to live better at the expense of the populace. However, the latter can gain no consolation from the findings of both the Interim Report (IR) and Final Report (FR) of the Federal Inter-Agency Task Force (lATF) . It is not the voice of the turtle that is heard throughout the land, but instead those who self-servingly cry wolf. In short, the reports are a lethal blow to a mercenary, mendacious mythology of crisis and alarm fomented by the in- surance industry and echoed by those in a position to gain. The Final Report further finds that there is an abysmal absence of data from the insurance industry even after continued pleas via the Federal Register and dissemination of the need for same to the presumably most interested parties in the insurance industries and others who created the call for the InterA^ency Task Force. This absence of supportive data makes it impossible to confirm whether any insurance price increases 46 in the area of products liability are indeed justi f ied. (FR 1-20) Furthermore, according to the findings of the Task Force, available data supplied by those most interested failed to establish a crisis "in the sense that a large sector of in- dustry cannot obtain products liability insurance or that the increased cost of such insurance has made a substantial impact on the price of many products". (IR 40) Indeed, the Task Force study could not have reached any other conclusion. On the same page (IR 40) it is stated that the study "should do more to preclude precipitous legislative action and duplicative re- search efforts, than to find a total 'cure-all' for p.roducts liability problems". The utility of any system such as the tort-litigation system cannot be measured solely by economic factors. The lATF has recognized that the rights of injured victims are paramount and has placed special emphasis upon the deterrent effect of the present products liability system. Consumer products are involved in accidents which annually kill 30,000 people, per- manently disable 110,000 and hospitalize 585,000 more (see the 1970 Report of the National Commission on Products Safety) . This appalling body count underscores the continuing need for a system which efficiently induces product safety. Moreover, this toll excludes factory, farm, construction and transportation products injuries . 47 The Final Report verified the fact that the insurance industry and business community were making invalidated extra- ordinary assertions. The figure of one million products lia- bility claims for the year 1976 was stridently bandied about by the industry. The hearings disclosed that the insurance industry now has drastically revised its still unverified esti- mate to 60,000.00 to 70,000.00 claims. Perhaps, a minimal dis- parity to anyone concerned with actuarial statistics. Insi- dious propaganda of this type, according to the report, has helped create a false "crisis" atmosphere. (FR 1-3) This statement will briefly examine the lATF ' s analysis of the cost of maintaining the present system of deterrence and will briefly illustrate the efficacy of the system. Also, we will discuss some proposals for increasing the efficiency of the tort-litigation approach. I IS THERE A LEGITIMATE CRISIS? Those who advocate a change in the products liability system claim that the cost of products premiums has increased dramatically. However, the lATF report found that, "in most industries, even those affected by a sharp increase in pro- ducts liability premiums , that cost has accounted for less than 1% as a percentage of sales." (Emphasis added) (IR 6) (FR III-2) When one compares this figure to the $300 that a $10,000 a year 48 laborer must spend annually on his automobile insurance, the relative insignificance of products liability premium cost is underscored. Compared to the relative losses often suffered by an injured plaintiff, the cost to the manufacturer of pro- ducts liability insurance is infinitesimal. In addition, the FinaX Report finds that since 1972, there has been no signifi- cant change in the average amounts paid per firm being preferred in products liability awards, according to the surveys. (FR III-3) The above figure of less than one percent of sales is even more impressive when one considers that it is based on con- clusions from an independent telephone survey of 3 37 producers evely distributed among small, medium and large organizations, an analysis of products liability surveys conducted by 17 na- tional trad associations, and solicitation for information in the Federal Register . Surely, those most interested in draconian remedies would have responded with alactrity at the opportunity to corroborate their own mythical thesis. In the surveys conducted by the national trade associa- tions, only a 20 percent response rate was elicited. The impli- cation of this disinterest on the part of many manufacturers- would seem to be that only few of them are experiencing a pro- blem of being able to afford insurance. Furthermore, the less than one percent figure might be inflated, since one might expect that only those with an extraordinary af fordability program would 49 respond to either the Federal Register' s solicitation or the trade association studies. In addition, the lATF report indicates that the avail- ability problem is an isolated one. The Final Report found that there is no widespread problem of availability of products lia- bility insurance of the firms responding to the various surveys. (FR III-2) A few companies in high risk product lines were having difficulty. (FR VI-81) There is no direct verifiable evidence that products liability insurance has been the cause of any business failure. (FR VI-81) Therefore, to solve this initial problem, we would support either a voluntary pooling mechanism as discussed in both studies. Notably, an advisory committee to the National Association of Insurance Commissioners has supported the sug- gestion of a voluntary pooling mechanism. A plan is now success- fully operating in Connecticut. Implementation in other states can be expected to eliminate any availability problem which exists. Indeed a staff report indicates it could be only 0.1% of American business who possibly could have an availability- af fordability problem. (IR 8) Significantly, the Final Report questions the reserv- ing practices of the insurance companies. The precise impact of reserves for incurred losses, including incurred-but-not-reported (IBNR) losses, on product liability underwriting losses, rates. 50 and the determination of the profitability of the line is still unresolved. Similarly, the Task Force staff has not been able to directly address the issue of whether or not the unpredictability inherent in the reparations and insurance systems lend itself to a continuing redundancy in the reserves. The entire area of reserving practices is one that has been the subject of consi- derable debate which appears certain to continue. It is an area in which there is a vital need for more objective study. (FR V-30) Finally, the implications of the recent Insurance Ser- vices Office (I.S.O) Closed Claim Study would seem to be that there is no crisis. The Final Report clearly indicates the need for more information before any tampering of the tort litigation system is contemplated. It states that better data should be collected for all product liability insurance premiums, losses and claims. The Final Report finds that product liability insurance rates and premiums should be regulated to ensure that they are more closely related to statistical assessments of and are fair, nondiscriminatory and reasonably related to product risk. (FR V-40) Also, there is a need to promote greater financial disclosure and accountability in product liability insurance. (FR V-41) 51 In conclusion, the Task Force believe that steps out- lined herein will help address the so-called product liability problem. They might also reduce pressure for extensive govern- ment involvement in the area of product liability insurance regulation. (FR V-42) The statistics which are available on such questions as the actual cost per claim, date of sale of the product, and the relative compensation which the average claimant received in relation to his economic loss seem to suggest that there is no manufacturers 'crisis' in products litigation. II THERAPEUTIC EFFECT OF TORT-LITIGATION SYSTEM It has been suggested that the purpose of the tort system is twofold: (1) to compensate those injured by the faults of others and (2) to discourage tortfeasors from continuing tortious activity. Nowhere in the tort system are these pur- poses better achieved than in the products liability case. One of the most practical measures for preventing acci- dents in the field of product failure is the successful lawsuit. In finding that (1) the tort-litigation system and increased premiums have been an effective spur toward inducing manufacturers to .produce safe products. (IR 10) and that (2) premiums still 52 amount to less than one percent of the gross sales, the lATF has thus confirmed that the present system is cost effective. The Final Report acknowledges and reaffirms the fact that products litigation helps place the incentive for risk prevention on the party or parties who are best able to accom- plish that goal. (See Industry Study 1-9 and I-IO) (PR VII-5) The final version of the industry study and other infor- mation that has come to the attention of the Task Force reaffirms its prior finding that the tort-litigation system and the in- creased products liability insurance premiums have caused a number of manufacturers and insurers to devote more time to and reinforce their activities in products liability prevention. (FR VI- 7 0-4) The most common approaches undertaken are: 1. Augmented quality control 2. Improved labeling 3. Product redesign These three techniques are viewed as having a signi- ficant impact on product safety. (FR VI-76) It also results in better research and development, and involvement and re-education of top management. (FR VI-7 7) Many insurance companies have increased their efforts to provide product liability prevention advice to their insureds. (FR VI-78) 53 Evidence of the salutary function of products liability suits abound. Two examples suffice: Tip-over steam vaporizers, true to that ominous descrip- tion with regularity in the past severely burned the young and the unaware with scalding water. Not even the withdrawal of products liability insurance could influence the manufacturer to change his design. When, finally, claims against this palpably defective product numbered over 100, the manufacturer was found to redesign the vaporizer with a single cover-lock top. (See Hamper, Product Safety v. Reliability: Know the Difference, 44 Machine Design 25) (July 9, 1971). A cover-lock top is not necessarily suitable for a con- tainer of granular drain cleaner. However, if water is intro- duced into a can of drain cleaner containing lye, it creates a chemical reaction producting heat and converting the water into steam. A cover-lock top, confines the pressure until an explosion occurs. Nevertheless, one manufacturer did continue to package its drain cleaner with cover-lock tops until a great number of claims were brought for injuries caused by exploding cans. Only then did it redesign the container with the current 'flip-top' of 'snap-can' covers. (See Moore v. Jewel Tea Co., 253 N.E. 2d 636 (Ill.App.1969) , affirmed 264 N.E. 2d (111.1970). 54 As the lATF indicates, there is a "strong social policy trend that seeks to protect the consumer in spite of his own carelessness". (IR 10) That is an eminently human, reasonable and compassionate policy reinforced by the products liability system and coinciding with our increased regard for all human rights. Thus, in supporting the continued protection of the consumer, the lATF has stated, "in considering any modifications of the tort-litigation system, one must be careful not to diminish pressure on manufacturers towards employing sound products lia- bility preventing technique programs. (IR 10) The Final Report pragmatically states that, "we do not believe that one should creade a state of ' affordable ' pro- duct liability insurance with adequate coverage to all manu- facturers", ... "more specifically the law should not be modi- fied as to who are both unwilling and unable to follow rea- sonably safe manufacturing standards". (FR VII-4) In addition, the summary concludes that immunizing changes in the law of state-of-the-art, custom and usage and compliance with standards are self-defeating in that manufac- turers would operate according to the lowest common denominator. (FR VII-29-33) 55 Ill THE lATF REPORT - FURTHER SUGGESTIONS FOR CONSIDERATION An egregious inadequacy of the lATF report is its fai- lure to recominend programs for reducing the number of defective products on the market. Without defective products, there would be no litigation, and no premiums to be paid, high or low. There are still an inexcusably high number of products related injuries occurring each year. We would suggest that, if legislation is f orthcom.ing , it should be to obtain high standards for manufac- turers to produce safer products . Legislation ought, for example, to be enacted which would penalize manufacturers for failure to initiate safety de- sign programs. Although the marketplace now makes its own^ adjustments for lack of safety programs, eg: underwriters adjust premium rates on the basis of a manufacturer's concern for safety, these adjustments do not sufficiently protect consumers. Mandatory guidelines for safety design programs should be established. It is not uncommon for a manufacturer to design a pro- duct with a defect which repeatedly causes injury. As recounted above, a steam vaporizer was produced by one manufacturer which caused severe injuries to over 100 people. Yet, despite notice of numerous injuries caused by products, manufacturers too often refuse to recall or redesign their products. The lATF study has 56 made no recommendation regarding this problem of the chronic offender. We suggest that a better system be established for reporting injuries caused by defective products and that action be initiated, either civilly or criminally, against manufacturers who fail to respond to the design inadequacies of their products which repeatedly cause harm. Corporate recidivism cannot be tolerated Finally, the lATF study omits any discussion of manage- ment accountability. Where conscious design choices prove to be totally inadequate, and where management wilfully fails to correct the problem, management should be held personally responsible. The recidivism of a products supplier who delivers defective goods should not be tolerated and the corporate shield which pro- tects the culpable officers personally should be removed. It is a paradox that those who are the first to advocate the curtailment by govfernment of the great heritage of common law rights of our people are the very same industries, corpora- tions and persons to view with alarm any necessary involvement of the government in their affairs. The insurance industry, trade associations and manufacturers should look to the mote in their own eyes. Concurred in by Paul Rheingold 57 STATEMENT OF JUDY BRAIMAN-LIPSON, CONSUMER REPRESENTATIVE The Task Force Report exposes much of the misinformation being used by manufacturers and insurers to promote anti-consumer legislation on product liability. Since state legislators have been fed much misinformation, the Task Force should ensure that they learn the findings of the Report. The Report finds that business is not being ruined by product liability insurance rates. While rates have been increased by insurance companies, they remain, on an average less than 1% of total sales, and have not, contrary to the propaganda, been the cause of any identifiable company going out of business. The Report finds that one million product liability lawsuits are not filed annually, even though this figure has been used by insurance companies to create fear of consumers swamping the court system. Best estimates are that about 1/15 of this figure are filed, which means that injured consumers are using the court system more to settle their grievances than they have in the past, but not dramatically more, particularly in the context of increases in all kinds of litigation. Product liability cases still represent a miniscule proportion of all legal cases. The Report shows that recent increases in the cost of insurance premiums are not justified by any objective facts. While some in- crease in rates appears to be justified, if nothing else than because of high inflation of medical care and other costs, the astronomical increases appear to be set merely because of "bad vibes" insurers have about the future. Insurers say they have bad vibes because of pro-consumer legal doctrines developed by the courts in the 58 last twenty years. They have requested a number of incautious remedies not because of any evidence that the remedies will cut the rates manufacturers are complaining of, but merely because the remedies will make insurers feel better. The idea legislatures are supposed to accept is that if insurers feel better, they might not set nasty rates. The Task Force has pointed out that there is no nexus between legal doctrines held in the various states, the amount of product liability lawsuits filed, or the proportion of plaintiff victories. Nor has evidence been pre- sented that insurance rates vary between states according to the liberality of their legal doctrines. Giving the insurance companies everything they want is unlikely to help manufacturers ' premium costs.* Certainly there are problems with the product liability system which need work in the future, for the benefit of the consumer. First, litigation is at present too expensive to permit any but the most grievous injuries to enter the system. The losses for all the other injuries lie where they fall, re- gardless of fault, on the injured. Those consumers who do win a case, must pay too much of their recovery for lawyers and ex- perts. Second, much more attention should be paid to improving manufacturing processes, and redesigning products. The Report indicates that there have been improvements in injury prevention * The only remedy suggested which appears to have a bearing on rates by any objective measure, is prohibition of consumer law- suits at a certain cutoff time after purchase. While it may be true that manufacturers should not be liable for products which break down after their useful life is done, a flat cut- off will unfairly protect manufacturers who know their products are used for a long time, who promote their products for dura- bility, and manufacturers of products whose injuries have a delayed appearance. _q activities in recent years, but a large number of businesses do not have them. Insurance companies should require all insured to initiate prevention activities. Trade associations should do a better job of apprising their members of their legal obliga- tions and developing case law. Finally, it should be realized that commercial product liability insurance is not a societal necessity, and that, in fact, business which do not have such insurance may have a much higher incentive to prevent injury, since the losses will come out of their own pockets. In a number of state legislatures, insurers and manufac- turers are continuing to promote self-serving measures which the Report opposes. For example, at least 12 bills have been introduced in states such as New Jersey, Minnesota, and Washing- ton to make industry custom an absolute defense to a product liability lawsuit; at least ten bills have been introduced to make compliance with government regulations an absolute defense. State legislators are frequently ill-equipped to evaluate industry claims and some mechanism needs to be established by the Task Force to disseminate its findings to the states, where its rational approach is needed at this time . 60 Marsh ^^ NkLennan. Inc or[i(>rat( u COMMENTARY ON THE INSURANCE CONSIDERATIONS IN THE FEDERAL INTERAGENCY TASK FORCE REPORT ON PRODUCT LIABILITY The Interagency Task Force Report on product liability is a significant piece of research, a synthesis of an enormous amount of information from a wide variety of sources concerned with product liability. Moreover, it attempts to describe current practices in product liability insurance, underwriting and rate-making, and brings a welcome emphasis on the potential of industry and insurers to reduce product liability losses through preventive techniques. Our major concerns with the report are those policies which are implicit in the conclusions pertaining to in- surance mechanisms. Unquestionably there is a "credibility" problem connected with product liability insurance in that insurers are not generally believed to have had sufficient reason for the sharp increases in rates imposed over the last two years. In pursuit of that belief the Report concludes that better data should be collected and product rates should be 61 Mar'-li iS. Nklennan. inccirporatod closely related to correctly assessed product risks. The Report suggests that this might be best accom- plished through government regulation and that the thrust of regulation in the product liability field should be directed thereto. Such a conclusion assumes the necessity that a given line of insurance (and within the line itself each individual rate classification) can and should be statistically credible for rate-making purposes and that the packaging of product liability with any of the many other third party lines of in- surance is inappropriate. We disagree. Lack of data on a single peril does not necessarily justify establish- ing large-scale reporting mechanisms with their attendant costs, nor is it a basis for imposing rate regulation in an effort to accomplish what may be actuarially impossible, Here it may be useful to look at analogies to other lines of insurance. For example, the peril of earthquake is an actuarial puzzle and is offered as a separately in- sured and rated risk only at prohibitively high premiums. When packaged as part of "all-risk" property insurance policies, however, the coverage is generally available at reasonable cost. The same circumstances prevail in the risk of contractual liability which defies the pricing ability of ratemakers and is therefore normally written as part of a comprehensive policy. 62 Recognizing that the Report's conclusions in this area are not specific recommendations for legislation, it is nonetheless our impression that the Report calls for increased regulation in an area which does not re- quire and is not amenable to rate regulation. In the absence of regulatory action, we expect that rates for product liability insurance will fall. The conclusions of the Report, however, suggest a reporting system which would primarily be of use to regulators and which could lock in permanent place a problem beginning to be aolved by the forces of the marketplace. Continuing its emphasis on regulatory solutions, the Report discusses surplus lines and reinsurance; it is correctly observed that these are both important sources of product liability insurance capacity. How- ever, a fundamental misunderstanding of the actual surplus lines function and its significance in the overall insurance mechanism is apparent when the implication is left that surplus lines ought to be more closely monitored in order to control costs and minimize the risk of insolvency. The concept of surplus lines and in fact the term itself are as unique to the United States as our form of rate regulation. It could be said that the development 63 of the surplus lines market and its continued existence is a direct reflection of the failure of regulation to accomplish its intended purpose. It is a form of escape hatch or relief valve which allows the system to continue to function in spite of regulation and is tolerated by regulators as such. Rate regulation of surplus lines is a contradiction in terms. With respect to solvency considerations we would like to make two points: First, the insolvency record of regulated companies is far worse than the record of the surplus lines market. Second, the prospect of insolvency should be considered primarily from the standpoint of the policyholder rather than the acci- dent victim. To our knowledge no claimant in a product liability case has failed to collect his loss due to the insolvency of the defendant's insurer, and no one has suggested compulsory product liability insurance for the benefit of accident victims. A self-insurer is not required to show evidence of financial responsi- bility and so long as this is the case there is no apparent reason that the solvency of a product liability insurer should be the subject of regulation for the bene- fit of interests not a party to the insurance contract itself. 64 Marsh l^ \1cLennan, Intorfior.iUxl Several details of the Report are especially worthy of comment: 1. The discussion of "claims-made" liability insurance forms of coverage is very mis- leading. The "claims-made" form of liability policy is useful in certain types of in- surance, principally professional indemnity coverage, but it is potentially dangerous to the buyer of product liability, especially if he does not understand fully its limitations. The real problem with "claims-made" in product liability is that it will occasionally put the buyer in a position of in effect having to in- sure his house when it is already burning. There are other better ways to shorten the underwriting tail and reduce the speculation in product rate- making: To cite one, the definition of "occurrence" can be tied to the date when injury is first mani- fest. 2. The Report says (Chap. V, Pg.l2, lines 617-20) "To be statistically sound, rates for each product class should be based on the claims experience per unit of exposure that has occurred in the past. That is, assessments 65 Marsh & McLennan, Incorpcjrated of the probability of claims in the future for a given class should be based on know- ledge of claims in the past." This is a decidedly arguable point which ought not to be made as a statement of fact. For example, a growing number of rating experts is exploring the possibility that environ- mental or exposure rating techniques are more valid in product liability rate-making than the mere extrapolation of loss experience It would have been preferable to see the Report speak to the point that for product rating to be statistically sound, it is necessary to achieve technological improve- ments in underwriting techniques and the industry should be encouraged to devote the effort and expense necessary to accomplish this end. 3. There is a discussion (Chap. V, Pg. 38, lines 1798-1805) of the possibility that the IBNR techniques of insurers and rein- surers may be working to create a pyramid effect on reserves and hence on product liability rates. It is perhaps more than anything else a testament to the complexity 66 Marsli \ .Wclennan, Incnrpiiraird of the insurance business that the Task Force could reach such conclusions. There may or may not be a pyramid effect in product liability rating but if there is it is due to other causes. By way of illustration, insurers and reinsurers both may set case reserves for individual claims and though the primary in- surer's reserve may include amounts recover- able from reinsurers, no one suggests that the effect of the reinsurers' reserves leads to rate redundancy. 4. In the discussion of federal reinsurance (Chap. VII, Pg. 101, lines 5127-5129) there is the suggestion that retrospective rating and full credit for investment income generated by reserves might limit the amount of the sub- sidy inherent in the federal reinsurance pro- posal. The long tail in product liability and the essential need for conservatism in the rating thereof (from solvency considera- tions alone) are factors which make retro- spective rating and credit for investment income highly desirable facets of any rate- making scheme, not only federal insurance. These concepts are increasingly adopted by 67 Marsli \ McLeimaii, Inc orpiucikd product liability underwriters today and it should also be noted that the idea of group captive insurance companies and structured self-insurance plans are both essentially adaptations of the idea that equitable pricing of long tail risks requires giving insureds a stake in investment income generated by the premium and in any adjustment of the overall cost dictated by the claims experience which is eventually developed. (Not obvious in the Report or its conclusions, is the evidence that society is suffering from the problem of availability and af fordability and that governmental initiative is needed.) 5. The Report (Chap. VII, Pg. 109, lines 5504- 5518) quotes and appears to endorse a state- ment to the effect that the practice of under- writing selection is unique to insurance and, furthermore, not in the best interest of in- sureds. The first part of this statement is incorrect, (e.g., selective underwriting is fundamental to the credit side of banking and other forms of lending) . The second is highly arguable — selective underwriting is 68 Marsfi cK Wclennan, Incdrpor.itrcl inherent to classes of insurance that are generally available as well as those which have a residual market problem. Many factors can lead to the unavailability of a given line of insurance, but "selection" is not one of them. 6. We commend the Task Force for its generally favorable position with respect to the en- couragement of captive insurance companies, including association captives. However, the conclusions with respect to individual-owner captives reflect a possible misunderstanding of their function. The Report says (Chap. VII, Pg. 127, lines 6253-6260) that such captives could lead to increased insurance costs because they lack the pooling of risk common to other insurance ventures. The main point of a single- owner captive is to provide a means of funding and administering that portion of the owner's risk which he is able to absorb himself and does not need to transfer to a conventional insurer. To the extent that the use of captives is in- hibited by regulatory and federal income tax considerations, risks are transferred to the 69 \Aarhh S< \kLennan, Intf.irjjoralotl convantional insurance market unnecessarily. This results in a wasteful increase of demand on an insurance market which already suffers from limited capacity. Furthermore, it is demonstrable that captives lead to a reduction of the overall cost of insurance, not an in- crease. The Report also suggests that an inadequately capitalized single-owner captive may not be able to compensate claimants. In addition to noting again that there is no demand for com- pulsory product liability coverage, we would point out that the risk of insolvency is immaterial to the policyholder when he is the sole owner of an insurer in which he has placed risks he has chosen not to transfer to the conventional market. 7. The Report recognizes the potential value of structured self-insurance programs (Chap. VII, Pg. 135) but expresses concern over their potential impact on federal tax revenue and about the prospect of giving special treatment in the tax code to product liability. With respect to the tax impact, there is reason to 70 M.ifsli \ M( Lcnnan, Inc orpnroti d believe that the deductibility of payments to structured self-insurance programs can lead to an increase in revenue. Experience has proven to our satisifaction that much in- surance is purchased purely for tax reasons; this is particularly true in the case of "long tail" business where an insured can take tax deductions for premiums years be- fore he could acknowledge an uninsured loss. On the other hand, the amount contributed to a self-insurance fund should consistently average in the area of 25% less than the amount necessary to secure conventional in- surance for an equivalent risk. Since the deductibility of such contributions would lead to a significant increase in the practice of self-insurance and a correspond- ing decrease in the purchase of conventional insurance, it is argued that the result would be an increase in corporate profits and, there- fore, corporate taxes. This would obviously be offset, but only partially, by a reduction in corporate tax revenue where credit is given for risks already self-insured. As for the 71 N\arsli (!s, Mclennan, Im. orporatccl argument recited in the Report that adverse contingencies should be funded with pre-tax dollars, we would like to make the point in support thereof that insurance companies are permitted to fund such contingencies with pre-tax dollars and the denial of a similar right to non-insurance companies could be viewed as discriminatory or, in effect, a form of federal subsidy of the insurance industry. ****************** A general impression of the conclusions of the Study is that they seem to place undue faith in residual market mechanisms as a solution to the product liability avail- ability and cost problem. We agree with the Task Force's caveat that the provision of such markets has serious policy implications, but we do not agree that such mar- kets are rooted in practicality. There is unsatisfactory evidence that such mechanisms are practical. They have not worked, voluntary or compulsory. If such mechanisms are effected, public subsidies can become subsidies to the production of unsafe products, and could tend to be triggered by political considerations more than underwriting and market considerations. It is also historically true that no matter with what good faith 72 Mcirsh X \\( U'nn.in. Inc orpurjlcci they may be initiated on a temporary basis, they in- evitably become permanent institutions with a tendency to perpetuate, if not compound, the problem they were designed to solve. The study is unequivocally correct in noting there is a lack of specific data about the effectiveness of such mechanisms. There is ample evi- dence about their ineffectiveness, however. The Task Force is to be commended for taking a balanced view of the product liability problem. We believe that a number of factors are at work which can improve the situation with respect to the availability and also the cost of insurance. Among those we would include the increasing use of single-owner and association captive insurance compani^es, the generally impressive current profitability of traditional insurance companies and the accelerating influx of foreign investment through the entry of foreign carriers in the domestic market. Each of these developments represents an encouraging new form of additional insurance capacity and the effect thereof is inevitably favorable in terms of availability as well as af fordability . Robert Clements RC:ut November 10, 1977 73 SEARS, ROEBUCK AND CO. Comments on Final Draft Report of Interagency Task Force on Products Liability The Report provides a diligent and admirable study of both products liability issues and a variety of advocated changes in our socio-legal mechanisms which deal with product related injuries. It is clear that few of the advocated changes have much chance of early enactment (at least at the Federal level) , because of insufficient hard data to support them. It is reasonable to expect that product related injuries will continue to be the subject of litigation, with the courts as the ultimate decision-maker in assessing responsibility for such accidents. As this is true, it is incumbent upon those concerned with products liability issues to sift through the changes advocated for the tort law system and determine which of them, alone or in combination, offers any realistic hope of alleviating some of the problems besetting manufacturers and insurers, while preserving the right of consumers and workers to secure redress for injuries caused by unreasonably unsafe products. I. The pre-eminent objective of the Restatement , § 402A, was to protect the American consumer from the "lemon"; that is, a mass-produced product 74 subjected to shoddy workmanship or made fallible through the use of inadequate materials. The Restatement excuses the injured plaintiff from developing proof of specific negligence during the manufacture of such products, and allows recovery where the product is defective, no matter how thorough the manufacturer may have been in its quality control procedures. The Restatement recognizes that even the most careful manufacturer can put out a "lemon", and adopts the value judgment that all consumers, through the seller, should bear the loss of any injury, rather than the individual consumer. Courts have expanded the concept of "product defect" to an un- realistic and unworkable extent, as evidenced by the Report's discussion of a number of areas of tort law which have become fundamentally unfair or excessively burdensome to manufacturers and other sellers. Some of these specific areas include liability for ancient products; the use and extent of a "state-of-the-art" defense; the "foreseeable misuse" doctrine; and the application of hindsight through the testimony of hired expert witnesses. All of these subjects are further cloaked with the unpredictability and inconsistency arising from the variety of case law generated by fifty State jurisdictions. It can be argued that some of these extensions put the seller and manufacturer in the position of insuring against any injury. Most of the manufacturers' legitimate complaints in these areas would be put to rest by the adoption of a Federal statute of limitations 75 and/or uniform State laws which would bar products liability claims five years after the date of manufacture, except those based on express written warranty or a defect in workmanship or materials. This proposal would retain the manufacturer's current "wide open" liability exposure for the first five years of a product's life. Claims based on design, warnings, advertising, instructions, foreseeabi- lity, testing, etc., would be barred after five years. Component manufac- turers should remain liable for defective parts incorporated in the finished products of others, in appropriate cases. Although under this proposal, a component manufacturer might not be sued directly by the consumer, he should remain vulnerable to claims for indemnity or con- tribution. Viewed in light of Chapter VII 's six basic considerations for evaluating tort law changes, this proposal has much to offer and suffers few of the infirmities of other advocated changes. 1. Ensuring Reasonable Compensation for Parties Hurt by Unreason- ably Unsafe Products A seller remains fully liable for construction (workmanship and materials) defects for the life of the product. Such liability presents no conceptual problem and is a risk manu- facturers and insurers are capable of bearing (p-VII-13) . Retaining life-time exposure for construction defects avoids 76 the useful life debate, leaving that issue to be a factor in individual cases, in determining whether a product was defective when made or whether its failure was due simply to wearing out with the passage of time. Cutting off other causes of action after five years admittedly may deprive some plaintiffs of recovery, where no construction defect in the product is demonstrable. However, the vast majority of product claims appear to arise within five years of the distribution of the product (p-VII-16) . Any true or serious design or mislabeling defects in all types of product almost always will manifest themselves within five years. The activities of OSHA, CPSC and private standards-making groups are having an increasing influence on manufacturers' choice of designs and materials. It is becoming less likely that poor designs will be marketed, or, if they are, that they will survive more than five years on the market without government intervention. This proposal would not require any changes in the basic tort law system or impair any of its legitimate aims. Its adoption would eliminate or significantly reduce the "horror stories" in the present system. It does not seem unfair to limit a manufac- turer's responsibility for design, warnings and foreseeable use to a full five years into the future. Often design and warning complaints are efforts to excuse an obvious misuse of a product 77 in the guise of a "foreseeable misuse". The imposition of design liability years and years after a product is made essentially makes a manufacturer an insurer against all injury, and it is this burden which appears most inequitable (and difficult to insure) under the present system. When a manu- facturer is held liable for a design that is long superseded by technical progress, there is no therapeutic effect on the people designing products today. This is especially true in the case of workplace machines that have been reworked, altered and modified over the years. Under this proposal, the States will continue to establish policies regarding essentially l^cal matters such as attorneys' fee arrangements, the nature of damages recoverable, and the treatment of the relative rights of employers, workers' compen- sation insurers and third party manufacturers. Any changes in these areas should be made on the basis of their impact on the entire tort system and not on the effect on products liability alone. 2 . Ensuring Availability of Insurance to Responsible Manufacturers. The proposal would not eliminate all uncertainty as to the insured risk on older products, but would eliminate a significant part of it. The effect on rate-making of such a limitation is not clear, but it would tend to make insurance more available to the manufacturing sectors most affected by the present situation. 78 The proposal would enable Insurers to take a hard look at the design and production skills of current or potential customers and give favorable rates to those putting out good products now, without the spectre of untold liability risk on products designed technical generations in the past. 3. Placing Incentives for Risk Prevention on the Party Best Able to Accomplish that Goal. The incentives for marketing safe products will not be affected by this proposal as the manufacturer will have his present expo- sure for five years. Adherence to the state of the art will still be a compelling interest. Adoption of design and safety innovations will continue to increase as a loss preven- tion and competitive factor. In contrast, broadly funded no fault arrangements, if applied to products liability, could reduce manufacturers' incentives. Since the tort system remains a fault-finding mechanism, the continued imposition of a reasonable fault oriented liability may still be the best means devised to date to encourage the production of safe products. 4. Expedited Payment of Reparations. So long as product liability is still determined by the courts, there is no simple panacea for delay in the processing of claims. Arbitration boards or no fault systems are not clearly 79 preferable alternatives. In most juridictions , it is possible to bring a claim to trial in 1-2 years. Often, claimants will delay prompt hearings on claims because time must pass before the nature and extent of their injuries can be evaluated. Even in badly back-logged courts, discovery and trial can be accelerated to accommodate plaintiffs whose injuries have left them without income. Special divisions of courts can be created to expedite the hearing of product suits, such as the Circuit Court of Cook County, Illinois, has done in the case of medical malpractice claims. The limitation proposal, as applied to claims on products older than five years, could have the salutary effect of reducing court burdens by eliminating many of the questionable suits which are less likely to be settled and more likely to entail extensive discovery, motions, trials and appeals. This should help expedite the handling of the remaining cases. 5. Minimizing the Sum of Accident, Prevention and Transaction Costs. The proposal would have a significant effect in lowering trans- action costs in regard to those cases involving older products. Claims and litigation would be less protracted and would not invite the use of costly, hired design experts and the expendi- ture of attorneys' time in evaluating esoteric design questions. 80 6. S pecificity and Concreteness of Remedy. The proposed limitation responds to both desired criteria. The limitation should be drawn so as to pre-empt State legislation and may be Constitutionally justified by a finding that the claims and suits to be barred now impose an undue burden on interstate commerce. In addi- tion, the adoption of uniform State legislation incorporating the limita- tion should be undertaken as a backstop to the proposed Federal measure, and to govern intrastate products liability claims not reached by a Federal enactment. II, Some have proposed a no fault system as a means of solving the products liability problem. The Report states that insufficient data are now available to evaluate the effectiveness and cost of a no fault approach. The Report recommends 'further study in this area. We agree that further study is indicated. However, such study should not be con- fined solely to the products liability context, but should be related to the on-going legislative dialogue over universal health care or national medical insurance. It is true that catastrophic accidental injuries are too costly for any one individual to bear, but this is true whether or not a defective product caused the injury. The present tort system helps only those who can find a viable defendant and prove liability under the many diverse laws. It is not equipped to help the many others with similar injuries who cannot recover from anyone. 81 One area of the Report departs from the now well-accepted and rational imposition of product defect losses upon the party ultimately responsible, i.e., the manufacturer. At pp. VII-70, 71, the report endorses "downstream" contribution among manufacturers, distributors and retailers in the stream of commerce. The Report states that the goal of accident prevention "would be more likely to be achieved if contribution claims were allowed among all parties in the manufacturing chain". This statement does not reflect commercial reality. Manufacturers employ the engineers who design products and have sole control over the facilities, materials and processes involved in production. Distributors cannot control defects. Downstream contri- bution would diminish the manufacturers' dollar incentive to market safe products. Existing law and insurance arrangements already provide a liability exposure for the downstream merchant who, for example, creates a defect by altering or damaging a safe product while it is in his hands. Downstream merchants already have high transaction costs from product liability claims traceable to manufacturers. The downs treamers ' incentives the Report speaks of already exist in abundance. If consistency in the law is valued, there is a further objection to a proposal allowing downstream contribution on the sellers' side of a lawsuit, where the distributor or retailer has not created the defect. Most States adopting strict liability have held, in one way or another, that an injured plaintiff is not barred from recovery if his alleged contributory "misconduct" consisted merely of failure to discover or remedy a defect in the product. It would be anomalous to hold that a 82 consumer Is Innocent in law when he has failed to discover the manufacturers' defect, and yet hold that the manufacturer is entitled to contribution from downstream merchants who likewise have simply failed to discover or remedy the defect. In most cases, the distributor or retailer has no opportunity to discover defects in manufactured goods, either because they come packaged ready-for-sale or because only exhaustive testing and use of products can disclose latent defects. Design and testing of goods are and should remain primary responsibilities of manufacturers, who know their products best and have the best opportunity to enforce quality control. Shifting of defect losses through contribution would dilute those responsibilities. The adoption of downstream contribution would further aggravate the present uncertainties in products liability insuring practices and would add an inflationary products liability cost factor to the consumers' cost of goods. At present, it is generally understood that manufacturers will bear the ultimate loss for manufactured defects. The insurance cost and availability problems prompting the Task Force study have been manufacturers problems. If downstream contribution is adopted, manufac- turers' insurance problems will not go away, but distributors and retailers, relatively unburdened until now, will inherit the same problems that now afflict manufacturers. Downstream contribution would make loss allocation uncertain, requiring all sellers to insure to the hilt with increased cost to the buying public. 83 TELEPHONE AC 615 455-0691 ESTABLISHED 1912 m ismMmmmmm m^. TANNERS AND MANUFACTURERS indoor, f>i^av qrouno & recreation bal^us We Own and operate Our own tannery and woolen mill TUL,I-.A.HOMA., TENNESSEIE:, 3T388 Novmbtft S, 1977 JOHN L. PARISH. PRES. BILL N. KEENE. (cPa) V. PRES. a TREAS. W. C. TiPPS. V. PRES. FRED JUER. PRES. WORTH BAT CO. JESS HEALD. V SALES a MARKETING R. D. CLAY. VtCE PRE PAUL CREOLE. V. PRE W. C. YARBROUGH, V, CHARLES DALE. SECY ES. Wi. Sidmy Hanmon UndzA-SzcAeXcuiy OjJ CormeAcz Vzpa/itmznt o^ CormeAcz Washington, V. C. 20230 Ve/Vi UndeA-Se-CAeXoAy Ha/mon: I vQJiy muck app^zcMite. thU opponMiviUy to utttxtz to you. my concZm-ion CL^tzA studying thz IntznaQoncy Ta&k Vo^cz fiapofvi on pfwduict tLcLb-lllty. Thz fizpoKt U> vznjy tko/ioagh and pfuweA o£ thz pfwblojn. I faetceve It hcu cuttzmptzd to 6tatz aJUi Any H.zpofit o^ thii typz can, o^ nzzzi><jy , itatz ati phtuzi cmd po6.6tblz iuggz&tzd &oZutloni> to thz pfwdacLt tixibAjLity pnjobtom it oxun, oi couJuz, bz tntzn.pKztzd by dl^^zn.znt pzoplz laitk dl{i^zn.znt vtmi to makz it appzoA that it 6uppoAt4> thzOi poAttion. J, natuAoZty, view thz fizpoftt iAom thz itandpotnt o^ thz ipoKting good& manu^acMvizfU , Mho in mo&t oueA, zon&jibt^ ol i>maZZ. buii>tnzi>i>. In addition to thz iaxit that we aAz ptanoAiJiy a gfioup o^ &maJU. ba&tnoji&zit , we aA.z, aJUo, In an tnxiii&tAif that by ttb \jzn.y njoitwiz i& onz in Mhlzh tnjuAA.z6 do ocean. , Thz KzpofLt dozi> 6tcLtz that maZt biutnz&6z& havz ^a^^zfizd mofiz by thz product tUibWiXy pfvobtzm than ZoJtgz bu/^tnz&i. Thz n.zpoKts>, at&o, 6tatz& that Aomz tndii&t/U.z6 can havz kighzn. HjoZz incMjzaMzM that othzu. Spotting goodi tndu&tAy laJUU into thz6Z catzgonA,z& . I knov) pz^onaZZy ojj a nuumbzn. o£ ^pohtaig goodU manjm^actuAzu that havz had thzOi tn6uJtancz noAMzd to i% oi thz &ztting doWvi not thz 1% avznagzd out in thz fiojpofit. I am 6u/iz that you mUZ agn.zz that avzHjagz^ afiz veAy ml&tzadlng. ThzAz afiz, aJUo, a numbzfL o^ &poAting goodi manixiactuAzfU> voho havz bzzn unahtz to obtain iMuAancz bzcaa&z it i& una^^ondabtz, A vzAy aZa/mlng ittatomznt in thz Kzpofit iJ> that pznhapi thz tzgi&tatuAz ■should 6tudy thz itOCMxt djconomic a^pzcti o^ bu^inz&6 that might bz pha&zd out bzcausz o^ high co&t oi in&uAjoncz, Thz dzcl6ion to Zzt bu6im&6z& go down thz d/LOin haA aVizady co&t thz. knzHAJcan pzoplz a gfizat numbzn. o^ jobs. 84 W^^^K^TH-anotHcr- name tor w/X tL U Page 2 Und2A-S^ciA2Xa/iy Hanmon MovmboA S, 1977 I attended the Keeent meeting o^^ the ^maZJi biutnei^ administration tn which aX mou> j^ toted that 471 ol the mnk ioK.ee tn the eomntAy mnks ^on. imalZ buLi>tne6-i> . I ee^MilnZy do not betieve It aj> the Intent, o^ the United Statos government, eentalnty not o^ the VepoAtment o^ Commenxie, to attow 47% oi the woKk. ioK.ee in tkii> eoiintfiy to be pat oat oi work on a matt ifiagmentoAy pteee-miZt basti. The fiepofit did 6tate that thJj> is not a decAAton ofi oAea to be covered by the report, bat, oi coarse, it aj, one oi the ttem that alarm my tnda^try very mach. A great i>haAe ol the spotting goods tndastry has already been exported to foreign coantrtei and we have become tmporte/is oi the prodacts. It certatnty woald -ieem that it is to the advantage oi our coantry, even in the 6mall, amoant oi dollars involved In the i>porting goods Industry, to keep the empZoyment in this coantry and not farther hurt our balance oi payments. Our Industry, also, is not In lavor oi govermnent mbsidy in the ionm oi reinsurance or other methods to gtve a tmprary solution to the problem. Among the isolations mentioned in the report, is a revision oi the Tort Lojw on the Vederal level to return to manaiacturen i>ome reasonable defenses. The reason ior reqaeiting a federal level rather than state level as mo^t manaiactuAen> operate throaghout the ii{,ty state.s and anliorm lawi> are certainly necei^ary. We are reqaesting that Congress return to its position as a legislative body oi making law allowing the courts to aximlnistefi law. The problem has occared with the courts making law throagh very Itberat interpretations . for the record, I do wish to i>tate that no one tn oar Industry is i>eektng to prevent any injured party irom his or her just, legal right to p.ecovary tn the event oi injury ti a product is truly the cause o^ the accident, We do ieoZ that the manaiacjbxreri and i>ellen> oi prodacts should be returned our constitutional rights to being Innocent antit proven gallty and not to be r2Sponstble ior things beyond our control tn the use and misuse oi products . A incintt|)':i':-''U/:-CA who make6 products that are not de^ecttve when they leave his custody and that are designed with the best oi all knowledge avatlable at the tune oi manaiacture and prodacts that have periormed ior a reasonable expected ll^e, depundtng on the use and construction oi the product, i,houZd be able to use thede iacts as a legitimate defense. 85 Pago, 3 llndQJi-SzcAQjjaAij Houmon UovmboA S, 1977 1{^ action AJ> not taken on a {^zdaAat tzvoJi many malZ maYWi{^acLtuJi2A^ mZt go out o£ biLi>-in2^6 and ai, itatzd tn tkz n.zpoHjt many 6malt manu.{^a(itLUiz/u> [mWL be obiionhtd by Za/igeA bai^ne64 Mho can a^o^d tnsuAancc and the cO'Sts 04 they have a bn.oadeA boic oven, which to i>pn.ead the co6t. I betieve that you. mZt agfiee IX ti not In the be^t Intene&t o^ the count/iy to have thU type Oj^ thing happen, I respectively ^.equeit that In the llnat copy ol tkii, n.epoht on. n.et(uou>e ol thu> n.epont by the task ion.ce mon.e emph/uls mitt be ptaced on the aHects oi the pKodact tiabltlty pn.obtem and IXs posslbte remediless on the smaJit business community. Vou/u veMj tHjjJiy, WORTH BAT COMPAW/ - /; Vfiedefilck Juen. President fJijb 86 WHITIN ROBERTS COMPANY POST OFFICE BOX 1889 CHARLOTTE, NORTH CAROLINA 2S233 EUGENE M. KENNEDY PRESIDENT SALES D.vmoN NovGinber 14, 197 7 Mr. Edward T. Barrett Project Director Interagency Task Force on Product Liability United States Department of Commerce Washington, D. C. Dear Mr. Barrett: Concerning the Final Report, October 31, 197 7, Interagency Task Force on product liability: I am encouraged that it offers support to capital goods manufacturers dire need for relief. Specifically, the report indicates there should "be given high priority for further development and evaluation" of workers' compensation as sole source remedy. I agree. The Textile Machinery Industry and other capital goods associations are presently adding to existing conclusive data to support this approach which should be legislated. One of the increasingly clear and severe trends is that the percent of sales/insurance rate ratio has risen since the December 1976 base cited by the report. Congratulations for compiling such a fine document. Yours sincerely, .^ EMK : pg 87 ONE OF THE WHITE CONSOLIDATED INDUSTRIES Our Dtamonr' Jubilee Year 1902-1977 m machine tool builder!* 7301 WfiSTPARK DRIVE McLEarsl. VIRGINIA 22101 AREA CODE I '031 B33-2300 TWX 710-B31-n031 NMTF^A MCLM October 21, 1977 MMES L KOONTZ NORMAN L. DUNLAP FRASEn MICHIGAN AOMINISTF HASEMAMN ATlve DIHECTOn e™,",°o:;^:^ on ;??::?-' 'iX.^S'. SAFETY 01 RECTOR -. iS?c".? ACK «CTOB x •The Honorable Sidney Harman Undersecretary of Commerce U. S. Department of Commerce Washington, D. C. 20230 RE: Pinal Report of the Federal Interagency Task Force on Product Liability Dear Mr. Secretary: As a member of the advisory committee of the Federal Interagency Task Force on Product Liability, I appreciate your giving me the opportunity to comment on the factual statements and the conclusions or opinions expressed in the Final Report. I have enjoyed working with you aad the staff of -the Task Force as well as the other advisory committee members in putting together this report on the increasingly serious product liability problem. While some questions remain unanswered, the assemblage of facts and the discussion of remedies in the report offer a helpful basis from which to proceed in the search for a solution to the product liability problem. The Final Report is, when taken as a whole, an objective and well-balanced presentation of the product liabi- lity problem and various remedies. Although members of the advisory committee and of the community at large might quarrel with particular points of emphasis (or lack thereof), no fair observer or commentator can fail to commend the report's fairness. Nor can one fail to recognize the willingness" of the report to achieve compromises in the tangle of legal, socio-economic and political issues which encompass the pro- duct liability problem. It is in this spirit of compromise that I was particularly pleased that the report supports the concept of increased Workers' Compensation benefits as an injured worker's sole BKttiiifive remedy against third parties as well as against his or her own employer. Overlooking The Nation's Capital 88 The Honorable Sidney Harman October 21, 1977 Page Two In my memorandum of June 10, 1977 to Ted Barrett, I set forth in detail the factual, legal, and social considerations upon which underlie the conclusion of many observers including the Final Report that the fairest solution to the workplace product liability problem is to make increased Workers' Compensation benefits the sole and exclusive remedy for workplace injuries. I have attached a copy of that memorandum to this letter and Incorporate it herein by reference. V/hile some doubts have been raised as to the severity of the product liability problem in the consumer products area, I believe the facts which have been developed by the Task Force clearly establish that the product liability problem in the work- place is fast reaching crisis proportions. The cost of product liability insurance coverage has risen dramatically since 1970. The range of annual increases in the last two years was 20 to 287 percent, in contrast to a range of to 123 percent in the period from 1970 - 197^. The number of firms with deductibles has Increased between 1971 and 1976 by 80 percent for large firms, 130 percent for medium firms, and 100 percent for small firms. Some companies have been unable to attain product liability insurance either because they cannot afford the high cost of premiums or because they cannot obtain coverage at any price. In the most recent study conducted by the National Machine Tool Builders Association, it was found that the average machine tool builder has seen his product liability insurance costs rise from $10,000 in 1970 to $^0,000 in 1975 to $71,000 in 1976 and then almost double again to $132,100 this year. This pattern is typical, even among manufacturers who have never lost a law suit and who have no claims pending. The average metal-cutting machinery builder saw his premiums jump from $1,900 in 1970 to $126,800 in 1977. That is a 6,673 percent increase in just seven years. In a recent survey conducted by Iron Age Magazine it was found that 5^ percent of the respondents believed products liability is indeed a threat to the financial health of their companies. It found that product liability insurance premiums had gone up on an average of 42M percent over the last year, and 657 percent since 1975. One out of three companies which responded to the Iron Age survey had been sued on a products liability claim. The results of a survey conducted by the Insurance Service Office (I.S.O.) revealed that 42 percent of the dollars paid out by insurance companies on all product liability claims are expended on claims arising out of workplace incidents despite the fact that these workplace injuries represent only 11 percent of the total number of product liability claims. In an analysis conducted by the American Mutual Insurance Alliance (A. M.I. A.) of 79 large- loss claims, it was found that "nearly three-fourths of the awards (70/?) involved industrial products, and 60 percent of the 10^^ 89 NATIONAL MACHINE TOOL BUILDERS' ASSOCIATION • 7901 Westpark Drive, McLean, Virginia 22101 • (703) 893-2900 The Honorable Sidney Harman October 21, 1977 Page Three Injured persons sustained bodily injuries while at work. Given this dominant pattern or workplace product liability injuries, it is not surprising to read the reports of large increases in product liability insurance costs, limited coverage, rising claims, and large court judgments on product liability suits arising out of the workplace. The trends are ominous. Product liability insurance premiums have increased dramatically over the last six years and the prospects are that they will continue to double or triple. Just today I spoke with one of our members who indicated that although he has only two claims pending and has never lost a case in the courtroom, his product liability insurance premiums will increase from $45,000 in 1977 to $450,000 in 1978. Those com- panies who have deductibles are being asked to retain an ever Increasing portion of their liability. The capacity of the insur- ance Industry to cover the product liability exposure of American business has shrunk to the extent that substantial numbers of businesses can either not afford to pay the premiums for available insurance, or they are unable to buy product liability Insurance at any price. While these statistics developed by the Task Force substantiate the contention of the Journal of Commerce that there "is a product liability mess" (if not a crisis) in the workplace, it is equally clear that the system of compensating people who are Injured in the workplace is extremely unfair and wasteful, and that the wrong party is paying the bill for this wasteful system. The Final Report recognizes the Inequity of the present system of compensating many victims of workplace injuries. Under present law virtually every state Workers' Compensation statute (and/or its court interpretation) bars recovery or indemnification from the employer by a product manufacturer, no matter how negli- gent the employer may have been in falling to properly guard and maintain the product or in failing to properly Instruct and monitor his employees on how to use the product. This inequity is further compounded by the fact that, in most jurisdictions, the employer and/or his Workers' Compensation Insurance carrier has a subrogation lien against third party recoveries even though the employer may have caused or contributed to the cause of the employee's injury. The recently released I.S.O. Study reveals that about 24 percent of product liability bodily Injury payment dollars are expended in cases involving possible employer negligence. This means that over 57 percent of the dollars paid out for workplace Injuries involve cases in wliilch the party who caused the accident gets off scott free. Thus manufacturers of workplace products are, in effect, paying the entire cost of many industrial accidents, while users of the product are completely relieved of financial responsibility even though they may have been in a better position to prevent the accident from occurring. 90 NATIONAL MACHINE TOOL BUILDERS' ASSOCIATION • 7901 Westpark Drive, McLean, Virginia 22101 • (703) 893 2900 The Honorable Sidney Harman October 21, 1977 Page Four The Final Report recognizes that the workplace product liability problem is inextricably interwoven with the inequities and injustices inherent in the Workers' Compensation system. I am pleased with the conclusion of the Pinal Report that "the cost effectiveness and potential impact of the Workers' Compensa- tion sole source remedy make it an attractive one for serious legislative consideration. It would appear that it should be considered along with more general workers' compensation legislative reform." That conclusion is supported by the Industry Study which stated that "the use of the Workers' Compensation system assures compensation to the injured parties, minimizes the total sum of accident cost, places incentives on the party best able to imple- ment preventive programs, and expedites the reparations process." The Insurance Study makes the same recommendation. Although many industrial product manufacturers and suppliers would question whether the recommended third party con- tribution to the Workers' Compensation system or post accident arbitration proceeding is needed as an incentive to product manufacturers to improve the safety of products, most would be willing to accept such a compromise as an alternative to the clearly inequitable and costly system currently in operation. The forum for the arbitration proceeding might well be the state Workers' Compensation agency and should allow an employer or Workers' Compensation insurance carrier which shall have paid or is obligated to pay compensation benefits to assert that a third party has caused or contributed to the cause of the employee's injury for which such obligation to pay compensation benefits existed. The recovery would be limited to the total amount of the compensation benefits obligation. Because the employer is required to proceed under traditional negligence theories, the employer would have to be confident of his own lack of fault before he would incur the expense of an arbitration proceeding against the third party product manufacturer or supplier. If the Workers' Compensation exclusive remedy approach is adopted, the American working men and women will benefit by the raising of state Workers' Compensation benefits standards to a Federal minimum level and they would be sacrificing only a minimal chance of receiving a substantial award in excess of Workers' Compensation. The facts developed by the Industry Study and which are discussed in the attached memorandum, indicate that only one- half of one percent of product-related work injury claims ever mature into a recovery substantially in excess of Workers' Compen- sation benefits. From the standpoint of public policy, the American working men and women would benefit more by this compro- mise proposal than under the present system. The worker would avoid having to pay 25 to 40 percent of his award to plaintiff's attorney and the uncertainty, delay and mental anguish suffered during tort litigation would be eliminated. The exclusive remedy provision would preclude third party law suits from arising 91 NATIONAL MACHINE TOOL BUILDERS' ASSOCIATION • 7901 Westpark Drive, McLean, Virginia 22101 ■ (703) 893 2900 The Honorable Sidney Harman October 21, 1977 Page Five out of workplace injuries thereby eliminating the costs of liti- gation for all parties and reducing the dollars paid out for product liability claims throughout the country by approximately one-half. The negligent employer will become more responsible because his rights to subrogation would be eliminated thereby creating an economic incentive for maintaining a safe workplace. The manufac- turer would retain its incentive to develop safe products because of its potential exposure to an arbitration proceeding with the employer for the amount of the Workers' Compensation award. I believe the Pinal Report establishes a strong case for Workers* Compensation being the exclusive remedy for all injuries occurring in the workplace. It is particularly timely because the United States Congress will be considering reform of the Worker^' Compensation system next year and groups such as the Special Committee for Workplace Product Liability Reform will be urging Congress to include the exclusive remedy in the reform legislation. I would also like to comment on the assertion in the Pinal Report that "we are unable to prove that subrogation rights are of special importance in generating product liability suits." The A. M.I. A. Study cited by Report does not rebut the suspicion of some manufacturers and their trade associations that a substan- tial number of third party law suits were directly fostered by Worker Compensation carriers or by employers asserting subrogation rights. The A.M. I. A. Study deals only with "large-loss" claims resolving payments in excess of $100,000. Obviously, the Workers' Compensation subrogation liens are an insignificant portion of such "large loss" claims. But those claims are in the minority. As the study points out, 95 percent of all plaintiff recoveries involve out of court settlements. Our own data suggest that these out of court settlements are for an amount somewhere in this neighborhood of the subrogation lien. Further study is needed in order to resolve this question. Now that the Pinal Report has been completed and will soon be issued I look forward to working with you, your colleagues at the Department of Commerce, other representatives of American business, and the United States Congress in order to achieve legislative relief for the product liability crisis which is 92 NATIONAL MACHINE TOOL BUILDERS' ASSOCIATION ■ 7901 Westpark Drive, McLean, Virginia 22101 • (703) 893-2900 The Honorable Sidney Harman October 21, 1977 Page Six threatening the financial viability of many American businesses and the future of our economy. JHM:dr Enclosure irnj f 93 NATIONAL MACHINE TOOL BUILDERS' ASSOCIATION • 7901 Westpark Drive, McLean, Virginia 22101 • (703) 893-2900 June 10, 1977 ME MORANDUM TO: Ted Barrett PROM: James Hack RE: Federal Workers Compensation as the Exclusive Remedy for Workplace Product Liability Injuries I appreciate your giving me the opportuni .y to present my comments regarding the content of the final repo t of the Interagency Task Force on Product Liability. After reviewing the various studies conducted on behalf of the Task Force and based upon my ovm continuing study and analysis of the product liability problem, I urge you to recommend that the Task Force support the concept of workers compensation being the exclusive remedy for workplace injuries. It is my belief that the facts which have been developed through the efforts of the Interagency Task Force on Product Liability and the studies prepaj?ed by outside contractors corrobo- rate the crisis nature of the product liability problem in the workplace. In the briefing report issued by the Task Force in January, 1977 » it found that product liability insurance premivims appeared to have risen substantially for manufacturers who have workplace product liability exposure. Some companies have been unable to attain product liability insurance either because they cannot afford the high cost of premiums, or because they cannot obtain coverage at any price. A number of companies, large and small, are therefore going without product liability insurance. The results of a survey conducted by the Insursmce Ser- vice Organization (ISO) reveals that, while 11 percent of the total product liability claims arise out of workplace incidents, approximately half the dollars paid out by insurance companies to plaintiffs, attorneys, and other insurance companies are expended on claims arising out of workplace incidents. In testimony before the Small Business Committee of the U. S. House of Representatives, ISO stated that the average product liability defense cost to the 94 - 2 - insurance Industry amounts to ^2 percent of the total awards made to product liability plaintiffs. For every one dollar that the Insurance Industry pays out on product liability claims, it has spent another ^2i defending those claims. In the final report of the Industry Study conducted for the Interagency Task Force a most convincing case is presented for the need for an immediate solution to the workplace product liability crisis. It reviews an analysis conducted by the American Mutual Insurance Alliance of 79 large-loss claims which found that "nearly three-fourths of the awards (70$) involved industrial products, and 60? of the 10** injured persons sustained bodily injuries while at work." Vol. 1, p. VI-10. The Industry Study also points out that "firms of small and medium size are more likely to have claims experience if they are engaged in the manufacturing of workplace machinery or equipment rather than consumer goods or "anonymous" products." Vol. 1, p. IV-76. Given this dominant pattern of workplace product liability inj\iries, it is not sur- prising to read the reports of large increases in product liability insurance costs, limits of coverage, rising claims Eind large court Judgments in product liability suits arising out of the workplace. The Industry Study indicates that the cost of product liabil'lty insurance coverage has risen dramatically, from two to six times since 1970. 'The range of annual Increases in the last two years was from 22 to 287 percent, in contrast to a range of to 123 percent in the period from 1970 - 197^ " Vol. 1, p. 1-6. In the most recent survey conducted by the National Machine Tool Builders Association, it was found that the average machine tool builder has seen his product liability insurance costs rise from $10,000 in 1970 to $10,000 in 1975 to $71,000 in 1976 and then almost double again to $132,100 this year. This pattern is typical, even among members who have never lost a law suit and who have no claims pending. The average metal-cutting machinery builder saw his premiums Jump from $1900 in 1970 to $126,800 in 1977. That is a 6,673 percent increase in Just seven years. 95 - 3 - The Industry Study also found "that the number of firms with deductibles has increased between 1971 and 1976 by 80 percent for large firms, 130 percent for medium firms, and 100 percent for small firms. The average deductible or self Insurance retention level Increased by about 500 percent In large firms,' 110 percent In medium firms, and decreased 4l| percent In small firms. Smaller and medium sized firms assumed the total risk for product liability more frequently than large firms: In 1976, 29 percent of small firms had no product liability coverage; 13 percent of medium sized firms had no coverage; while only 3 percent of the large firms were Insured." Vol. 1, p. 1-7. The average number of pending claims per firm has also Increased nearly six times and the average amount of damages sought per firm In new claims rose from $^76,000 In 1971 to $1.7 million In 1976. While these statistics establish the fact that there Is a product liability crisis In the workplace. It Is equally clear that the present system of compensating people who are Injured In the workplace Is extremely unfair and wasteful, and that the wrong guy Is paying the bill for this wasteful system. Under present law, virtually every state Workers Com- pensation statute (and/or its court Interpretation) bars recovery or Indemnification from the employer by an equipment builder, no matter how negligent the employer may have been in falling to properly guard and maintain the machinery or in failing to properly instruct and monitor his employees on how to use the machinery. The costs and damages of product liability suits arising out of workplace accidents are therefore bourne 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 compen- sation carriers. The present court system is Inequitable In that the manufactxirer is forced to bear the entire burden of liability even though other parties, particularly the employers, may have been partly at fault. Thus, the capital equipment Industries are. In effect, paying the entire cost of many industrial accidents, while 96 - n - many users of the equipment are completely relieved of financial responsibility. Subrogation actions relieve the users of even the Impact of worker^ compensation awards, which In many states are less than adequate. In the 1976 survey of the National Machine Tool Builders Association, It was found that In only 13 percent of the workplace product related accidents a case could have been made for some sort of mechanical failure of the machine Itself. Almost half of the machines Involved were over twenty years old, many of them having been sold, resold. Junked, resurrected from the Junk yard, and placed In operation In the plant of the employer of the person who was unfortunate enough to get himself or herself permanently maimed. Most of the machines have been modified one or more times by the employer and/or the person or persons he bought the machine from. The study shows that 18 percent of these machines were poorly maintained by the employer. Sixty-three percent of the time, the accident occurred because the employer failed to properly guard the machine. Thirteen percent of the accidents occurred because he failed to make sure that his employees use the appropriate safety device. Sixty-five percent of the Injured employees did not receive appropriate training from their employers on how to properly and safely operate the machine, The NMTBA survey also showed that 58 percent of the employees had been on the Job for less than six months prior to Injury. What all this adds up to Is a situation in which unsafe work practices in unsafe workplaces, maintained by unsafe employers, are causing work- ing men and women to lose fingers and hands, or worse, and the manufacturers are paying for it. I believe that the product liability problem is inextri- cably Interwoven with the inequities and injustices inherent in the workers' compensation system. Of the four principle potential reme- dies suggested by the Industry Study, "first and most prominent is the elimination of subrogation and third party litigation under workers' compensation, coupled with the equalization and raising of 97 - 5 - state benefit levels. . . . The use of the workers' compensation system "assures compensation to Injured parties", minimizes the total sura of accident costs", "places Incentives on the parties best able to Implement preventive programs", and "expedites the reparations pro- cess." Vol. 1, pp. VI-6 and 7. Under this proposal workers would give up certain rights to sue In return for higher, uniform minimum compen- sation levels for work-related injuries. In operation, this proposal would set federal minumura benefit standards for state-administered workers' compensation programs, and make those benefits the workers' exclusive remedy against the whole world, shutting off the right to sue third parties such as the manufacturers or designers. Subrogation of workers' compensation claims is difficult to justify in the case of a negligent employer and a non-negligent, strictly liable manufac- turer. Therefore, the prohibition of subrogation by negligent employers would be desirable. Such a proposal would introduce an economic incentive for employers to provide a safe workplace and at the same time apply the same economic incentive to manufacturers to produce safe products. I believe the analysis conducted in the Industry Study supports this conclusion. In determining the extent of litigation from workplace injuries under product liability theories, the Industry Study focuses on an analysis conducted by the American Mutual Insurance Alliance and on two surveys conducted by the National Machine Tool Builders Associa- tion. In analyzing the NMTBA Survey, the study found that of the 389 resolved claims, "slightly less than one-half (186, or hB percent) were dropped, while 37 percent were settled out of court at an average settlement amount of $18,000." Vol. 1, p. VI-ll. Of all claims, only 15 percent went tn trial with 72 percent of those cases found in favor of the defense. Only >^ percent of the total resolved claiiiis ever came to trial and were won by plaintiffs for an amount substantial ^y in excess of the workers' compensation award, A further factor considered by the Industry Study is the frlctional cost such as the expenses of defense and preparation of expert testimony. Its inquiry among affected firms discovered that the average defense cost for workplace product liability claims 98 - 6 - was $15,000. The AMIA study found that the average defense cost per case handled was $20,680 and that additional costs for provision of expert testimony averaged $5,888 per claim. Vol. 1, p. VI-1^ The Industry Study also analyzed workers' compensation injury reports from a selected body of five states. Product related in- juries accounted for one in every ten workers' compensation claims. In approximately one-half of these (or 5 percent of the total), the pro- duct involved was a motor vehicle. It is not clear how many of these motor vehicle related injuries involved the potential liaiblity of a third party either in a products liability action against the manu- facturer or in a negligence action against the driver. If one were to assume that all of these product related injuries matured into a product liability action and since the study points out that less than 5 percent of all product-related claims are won by plaintiffs at trial, it appears that at best, only one-half of one percent of product- related work injury claims ever mature into a recovery substantially in excess of workers' compensation benefits. If the workers' compensation exclusive remedy approach is adopted, the American working men and women will benefit by the raising of state workers' compensation benefits standards to a federal minimum level and they would be sacrificing only a minimal chance of receiving a substantial award in excess of workers' compensation bene- fits. From the standpoint of public policy the American working men and women would benefit more by this compromise proposal than under the present system. The exclusive remedy provision would preclude third party law suits from arising out of workplace injuries and there- fore eliminate approximately one-half of the dollars paid out for product liability claims throughout the country. It would eliminate the product liability crisis in the workplace and effect a 50 percent increase in the capacity of insurance companies to offer product liability insur- ance to the rest of American industry. The negligent employer will become more responsible because his rights to subrogation will be eliminated. However, should the injury be caused by a defect in the product, the non-negligent employer could recover the ajnount of the 99 - 7 - workers' compensation payments from the manufacturer. In this manner, both the employer and the manufacturers will have the economic incentive to maintain a safe workplace and produce a safe product. If Congress and the Administration decide to go forward with federal minimum standards for workers' compensation, a solution to the workplace product liability crisis should be included in such legislation. It is my belief that evidence developed by the Task Force leads to only one conclusion: the final report of the Task Force should include a recommendation to the Administration and the Congress that any federal workers' compensation legislation should include a provision making workers' compensation the exclusive remedy for disa- bilities covered under the act and that the subrogation rights of negligent employers should be eliminated for all workplace injuries, and that passage of such legislation should be accomplished as soon as possible. 100 "sTo NIEL J. McNAMARA PrE8!OENT INSURANCE SERVICES OFFICE TWO WORLD TRADE CENTER NEW YORK. N. Y. \004a TELEPHONE: (211) 038-4622 November 15, 1977 lonorable Sidney Hannan [nder Secretary of Commerce fashington, D. C. 20230 •ear Mr. Hariaar : tS a member of the Advisory Committee appointed to assist the Commerce UepartmciDt in ts eighteen month study of product liability, I must express my grave disappoint- lent over the extremely short tinie period given to the Advisory Comrrittee iuembers to ■evicw the draft of the Final Report prior to its public release. I know you can ap- ireciate that it was virtually impossible, within such a short time-frame, to com- •rehensively review and comment on the entire 60G-page document on this substantive md complex subject. lS President of Insurance Services Office, I am disturbed that Clidpter V, wliich deals [irectly with the operation of the insurance meclianism and those functions which are m important part of ISO's responsibility, contains many factual errors, improper itatemonts and/or interpretations that can mislead the reader into improper conclu- ;ions. As your associates know, our Wasliington, D. C. office has already broughi- to ;he attention of your office many inaccuracies appearing in the draft report, aiid wc ire pleased thr^t many of the errors i/ere corrected. The enclosed memorandum outlines iome additional specific areas of concern that remain in the final report, and we /ould like to have the privilege of discussing these matters further with you or des- -gnated members of your staff. le are confident that individual insurers and/or their trade associations will be submitting to you, in due course, their comments and observations on this report. iy cop>' of this letter, I am urging tiie President of the three niajor property- l;i - ibility trade associations to review this report with special empliasis on its dis- ;ussion of possible legal remedies, since these proposals concern their areas of responsibility rather than those of Insurance Services Office. lie fully appreciate the complexities involved in product liability and, from the ^ery beginning, we gave our support and cooperation to the study being conducted mder the lead of the Commerce Department. We commend the extensive efforts of the >taff in putting together this report, which we know will be widely read. [n conclusion, may I once again emphasize that Insurance Services Office is most inxious to cooperate with any efforts to find solutions to the product liability situation. We are most concerned that any future legislative or regulatory activ- ity not be based upon misleading information, errors, or misunderstandings of the 101 Honorable Sidney Harman Uncier Secretary of Commerce November 15, 1977 Page 2 complex technical considerations involved in this line of insurance. Toward that end, I would like to suggest that Mavis A. Walters of our Washington, D.C. office be contacted to aid your Department in its future endeavors in this area. Si!icerely yours. Daniel J, McNamara President enclosure cc: Mr. Paul S. Wise, President Alliance of American Insurers (v/ith enclosure) Mr. T. Lawrence Jones, President Aifierican Insurance Association (with enclosure) Mr. Arthur J. Mertz, President National Association of Independent Insurers (with enclosure) 102 INSURANCE SERVICES OFFICI INTER-OFFICE CORRESPONDENCE fo-. Kr. Daniel J. McManara Navis A. Walters Roport C)f I nLoraj^eacy Ta.k rorce oii Qf^j^g Hom e /Executive Offr- Washington, D.C. tice. r, . November 10, 19 77 Date . As you Lcquu.jted, the Actuarial Department has carefully reviewed Chapter V of the r-eport on product liability prepared under the lead of the Commerce Department. Many factual errors ivere found in the earlier draft and were reported to their staff. Many of those \.ere corrected; a few, however, still remain in the final report . Ther«^ are two major weaknesses in the report which clearly result In improper conclur, ions being drawn. First, there is little consideration given in the entire discussion to the many substantive changes made ov^r the past sevt;ral years in the statistical reporting rfqi^irc'.monts , in tlie classification plan, in individual risk rating plan procedures an't the dev.ilopment of the Commercial Statistical Plan. All of these steps will improve and expand the data base and accomplish most of the things suggested or rc-conu'iendcd in the final report. Tlie r.econd shortcoming is the lack of recognitiovi of the great amount of supple- lui'ntarv material provided to the staff of th.e Commerce Department during the course of ilifclr r^. tudy. In several places the report refers to no information or lack of evidence on a point when in fact such material was provided by ISO. Specifically, the trend exhibits provided to their staff display the actual increase in product l:i.i!)iiity claim costs over a IQ-year period compared with the increase in the ^•^(■nLral price level as measured by the Consumer Price Index over that same time p<.>rtod. Tills is dramatic evidence that product liability claim costs have out- stripped inflation. Tliose odiibits also provide the justification for the factors u-;ed in adjusting the closed claim survey data. Information has also been provided ou^ihi! rcprc'.'.i'.ntat Ivenesi. of the data in the closed claim study. ijthc. r opiv.ific co:muBnts and observations on Chapter V of the final report are as t'ol ! ows : i'a;;(? V- A, lin es 2 11-2: Coverage is not provided for all product-related damages ;i:; is stated in the draft. Rather, coverage is dependent upon liability or ueiiUgence. (V-5) '!i^li'l:" V~-' thro' ";h V-7 contain an excellent discussion of occurrence policies com- pared with claims -made policies. (V-6 - V-9) Pa,'/ _V-8^ linc ;s A4 3 -A46 : This is a very misleading statement. Other rating methods very clearly produce statistically derived ratoj, i.e., composite rating (when based on nanua] rates) and loss rating. (V-10, last paragraph) 103 Mr. Daniel J. HcNarnara -2- November 10, 1977 Pa{.-c' V-9 . 1 In es A 50 ,_ A 73 , A 86 : The text quotes the numbers referred to in Table V-3; the coiranents on that tabic on page 5 of this memorandum apply. (V-10 - 11) 1^1 i^e V7 1 , line 497: iliis is an incorrect statement. ISO has not requested that composite rating not be used after January 3, 1977. Ra'cher, ISO has filed an amendment to the Cociposite Ratiny Plan to eliminate product liability coverage froni compos Lte ratl.ig aitur January 1, 1911. (The exception for loss rating I5; correct."^ (V-12) Paj^e y-^10 1. lines 5A5-7: Tnere is confusion liere. llie ISO rate increas.^s occurred in August, 1975 and August, 1976, not December, 1976. The report may hi referrln;; to the ISO Circular Letter of January 21, 1977 on suggested (a) rates but it is incorrectly defined as a rate increase. The statement then iiUt^gests that increases of this magnitude are likc^ly to occur in the future. ITiis is absolutely incorrect. Not only is it illogical but such a statement is directly contradictory to all of the evidence. The McKiusey study prepared for tl-L T'ltoragency Task Force states exactly tlie opposite (page ES-A) : Insofar as recent rate Increases appear to represent a correction for past rate inadequacy, it seems unlikely that product liability rates will rise as sharply in the future as they have in the past 2 years. Furthemorc, testimony ISO presented to Congressional committees also indicated that no increases were likely in 1977 and the record shows that ISO did not, in fact, file rate increases for product liability insurance in 1977. (V-13) I' age V-11, lines 550-3 : This section attempts to explain the ISO ratemaking pioredurc, but does ao quite poorly. Again, the description is misleading in this context. It leaves the reader with the Impression that ratemaking is strictly subjective and judgmental, rather than based on standard credibility theory. (V-13, first paragraph) P ag(^ V- 3 1 , lines 556-7 : Tliis is another reference to a supposed ISO December, 1976 rate increase over August, 1975 when there is no such animal. This again rtiflects a lack of understanding of some rather simple facts that were well (Icjcumentc'd oven by the Task Force's own contractor. (V-13, second paragraph) Pa ge V-Ll, lines 572- 5: Another incorrect statement suggesting further rate increases in the future. (V-13 - 14) P age V-12, lines 596-604 : This section purports to explain the new Commercial Statistical Plan but it is quite garbled and incoherent. The dates are also incorrect. (V-14, third paragraph) P age V-12, lines 611-20 : These paragraphs state that exposures, claims and losses should be obtained to determine overall rate levels and rates by class. It is also stated that rates for each class should depend on the experience of the class. This section actually describes current ISO procedures accurately, aiid one wonders why it was written in such a way to give the opposite impression. (V-14 - 15) 104 Mr. Daniel J. McNaraara -3- November 10, 1977 Page V-12, lines 623-5 : This section describes what are believe to be ISO pro- cedures incorrectly. The description is at odds with the McKinsey study, with the ISO Background Report on product liability insurance, with formal testimony made available to the staff, and with the information provided by ISO in a 90- minute briefing session with the Interagency Task Force staff last year. Whether or not rates were adequate to pay losses in the past is not a factor in ISO rate- making; the methodology for this line of insurance is a premium at present rate analysis using estimates of future losses. (V-15, second paragraph) Page V-12, lines 627-9 : We flatly disagree with this statement. Rates by class are most definitely based upon the actual claims experience within each class. Going further, it can be stated that the ISO procedure is statistically sound since application of credibility factors reduces distortions. (V-15) Pages V-12 and V-13, lines 631-73 : This entire discussion of product liability classes seems to suggest that a classification plan containing fewer classes would result in more "statistically significant" rates. While credibility might be greater for each of the reduced number of classes, the peculiar characteristics of the individual classes that should be preserved would be lost. The resultant rate based on a more heterogeneous class definition could well result in market dislocations. The current ISO ratemaking procedure results in statistically reliable rates by using credibility theory and by applying appropriate weights by hazard groups. The author of this section apparently does not understand that full credibility by class is not necessary to achieve statistical reliability. Addi- tionally, the discussion gives the mistaken impression that ISO rate classes are based on the product codes used in the closed claim survey. (V-15 - 16) Page V-14, lines 684-9 : This section speaks to the desirability of having a reliable data base for establishing rates and determining trends. There can be no argument that a reliable data base is highly desirable; ISO has already imple- mented the changes and improvements to maximize the data collection and compilation. It is quite misleading to have these statements appear without any reference to the important changes and improvements already in place. (V-16 - 17) Page V-14, line 706 : The statement is made that data related to claims trends are not available. This is not true. ISO has provided such data to the staff of the Interagency Task Force during the course of their study and it appears in public testimony made widely available. (V-17) Page V-14, lines 711-14 : This again states that trends in the severity of product liability claims cannot be determined from available data. This is not true. ISO staff measured claim severity on both a paid and incurred claim basis and provided that information to the Interagency Task Force staff. (V-17) Page V-16, lines 781-6: This is another reference to premium increases, apparently the basis for earlier statements in the report about the magnitude of future increases. This interpretation fails to recognize that the survey cited merely reflected the effect of the August, 1976 rate increases being felt on renewals . By this time, however, the full effect of the August, 1976 increase and the January^ 1977 suggested (a) rates should be realized. (V-19 , third paragraph) 105 Mr. Daniel J. McNamara -4- November 10, 1977 Page V-23, lines 1114-20 : This section also tends to be misleading. It contains a loss ratio analysis of historical underwriting experience and concludes that further rate increases may be anticipated. The implication is that the increase in rates as calculated here is to be expected in the future. What is more likely is that rate increases have already been implemented, as explained above, and that there will be a levelling off as the McKinsey & Co. study predicted. (V-28) Page V-24, lines 1154-62 : This section is also slightly misleading in that it suggests an arbitrary selection by ISO of what payment amounts would be trended. This was not the case. Every field of data containing economic information was adjusted based on each record submitted to ISO and based on the date of occurrence of each incident. (V-29, last paragraph) Page V-24, lines 1167- 9: We disagree with the implication in this section that trending the data base is not essential in order to make comparisons or draw valid conclusions from the closed claim study. Trend adjustments are used not only as a ratemaking practice but also in any rigorous analysis based on data derived from incidents occurring over a long period of time. It is clear that such incidents reflect different economic values which are a function of the time of occurrence and the distortion in the data resulting from that must be removed. (V-30) Page V-25, lines 1186-9 : This summarizes the trend discussion. While it is true that the untrended data do describe the information for claims already closed, they do not describe that information for claims occurring recently, i.e., even last year. In a very real sense the untrended data base describes a little bit, very little, of what happened last year, a little bit of what happened in 1975, a little from 1974, etc. It does not tell us the effect of everything that happened last year with respect to all these product liability claims; only the adjusted (trended) data base can give us a picture of that. (V-30) Page V-25, lines 1192-8 : This section speaks to the representativeness of the ISO sample and states that it is not known what fraction of the total product liability premium is written by the 23 participating carriers. This is untrue. ISO supplied the Task Force staff vjith precisely this information. (V-30 - 31) Page V-25) lines 1203-12 : This section mentions two other "deficiencies" in the Preliminary Report. Neither of these "deficiencies" exist in the Final Report. (V-31) Page V-27, lines 1256-71 : This section summarizes some of the earlier discussion and repeats the suggestion that the closed claim study may not be a representa- tive sample. This is despite the evidence presented to the staff. It appears that the writer did not review all of the material submitted by ISO. (V-32 - 3 3) The reasonable "assumption made" in lines 1266-8 turns out not to be so reasonable. ISO has run the reports both with and without the Liberty Mutual submissions and that insurer's data do not affect the results. 106 Mr. Daniel J. McNamara -5- November 10, 1977 Pages V-27 and V-28, lines 1283-1293 : The conclusion that current methodology is imprecise cannot be disputed. However, the deficiencies in ratemaking procedures and statistical gathering have already been or are about to be corrected. This report does not give much weight to the changes that have been implemented; perhaps this was other evidence somehow overlooked by the author of Chapter V. With the respect to the ISO closed claim survey, as mentioned earlier, 1. The "deficiencies" of the Preliminary Report do not exist in the Final Report. 2. The ISO Closed Claim Survey does present a representative sample. 3. A continuing closed claim study would not provide any additional information beyond that already provided. 4. Untrended data cannot provide valid information about the current claims environment. One would hope that future decisions would not be based on such misleading information. (V-33) Page V-38, lines 1798-1804 : This discussion reveals a lack of understanding of how rates are made. There is no cumulative effect of IBNR reserves for primary companies and reinsurers because rates are determined on a direct basis. (V-4 6) Page V-38 : The conclusion section focuses again on lack of data for product liability and again fails to recognize that major steps have already been taken to alleviate this. (V-4 7) Page V-39, lines 1873-7 : See previous comments on this subject. (V-48) Page V-40, lines 1909-14 : Another discussion of classification plans. Again, current ISO practices are in accordance with the suggestions made here. (V-49) Page V-41, lines 1929-32 : The statement is made that state regulators should have a country\^?ide data base to evaluate rate requests effectively. Since ISO reviews product liability experience on a countrywide basis, that material is filed with insurance departments. They have it and will continue to get it. (V-49) Table V-3 : The presentation of this distribution of product liability premium is incorrect and therefore misleading. The information is extracted from some preliminary estimates made by ISO staff in the early stages of the McKinsey study. The ISO Background Report, purported to be the source, presents the information differently than shown in this table, stating that manual rated premium might be up to 10%; small (a) rated up to 30%, package policies possibly as high as 30% and the composite group at least 30%. Since that time the staff of the Commerce Department has been provided with better estimates of the distribution of product business based on information from the ISO closed claim study, but they apparently chose not to use it. (page V-56) 107 Mr. Daniel J. McNamara -6- November 10, 1977 Table V-4 : Interagency Task Force staff were advised by ISO that there are sub- stantial errors in this table. Although ISO is cited as the source, it did not prepare this table. Presumably it was derived from ISO-supplied data, but it contains over 50 factual errors. (pages V-57 - 58) Table V-6 : Contains over 60 factual errors, most of which are in the third column. (pages V-60 - 60a) Table V-22 :. There is an error in the bodily injury column and the distribution of claims in the property damage column is incorrect. (Table V-20, page V-74) Table V-23 : This table contains several rounding errors . (Table V-21, page V-7 5) Table V-33 : The total for 1975 is incorrect; therefore the percentage change figure is incorrect. We cannot reproduce any of the other totals. (Table V-31, page V-83) In conclusion, it should be noted that there are other sections of the report which draw upon ISO ratemaking data and closed claim analysis. Some of the errors in those sections result from apparent confusion between insurer Annual Statement reporting requirements and statistical plan procedures used in capturing data for ratemaking purposes. Other errors result from misreading the closed claim study. A thorough review of those sections was precluded by the time contraints. Vice President 108 The ISO coiranentary on Chapter V was entered in the record of hearings conducted by the Subcommittee on Capital, Invest- ment and Business Opportunities of the House Committee on Small Business (John H. LaFalce, D.-N.Y., Chairman) on November 28, 1977, and also forwarded to major insurance trade associations. In light of the questions raised by the detailed nature of the commentary, it was deemed appro- priate to include the product liability staff's analysis V of its content. ^/ The corresponding page numbers in the Final Report are indicated parenthetically after the analysis of each of ISO's comments. 109 NOTES ON ISO COMMENTS ON CHAPTER V OF TASK FORCE REPORT This paper provides commentary on each of the specific comments made by ISO on Chapter V of the Final Report of the Product Liability Task Force. Page V-4^ lines 211-2. ISO notes coverage is dependent upon liability or negligence and is not provided for all product-related damages. The report states that on an "occurrence" basis, "coverage is provided for all product- related damages that occur during the policy period." The report statement could have been more artfully worded. The emphasis was intended to be on the fact that under an "occurrence" policy the insurer agrees to defend all claims based on product- related damages where such damages were allegedly sustained during the policy period and to pay damages on such claims when the insured is found or deemed to be liable. The ISO statement is imprecise in that coverage includes defending certain claims whether or not liability or negligence is ultimately found. (V-5) Page V-8/ lines 443-446. ISO comments that rating methods other than manual rating use statistically derived rates, i.e. composite rating (when based on manual rates) and loss rating. The report states that manual rating "is the only rating method which uses published rates which have been statistically derived from reported claims experience." [underscoring added] Manual rating is the only rating method that exclusively uses statis- tically derived published rates. Furthermore, while manual 110 -2- rates have been used in composite rating in the past, as ISO has noted, composite rating is no longer used for product liability coverage. Loss rating does not rely on published statistically derived rates, but rather, relies upon the past experience of the individual insured. The report statement is therefore believed to be accurate. (V-10, last paragraph) Page V-9, lines 45Q, 473 and 486. See comments under ISO comments on Table V-3. (V-10 - 11) Page V-IQ, line 497. The report statement does not appear to be incoherent as alleged by ISO. The distinction seems to be that the report states "ISO requested that composite rating for product liability not be used after January 1, 19 77" whereas ISO states that it " has filed an amendment to the Composite Rating Plan to eliminate product liability coverage from composite rating after January 1, 1977." The distinction is subtle. (V-12) Page V-10, lines 545-7. The report states, "the rate increases, established by ISO in August, 1976, and December, 1976, provide an indication of the magnitude of product liability premium increases which have occurred and are likely to occur in the near future." The Task Force stands behind this state- ment. The December increases referred to are the (a) rate increases referred to by ISO as appearing in the ISO Circular Letter or January 21, 1977. The following areas of disagreement exist: 111 -3- 1. ISO claims the December- January (a) rate 'suggestions' should not be defined as 'rate increases'. We disagree. In fact, the (a) rates did show increases. The distinction seems to lie in the fact that ISO does not call the (a) rates, 'rates.' ISO seems inconsistent on this point since they note in the last two lines of Page 3 of their comments that "the full effect of the August, 1976, in- creases and the January, 1977, suggested (a) rates should be realized [by now] . 2. ISO disagrees with our conclusion that the rate increases provide an indication of premium increases which have occurred and are likely to occur in the near future." It would appear that ISO misread the sentence since they seem to believe the sentence refers to 'rate' increases likely to occur in the near future. In fact, the statement refers to the fact that the, new rates already established have caused premium increases and that these premium increases are being felt in policy renewals that have occurred and that are occurring. (V-13) Page V-11, lines 550-3. ISO claims that the report's discussion of ISO ratemaking procedure leaves the reader with the impression that ratemaking is strictly subjective and judgmental, rather than based on standard credibility theory. The lines complained of read as follows: 112 -4- "Having determined the amount of an overall average increase in rates, ISO assigns weights to individual product classes. These weights, based on the limited experience data reported to ISO (see Table V-3) and subjective judgments, are used to factor the individual rates . . . . " While the Task Force recognizes the utility of 'standard credibility theory' as used in the insurance industry, it also recognizes that credibility theory requires a base of claims ex- perience date upon which to predicate its use. In addition to its concern about the availability of a data base, the Task Force has noted that some writers question the reliability of the standard credibility theory even when sufficient data is generated to provide credibility of unity. The report acknow- leges the use of data, where available, but also notes that ISO's actual historical claims data is quite limited. Necessarily, ISO must rely upon subjectivity in those areas where they lack data. (V-13, first paragraph) Page V-11, lines 556-7. ISO again argues that there were no rate increases in December, 19 76. As noted previously, this reference is to the (a) rate increases which ISO chooses not to define as rate increases. Since the (a) rates are sent to insurance companies for use in establishing rates and since they were increased in December or January, 1976-7, the Task Force considers then to effectively be rate increases. (V-13) 113 -5- Page V-ll^ lines 572-5. ISO claims this is an incorrect statement suggesting further rate increases in the future. The Task Force stands behind the statements in the report as written. The first part of the statement notes that "...for most of the monoline rated products classes, insurance costs have increased or will increase and that some of these increases will be substantial". This statement relates directly to the effect of the rate increases ISO has published or othervise established in the monoline rates, and refers to these existing rate increases being reflected in premium increases upon renewal of policies. The second part of the statement notes that "As noted on p. V-2 3, continued reliance on the current methodology for determining the need for rate increases could result in further rate increases in the near future". [under- scoring added] . This statement does not say that there will be rate increases, but , using ISO's figures and the methodology laid forth in the ISO Background paper, the Task Force calculated that such are likely to be forthcoming if^ the usual methodology is used. (See Report, p. V-23) . (V-13 - 14) Page V-12, lines 596-604. ISO claims the description of the new Commercial Statistical Plan is garbled and the dates are wrong. The explanation of the substance of the Plan seems consistent with the ISO Background Report; however, the date given in the report may be erroneous. The ISO Background Report, dated December, 1976, refers, on Page 6, to "the new ISO Commercial Statistical Plan (CSP) currently being prepared for implementation..." 114 -6- It is our belief that the implementation date was to be June, 1911 , but we cannot validate this from any written documentation readily available. In any event it was in preparation at the end of 1976, the discussion therefore remains valid. (V-14) Page V-12/ lines 611-20. ISO claims that this section accurately describes current ISO procedures but gives the opposite impression. The section states that "to be statistically sound, rates for each product class should be based on the claims experience per unit of exposure." Historically, ISO has not collected sufficient data to be able to develop statistically reliable rates based on claims experience for other than the manual rates. Small (a) rates have not been statis tlcally sound and are acknowledged to be useful only as 'guides'. Hopefully, ISO's new statistical plan will permit the collection of sufficent data, but adjustments in classes may still be necessary and considerable time may be necessary to accumulate sufficient data for some product classes. (V-14 - 15) Page V-12, lines 623-5. ISO claims their procedures are described inaccurately. The sentence complained of reads: "the procedure. .. .is based on aggregated incurred losses for each policy year. In essence, the procedure amounts to determining whether premiums have been adequate to pay for incurred losses and making adjustments in rates accordingly." 115 -7- ISO's coiranent regarding past adequacy is well taken. The report statement might better have read "whether existing premium rates will be adequate to pay for future estimated losses". It is, however, essentially consistent with the ISO Background Report (Attachment A, Sheet 5) which says: "The loss trend factor is then applied to the incurred losses and loss adjustment expenses reflecting loss development. The result is divided by the earned premiums at current rate levels adjusted by the exposure offset factor. The quotient is called the loss ratio, and it represents an estimate of the percentage of premiums at present manual rates that will be required to pay claims . .. .during the effective period. [Underscoring added] In order to determine the indicated rate level increase, the loss ratio.... is divided by the expected loss ratio". The result of this calculation is the percent change necessary. In essence the methodology compares current rates with current loss expectations adjusted to approximate future possible costs. (V-15, second paragraph) Page V-12, lines 627-9. ISO disagrees with the Report statement that ISO procedures result in rates for most product classes which are not statistically sound, or reflective of actual claims experience. We stand by the statement in the report. The (a) rates are not currently statistically reliable, and ISO has not historically collected claims data on all claims (See Table V-3) . (V-15, third paragraph) Page V-12 and V-13, lines 631-73. ISO presents several comments in this paragraph: 116 -8- 1. ISO agrees that a classification plan containing fewer classes would result in more statistically significant rates, but argues that the peculiar characteristics of the individual classes would be lost. This would be true if sufficient experience data were availble for each discrete product class. The reason that the Task Force suggested the merger of certain classes with similar product risk characteristics was that for some existing classes there is insufficient experience data available to allow the peculiar characteristics of the individual classes to be adequate reflected in the rate assessments. 2. ISO argues that more heterogeneous class definition could result in market dislocations. While such class mergers might result in broader risk spreading, it is unlikely that it would result in greater market dislocations than are currently being experienced by firms whose premiums are extremely high and bear no apparent relationship to either the experience of the firm, other firms in the product class, or the product class as a whole. 3. ISO further claims that existing ratemaking procedures result in statistically reliable rates because of the use of credibility theory and hazard weights. As noted previously, credibility theory and the development of 117 -9- hazard weights are appropriate only where there is a sufficient data base upon which to predicate the use of credibility theory and the development of weights. 4. The Task Force recognizes that full credibility by class is not necessary and that ISO rate classes are not the same as the product codes used in the closed claim survey. The closed claim examples were used only to illustrate the point the claim experience is generated slowly for some products. The overall point made by the Task Force report in this section was that some better means should be found to permit the establishment of rates that are related to product risk..^ This process may involve the collection of far more data, the merger of product classes or a combination of the two . The Task Force attempted to identify means by which rate could be more related to risk but is not attempting to dictate the precise means by which it should be done. (V-15 - 16) Page V-IA, lines 684-9. ISO agrees that a reliable data base is needed but alleges that the report fails to note ISO's improved data collection procedures . We believe the Report does note the improvements in the ISO data collection. (V-16 - 17) Page V-14, line 706. The report states that data related to claims trends are not available. ISO argues that they are available and have been reported to the Task Force. To the 118 -10- best of our knowledge the only data given the Task Force is that which shows trends in incurred losses for monoline policies only. Such data represents only a relatively small percentage of the total product liability claims experience and, more importantly, it is not the equivalent of actual historical claims experience since the incurred losses include both paid claims and estimates for potential liabilities. The only published actual claim experience is that collected in ISO's Closed Claim Survey. While those data are valuable, they represent only a one time collection of data and alone they cannot be used to show trends over time. If such surveys of actual claims experience were to be continued on an annual basis, trends in actual claims experience would be generated. While the data collection need not be as voluminous as was collected in the ISO Survey, certain of the data items should be continued to be obtained to ascertain actual trends in claims over time. This may also require more precise definitions of covered exposures. (V-17) Page V-14, lines 711-14. ISO argues that data on trends in severity of product liability claims are available. The Report says they are not. One indication of the fact that neither trends in frequency or severity of claims are available is the 119 -11- fact that until recently, no one, including ISO or the Task Force, could effectively either support or refute the allegations of the 'million claims filed in 1976 ' . Given the facts that the total numbers of claims filed is not known, and total exposure is not known, it is impossible that severity trends could be known. The fact that there have been increases in aggregate projected losses or even in actual paid claims are not in themselves indicative of increases in severity without appropriate correlations to exposure units. (V-17) 120 -12- Page V-16^ lines 781-6 . ISO suggests that the MAPI survey merely reflects the effect of the increases on renewals. We agree. The point is that the premiums for the respondents did show increases. (V-19, third paragraph) Page V~23/ lines 1114-20 . ISO claims there will be a leveling off of rate increases, and claims the report is mis- leading in suggesting further rate increases may be expected. The report made reference to calculations made by the Task Force staff using ISO's figures and ISO's methodology and concluded that if^ these were the basis for determining the need for future rate increases, then "further manual rate increases may be anticipated, " This is not to say that there will be further increases but only that reliance on current ISO figures and methodology would seem to present the case for such increases. (V-28, last paragraph) Page V-24, lines 1154-62 . ISO claims every field of data containing economic information was trended and the report is claimed to be slightly misleading in this regard. The report states, "ISO chose to apply a trend factor to certain of the payments reported," and also states that all cost data on each claim was trended. The report's allusion to 'certain payments' was intended simply to reflect that costs were adjusted assuming a July 19 76 occurrence. Presumably any claim in the survey occurring in July 1976 would not have been trended. The report 121 -13- intended no allegation of arbitrary selection of payments to be trended. (V-29, last paragraph) P age V-24, lines 1167-9 . ISO and the Task Force staff have a basic disagreement over the appropriateness of trending the Closed Claim Survey. We also disagree with ISO's assertion that economic values are a function of the time of occurrence. More importantly, the use of trended data to discuss distributions within the sample, as has been done by ISO, is misleading and distorts information about characteristics of claims closed during the survey period. (V-30) Page V-25, lines 1186-9 . We agree that the untrended data do not describe claims occurring recently. They describe only those claims closed in the survey period by the reporting companies. We disagree with ISO's claims that the trended data necessarily accurately describe future claims. (v-30) Page V-25, lines 1192-8 . ISO claims that they supplied the Task Force with information about the fraction of the total product liability premium written by the participating carriers. This is true but what is not known are the fractions of the total premium written when the closed claims were initiated nor the fraction of the total losses incurred during the period. ISO was not able to provide more than the fraction of the premium currently written by these companies. (V-30 - 31) 122 -14- Page V-25, lines 1203-12 . ISO claims that the deficiencies of the Preliminary Report on the Closed Claim Survey do not exist in the Final Report of the survey. Unfortunately, the Final Survey Report was not available to the Task Force until after the preparation of the Task Force Final Report. In the opinion of the Task Force Staff, the deficiencies of trending and representativeness still exist in the final ISO report. (V-31 Page V-27, lines 1256-71 . ISO notes that they ran their data both with and without the Liberty Mutual submissions and that the results were not affected. ISO therefore challenges the reasonableness of the "assumption made" in the Task Force Report. The assumption in the Report referred to the claims listed in Table V-24 in the $1 ,000-$5 ,000 payment range. There is a typographical error in the Task Force Report text. The range should have read $1-$5,000 which is the rancjC given in the table. The table shows that Liberty had 5,49 8 paid claims within this range in 19 76. The average amount of the paid claims is $473. The point being made in the report was that the majority of the claims paid by Liberty Mutual were for less than $1,000 and that the inclusion of those claims might have significantly affected the results. ISO's data runs were conducted with and without the Liberty Mutual claims submitted , i.e., all claims for the first month but only those in excess of $1,000 after that time. It was the suggestion of the Task Force Report that the inclusion of the very numerous 123 -15- claims for which payments under $1,000 were made as well as those for which no payment were made might have affected the results. This assumption has not been tested by ISO. (V-32 - 33) Pages V-27 and V-28/ lines 1283-1293 . This is a summary of ISO's comments regarding trending; namely, 1. The preliminary report deficiencies does not exist in the final survey report. Comment ; While the Task Force did not comment on the Final ISO Report since it was not available certain of the deficiencies appear to remain. 2. The survey presents a representative sample. Comment : The survey is not necessarily representative of more than the reported experience of the partici- pating companies. See note above regarding Liberty Mutual data. 3. A continuing closed claim survey would not provide any additional information beyond that already provided. Comment: We disagree. A continuing closed claim survey would provide actual trend data showing changes in actual claims over time. 4 . Untrended data cannot provide valid information about the current claims environment. Comment: This is true but neither can trended data. Only by collecting the untrended data over time would permit better estimates of the future environment by tracking actual changes over time. (V-33) Page V-38, lines 1798-1804 . ISO claims that there is no cumulative effect of IBNR reserves for primary companies and reinsurers because rates are determined on a direct basis. The report refers to the danger of a possible redundancy in con- sidering reserves. This still appears to be the case whether one directly considers IBNR or utilizes loss development factors, which appear to be surrogates for IBNR. (V-46, first paragraph) 124 -16- Page V-38 . ISO again alleges that the report fails to recognize the major steps which have been taken to alleviate the data unavailability problem. In other places the report notes changes ISO has made. Nevertheless, this does not affect the fact that sufficient data are currently not available and that they are needed in view of the impact of premiums on business. (V-4 7) Page V-4Q, lines 1909-14 . ISO claims that their practices are in accordance with the report suggestions. We hope so but have no way of verifying the assertion. (V-49) Page V-41, lines 1929-32 . ISO claims that state regulators get countrywide experience data from ISO. The report simply made the point that regulators require access to data on all product liability experience to adequately evaluate rate requests, The main point is that more data is needed. It could also be pointed out that state legislative directives mandating the collection and compilation of state data on product liability claims will not suffice in most instances to provide an adequate data base for the regulators in the state. (V-49) Table V-3 . ISO claims the distribution of product liability premium is misleading and states currently that the report figures were extracted from preliminary estimates made by the ISO staff. There is not a significant difference, however, between the Table figures and the figures ISO uses in its letter. The figures are reproduced below: 125 ■17- Task Force Report ISO Letter 10 - 15% < 10% 30 - 35 < 10 30 < 30 Manual rated Small (a) rated Package Composite, loss rated and large (a) rated 20-30 >^ 30 It should be noted that ISO does not take issue with the table summary of the claims experience which is reported to ISO. This summary documents the very limited claims data which have been reported to ISO in the past and which form the basis for the rates which are developed by ISO. (page V-56) Table V-4. ISO claims that this table contains over 50 . factual errors. They have not identified the specific errors, therefore the allegations cannot be responded to directly. The (pages V- table was prepared by the Task Force staff using ISO data. 57 - 58) Table V-6 . ISO claims that this table contains over 60 factual errors, most of which are in the third column. Again, ISO has not identified the errors with specificity, (pages V-60 - 60a; Table V-22 . ISO claims that there is an error in the bodily injury column that the distribution of claims in the property damage column is incorrect. The Task Force staff calculated these figures from the ISO closed claim tables and believes them to be accurate. Rounding may provide minor distortions. (Table V-20, page V-74) 126 -18- Table V-2 3 . ISO notes several rounding errors. While they do not identify them, this matter is of minor significance. (Table V-21, We use different rounding procedures than they do. page V-7 5) Table V-33. Most of this table is identical to that pro- duced in the Insurance Study. Some corrections should be noted however. They are reproduced below. (Table V-31, page V-8 3) TABLE V-33. SURPLUS LINE PREMIUMS REPORTED BY MAJOR STATE INSURANCE DEPARTMENTS Top 10 States (1975 ) California New York Texas Louisiana Florida Pennsylvania Illinois New Jersey Michigan Georgia All other states Total Percent increase Year to Year (Premiums ;[$ million) 1972 38.4 50.6 79.3 316.1 1973 41.1 44.3 1974 54.0 43.6 97.7 114.7 343.5 392.6 1975 78.1 72.2 30.9 35.9 48.5 66.9 44.1 43.2 44.9 60.1 15.3 18.4 20.8 34.5 12.2 10.4 16.4 29.4 21.3 25.9 22.8 27.9 18.1 19.7 18.1 24.8 N.A. N.A. N.A. N.A. 5.9 6.9 8.8 15.5 190.8 612.8 72-73 7.8% 73-74 16.3% 74-75 51.0% Source: State Insurance Department Annual Reports. 127 INSURANCE FROM CNA Plaza Chicago, Illinois 60685 Edward J. Noha Chairman of the Boards and Chief Executive Officer of the CNA Insurance Companies November 15, 1977 The Honorable Sidney L. Harman Under Secretary of Commerce Department of Commerce Commerce Building 14th and Constitution Avenue, N.W. Washington, D. C. 20230 Dear Mr. Under Secretary: In response to your request for my views as a member of your Advisory Committee on Product Liability, I am pleased to attach a series of general observations and specific comments on the Interagency Task Force on Product Liability. You will note I conclude that the Report, although generally balanced, is long on analysis and short on recommendations — particularly in the need for imme- diate tort reform and modification of the contingency fee system. While I recognize that a policy decision was made to avoid specific recommendations for action on the part of Congress or the state legislatures, I must state my genuine disagreement with that decision. In my view, the time for effective tort reform is long overdue and thus I had hoped that the Report would specifically address and seek to resolve the problem rather than confining itself to a more abstract dis- cussion of the issues. 128 -2- However, the Report does lay a foundation for future action by delineating the underlying causes of the problem and focusing on areas of needed reform. To that end it is a contribution to the collective understanding of the subject and I thank you for the privilege of serving as a member of your Task Force . cc: Judge Ned Price Chairman, Advisory Committee Edward T. Barrett Secretary, Interagency Task Force 129 MEMORANDUM TO INTERAGENCY TASK FORCE ON PRODUCT LIABILITY November 15, 1977 130 Edward J , Noha Chairman of the Boards CNA Insurance Companies Member, Advisory Committee on Product Liability MEMORANDUM TO INTERAGENCY TASK FORCE ON PRODUCT LIABILITY A. General Observations 1. While the extension of time for reply was helpful, the overall period for review by members of the Advisory Committee was still unnecessarily short. The necessity of reviewing the entire Report for factual errors within the first week produced considerable inconvenience to all concerned. Since that time, we have examined the Report in considerable detail. In the process however, the Task Force may have lost a valuable commodity- -the opportunity for a fully developed interchange of views between members of the Advisory Committee and representatives of the Task Force. This is not to say that the comments of the Committee will not be considered fully; only that a little more time for reflection and internal discussion would undoubtedly produce a better result. 2. The Report is generally objective and factual. A great deal of thought and effort obviously went into drafting the various components of the final product. However, the tenor of the Report is occasionally marred by unfortunate and unnecessary references to matters such as a possible link between stock market losses and increases of premiums or the veiled suggestion that 131 -2- insurers have been less than candid with the public or are somehow manipulating reserves to understate investment income and hide profits. To some extent these inferences are the result of what appears to be a reluctance to fully utilize the findings of the contractor for the insurance study; in other cases, particularly in Chapter V, these innuendoes reflect a less than complete understanding of the insurance industry and the principles of integrity and trust on which it was built and run. In either case, the generally objective tone of the Report is impaired. The end result may well be a feeling of uneasiness or concern in some segments of the insurance industry and state regulators as to the underlying intent or bias of the Task Force. 3. The Report is long on analysis and short on recommendations. While this is undoubtedly due to inherent practical and political limitations in the drafting of the Report, there should have been more concrete recommendations in certain areas such as tort reform and further clarification of the federal reinsurance proposal. Since the Report will undoubtedly be the source document for serious discussion of the 132 -3- problem for years to come, it could have enhanced the possibility for progressive change by taking a harder stand on several key issues such as the contingent fee system or the role of the Federal Government in opting for real change. The absence of a series of decisive recommendations ultimately reduces the long term effectiveness of the Report as a vehicle for the stimulation of further action. 4. On balance the work is of generally high quality and reflects a great deal of effort expended in an attempt to define the scope and nature of a pervasive problem. As such it has laid a necessary foundation for future action. However the stimulus or catalyst for action has yet to be applied. 133 -4- B. Specific Comments Chapter I - The Causes of the Product Liability Problem 1. The list of causes — the liability rate-making system, tort-litigation system and manufacturing process is sound but much of the remaining discussion leaves unstated the effect of social and economic pressures, particularly those associated with the shift from a system of fixing responsibility to one of finding a means to compensate all injuries regardless of fault, i.e., the new sense of entitlement. 2. The nine target industries selected by the -Task Force are well recognized as having particular liability problems. Thus the findings may not necessarily represent the entire manufacturing industry and the Report's credibility is affected. 134 -5- Chapter II - The Legal Study 1. The legal study appears to have been unduly preoccupied with a mechanical review of the factual elements of product liability cases and v/ith what the courts say about the law of product liability, as opposed to how they actually apply it in daily situations. Courts are notoriously self-conscious about observing the proprieties of the law in written opinions and less so in settlement negotiations or rulings in open trial. For example, more study should have been given to the manner in V7hich courts apply rulings governing the availability of traditional defenses or rebuttable presumptions of liability. In short, the legal study lacks the feel of the nuances of the courtroom and an experienced view of how the law is administered in action. 2. Certainly more study should have been given to the factors underlying the increase in awards in action cases. It would have been useful to know what effect the claim for punitive damages may have on the size of awards or how juries are reacting to the growing product liability cases in the plaintiff's bar with the rise in the number and growing complexity of such litigation. To what extent has the crisis been the product of the bar's interest in new areas of remunerative litigation? 135 -6- Chapter III - The Impact of Product Liability on Selected Industries 1. Although some questions can be raised about the accuracy and effectiveness of a telephone survey, it probably was the only feasible approach given the time and expense factors involved in conducting the study. 2. The Report correctly surmises that unavail- ability of insurance coverage is not widespread but that the cost of insurance has increased substantially since 1974. The Report also finds that there has been a signficant increase in the number of claims and the amount of damages sought. However, the Report states that the industry contractor found no apparent increase in the frequency of product-related injuries. The data base for this conclusion is very questionable in that it is based on closed workers' compensation cases in the State of New York only for the period 1966 through 1972. More current data could certainly have been used. The Report later recognizes these shortcomings. 136 -7- Chapter IV - Product Liability Prevention Techniques 1. An increase in the availability and quality of loss prevention services is a welcome trend. Perhaps more effort or study should be given to how this service can be improved and what if anything can be done to encourage even broader cooperation between insurers, manufacturers and government agencies concerned with quality control. 2. The discussion of loss prevention techniques was superficial despite the fact that it was considered one of the three major causes of the product liability problem. Although the Report is over 500 pages long, only 14 pages were specifically devoted to the issue of product liability prevention techniques. 137 -8~ C hapter V - Product Liability Insurance 1. Since the ISO Closed Claim Study has now been completed and published, its use might improve the quality of the Report and also eliminate the lack of credibility objection due to the small sample of claims reviewed in the ISO preliminary report. 2. While the recommendation that product liability premiums be reported as a separate line in the Annual State- ment has merit, the recommendation that insurers also report investment income earned on the unearned premium and loss reserves for products liability implies that investment income is not now considered in the setting of products liability rates. Insurers do in fact take investment income into account in setting rates. The small loading for profit and contingencies (5%) reflects that fact. If expected investment income must be taken into account in rate filings with regulators, the profit and contingency factor will have to be increased so that insurers can get a return on capital and surplus commensurate with the risk involved in writing product liability. 3. In the opening paragraphs of Chapter V the Report states that if premiums are commensurate with the risk but are still too costly, then the cause of the problem is outside the insurance system. But if the data reveals that 138 -9- premiums are unreasonably assessed, the insurance mechanism needs revision. Chapter V makes clear that there is insufficient data to make a judgment but then goes on to implicitly assume that if all products liability premiums and losses could be separately reported and properly classified, then rates can be established with a very high degree of actuarial certainty and the performance of the insurance mechanism properly evaluated. This assumption does not allow for the high degree of judgment necessary in setting rates for individual risks, particularly in a time of monetary inflation, expanding liabilities and a "deep pocket" public attitude. Even if the industry had product liability data for 1971 through 1977 which was complete and accurate, it could not establish rates for 1978 with complete confidence that they accurately reflected the exposure. Thus, the Report should recognize that past data, however complete, accurate and credible, has a limited value in establishing future rates for a large number of products. 4. The comparison of the product premiums charged to small and large businesses, concludes that small firms have experienced significantly greater increases than large firms. That conclusion is not supported by sufficient data. Large firms can mitigate the impact of a premium increase by purchasing a higher deductible or electing a retrospective 139 -10- rating plan as the Report itself recognizes. Hence there is no common denominator for small and large businesses upon which a meaningful comparison can be made and therefore the implication in Chapter V that the insurance industry is unfairly discriminating against small business is totally unwarranted . 5. The conclusion that the insurance regulator could regulate product liability rates more effectively if he targeted for special attention those rate increases which exceed a threshold amount is an interesting concept. How- ever, it may not prove practical in application because a large number of classes are (a) rated and because under- writers often find it necessary to vary even manual rates for individual risks based upon judgmental factors. 6. Although the discussion of underwriting experience data states that insurers may be underreserved, the overall impression left by the commentary is that carriers are over- reserved and thus, by implication, that rates are excessive. If the Report placed more emphasis on the fact that in recent years, the reserves of insurers have proven seriously deficient because of inflation, legal doctrines imposing greater liabilities and a "deep pocket" social attitude and that these causes are still present — the tone of Chapter V would be more balanced. 140 -11- Chapter VI - Major Impacts of Product Liability 1. In attempting to synthesize what the legal, insurance and industry data and other information show, this chapter incorporates whatever shortcomings may be contained in previous chapters . 2. Conclusions regarding compensation obtained by persons injured by products are based on the ISO preliminary closed claim survey. More credible and up-to-date data is contained in the final ISO Report. 141 ■12- Chapter VII - Remedial Approaches in the Field of Product Liability 1. This chapter discusses various proposed tort reforms. Unfortunately, the authors seem to have two philosophical beliefs which color their analysis. First, is that almost any injured person is entitled to some form of payment. Second, is that these payments should be divided among all negligent parties according to their respective fault. The authors are extremely hesitant about supporting any proposal which they feel might reduce the amounts received by injured persons. The only recommendation advanced with any vigor is that a manufacturer who has paid a product liability loss to an injured employee should be allowed to seek contribution from the employer whose negligence contributed to the injury. V7hile this proposal has a certain emotional appeal, such contribution would have to be paid under the employer's liability coverage provided in the standard workers' compensation policy-- a line of business which is already extremely unprofitable 2. The Report contains two statements attributed to Mr. Howard Clark of the Federal Insurance Agency which are in error. The first is that a comprehensive general lia- bility (CGL) policy provides coverage for payments due under a hold harmless agreement. A CGL specifically 142 -13- excludes liability assumed under a contract from coverage and such coverage must be specifically endorsed therein. The other error is that, if a manufacturer is allowed to seek contribution from an employer whose negligence contributed to an employee's injury, the employer would have no insurance coverage for this contribution. The fact is that these amounts would be payable under the employer's liability coverage of the standard workers' compensation policy. 3. The reluctance of the authors to make any concrete recommendations is particularly evident in their discussion of proposals to abolish attorney's contingency fees, the collateral source rule, awards for pain and suffering and place limitations on the use of punitive damage awards. The Report halfheartedly suggests that attorney's contingency fees be regulated according to a sliding scale similar to that presently used in New Jersey, that awards for pain and suffering be based on a fixed schedule, that amounts already paid to an injured person by the government, e.g. , Medicaid, be deducted from any judgment against a product manufacturer and that, in awarding punitive damages, the judge take into account previous punitive damages awards involving the same product. These suggestions while helpful simply do not go far enough. More fundamental changes are needed if the problem is to be solved. 143 -14- 4. The tendency of the authors to opt for the easy solution rather than making hard decisions is particularly evident in their discussion of modifica- tions to the insurance mechanism. The authors state that for there to be any reduction in product liability irisurance rates, these rates would have to be subsidized in the absence of significant tort reform. Unfortunately, while the Report admitted that the proper source of the subsidy in such a case should be the federal government, it goes on to confuse the issue by stating that the private insurance industry would be an acceptable alternate source. 5. The Report discusses and rejects the various no-fault proposals which have been advanced with the conclusion that they may be too easily manipulated by manufacturers to the public's detriment. However, the Report then states that the concept of no-fault is worthy of further study to determine if a no-fault system could be developed that would be relatively easy and inexpensive to administer while placing appropriate incentives on manufacturers to improve the safety of their products. The end result is confusion and a complete lack of direction on this issue. 144 -15- 6. Finally, although the Report concludes that certainties in the tort litigation system are one of the three main causes of the product liability problem (along with "inadequate" rate-making procedures and unsafe products) it stops short of emphasizing the absolute need for meaningful tort reform. Rather it merely "suggests" consideration be given to several specific modifications in the statute of limitations, available defenses, use of comparative negligence, allocation of responsibility between judges and juries and penalties on lawyers bringing frivolous suits. While their "suggestions" are useful and appropriate, the fact is that they will not become reality without a strong endorsement for action on the part of the state and perhaps federal legislatures. As noted in my General Comments supra, this is the single most important shortcoming of the Report. Hope- fully the momentum for action generated by the preparation of the Report can be rekindled by the Congress and state legislatures. But in the interim, we will have 145 -16- lost a valuable opportunity for effective change at an early date. Unfortunately, such opportunities do not often reoccur in our political process at frequent intervals. Respectfully submitted, November 15, 1977 Edward J. Noha Chairman of the Boards CNA Insurance Companies Member, Advisory Committee on Product Liability 146 NED PRICE HUGH C. YANTIS, JR. DURWOOD MANFORD • Member Chairman Member MRS. PAT WAGNER Bo*l*"1w^O ^' ''• ^OORHIS Chief Claris 'B*\^Wi^^fl^S# Commissiorier of Insurance STATE BOARD OF INSURANCE 1110 SAN JACINTO AUSTIN, TEXAS 78786 November 15, 1977 The Honorable Sidney Harmen Under Secretary of Commerce U.S. Department of Commerce 14th Street Between Constitution Avenue and E. Street, N.W. Washington, D.C. 20230 Secretary Harmen: The Department of Commerce is to be commended in it's role as chair of the Interagency Task Force on Products Liability. The volumes of material to be reviewed and the complexity of the process for this review were a challenge that could be overcome only by dedicated, knowledgeable staff such as yours. They are to be individually commended. As you know, I have been concerned about the time necessary to review a document that cross-references so many outside sources of informa- tion. As I emphasized earlier in conversations with your staff, we found that it could take a week simply to identify "where in the report" one's interests are mentioned. As such, I have attempted to review only those sections directly impacting on the insurance sector. My specific remarks are focused under two general headings: (1) a historical perspective in analysis of recommended changes in government regulation of products liability and (2) the role of voluntary non-legislative solutions to products liability problems. My comments due to the time factor and your request for confidentiality have not been reviewed by anyone from the National Association of Insurance Commissioners, or the Texas Department. I am certain how- ever that your report will be a focal point for both in future delib- erations regarding products liability. It has been an honor and a pleasure to work with the Department over the past year. Sincerely, 147 Ned Pricd>-^G^teir Department of Commerce Advisory Committee on Products Liability Comments by Judge Ned Price on the Final Report of the Interagency Task Force on Products Liability This analysis focuses on the following Chapters of the final report: Chapter I Introduction and Causes Chapter V Product Liability Insurance Chapter VI Major Impacts of Products Liability Chapter VII Remedica Approaches in the Field of Product Liability This focus allows overall review of the major conclusions relative to the insurance industry and the current system of government re- gulation of the industry in providing product liability insurance coverage. This review does not attempt a line-by-line analysis, but rather addresses the broad issues of public policy discussed in the enumerated sections of the report under two broad topics: I. A Historical Perspective in the Analysis of Recommended Changes in Government Regulation of Products Liability Insurance II. The Role of Voluntary Non-Legislative Solutions to Product Liability Problems Introduction: At the outset of the cry "product liability crisis" government regulators through the National Association of Insurance Commissioners (hereafter referred to as the NAIC) recognized the probable cpntribu- Page 2 tion of the insurance sector to any problem occuring in the area of products liability. (The two other potential contributors, the legal system and industry practices will not be reviewed in this discussion.) However, in the Interagency Task Force's Final Report on Products Liability (hereafter referred to as the ITFR) while some direction is given to state insurance regulators for review- ing the product liability insurance rate making system and other insurance companies practices, little recognition is given to the complex of state regulation that exists when analyzing remedies in the final chapter of the report. This oversight is critical to legislative enactment and subsequent implementation of many if not all of the enumerated insurance remedies. The other general failing of the report is the limitation of remedial proposals to major legislative solutions. Although the report mentions many areas for improvement in the current rate making system, at no time are these discussed in the summary sections of the report. One is left to "preening" them from between the pages of the report. It is also curious that the report begins by stating that: "In the early period some extraordinary assertions were made that we (the Federal Interagency Task Force) were unable to validate. For example, it was alleged that one million product liability claims would be filed in 1976. The insurance industry's own best estimate is today 70,000. Many letters told about cases where it seems transparently unfair for the plaintiff to recover damages. We (FITF) have found these so-called "horror stories" do not reoresent the standard of the day " then goes on to discuss the limited data available within the insurance sector (for a variety of reasons) but concludes with remedial insurance proposals that significantly impact the insurance industry and stare regulation of that industry. Further an apparent 149 Page 3 bias toward federal regulation is demonstrated when the remedies for the industrial sector include provision of technical assist- ance on loss prevention techniques, and statistical assistance on types of injuries but focus only on legislative solutions to the insurance sector that would pre-empt, not supplement or assist current state regulatory authority . I. A Historical Prespective in Analysis of Recommended Changes in Government Regulation of Product Liability Insurance. The broad underlying objective of the regulation of insurance by state government is the protection of the public from incom- petent and fradulent operations of insurance companies. This protection is necessary because "the parties to an insurance 2 contract are not negotiators of equal weight in the market place." This protection is afforded primarily through regulation of solvency. How then does a split in regulation of insurance between the federal and state government with some aspects of products liability either mandated by or regulated in Washington and other aspects of this line and general liability regulated at the state level affect this overall goal of protecting the policyholder? It is not considered. Uniformity in regulation is idealized in considering federal residual market mechanisms but regulating one line of liability partially or wholly in Washington and the other liability lines in the states is hardly uniform. It could be viewed by some as simply a finesse to federal takeover of insurance regulation. VJhy not consider how the federal government can help the state system of regulation instead 150 Page 4 of how the federal government can do it better than the states. The flaws in the current rating system can be overcome with a joint effort, but the flaws in implementation of a piecemeal system of federal and state insurance regulation may not be so easily averted. The FITF reports very aptly describes the products liability situation as not warranting "a direct federal product liability program at this time." However when the situation is reassessed to determine the need for such a program, the impact of such a program on the whole complex of state regulation should be given due consideration. II. The Role of Voluntary Non-Legislative Solutions in the Products Liability Problem Although scattered mention is made in the FITF report to individual, specific problems that can be addressed in the products rate making and regulation system, this body of solutions is no- where summarized as a remedy to the product liability insurance problem. These adjustements to the system and the voluntary market assistance programs (MAP) that are functioning should be given an opportunity to work prior to discussion of additional insurance remedies such as captive companies, self insurance programs, mandatory loss prevention programs and unsatisfied judgement funds. In addition to the lack of demonstrated need for such program, the current assessment of their potential is incomplete. For instance, what prevents the fradulent or incompetent management of a captive chartered through a trade association such that it merits special status by statute? Why are captives described "more efficient" in the heading summaries when 151 Page 5 the subparagraph conclusions are that it is "uncertain as to the potential efficiencies of captives." Why do reduced insurance costs necessarily follow direct control over litigation and settlement? What is the logic underlying any proposed assessment against insurers for unsatisfied judgement funds? The questions in analysis of legislatively involved remedies could continue. But let me outline another area that must be more fully explored before legislative solutions are considered: rate making. Texas has what are considered some unique rating laws on the books. And the Texas rating system for products liability has one characteristic not described in the final report. When "a" or judgement rates are developed in the categories approved under the ISO filing, they must be submitted to the department for review. And in instances where rates exceed a certain "threshold" figure (as suggested in the FITF report) additional justification for the rate increase is requested. Thus, rates in Texas are not "effectively uncontrolled" as described in the report. The loophole in this system is, of course, the surplus lines market which is truly unregulated in regard to rates. But to attack the surplus lines market might, as the report further concludes restrict the current capacity to underwrire products liability more than it adds to rate making certainty. The effect of this additional step in the products liability rate making process should be more carefully reviewed and compared to other jurisdictions before legislative remedies are sought. 152 Page 6 Conclusion : As a regulator, I have participated in the development of voluntary, non-legislative remedial solutions to the problems in the products liability insurance system. Any assessment of additional remedies in the insurance system must be based on the success or failure of these voluntary solutions. The National Association of Insurance Commissioners recognizes the need for more substantial data on products liability insurance. One attempt to separate products liability as a separate line on the annual statement failed in 1976, but will be attempted again. A questionnaire on products liability insurance that was submitted to the major industry trade associations i.e., file American Insurance Association, the Alliance of American Insurers and the National Association of Independent Insurers emphasized the limitations of current data on products liability. So the Task Force has revised the questionnaire to be administered on a state-by-state basis to individual companies. The Task Force is also soliciting specific underwriting case histories on several products categories to become more familiar with underwriting procedures. But most importantly the Task Force has taken to critical steps to alleviating availability problems where they are found to exist and to collect data of the scope of these problems in the States . through market assistance programs. This information, we believe is an impetative precedent in analysing any attempt to mandate implementation of state programs for products liability by federal standards. The time to study the products liability problem and implement 153 Page 7 desired solutions can only be taken if temporary solutions are available. The NAIC has recommended with the cooperation of industry, voluntary market assistance programs or MAPS, in the states where the Commissioner determines a need exists. The purpose of these MAP committees is twofold. First they provide Market Assistance to Risks having difficulty placing their pro- ducts liability insurance. And secondly they develop specific data on a state-by-state basis on the type and entent of products liability problems. The states which are currently operating MAP Program include Connecticut, Illinois, Kansas, Maine Massachusetts, Michigan, Minnesota, New Hampshire, New Jersey, Ohio, Pennsylvania, Rhode Island, Virginia and Wisconsin. The states that are still in the preliminary stages include Arkansas, Indiana, Iowa, Kentucky, Louisiana, Nebraska, Tennessee, Texas and Washington. It was recommended that the "MAP" Committee in each state be composed of licensed producers with knowledge and background in underwriting and pricing products liability, knowledgable representatives of insurers writing products liability insurance in the state and the Insurance Department. In Texas this Committee also has consumer, attorney, and business representatives. The duties of the Committee include: 1. Reviewing products liability insurance availability problems to be certain that all markets have been explored and assisting controlling producers in placing the business when necessary, 2. Negotiating extensions of coverage with required carriers where necessary to permit additional ex- 154 Page 8 ploration of the market or accumulation of needed underwriting data, 3. Encouraging the development of alternatives volunatry markets including a referral program involving the use of voluntaring designated insurers participating in a voluntary quota share reinsurance agreements. These committees report periodically to the Insurance Department regarding their activities / assessments of specific availability problems and recommendations. This program is not, of course/ designed to guarantee coverage as in a pool and does maintain pricing flexibility subject to underwriting judgements. A further step has been taken to tie the data available from these committees together. A centralized reporting fbrm has been developed for all state MAP programs to report to the NAIC. This form will be finalized at the December meeting of the NAIC (draft attached) and will be used to summarize 1977 data and for periodic reports thereafter. Summary: While the Final Report of the Interagency Task Force on Products Liability is a commendable effort at synthesizing volumes of information about a complex problem, its analysis of remedies in the insurance sector: 1. places too great an emphasis on legislative remedies in the summary sections of the report, 2. buries non-legislative recommendations on adjustments to the current rate regulatory system in the body of the report/ 155 Page 9 3. is incomplete and somewhat biased in its analysis of state vs. federal regulation of insurance, 4. is incomplete in its charaterization of rate making procedures at least in regard to Texas, and 5. provides insufficient documentation of its conclusions concerning captive insurers, self insurance programs, unsatisifed judgement funds, and mandatory products insurance . These limitations however do not diminish the importance of the document as a summary of current data on the products liability insurance mechansim. 156 Page 10 Mehr and Cammack, Principles of Insurance , 1966 (Richard D. lirwin. Inc.) p. 913 2 Kimball, The Purpose of Insurance Regulation and Preliminary Inquiry in the Theory of Insurance Law, 45 Minn. L. Rev. 471, 523 (1961) 157^ REVISED DRAFT 10-12-77 PRODUCTS LIABILITY MARKET ASSISTANCE PROGRAM (MAP) QUESTIONNAIRE I. STATE: II. ORGANIZATION OF MAP A. Date MAP was established B. Date of this questionnaire C. Names of Insurance department personnel who are members of or working with MAP: D. Name, address and telephone number of MAP Chairman: E. Names and affiliations of MAP members: 158 - 2 - III. INSURANCE APPLICATION DATA A. Total number of general requests for Information about MAP to date: B. Total number of formal applications for products liability in- surance coverage received by MAP to date: 1. Number of applications returned to prospective insureds for incomplete information, etc.: 2. Number of applications currently pending before MAP or MAP subcommittee: 3. Number of applications which have received final action from MAP: C. Number of prospective insureds submitting formal applications to MAP with gross annual sales of: 1. Under $500,000 2. $500,000 - $1 Million 3. $1 Million - $2 Million 4. $2 Million - $5 Million 5. Over $5 Million D. Types of products or completed operations for which at least one formal application for products liability insurance cover- age was received. (Give 5 digit SIC code if possible.): Type of Product/Completed Operation SIC Code Wf • ■■ W|l ■.■! ^1 »■■■■■ < ■ If ■ — I- .f I— - I ■ ■■ ■ I ■- -I -— I.. ■ — ' I ' ' " I ' ^ ^ ' '•^ ■ ■ iW ^ "^ ■ ■■ W ^ ■ i^*- . »^ " ^mmi^ m^ II ■ »< ■ M ■— '-^ ^■■.■- ■ ■ ■^P -M 159 - 3 - E. List filing dates of all applications pending In 111(B)(2) above: IV. INSURANCE PLACEMENT DATA A. For how many applications In 111(B)(3) above was products lia- bility Insurance coverage placed through MAP? B. Number of placements with: 1. Licensed Insurers 2. Unlicensed Insurers C. Number of placements where applicant had gross annual sales of: 1. Under $500,000 2. $500,000 - $1 Million 3. $1 Million - $2 Million 4. $2 Million - $5 Million 5. Over $5 Million D. Type of products or completed operations for which placements were made through MAP (Give description and 5 di^^it SIC Code if possible) : 160 - 4 - Product/Completed Operatio n SIC Code £. Number of placements with deductibles of: 1. $5,000 or less 2. $5,000 - $10,000 3. $10,000 - $25,000 4. $25,000 - $50„000 5. Over $50,000 F. Number of placements under policies of: 1. Commercial Multiple Peril 2. General Liability 3 . Other G. Number of placements where the applicant's previous policy limits were: 1. Raised 2 . Lowered 3. Remained the same 161 - 5 - V. NOIffLACEMENT DATA A. For how many applications In 111(B)(3) above was products lia- bility Insurance NOT placed through MAP? 1. Number of applications denied insurance coverage by HAP: 2. Number of applications for which offer t;o insure was made but no insurance effected throug)^ MAP: Number of nonplacements in V(A) abQve yhich involved an appli- cant with gross annual sales pf: 1. Under $500,000 2. $500,000 - $1 Million 3. $1 Million - $2 Million 4. $2 Million - $5 Million 5. Over $5 Million C. Types of products or completed pper^tlons denied coverage in V(A)(1) above and reasons for den|,al (Give description and 5 digit SIC Code if possible); Product /Completed Operation SIC Code Reaeoo for Denial ——^^1 I I I M M ■ ^ I I I PI — — — f«*ip«i^^*»i^*pw»*^y»r" ii^ H i H I I mn !| II 1^1 162 - 6 - D. Types of products or compleced operations offered coverage In V(A)(2) above and reasons for not effecting Insurance (Give description and 5 digit SIC Code If possible) : Product /Completed Operation SIC Code Reason Insurance Not Effected VI. Please attach a copy of the plan of operation for the MAP, If any, and any other descriptive documents which Illustrate the MAP's act- ivities. ******************************** THANK YOU FOR YOUR COOPERATION 163 Fred G. Secrest Ford Motor Company Executive Vice President The American Road Dearborn, Michigan 48121 November Ik, 1977 Mr. E. T. Barrett, II, Project Director Interagency Task Force on Product Liability U. S. Department of Commerce Office of the Secretary Washington, D. C. 20230 Dear Mr. Barrett: We have reviewed the report of the Interagency Task Force on product liability which you were kind enough to provide in advance of its publication, and we believe it is an extremely useful discussion of the major issues. I should like to complement you. Professor Schwartz, the Department of Commerce, and the other members of the Interagency Task Force on a truly outstanding job of defining the basic problems and describing in a fair and balanced way the arguments on both sides of the various proposals and reforms which have been advanced. We were pleased to see that the report recognized that some reform is required in the current tort litigation system. Although we believe the report does not go far enough in recommending reasonable limitations on the exposure faced by manufacturers under the current system, we were pleased that it does propose adoption of a number of reforms that would tend, in our view, to strike a more appropriate balance between the rights of those injured and the responsibilities of manufacturers. As a member of the Advisoiy Committee to the Department of Commerce, I recognize my function was to submit views and data for consideration, and I have no responsibility for the conclusions and recommendations reached. Nevertheless, I want to note our disappointment and disagreement in two areas where we believe the Task Force reached conclusions which are unjustified. The recommendation that serious legislative consideration should be given to making Workers' Compensation the sole source of recovery in industrial accidents is ill-advised when coupled with the suggestion that, before this change J64 could occur, there would have to be a substantial increase in benefit levels. An overall increase in the level of Workers' Compensation benefits to assure adequate recovery to the small percentage of those injured who might have had a viable negligence claim against a third party is clearly an unsound and grossly uneconomic method of compensating workers for the loss of their right to bring third party actions. The recommended solution would involve not only a pointless shifting of insurance costs from third parties to employers, but also a significant overall increase in costs. We were also disappointed with the Task Force's apparent lack of practical understanding of the impact of claims for punitive damages in product liability actions. The study concluded that there were no data indicating that punitive damages had any substantial impact on liability insurance rates. Although we recognize the data are difficult to collect, the fact is that the mere existence of punitive damage claims results in pressure for higher settlements and frequently prompts juries to increase their awards of con^Densatory damages, even though no punitive damages are awarded. Claims for punitive damages are becoming more and more commonplace in product liability suits. We believe that, if the Task Force had recognized the significant influence which these claims have on overall costs, it would have seriously questioned the concept that permits private parties to gain a windfall at the ultimate expense of consumers generally. Sincerely, 0^>C^ ' BM^rt+ error, the least squares estimate for B was 0.734 with a t-value of 1.11 and a coefficient of determination of r'^= .0672. The fit was even worse, [r^= .0257] when I replaced M,(i by the second index of machine intensity ^-jX. The results were virtually identical for the log-linear functional forms. No firm conclusions can be drawn from these simple regression equations based on aggre- gate industry data. I have not controlled for the influences of other variables that effect work injury frequency rates. Indeed, when the percentage of female workers was added in a multivariate regression equation, the goodness of fit rose from r2= .0627 to R^ = .3343. When the data for eleven Service industries were examined I found that their mean injury rate was lower, Y = 21.1 per 1,000 workers, and that they exhibited a lower index of machine intensity. 410 Mj = 16.1 percent. The production processes as well as the sex composition of employed persons are very different from those manu- facturing. Finally, it should be emphasized that the data of Table 2 only show how machine intensity was associated with the injury frequency rate across manufacturing industries. The data tell us nothing about the fraction of industrial injuries that were "caused" by defective industrial machines. Industrial accident researchers have established some interesting empirical relationships between the injury frequency and such explanatory variables as age, sex, race, occupation, labor turnover, working conditions, time of day, firm size, etc. An excellent survey can be found in Surry (1971) and a briefer review appears in Oi (1974). Given the massive quantities of data that have been collected by many State Workmen's Compensation Agencies and by OSHA, one might think that we ought to be able to estimate the fraction of all industrial accidents which w,ere "caused" by defective equipment. Such estimates are not available. When causation or fault is determined on a case by case basis, financial and personal situa- tions of victims and defendants unavoidably influence outcomes. Objective scientific research of large samples of accident records would enable us to develop estimates of the fraction of injuries that were truly "caused" by defective products where the determina- tion of "cause" is not confounded by knowing the identities of victims and manufacturers. These scientific estimates would give us benchmarks against which one could compare the overall reliability of judicial determinations of accidents due to defective equipment. 411 Several participants at the Symposium on Product Liability conducted by the Department of Commerce on July 21, 1976, argued that any long-term resolution of the products liability problem must involve policies that will reduce the frequency and severity of product-related accidents. With respect to consumer products, the National Commission on Product Safety (1970) contended that a move to strict producer liability was in the public interest because manufacturers were in a better position to achieve product safety. This contention could not be refuted or verified because no one had the statistics showing what fraction was the result of unsafe (defective) products, and what fraction was the result of unsafe acts by users. Although our knowledge about the factors responsible for industrial accidents is far from adequate, we have had the opportunity and the data to evaluate earlier public programs that tried to lower the frequency/severity of industrial accidents. The mandated standards path to occupational safety was tried in several states fully 15 to 20 years before the establishment of OSHA in 1970. In New York, an extensive safety inspection program [similar to the target industries program discussed by Smith (1976)] was launched in the mid 1950 's to enforce compliance with mandated safety code rules. The injury rates in the heavily inspected industry (foundries) fell in the first few years, but these improvements were subsequently eroded away in the next decade. If an injured worker could show that his injury resulted from a safety code rule violation, he became eligible for supplemental benefit payments under the Wisconsin State Workmen's Compensation laws. In the three years, 1964-66, less than 2 percent of all compensable cases received these supplemental benefits, but the percentage was higher for the 412 more serious injuries — around 7 percent. In another New York study of 3,216 accidents, it was discovered that a standards violation was present in 23 percent of these cases. Further discussion of these studies can be found in Oi (1975). These remarks are, I believe, pertinent to an evaluation of the several remedies. Under one proposal, part or all of the losses suffered by the injured party could be shifted from the manufacturer to the employer who owns the equipment if the manufacturer can show that the employer was negligent. The impact of this proposed remedy should be examined in conjunction with the doctrine of comparative negligence. Another proposal would relieve manufacturers of industrial equipment, who meet the mandatory inspection/certification require- ments, of liability for damages. In effect, the liability for accident costs would be returned from the equipment seller to the owner-firm or the user-worker. The mandated standards for certifi- cation as well as the inspections that will presumably enforce compliance with those standards will presumably reudce the frequency/ severity of equipment-related injuries. The empirical evidence to date suggests that the standards path to occupational safety has not been effective; confer Oi (1975) and Smith (1976). 413 other proposed remedies are intended to reduce insurance premium costs by limiting losses for product-related injuries. The impact of these proposed remedies will depend on the nature of the empirical relationship between the size of the claims V [which is the gross accident cost imposed upon the seller] and the frequency/ severity of product-related industrial injuries. It might appear, at first blush, that larger claims would reduce the frequency/ severity of industrial accidents. With larger claims, the producers of the more hazardous machines would face larger advances in insurance premium costs thereby driving them out of the market. However, when all adjustments to higher claims costs are considered, the conclusions become fuzzier. Suppose, for example, that there were two kinds of packaging machines. As premium costs rise, the more hazardous type of machine could be driven out of the market. Some firms that previously demanded the more hazardous machine may not choose to shift to the safer but more expensive packaging machine. They may, instead, shift to other, more labor intensive means of packaging their products. Although the operators of the hazardous packaging machines are no longer exposed to risks, firms are now employing more unskilled, inexperienced workers in thier packing sheds. The injury toll could well increase when the more hazardous packaging machines are replaced by more labor intensive production methods. 414 statutory limits on product-related industrial injuries similar to workmen's compensation, arbitration of claims, or limiting the size of lawyer's fees involve not only the issue of efficiency or socially optimal risk levels, but also the equity issue. One must also examine the impacts of these proposals on the extent to which firms and workers will exercise "due care" in using the industrial equipment. Finally, the doctrine of comparative negligence would seem to bring us claser to the goal of socially optimal risks which minimize the sum of accident costs and accident prevention costs because it can, in principle, give the "right" incentives to all parties, [equipment sellers, employers, and workers] to exercise "due care". However, the actual implementation of this system must be more carfully examined. A fault system must assign "fault" meaning that it must determine the cause for every litigated accident case. Conceptually, accidents are "caused" by objects, people, and random chance or some combination of these. I argued earlier, [Oi (1973B), pp. 56-59] that the fault system minimized the importance of random chance. Further, there is reason to suspect that the cause is more likely to be assigned to objects rather than people. Transitory actions and events that cannot be reexamined or easily monitored, are less likely to be singled out as causal factors. Some auto accidents are surely "caused" by the failure to keep one's eyes on the road. After the crash, we can examine the wreckage and the road, or we may even get eye witness accounts of movements of other cars. But, if we are unable to observe whether or not the driver kept his eyes on the road, how can we attri- bute the blame to this unobserved event? The problems and possibili- ties for errors are greatly magnified when courts and juries are asked to apportion the blame for an accident among product defects, improperly 415 designed workplaces, and negligent acts on the part of the injured party or fellow workers. I suspect that the administrative costs of implementing a system of comparative negligence would be extremely high, especially when we consider the judicial costs of subsequent appeals. With respect to consumer product safety, anecdotal evidence can be gathered to support the claim that consumers are ill-informed about the risks and accident costs associated with the use of consumer products. Strict liability presumably provides producers of consumers goods with incentives to hold back products which are "unreasonably hazardous". Are these arguments equally valid for industrial machinery and equipment? Are the firms that purchase these machines ill-informed about the risks and costs associated with different brands? The answers to these questions will indicate whether there is a valid basis for treating industrial products differently from consumer products. In closing, I believe that it is important to remember the goal of economic efficiency when we evaluate the various remedies that are being proposed to "solve" the products liability problem. There is some danger that policy-makers will attach too much weight to short-run considerations of reducing premium costs for equipment producers. Policies that limit losses, shift liability back to employers/workers, or provide subsidized insurance protection, [possibly through Federal insurance or reinsurance programs] can obviously aid in promoting the survival of equipment sellers. But are these policies also consistent with the goal of minimizing the sum of accident costs and accident prevention costs? 416 The fourth monograph. Some Comparisons Between the Medical Malpractice and Product Liability Problems (1976) , was V written by Eli P. Bernzweig. As its title indicates, Mr. Bernzweig' s monograph compares these two problems in an effort to identify common solutions. His paper is especially interesting because of the perspective he gained as the Executive Director of the staff of the Commission on Medical Malpractice of the Secretary of the Department of Health, Education and Welfare. That Commission's report, published in January 197 3, described the medical malpractice problem and set forth 20 specific recommendations for imple- mentation by the Federal government. V Mr. Bernzweig is currently a Federal Executive Fellow at the Brookings Institute. 417 SOME COMPARISONS BETWEEN THE MEDICAL r^LPRACTICE AND PRODUCTS LIABILITY PROBLEMS by Eli P. Bernzweig, J.D.* The growing public interest in the problems surrounding products liability insurance for manufacturers of capital equip- ment and consumer goods, leading to the establishment of the Interagency Task Force on Product Liability, invites a renewed look at the still-festering medical malpractice problem to de- termine if these two major issues have elements in conmon which might point the way to some comnon solutions. This paper rep- resents an attempt to draw some comparisons and note the dis- similarities between these issues for the purpose of obtaining a better perspective on the common-solution thesis. We shall begin with a discussion of the problem similiarities, followed by some general comments and observations on the subject. The malpractice and products liability problems are similar in the following respects: a. Both have escalated to the rank of national problems and are widely discussed in the popular and trade media. b. Both achieved public prominence as a result of * Special Assistant to the Administrator, Federal Insurance Administration. The views expressed herein are those of the author alone, and are not intended to reflect any official position of the Federal Insurance Administration. 418 problems of insurance cost and availability. c. Both malpractice and product claims have been increasing in frequency and severity, along with higher insurance premiums for the policyholders in each category. d. The consequences of both problems have led to dysfunction in the marketplace, albeit to different degrees. e. The paucity of credible insurance data has hindered the ability to draw conclusions regarding the magnitude and intensity of the two problems. f. Higher insurance costs invariably have been passed on to the public at large in both instances, sometimes directly and sometimes indirectly. g. Though affected by these added costs as well as in other ways, the public as a whole has not been significantly involved in voicing its concerns or in demanding an active role in the problem- solving process. h. The pressures for reform in both instances have come almost entirely from those interests responsible for causing injuries or insuring against them rather than interests representing the injury-receiving public in general. While the malpractice and products liability problems each have become matters of national concern, the latter appears to have achieved crisis status (if, indeed, that is what it is) far more suddenly than the comparable malpractice insurance 418 crisis. As far back as the mid-fifties, doctors in California were experiencing serious liability insurance problems, 1 as evidenced by the following excerpt from a 1959 article on the malpractice problem which appeared in the Saturday Evening Post: "Unquestionably, the malpractice problem has become one of the most serious in the modern practice of medicine. Medical authorities have described it as shocking, humiliating, and dangerous. One Los Angeles hospital official stated only two years ago, 'The situation is becoming acute in many parts of the Nation, but in Los Angeles it is already intolerable.' Last year the head of a special AMA committee claimed, 'The situation now has become critical and is very 2 nearly out of control.'": One would hardly suspect that those dire remarks were written so many years ago. Clearly, California was experiencing more problems at that time than any other State, but even a cursory review of the malpractice literature would reveal that insurance cost and availability problems have been plaguing doctors and 3 hospitals in many States for several decades. What distinguishes the present state of affairs from these earlier intermittent malpractice crises is not the fundamental nature of the problem, but its pervasiveness. By contrast, the liability insurance problems of products manufacturers are of relatively recent vintage. Un- doubtedly, problems unique to a specific manufacturer or a specific type of enterprise have ebbed and flov/ed over the years, but it was not until a year or so ago that official industry 420 pronouncements began heralding the upcoming crisis in product liability insurance. As late as October of 1975 the president of the American Insurance Association (AIA) was able only to speculate whether the then problems in medical mal- 4 practice would be repeated in the products liability lines. Absent any concrete data to support a more definitive assessment, he was hardly in a position to do otherwise. That the situation had not yet become a "crisis" as recently as February of 1976 is disclosed in a letter to the Commerce Department by another official in the AIA wherein the latter commented: "The insurance industry is increasingly concerned over problems which are developing with respect to products liability * * * *These problems are just emerging and we feel it is desirable to pro- vide remedies before the situation becomes serious* * *" (under- 5 scoring added) However, the current situation may be charac- terized, it has certainly captured the attention of the 6 7 popular press, the Congress, and the public as a whole. The creation of the Interagency Task Force itself is indicative of the seriousness of the problem from the vantage point of the Administration. Turning to the matter of claim frequency and severity, it is clear that the trend for both malpractice and products claims is steadily rising, though there is a marked difference in the magnitude of the respective problem areas. The best 421 available data — and obtaining hard data is a probleTi in itself — indicates that something on the order of 20,000 - 25,000 malpractice claims are filed annually, while estimates of the number of products claims are generally in the range of 8 500,000 to one million. The average incurred loss for mal- practice claims is approximately $15,000, while the average pro- ducts claim loss is said to be approximately $100,000. If these figures are substantially accurate, then products claims are certainly more costly and more potentially ruinous to products manufacturers t-han malpractice claims are to doctors and hospitals. Despite the comnonality of certain factors which may be contributing to the rise in claim frequency and severity for 9 malpractice and products claims, it is reasonable to assume that the rise in products claims is at least partially attri- butable to several major pieces of Federal legislation v/hich focus on the rights of consumers in the products safety area: 10 the Flammable Fabrics Act, the Federal Hazardous Substances 11 12 Act, the Poison Prevention Packaging Act, the Occupational 13 14 Safety and Health Act, and the Consumer Product Safety Act. So far, no Federal statutes in the health area have provided any analagous stimuli to sue doctors or hospitals for sub- standard treatment, and none appears to be in the offing. As we shall see later, the vast number of patients who suffer 422 medicifl treatment injuries is infinitely greater than the number who are currently bringing malpractice claims, so a steady increase in malpractice claim frequency is a foregone conclusion without any legislative influence. The build-up of claim frequency and severity, however, is not limited to the medical malpractice and products liability lines.' The trend is now becoming apparent in the general liability lines as well as in other professional coverages (lawyers, architects, engineers, accountants) fiduciary 15 coverages, and municipal liability coverage. Some have re- ferred to this spate of liability claims as a litigation explo- 16 si on or revolution. Thus, the frequent comparisons drawn between the products liability problem and the still -festering medical malpractice problem tend to mask the widespread nature of rising claims in all liability lines. Similarly, one should not too hastily equate the difficulties recently experienced by doctors in finding available sources of professional liability coverage with availability problems facing products manufacturers. The relatively thin market for physicians ~ a true "crisis" in many areas of the country in 1974-75 — has no parallel in the products area, where considerably more companies are still offering coverage, albeit at rapidly rising rate increases and with extremely selective underwriting. In short, comparability between the 423 products and medical professional liability lines clearly is more a matter of price than availability. A significant distinction between the products and malpractice fields lies in the relative consequences to the public of rising insurance costs or complete insurance unavailability. When doctors in California, New York, and Florida reacted to enormous premium hikes in 1975 by staging walkouts of varying periods, for all practical purposes the health care delivery system(s) in those areas completely broke down. The withdrawal of all but emergency medical services left the public angry and frustrated, and nearly forced some hospitals to file for bank- 17 ruptcy for lack of operating funds. To describe this sit- uation as chaotic would hardly be indulging in hyperbole, and in some areas, the aftereffects of these doctors' strikes are still being felt. By contrast, when individual products manufacturers faced with crippling rate increases or the inability to obtain coverage have chosen to go out of business, the consequences to society as a whole have not been nearly as cataclysmic. For the most part, manufacturers have been able to adjust product prices sufficiently to meet the additional premiums they must pay — something that physicians and hospitals find harder to do under the rather inflexible third-party payment systems 18 which govern the bulk of their billings. 424 8 One can state with little fear of contradiction that the lack of authoritative and credible statistical information has been a major problem for those seeking solutions to both the malpractice and products liability insurance problems. In the case of the former, the closed claim data gathered and pub- lished by the HEW Secretary's Commission on Medical Malpractice was the first effort ever made on a national scale to determine the magnitude of the malpractice problem, and it was nearly four years later before the insurance industry -- with con- siderable prodding from Capitol Hill ~ undertook to supplement 19 the earlier study. In the products area, the insurance industry has yet to produce the first set of data which would substantiate its panic cries for rate increases, and this by 20 its own admission. As of this writing, we still have no authoritative, comprehensive nationwide figures showing claims _, frequency and severity, average claim costs, average allocated claims expense, or relative profitability of the products liability line. It is anticipated, however, that some claim data currently being gathered by the Insurance Services Office and by several of the contractors doing studies for the Inter- agency Task Force will provide useful baseline information in the near future. Without question, there is much similarity in the way that people talk about the medical malpractice and products 425 liability problems, particularly with respect to such ratters as the role of the tort system and the influence of legal doctrines on the initiation or outcome of the decided cases. The thrust of most of this talk is that legal doctrines which at one time were considered fair to all parties have gradually been eroded by the courts to the point where plaintiffs now have the decided edge over defendants in tort litigation. As is usually the case with sweeping generalizations, these charges do contain a certain degree of validity. Legal doctrines governing personal injury litigation have indeed undergone noticeable judicial revision during the past decade or so, with the bias clearly being in favor of plaintiffs, but a careful reading of the decisions in the leading cases generally reflects an attempt on the part of the courts merely to correct existing inequities in the law tending to favor defendants in tort litigation. There are clear examples of this both in medical malpractice and products liability litigation. For many years, plaintiffs in medical malpractice cases were confronted with literally insuperable problems of proof of medical negligence, particularly where complex medical procedures were involved. Proving a physician's departure from the normal standard of care required expert testimony which, as plaintiffs only too frequently learned, was virtually impossible to arrange. Inevitably, the courts took notice of the injustice 426 10 resulting from the inability of injured claimants to procure 21 medical experts, and they took appropriate steps to correct the situation by judicial acceptance of less stringent requirements for proving fault. Thus, a variety of legal rules gradually became more prominent in malpractice cases, e.g. res ipsa loquitur , the common knowledge doctrine, the use of textbook authority, the rule permitting a plaintiff to use the defendant physician as an expert witness, abrogation of the locality rule, etc. In addition to the foregoing, other substantive doctrines applied with increasing frequency in malpractice litigation have tended to correct some of the inequities faced by claimants seek- ing recoveries for their medically-caused injuries, e.g. informed consent and the discovery rule.. Needless to say, the plaintiffs' bar applauds these liberalizing changes in tort law with as much vigor as the defense bar condemns them. The Secretary's Commission on Medical Malpractice debated the pros and cons of these changes at length and concluded, by and large, that they have not been as vital to the disposition of medical malpractice cases as often contended, and in any event, have not been applied uniformly by the courts in all states. In the final analysis, the Comnission concluded that the public interest requires only that such doctrines be applied fairly and with some degree of 22 uniformity. Products liability law likewise has undergone significant 427 n change in the past decade, with the doctrine of strict liability having assumed major importance in this field of litigation. Privity of contract has disappeared as a requirement for an injured claimant to prevail, and though liability based on neg- ligence has survived to some extent, it is now treated more as a secondary line of attack to supplement the principal theory 23 of strict liability. As in the case of malpractice law, extension or modifi- cation of traditional legal doctrines was prompted in part by judicial recognition of the enormous difficulties of proof faced by injured claimants. As noted by one legal scholar. "The change from negligence to strict liability meant that it was no longer necessary to prove negligence on the part of the defendant. * * * It is often difficult, or even impossible, to prove negligence on the part of the manufacturer or supplier. * * *24 But behind many of the recent decisions endorsing the strict liability concept lurks another legal rationale, namely, that as between an innocent victim of a product's propensity to create harm and the (presumably) insured manufacturer of such product, the latter is in a better position to spread the risk of loss which occurs and that the loss should not be allov/ed to re- 25 main with the injured party on whom it fortuitously fell. There 428 12 is little doubt that this view of the law is in direct conflict with the underlying fault basis of the tort liability system operative in this country since 1850, namely, that some innocent 26 victims will have to bear their own injury losses. Obviously, something significant is taking place in our legal system to encourage the shifting of losses from innocent victims to those whose enterprises are likely to result in actionable harms, and all the legal pressures appear to be in the direction of broadening rather than limiting the liability of those engaged in such enterprises. We see growing evidence of this trend both in products liability and medical malpractice appellate decisions. Thus, in the landmark products case of Greenman v. Yuba Power Products, Inc ., 377 P. 2d 897 (Cal. 1952), the court noted: "The purpose of such [strict] liability is to insure that the costs of injuries resulting from defective products are borne by the manufacturers that put such products on the market rather than the injured persons who are powerless to protect themselves." In the 1967 case of Clark v. Gibbons , 426 P. 2d 525, the California Supreme Court held the defendant liable under res ipsa loquitur for injuries to the plaintiff resulting from an inex- plicable operating room accident. Justice Tobriner, who concurred - • in the majority opinion but strongly disagreed with its reasoning. 429 13 advocated absolute liability in such inexplicable accident sit- uations, without resort to the "largely fictitious and often futile search for fault which characterizes medical injury litigation." In an unusual display of candor he urged as a matter of public policy that the losses of otherwise unexplainable medical accidents "be shifted to the parties best able to protect against them 27 through insurance * * *." For better or worse, decisions of this nature — which are becoming increasingly common in personal injury litigation — reflect society's apparent desire to shift the focus from the defendant's conduct to the victim's plight, and judicial comnentary in this respect is increasingly evident. There is little doubt that both the malpractice and products liability problems have served to direct greater attention to the generic problem of injury reparations, a problem which has its interfaces v/ith all categories of personal injury litigation, with benefit levels in workers' compensation and disability benefit programs, and with the matter of compensation of victims of criminal assaults, compensation 28 of injured human research subjects, and the like. It is noteworthy that one of the principal studies conducted by the HEW Malpractice Commission focused on the problem of iatro- genic injury, that is, injury arising out of the treatment process itself. The study showed that 7.6% of the patients treated in hospitals for medical /surgical problems other than normal deliveries suffered varying degrees of iatrogenic injury. Extrapolating to the 35 million hospital admissions annually, the number of iatrogenic injuries nationally totals approximately 2.5 million, a figure which 430 14 does not include iatrogenic injuries incurred in physicians' offices or hospital outpatient departments. Since we know that not more than 20,000 - 25,000 malpractice claims a year are being filed at the present time, it is clear that the vast majority of injured persons are absorbing the economic losses associated with their injuries, either in whole or in part. The Malpractice Commission gave considerable attention to the plight of these individuals and,, in particular, their needs for prompt restorative treatment and compensation of their out-of- pocket economic losses. One of the Commission's major recommenda- tions was that a major governmental effort be initiated to explore alternative compensation mechanisms to achieve the above objectives. No such effort was undertaken by the Government, however, although the malpractice crisis which flared up in 1975 undoubtedly revived interest in this problem. Significantly, the swine flu claims legislation enacted in/ August of 1976 (P.L. 94-380). mandates an HEW study of "alternative approaches to providing protection against such (immunization program) liability . . . including a compensation system for such injuries. . . " Thus far, comparatively little discussion has centered on the needs of persons injured by defective products, with most of the concern to date being devoted to the insurance problems of prod- ucts manufacturers. Certainly no organized consumer lobby has actively entered the debate on this critical issue these interests apparently spending most of their time and energies 431 15 in'opposing attacks on the tort system perceived to bi inimical to the interests of personal injury litigants in gene:*:".. It is somewhat of a mystery why the. consumer interests have :hosen this tack, since individual litigants at least have legal representation in contrast to the vast numbers of injured persons (bo:h in the malpractice and products environments) who either are -ninformed of their legal rights or, for other reasons, choose to forego efforts to recover damages under the present adversary system. Few would argue that products liability law is far more diverse than malpractice law, encompassing a variety of legal issues and doctrines entirely foreign to malpractice litigation. The obvious distinction is the difference between a prcduct and a service, with products law focusing on such matters is what constitutes a defective product, state-of-the-art and product misuse defenses, applicability of comparative fault, wr-at consti- tutes an "unreasonably dangerous" product, the role of warnings to consumers, and extensive concern with application of the statute of limitations to products which may have been manufactured many years ago. Compounding the usual problems in personal injury litigation is the fact that products manufactured in ce state commonly are distributed nationwide, bringing into pl=y procedural law problems of conflicts of laws and applicability of state long- arm statutes. One of the most vexing issues in products law 's the mat- ter of suits for injuries arising out of defects in Cciltal equipment brought by employees of comanufacturers or final -produ:t assemblers. 432 16 Under the workers' compensation laws of nearly all the states, an injured employee is limited to recovery of workers' compensation benefits in a claim against hi,s employer, but he is not precluded from directly suing the original equipment manufacturer for negligence in product design or manufacture and recovering damages in full. A defendant manufacturer's ability to apportion such loss by bringing a third-party claim against a concurrently-negligent employer of the plaintiff is by no means clear, with considerable differences in legal treatment from state to state on the right to contribution or indemnity, the effect of hold harmless clauses, and the right of subrogation in general. Thus, the v/hole subject of product-related workplace injuries to employees is fraught with legal complexities which simply have no analogue in malpractice law. Parenthetically, it Is in large part due to these complexities that products liability litigation is undoubtedly more costly thanJmal practice litigation, a fact that should give pause for reflection to those who view the tort liability/Insurance indemnity system as a vehicle for compensating injured persons with some semblance of efficiency. To the extent that the malpractice and products liability problems share corresponding legal system concomitants, their greatest identity of interest probably lies in the rul^s regarding •ibe^ damages. The subjects most often cited by those seeking to bring about change include: (a) regulation of attorneys' fees, (b) regulation of awards for pain and suffering ^ (c) modification of the collateral source rule, (d) use of structured awards which 433 17 call for periodic payments rather than lump-sum awards, (e) restric- tion or elimination of punitive damages, (f) placing maximum limitations on awards, and the like. Each of the foregoing has been the subject of legislative enactment in one form or another by states grappling with the malpractice problem, and it is not unreasonable to assume that similar legislative lobbying efforts soon will be undertaken by those seeking products liability reforms. The latter point raises an important question about the funda- mental relationship between liability-insurance and tort process, an issue whose implications are often overlooked. Those who urge "tort reform" in the malpractice and products liability areas take for granted that the goals of tort law and liability insurance necessarily correspond, vhen it is more likely that the two repre- sent what one scholar has called a "miscegenetic union" of con- 29 flicting interests that rarely serve the broader goals of society. To illustrate: a commonly assumed goal of tort law — just compensation for harm — is squarely in conflict with a fundamental goal of the liability insurance system, which is to make higher profits by keeping losses as low as possible. Those who criticize the inefficiency of the tort system by pointing out how small a percentage of policyholders' premium dollars inure to the benefit of injured claimants simply ignore the realities of the situation: liability insurance is a device whose prime function is to protect the assets of policyholders (and their insurers) and achieving this result requires avoiding payment of compensation, if at all possible. This objective is totally inconsistent with a system whose function is to serve a broader public goal, e.g., to provide prompt, equitable, and 434 18 adequate compensation to injured claimants. The failure on the part of those in positions of authority to comprehend the serious infirmities of the tort process/liability insurance nexus has severely hampered efforts to solve both the ma.l practice and the products liability problems. For reasons of self-interest, the insurance industry goes to great lengths to preserve the essential status quo of the present claims system while simultaneously urging major tort reforms. By equating "tort reform" with "protecting the public interest" — as casualty insurers have urged upon legislators seeking solutions to the malpractice problem — artifice has be elevated to new heights, since the reforms being sought invariably limit or suspend long-established rights of injured claimants while legitimizing new immunities or privileges for doctors and hospitals 30 not accorded defendants in other types of personal injury litigation. We must not forget, however, that the insurance industry is a profit-motivated enterprise whose interests are not, and never have been, oriented toward serving broad, public goals. No better example of this could be cited than the conflicting interests of the Federal Government and the insurance industry during the recent swine flu Insurance imbroglio. Despite the dysfunctional nature of the system noted above, there is little likehood that any radical change in per- spective will occur in the immediate future. Accordingly, we can expect a plethora of state-level task forces and advisory commis- sions to study the products liability problem similar to those created to deal with medical malpractice. And if history is any guide, 435 19 vie may also expect the reports of these state advisory bodies to parrot one another ad nausem , repeating the sare litany of facts and TTiyths as though the problem was somehow unique to a particular state.- Most of these reports will be replete with testinrany taken at state insurance department or other public hearings, where industry witnesses seek to outperform each other in detailing the disastrous consequences of the products liability 31 problem on their particular businesses or segment of the industry. Hearings have already been held in Washington by the Small Business Subcommittee of the United States Senate... Insurance reforms understandably have received great atten- tion in the malpractice and products liability areas, attesting to the essential similarity of the underlying insurance problems — cost and availability. Of the vast variety of state legislative reforms enacted this past year to cope with the malpractice insurance crisis, many have dealt with the subject of insurance availability. Statutory joint underwriting associations (JUA's) abound, and many are serving a vital function in offering what amounts to the only source of malpractice insurance for health providers in certain areas of the country. Clearly, similar JUA approaches v/ill be suggested in the products area as well, although we can expect greater resistance to their creation for several reasons. For one, availability is not as great a problem with respect to products insurance as is the matter of cost and affordability. But of even greater significance is the fact that a products liability JUA, unlike its malpractice counterpart, v/ould subject insurers in the state in question to financial 436 20 burdens attributable to products manufactured outside the state [by virtue of state long-arm statutes] a situation which raises serious problems with respect to ratemaking and loss prevention, and cannot help but encourage forum-shopping. Resolving the availability problem in products liability, therefore, compels consideration of insurance remedies other than state JUA's to circumvent these undesirable results. Another insurance problem affecting both the malpractice and products liability lines is the actuarial uncertainty relating to claims frequency and severity. In attempting to make reasonably accurate projections of future claims frequency and severity, the actuary must take many "unknowns" into consideration, including changes in the legal and social environment, economic conditions in the economy as a whole, and the increasingly adverse effects of infla- tion on payouts and loss adjustment expenses. As the sad experi- ence of the recent past has shown, the actuary cannot assume that conditions which exist during any given base period will remain stable and, therefore, can be relied upon in making rates for the ensuing policy period. Complicating the ratemaking process is the long-tail nature of these claims, a matter which affects both the malpractice and products liability coverages, though in slightly different ways. Shortening the tail in order to improve predictability of claim frequency and severity trends is the desired goal, but how best to achieve that result is a major problem. In the malpractice area, the effort has focused mainly on changes in statutes of limitations and on switching from the occurrence form of policy to the claims-made form, with considerable impetus to the latter 437 21 approach coming from the nation's largest malpractice carrier, v/hich nov/ uses the claims-made form exclusively in its writings. In the products area, claims-made policies have long been the norm, but the long-tail problem is equally significant in that claims filed during the policy period can (and often do) relate to allegedly defective products manufactured years and even decades earlier. Changes in statutes of limitations may have an ameliorating effect on the long-tail problem in both the products and malpractice lines, but the issue is decidedly more complex with respect to product liability claims. This is due to the fact that products liability claims often involve multi-state litigants, creating difficult con- flicts of laws problems on the applicable substantive rights and remedies of the parties. The interstate nature of most products liability claims, therefore, makes resolution of the long-tail issue (and consequent actuarial problems) far more intractable and less amenable to solution on a state-by-state basis. Overemphasis on the insurance aspects of both the products liability problem and the medical malpractice problem has masked under- lying factors deservinq of greater attention. Rising claim frequency, for example, is not^ insurance-caused phenomenon, nor is claim severity, though both have a close relationshio with, the v/ay the insurance system functions. Without question, public awareness of liability insurance coverage on the part of health care providers and products manufacturers has, to some extsnt, stimulated suits for injuries sustained as a result of improper health care treat- ment or product defects. But injury itself is the essential 438 22 prerequisite for bringing such an action — a fact often overlooked by those striving to cope with the "insurance problem" of rising- claim frequency. Similarly, public awareness of liability insurance coverage undoubtedly has resulted in higher awards in some litigated cases and a greater willingness to find liability in others; but these factors merely reflect the infirmities of linking the tort process with liability insurance noted earlier, a systemic problem which can hardly be corrected by tinkering with the insurance mechanism alone. When one analyzes attitudes towards the potential Federal role in dealing with the malpractice and products liability problems, one cannot help but be struck by the differences in enthusiasm for Federal involvement. Although the problems of malpractice insurance (and to a lesser extent availability) have been a source of concern to the medical profession for a great many years, no one in organized medicine looked to the Federal Government for any sort of help during the malpractice crises in the late 60's and early 70's. Despite the increasingly negative impact of rising malpractice insurance costs both on individual physicians and on the health care delivery system as a whole, the American Medical Association was able to state in 1969 that the only role of the Federal Government should be "to encourage appropriate 32 action by the state governments." Significantly, the First National Conference on Medical Malpractice, convened in Chicago in February of 1970, was co-sponsored by the Department of Health, Education, and Welfare and the American Osteopathic Association, with the American Medical Association declining an invitation to co-sponsor the event. The- idea to establish a national commission to explore the medical malpractice phenomenon emanated entirely from within 439 23 the executive branch of government. It was one of a series of health options submitted by the Secretary of HEW to the V/hite House in late 1970, leading to creation of the 21-meiPher study commission in mid-1971. Following the issuance of the Malpractice Commission's report in early 1973, interest in the subject waned — partly because the country was not then experiencing any serious availability probler;s and partly because organized medicine was decidedly unhappy with the report itself. Regardless of the reason, from that day to this, 33 with only an occasional departure from its position, the medical profession has studiously avoided any request -for Federal assistance 34 or legislation to deal with this still -unresolved issue. Whiles it would be a gross overstatement to assert that the business and manufacturing interests most affected by the products liability insurance crisis have enthusiastically urged Federal involvement, their willingness to solicit some form of assistance at the Federal level is evidenced by their plea for help to the Economic Policy Board early in 1976, which led to the 30-day study by the Commerce Department and, in turn, the establishment of the Interagency Task Force on Products Liability. The interstate nature of products distribution certainly suggests the need for broader national solutions than called for in dealing with the malpractice crisis, though the precise nature of those solutions has yet to be agreed upon by anyone. In conclusion, it would be fair to say that the medical malpractice and products liability problems share a number of common elements, the most notable of which relate to insurance con- comitants. Thus, the insurance market has become rather severely 440 24 constricted with respect to both the malpractice and products liability lines, with policyholders in both categories facing highly selective underwriting practices, enormous rate increases and, in some instances, no available coverage — at least not at affordable rates. In the malpractice area, a variety of insurance alterna- tives have evolved, including: (a) formation of physician-owned carriers, (b) formation of captive insurers, (c) statutory joint underv/riting associations, (d) greater resort to self-insurance by hospitals, and (e) total abandonment of insurance coverage by grow- ing numbers of physicians — probably as many as 15% of the physicians in practice. What form of insurance remedies will emerge in the products area is difficult to predict, but the interstate nature of products distribution suggests insurance solutions which are decidedly more national in scope. To the extent that we are witnessing a general rise in all forms of personal injury litigation in this country, malpractice and products liability claims have been a part of this phenomenon and are likely to contribute to rising claim frequency for some time to come. Note, however, that despite all the hue and cry about a so-called "malpractice crisis," v/e are still seeing far fewer malpractice claims than the medical injury statistics v/ould seem to warrant. One of tht reasons for this may be the somewhat unique nature of malpractice litigation, in that a mal- practice claim often represents the final breakdown of a personal relationship between tv;o parties -- physician and patient ~ a breakdown not infrequently fueled by emotional and psycho-social^ 441 25 factors v;hich simply have.no counterpart in products litigation. With the stimulus of a variety of consumer-oriented Federal statutes relating to the manufacturing process, it is not unreasonable to conclude that products claims v/ill continue to increase at an accelerating pace throughout the foreseeable future. The fault-oriented liability insurance mechanism is already under severe stress, and its future is in considerable doubt. The legal environment — perhaps because of a mistaken conception of the role of liability insurance — has veered inexorably toward 35 the socialization of injury, a concept totally at odds v/ith the liability insurance mechanism. Thus, the battle to preserve the present system, albeit v/ith change, may prove to be of no avail if the public increasingly perceives liability insurance as a compen- sation mechanism, rather than the indemnification mechanism it was 36 intended to be. Policymakers seeking solutions to both the malpractice and products liability problems may well find it rrore desirable to focus on a comprehensive injury reparations approach if their objective is to achieve social goals not compatible with the liability insurance system as presently structured. ***** 442 I 26 Footnotes and References 1. Sadusk, J.F., "Malpractice Litigation--The California Experience," 27 Conn. Medicine 620 (October 1963). 2. Silverman, M. , "Medicine's Legal Nightmare," Saturday Evening Post, April 11, 1959. 15. 3. From time to time, critical insurance problems have surfaced in a number of states.- For example: California in 1953, 1968, and 1972; Alabama, Pennsylvania, and Hawaii in 1970; Florida in 1959 and 1974. 4. Jones, T.L., "AIA: Crisis Brewing in Product Liability," National Underwriter, October 3, 1975, 1. 5. Kalmykow, A., Assistant General Counsel, AIA, in a letter to S. Sherwin, Deputy Assistant Secretary for Commerce, February 25, 1976. 6. "Inflation in Product Liability," Business Week, May 31, 1976, 60; "Who Pays?," Forbes, August 1, 1976, 57. 7. The Senate Select Small Business Committee has already begun hearings (September 8, 1976), and several bills have been introduced in the Congress to deal with the product liability crisis. 8. See "Product Liability Insurance--Assessment of Related Problems and Issues," U.S. Department of Commerce (March 1976) at 5; Du Bain, "The Next American- Revolution," Vital Speeches, February 15, 1976, 276. 9. See editorial, "Sue the Bastards: A Social Malaise," Business Insurance. August 9, 1976, 24. 10. P.L. 92-542, 86 Stat. 1108 (October 25, 1972). 11. P.L. 92-516, §3(1), 86 Stat. 998 (October 21, 1972). 12. P.L. 92-516, §3(2), 86 Stat. 998 (October 21, 1972). 13. P.L. 93-237, §2(C), 87 Stat. 1024 (January 2, 1974). 14. P.L. 92-573, 86 Stat. 1207 (October 27, 1972). 15. Jaffe, A., "A Coming Crisis in General Liability Insurance?," National Underwriter, August 15, T975, 21. 16. Heap, I.R., "The Liability Explosion," Journal of Insurance, July-August 1975, 10. 17. "California Job Action Likely to Abate soon," American Medical News, February 9, 1976, 1; "California Legislators Debate Liability Crisis," American Medical News, May 26, 1975, 12. 443 27 18. See Report of the Special Advisory Panel on Medical Malpractice (State of New York), January 1976, 106-108. 19. See hearings before the Senate Subcommittee on Health, April 9, 10, 15, and 18, 1976; in particular, testimony of Secretary of HEW Casper Weinberger at 324-326. 20. Statement of American Mutual Insurance Alliance to the NAIC Task Force on Product Liability, August 5, 1976. 21. Sal go v. Lei and Stanford Board of Trustees , 154 Cal . App. 2d 560, 568, 319 P. 2d 170, 175 (1957); Richison v. Nunn, 340 P. 2d 793, 802 (Wash. 1959); Clark v. Gibbons , 66 Cal. 2d 399, 426 P. 2d 525 (1967) (dissent of Justice Tobriner). 22. Report of the (HEW) Secretary's Commission on Medical Malpractice, U.S. Government Printing Office, Washington, DC, January 16, 1973, 31. 23. Wade, J.W., "On. the Nature of Strict Tort Liability for Products," Insurance Law Journal , (March 1974), 141. 24. Id. at 141-2. 25. Id. at 142. 26. Franklin, M.A., "Replacing the Negligence Lottery: Compensation and Selective Reimbursement, 53 Va. L.R. 774, 779 (1967). 27. 66 Cal. 2d 399, 426 P. 2d 525, 538 (1967). 28. The New Zealand experience in dealing with injury reparations under a comprehensive national scheme may well serve as a stimulus to the development of similar theoretical approaches in the United States. See Sandford, K.L., "Comprehensive No-fault: The New Zealand Experi- ence," address to the lAIABS, New Orleans, September 22, 1976. 29. Smith, A.E., "The Miscegenetic Union of Liability Insurance and Tort Process in the Personal Injury Claims System," 54 Cornell L.R. 645 (1969) 30. Starr, P., "The Doctors' Discomfort," New Republic, June 28, 1975, 21. 31. "Witnesses Tell of Business Liability V/oes," Business Insurance, September 30, 1976, at 1, 59, 6D. 32. See response of Richard Bergen, Ar-IA Legal Research Director, to the Senate Subcommittee on Executive Reorganization in "Medical Malpractice: The Patient versus the Physician," Committee Print, November 20, 1969, at 509. 444 28 33. See "AMA Backs Federal Lav/ on Liability," American Medical News, December 23, 1974, 1. 34. See testimony of Malcolm Todd, M.D., President of the AMA, at the malpractice hearings before the Senate Subcommittee on Health, April 9, 1975, 169-188. 35. Vanderwicken, P., "Toward the Socialization of Injury," Fortune, November 1971, 161. 36. See Note 29 and accompanying text. ***** 445 Part IV; The Consumer Perspective The Task Force was very interested in ascertaining the consumer perspective about the nature of and solutions to product liability problems. As the Final Report indicates, this was essential if the Task Force's study was to be both objective and balanced. The Task Force identified three principal concerns of the consumer in regard to the product liability problem. First, the product liability problem can cause (and apparently has caused) an irrational increase in the price of some products. Second, some of the proposed solutions to the product liability problem may deprive consumers of the opportunity to obtain reasonable compensation for injuries received from unsafe products. Consumers have an interest in preventing the implementation of such solutions. Finally, consumers have an interest in ensuring that manufacturers have incentives to produce safe products. Because of the importance of the consumer perspective in achieving a balanced and objective solution to product liability problems, it seemed appropriate to include three statements which articulate that perspective and which were frequently cited in the Final Report. The first was presented 446 by Ms. Anita Johnson, then of the Health Research Group of Public Citizen, Inc. , at the fourth meeting of the Advisory Committee to the Under Secretary of Commerce (June 27, 1977). The other two statements were delivered by Mr. Ralph Nader, President of Public Citizen, Inc., and Ms. Benedicte Federspiel, Director pf the Legal and Economic Division of the Danish Consumer Council, at the First World Conference on Product V Liability in London, England on January 21, 1977. The Task Force wishes to acknowledge the cooperation of The Research Group International for granting the Department of Commerce permission to reproduce the statements made at that conference. ^/ That conference was sponsored by The Research Group International. For further information concerning the Proceedings to the First World Congress on Product Liability, one should contact The Research Group International, P.O. Box 7187, Charlottesville, Virginia 22906 (804-977-5690). 447 11 MS. JOHNSON: I am employed by a consumer organiza- 12 tion. I just have a couple of casual observations. I didn't 13 come prepared to make a statement. 14 I heard virtually no attention this morning to the 15 subject of lowering the cost of fact-finding. One of the 16 reasons you're all complaining is that it is very expensive to 17 determine what the facts of an injury are and it is very ex- 18 pensive to determine whose fault it is. 19 I would think a major priority of you all would be 20 how can we spend less money determining the facts of the case 21 and determining the fault involved. 22 Second, this morning at least, I have heard very 23 little about the prevention of injury. VThat new measures do 24 you all suggest for preventing the injuries that you are now 25 complaining about? 448 cam4 77 1 In the small business hearings a manufacturer of 2 trampolines from Iowa complained bitterly cibout the unfair 3 arbitrary costs of products liability insurance in his 4 business. It turned out the man was selling trampolines to 5 high schools. Although I do not know the man's business, I 6 would venture to say that it is virtually impossible to 7 adequately supervise the use of trampolines in a high school 8 setting. Yet no one on that Committee questioned him about 9 whether he was, in fact, selling a rather dangerous product 10 in a rather dangerous situation and that if he took those kinds 11 of risks, it was essentially his tough luck. I might add the 12 tough luck of a number of multiplegics that resulted from use 13 of his products. 14 I have found this morning at least, relatively 15 little attention on your part to alternative insurance mecha- 16 nisms. The representative of Congressman Whalen has suggested 17 a very conservative, sensible idea, I think, in general, we 18 all have a relatively limited understanding of the relative 19 functions of insurance companies. 20 On the one hand, insurance companies make money 21 by investing in the stock market and other places, and on the 22 other hand, insure companies by selling insurance. There 23 is a close relationship between the health of investments of 24 the individual companies and the amount of money that they are 25 charging for insurance. It may well be, and certainly there is 449 cam5 78 1 testimony in several Senate hearings on the subject, that as 2 insurance companies lose money in a bad stock market that they 3 have to make up for losses elsewhere. 4 I am not saying that is true, but I am saying that 5 the fact that the cost of insurance is rising does not mean 6 that products liability doctrines are crazy, unfair or bizarre 7 to businessmen. The cost of insurance is rising means only one 8 thing on its face and that is that the cost of insurance is 9 rising. 10 You all need to be more skeptical, in my view, at 11 least about what reasons there are in the conduct of insurance 12 raising these costs. And to what extent can self-insurance, 13 for example, why are trade associations not more active in 14 promulgating products liability insurance plans for their 15 members? 16 One of the advantages I think certainly true in the 17 malpractice area, one of the advantages of these self -insurance 18 programs is that it provides much closer control over the pre- 19 vention activities of the individual manufacturers. 20 I find that some of the remedies you all sort of 21 take as an article of faith are very extreme. The automatic 22 cutoff has already been commented on by Mro Rheingold and I 23 agree with his views. 24 The state of the art defense I find the most to my 25 mind, well, vying for the two most obnoxious proposals, the 450 cain6 79 1 real effect of the state of the art defense, that is, the 2 absolute defense that industry custom, following industry 3 custom is a total defense to a consumer industry means that 4 industry determines its own safety obligations under the law. 5 I can see why as businessmen, it is your role to 6 promote your own powers. I can see why as business you would 7 want to supplant the court function of determining legal 8 obligations . But I think society as a whole would not accept 9 the proposition that industry should determine its own obliga- 10 tions. The — and I certainly don't accept it. 11 I oppose it very strongly. I think that if the 12 state of the art defense succeeds in states such as Ohio, that 13 the overall level of marketplace safety would go down a great 14 deal. Moreover ^ that industry custom would go down a great 15 deal because there simply would be no challenge to industry 16 custom. 17 You all could be 30 years behind the times in terms 18 of safety devices, in terms of chemical toxicity, et cetra, 19 and it wouldn't matter as long as you all were equally behind 20 the times. In fact, it would give you all a very great incen- 21 tive to make sure that none of your members got out in front of 22 the pack, 23 It is sort of very similar to, well, sociological 24 studies that you hear about of line workers who work in groups 25 on the highway stringing, this is elementary sociology. 451 cam? 80 1 Excuse me if I am sounding very silly, Mr, Harman, 2 but I remember from college reading studies of working groups, 3 telephone linemen going out on the highway and a new member 4 comes into the group and frantically works to string more 5 line and very quickly within a number of days the other 6 call him aside and say listen buddy, if you want to get along 7 around here, you better slow up your work and sure enough, in a 8 couple of days, the new man is just as slow stringing line as 9 the others are. 10 I think that that is exactly the kind of group 11 dynamics that would be created if the state of the art defense 12 was enacted as a absolute defense. I sort of have to chuckle 13 at this idea that compliance with government regulation should 14 be an absolute defense » I have often heard that American 15 business is full of dynamic, energetic fighters looking for 16 new challenges, waiting to innovate. And the compliance with 17 government standards is sort of the idea, well, you know, I 18 shouldn't be liable because the government didn't tell me I 19 couldn't do this. It is the sort of making plastic men out of 20 American businessmen essentially, 21 Let's all sit back and as long as we do the minimum 22 that the government tells us, that is, if FDA approved my drug, 23 I have no particular reason to improve the safety of it because 24 I am covered. And sure I knew DES causes cancer; sure I knew 25 in 1960 that DES was not valuable for prevention spontaneous 452 cam8 81 1 abortion, but FDA approved my drug. I met government 2 standards . All I had to do is do what FDA told me to do 3 and that's all. 4 I think that is a pretty unfavoraible and and I hope 5 untrue picture of American business. I think that the common 6 law has been a very valuable institution to the growth of our 7 society and to the growth of English society as well.. The 8 great value of common law as opposed to statutory law, as you 9 all know from freshmen torts, is its ability to judge the 10 merits and facts of each individual case on its owno 11 The common law has grown with the increasing ability 12 of our technology to assess its risks as well as its benefits, 13 and I have a great fear as a general principle, a great fear of 14 making personal injury law a matter of statutes rather than a 15 matter of judge-made law, 16 I think we all agree that there has been a large 17 number of — well, the number of complaints filed by injured 18 consumers in recent years has definitely increased; think we 19 all agree to that amount and you all see to be opposed to that. 20 I don't think it is so bad. First of all, all law- 21 suits are increasing greatly. In years gone by in landlord- 22 tenant disputes, a tenant just did what the landlord said. It 23 never occurred to a tenant that he might have a legal right to 24 stay in his building, et cetera. 25 Landlord-tenant disputes did not go to litigation. 453 cam9 82 1 In years gone by, a person who was injured by DES or a person 2 injured by a — press machinery without adequate safeguards 3 would just consider the injury to be fate, an act of God. 4 Certainly on DES, again, I think at one time we all thought 5 cancer was just an act of God. We now know that cancer is 6 caused by chemicals, much of it, 95 percent of it perhaps. 7 The amount of litigation generally is increasing 8 at about the same rate as product liability litigation from 9 what I read in these reports. Products liability litigation 10 remains a tiny fraction of the litigation we are seeing. In 11 some ways increased litigation is healthy as I think, because 12 it recognizes new consumer rights, but also because isn't that 13 what our court system is for? 14 Our court system is for deciding disputes between 15 different members of society. Isn't it nice that consumers 16 are recognizing that they might have rights that would be 17 recognized by the court system? Isn't it nice that consumers 18 are not saying, gee, it was just my fate that I was given DES 19 by my doctor in 1960? Isn't it nice the consumer is saying, 20 gee, isn't it funny that I was prescribed tha Dalkon Shield as 21 opposed to some other contraceptive device? Isn't it nice that 22 people are going into the courtroom instead of shooting each 23 other, and obviously that is the one great advantage of the 24 court system, 25 So I would say in sximmary of this last point, that 454 camlO 83 1 increasing court cases is not necessarily a bad thing. What 2 our task in the future is to do is to decrease the costs of 3 this litigation and make this litigation available for middle 4 size and small injuries as well as large inj.uries. 5 Thank you. 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 455 FIRST WORLD CONGRESS ON PRODUCT LIABILITY 181 PRODUCT LIABILITY AND THE INJURED PARTY: PRODUCT LIABILITY AND THE CONSUMER Ralph Nader, Esquire Lawyer and Leading American Consumer Spokesman, Washington, D,C., U.S.A. Thank you very much and good morning to all. I can say that with some fervor since it 1s about 5:00 a.m. in Washington and the inaugural activities have just begun to subside. I am delighted to have the opportunity to speak (by transatldtic telephone) with you this morning on the subject of product liability and the consumer. I understand that Mr. Belli has regaled you with his experience and his vast storehouse of knowledge and that you have seen some of the specific documentation of product defects in Mr. Bloch's presentation, Unfortunately, the events associated with the governmental transition here in Washington precluded my personally being with you, but fortu- nately communications in this day and age to some degree substitute for transportation. Our subject today is one that reflects on the cost-benefit of an industrialized age. The mayhem of the machine age has for a long time lagged behind the spirit of the law in providing injured people with the legal tools and the rights of compensation and the conse- quential deterrence impact pursuant to their recourse in the courts of law. There is an analysis here, known as ergonomics in the United Kingdom and human factors in the United States, an analysis that is very pertinent. Basically, it is one that sees, as one of the purposes of the law, the dissemination of pressure to force the redesign of machines so that they adjust to human deficiencies or human needs rather than place the whole burden on the human operator or user of consumer products to adjust to deficiently constructed or designed machines. This is a traditional function of the common law, which, of course, our country inherited from the United Kingdom, but it is a function that has to be continually refined, continually brought up-to-date and kept attuned to the vast proliferation of products and drugs, to automobiles, to flammable fabrics, to toys, all of which increase the exposure of risk to Injury on the part of many, many people. One of the many problems, of course, is to generate the level of public concern that often translates into new lega> rights and remedies, and statistics can serve that function. The casualty toll attributed to defective products and services — I want to empha- size services in this context as well — often are like the tip of the 456 182 THE RESEARCH GROUP INTERNATIONAL iceberg. For many years in the United States almost all fatalities and injuries on the highway were attributed to driver misbehavior. More recently, the factor of highway design defect and automobile construction and design defect have been given long overdue recogni- tion. Unlike the tip of the iceberg, the extent to which the law can generate a deterrent impact will result in the iceberg itself getting smaller. The more the tip of the iceberg is exposed to the sunshine effect of product liability law, the more likely will be the greater care exercised by engineers, by lawyers,. and by the corporations involved, in determining the safety design and the warning- of use in the merchandising of the particular product. Now, in the United States it is important to make a dist-'nc- tion which perhaps you will find useful in your understanding of the emerging situation in Europe, a distinction between regulation for safer products and accountability for unsafe products. Tradi- tionally, the approach in the United States has been a back and forth relationship between litigation in products liability and the establishment of government agencies which are supposed to issue standards of safety for manufacturers to observe. The approach in the United States has been a kind of interre- lationship between government regulation in the area of product safety and an accountability pattern which goes by the name of pro- ducts liability. Now it is important to note that these have nourished one another. For example, over ten years ago. Senator Gaylord Nelson launched the movement in the Congress for the Tire Safety Act by taking information from a San Francisco case involving a products liability suit against a major tire manufacturer which involved internal documents by that manufacturer showing the paucity of tests and the lack of adequate standards in the design and market- ing of that particular kind of tire. That information was put for- ward on the Senate floor during the gestation of this legislation and played a key role in the passage of the Tire Safety Act of 1966. By the same token, regulation leads to the issuance of stan- dards after proceedings where evidence is adduced. This evidence is often obtained by lawyers who then use them in cases involving manufacturers of allegedly defective products. This kind of interre- lationship not only complements a broader advance in product safety and a respect for human rights of health and safety but also develops something quite significant for the future. And that is that you can always fulfill an individualized justice goal with product lia- bility that regulation and its standards by a government agency can never fill. We all know that political influence often distorts a regulatory agency's purpose in either not issuing standards on time or in diluting these standards. On the other hand, there is always the standby safeguard in courts all over the country on behalf of 457 FIRST WORLD CONGRESS ON PRODUCT LIABILITY 183 injured plaintiffs. So that the regulatory approach generates a preventive general standard function, and the products liability approach deals with individualized justice on a case-by-case basis. This, of course, raises an issue which I think will trouble people in Europe as well as in the United States. That is, to what extent will government safety standards either preclude or limit the range of recovery in products liability cases? To what extent will defendant manufacturers be able to say that they met a U.S. Govern- ment auto safety standard and therefore plaintiff has no case in bringing the matter before the court on an alleged auto design de- fect? In the United States auto safety law, there is a specific provision which says that adherence to federal standards by auto manufacturers will not constitute a defense in common law. In other words, the Congress wanted to leave the door to the courtroom open for products liability in the auto area. Such legislative drafting clarity, however, does not prevail in many other federal safety standards, for there is a constant ambiguity as to the effect of in- troducing at trial the existence and adherence to federal, or even state, standards. The problem is further complicated by a frequent tendency on the part of state and federal government agencies in the U.S. to adopt the standards of industry technical organizations, such as the American Society of Mechnical Engineers or the Society of Automotive Engineers. These standards are written, in effect, by technical employees of the auto industry or the pipeline industry or whatever the case may be. They are adopted virtually without dissent by the technical association once the subcommittee reports, and then they are often adopted by the federal or the state agency. The standards problem, whatever way it is resolved, will not disappear and needs to be given wery^ very close scrutiny so that the regulatory operation of product safety does not unnecessarily intrude and make rigid the products liability flexibility that is so important to maintain. A next point I would like to make is in the area of product liability as compensation — compensation for injuries and property damage due to defective products or services. The Common Market Directive, of course, comes down very clearly for strict liability. The movement toward strict liability has been gaining headway in the United States over the last few years as well. Strict liability sounds like it eases wery substantially the burden of proof. I think that is something you may wish to discuss in your proceedings. There is less than meets the eye in the practical impact of strict liability. The point, of course, is that you still have to uphold a burden of proof. It doesn't take it away. The establishment of 458 184 THE RESEARCH GROUP INTERNATIONAL what a defect is, is still difficult even though you don't have to establish negligence. And in some complex products, of course, it is excruciatingly difficult, particularly when the products meet industry-wide standards which have some approval via a regulatory agency's adoption of these standards. I am certain that Mr. Belli can elaborate the extent to which strict liability facilitates the burden of proof but does not diminish it very substantially in many cases. The size of damages under product liability, of course, are becoming more and more controversial in the United States. As I'll note in a moment, the insurance industry wants to limit damages by revising or passing state legislation in that regard. I don't think the Common Market Directive is a particularly useful idea, in one sense. That is, the deterrent impact of product liability flows to no small extent from the infliction of unanticipa- ted costs on manufacturers. The extent to which costs can be antici- pated and budgeted reduces the deterrent value of product liability. It allows the budgeted costs to be socialized or transferred to the consumer without motivating a newly vitalized quality control system. This is, of course, one of the most difficult conclusions at which to arrive because the studies here are not as abundant and specific as we desire. But from our conversations with people in industry, it is clear that ii; is the unanticipated cost that feeds a deterrent concern in producing safer products. The exaggerated product liability crisis which is now making headlines in the United -States is just that. For a number of years the insurance industry spokesmen would repeat the claim that there are 1,000,000 product liability lawsuits pending in the United States. This claim has never been substantiated; indeed, it has now been re- pudiated by the insurance industry's own spokesmen. They cannot substantiate it. Unfortunately, there's no particular aggregate data base on which to conclude exactly how many cases there are, but I for one would be very surprised if there were more than 50,000 product liability cases filed in the courts at the present time. The product liability crisis is not a crisis that can be substantia- ted by an enormous increase in payouts in verdicts and settlements. Indeed, one of the remarkable features of this "manufactured" crisis is that the insurance industry to .this day has not produced data on how much money they take in in product liability premiums and how much they are paying out in verdicts and settlements. The only esti- mate that I have come across would suggest that there are about $350,000,000 in total payments in the year 1973. Even if it's up to $500,000,000 for 1976, that cannot be considered a national com- pensation crisis by any means, given the size of the economy and the y/ery, very ample premiums that are being absorbed under the product 459 FIRST WORLD CONGRESS ON PRODUCT LIABILITY 185 liability coverage rubric. You may be interested in obtaining the results of a question- naire which Senator Jacob Javits of New York has sent to a number of insurance firms, 35 to be exact. He sent a list of 22 \fery pointed questions on December 8, 1976, to 35 major insurance firms regarding the product liability insurance needs of small manufacturers and dis- tributors. I am sure that if you wrote to Senator Javits at the U.S. Senate, Washington, D.C., he would be pleased to forward the results of that questionnaire. The Departm.ent of Conmierce has also been gathering data, and although their final report has not come forth due to' the change in Administration, there are some interesting studies and reports which you may wish to obtain by writing to the Department of Commerce Task Force on Product Liability. I'd like to make a few comments on product liability as a deterrent. Of course, lawyers in taking these cases like to high- light the compensation justice of their efforts to injured parties but also the deterrent effect which has led to safer products. Now once again, there are no comprehensive studies in this area to eva- luate the extent of the tie, the connection between products lia- bility verdicts and settlements, and the deterrent consequences of these law suits. But there are a substantial number of cases where such a connection can be made validly. For example, in the infamous railroad turntable cases, the railroad turntable had in the early twentieth century a fatal fascination for children. They could set it in revolving motion like a carousel without music. But the machine would not uncommonly slice off the foot of a participating child—as Professor Lambert has described it in some detail. The cases began coming through around the turn of the century, and these cases brought forth evidence showing that a mere one dollar lock, locking the machine when it was not in use, would eliminate this attractive nuisance in terms of the injuries to children. The imposition of liability here in a number of cases resulted, of course, in the correction of that turntable risk of exposure to children. In medical malpractice cases, successful medical negligence suits have induced hospitals and doctors to introduce such safety procedures as sponge counts, instruments counts, electrical ground- ing of anesthesia machines, the padding of shoulder bars on opera- ting tables and the avoidance of colorless sterilizing solutions in spinal anesthesia agents. In the case of dangerous railroad cross- ings, of course, it is well known that the automatic crossing gates tended to be installed after a particular verdict was rendered in a region of the country. The news traveled fast, when- the railroad had to pay up $1,000,000 or $2,000,000 in compensatory and punitive damages. 460 186 THE RESEARCH GROUP INTERNATiONAl The same is true in cases involving the tipover steam vapori- zer. This is a situation where a tipover steam vaporizer tipped over and burned a three-year-old girl. There were several similar accidents before and after. A $150,000 verdict was affirmed. When the manufacturer refused to take its insurer's advice to recall its vaporizers the company's continued coverage was refused af^er over 100 claims against it had been filed. Then in a 1972 advertisement for the same manufacturer's vaporizer there is the statement, "Cover lock tops protects against such spillage if accidently tipped; auto- matic shut-off." This is an example of the connection between ver- dict§ and deterrence. Of course, there are many other examples dealing in recycling washing machines, earth-moving machines, exploding Drano cans, etc., where there has been some reasonable inference that could be drawn between the liability and the correction. There are some cases, of course, that illustrate a minimal deterrent impact. The fuel -tank situation, which seems to be finally turning around toward some improvement, continued many years after it was exposed and after there were some significant verdicts and settlements pursuant to fuel-tank rupturing in rather modest rear-end collision situations. However, I suppose counsel for these manufacturers could give you a much better inside story on the extent to which they are able to change the design and persuade the cost analyst to relent to some degree pursuant to the lawyer's advice that there may be many liability claims that result from the con- tinuation of the existing product design. I'd like to make a few comments on product liability as it re- lates to legal and expert witnesses and other representation prob- lems. In the United States one of the greatest reasons for the ela- boration of product liability law, beyond that of any other country In the world, has been the contingent fee. The contingent fee has been given the curled lip by some members of the legal profession in the United Kingdom, Canada and Australia, but it 1s in many ways a facilitator of cases that are brought by poor or middle-class plaintiffs who could not possibly afford to pay an attorney up-front much less to pay the defendant's costs if the case is lost. What- ever way the European countries approach the problem, I don't think they can Ignore it. If they don't choose to go the way of the con- tingent fee, there must be some reserve, some fund, that can be drawn upon to deal with this economic barrier to the courts of law and permit consequent justice that injured people deserve to obtain. The problem of expert witnesses is serious everywhere, for several reasons; one is that 'most of the experts work or consult with Industries. They are associated with the defense. Secondly, 461 FIRST WORLD CONGRESS ON PRODUCT LIABILITY 187 some of these independent experts are reluctant to offer their talents because they are always looking for business on the other side and they do not want to be stereotyped as being antagonistic to the parti- cular industry for which they would like to provide services. Third- ly, there are some problems in having experts who work for government agencies to be available as witnesses in product liability trials. In the United States, the record is mixed. Some government agencies encourage or permit their specialists to be witnesses in product lia- bility cases and others discourage them. In a recent product liabi- lity case involving an auto manufacturer's sharp external p-rotrusion on the car, which injured a motorcycle driver, an expert witness from a government safety agency provided very important material which led to a very substantial verdict in the case. I think that the govern- ment should permit their experts to testify, but not to testify in a partisan sense, simply to answer questions that reflect their scienti- fic knowledge and experience. As Melvin Belli can tell you in such detail, the future of pro- duct liability some years ago received a very prominent boost by the loosening of the strictures by the courts in what kind of evidence can be brought into court. The development of demonstrative evidence has been a critical precondition in the expansion of product liability relief for injured people. Just the same way, the more liberal dis- covery procedures to obtain from manufacturers internal test data, internal caveat memos and other documents, and to bring them out into the light of open court has dramatically facilitated the possibility of recovery, the possibility of trying these cases at least on their merits, without succumbing to an excessive barrier within the adver- sary system of justice itself. There is, of course, in the United Kingdom, and possibly some other countries in Europe the problem of government secrecy prohibi- ting access to government information, such as test data, that could be used in trials. In the United States we have a Freedom of Infor- mation Act which is being vigorously used, not only by consumers, but also by companies, as they try to obtain information about meat and poultry inspection reports, food and drug test data, cosmetic hazards, auto safety information and the like. Because of the existence of this effective Freedom of Information Act, which allows a citizen in the United States to take a government agency to court and compel the production of reports or other documents, there is a greater libera- lity of disclosure in. the federal government in Washington than certainly there is in the United Kingdom. Our understanding of the situation in the United Kingdom, based on some scholars who have been working on this problem in England, is that a great deal of safety information is simply not available to the public. I think any pro- duct liability reform in the Common Market must face up to the acces- sibility of injured people to government expert witnesses and govern- 462 188 THE RESEARCH GROUP INTERNATIONAL ment documentation. Let me give you an illustration of the kind of information you can obtain, as well as American citizens can obtain, by asking Wash- ington: The Consumer Product Safety Commission has on systematic file data concerning the frequency of product hazards, the kinds of injuries that are inflicted, right down to brand names. They have what is called a N.E.I.S.S., a NEISS index, which is an acronym, that provides files which are obtainable on a whole host of product hazards^ reported to the Consumer Product Safety Commission by several hundred hospital emergency rooms around the United States. You might be interested also in knowing that the Consumer Product Safety Commission puts out what they call fact sheets. Number eighty-five for example, in this series of fact sheets is on trampolines and there is a description of the number of people treated in hospital emergency rooms for injuries associated with trampolines, as well as a list of sources and technical references on trampoline injuries. I would think that such fact sheets would be valuable for lawyers working in the product liability area. Also, as far as automobiles are concerned, a great deal of information is available at the U.S. Department of Transportation in Washington on automobile defect recall data. About 50,000,000 cars were slated in the last ten years for defect recalls, foreign imports as well as domestically produced cars. And there is a wealth of information that could be available for lawyers litigating parti- cular car model areas. A slight diversion here: there is a group in London called the Social Audit, or the Public Interest Research Center, which wanted to get some information from the Road Research Laboratory. The Road Research Laboratory refused it, invoking one of the many Official Secrets Acts that make up the cloak of secrecy that surrounds the British government, so the Social Audit people went to Washington, and they asked the U.S. Department of Transportation for information they had received from the Road Research Laboratory, and they obtained this information from the U.S. Department of Trans- portation under the Freedom of Information Act. They obtained infor- mation from Washington about the British Road Research Laboratory which they could not obtain directly from the Laboratory itself. That is not a singular episode. That is something you may want to keep in mind whenever you are obstructed from getting information in one country, to see whether that information is available under a different set of information laws in another country. I would like to end on a note regarding the developments recent- ly in the so-called product liability crisis in the United States. Whenever there is any modest success in achieving justice for injured 4Q» FIRST WORLD CONGRESS ON PRODUCT LIABILITY 189 people, one has always to expect a counter attack, whether by the manufacturers or by their insurers. And sure enough, the insurance industry has led a ferocious counter attack against product liability in the United States via a number of strategic methods. First, of course, they widely disseminated phony data about the number of pro- duct liability claims in the courts. And secondly, they began arbi- trarily increasing the premiums on small manufacturers, leading to cries of alarm by these small manufacturers which were heard in the United States Senate, and which led to a number of hearings by Senators with the small manufacturers being the prime witnesses. Now these premium increases were not reflective of the loss experience either of the particular company or of the industry. I would like to quote for you a recent article by a researcher for the Conference Board, that is an industry organization in New York. In this article, it was stated, for example, and I quote, "While it is clear that the casualty insurance industry is experiencing substan- tial losses, it is not equally clear that rises in an insurance pre- mium rates have been based on a particular company or even industry's claim and loss experience. In the recreational vehicle sector, for example, the lawyer for this industry's trade association told the Senate hearing that a survey of their membership had shown no appre- ciable rise in either the number of claims or damage payments, yet premium costs had soared by several hundred per cent in two years. In other cases, manufacturers report that although they have never had a product liability claim, let alone a damages payment, they have lost their insurance or face staggering increases in premium costs." Notwithstanding, the insurance industry has generated pressure in a number of state legislatures to restrict severely both the rules of liability and the way damages are measured. They want to shorten the statutes of limitations; they want to eliminate damages for pain and suffering; they want to control plaintiffs' attorneys' fees, keeping silent about defendant attorneys' fees; and in a number of other areas roll back the years of progress that have signalled one of the bright chapters in the consumer movement in the U.S. It is clear that both consumer groups and trial lawyers have their work cut out for them in the coming legislative sessions. It is also clear that if the insurance industry does not pro- vide, does not make available insurance for small businesses, that the government in Washington will supply this insurance. This has been done in other areas, such as flood insurance. There is no reason to expect that it will not be done in the area of product liability. Already I am informed by a number of Senators" that they are drafting legislation to provide product liability insurance by the Small Business Administration for small manufacturers. 464 190 THE RESEARCH GROUP INTERNATIONAL In Europe there is a problem that is not as serious in the United States, and it is the problem of product libel. If the legal profession in Europe is going to be educated in the technical pro- cesses of presenting product liability cases, there will have to be a number of public gatherings where lawyers can learn these skills. This is what occurred in the United States, of course, Melvin Belli being one of the teachers of many other younger lawyers in this area. Now this type of education seminar is simply not going to be able to pursue the full free speech rights if manufacturers try to threaten censorship, or, in the alternative, suggest that there may be libel suits br*ought against speakers or symposiums who dare to mention particular product names. I understand this problem has arisen to- day involving certain automobile manufacturers. It is quite clear that the requirements of free speech must override any stifling of critical treatment of products by brand name. This is a problem which does not really prevail in the United States. I don't think there is a case of product libel which has been successful in the United States. It is very difficult to libel any public figures in the United States, much less a vehicle, a particular automobile, or a particular drug by brand name. But it does seem to be a problem in some countries in Europe, and it has to be considered even though it is a pre-litigative issue because it relates to how fast knowledge about product defects is going to be disseminated and diffused throughout the legal pro- fession. In conclusion, I think it important to keep the broader picture in mind. I think that the pressure from consumers via product lia- bility can generate a whole new profession of quality control, a whole new set of rigorous standards, a process whereby defects are foreseen and forestalled, a humanizing of technology. Indeed, to that extent, there will be an increasing deterrence in order to bring to bear the more rigorous testing and design and construction of consumer products, as well as more rigorous delivery of consumer services. Thank you very much. 465 FIRST WORLD CONGRESS ON PRODUCT LIABILITY 331 COMMENTS ON EUROPEAN DEVELOPMENTS: EUROPEAN CONSUMER INTERESTS Ms. Benedicte Federspiel Member, Consumers Consultative Committee (CCC) of the Commission of the European Communities; Head of Legal and Economic Division, Danish Consumer Council Copenhagen, Denmark There are many differences between me and the previous speak- ers, but there are at least three: I don't have a tie with my shirt; I don't start with a funny story; and I'm going to criticize the draft Directive, but not for going too far, but for not going far enough. 1)' Production and consumption constitute the Economic foundation of modern industrial society. Production provides products, which are bought by consumers. One of the problems arising from this pro- cess lies in the fact that, while being consumed, a product not in- frequently causes injury to the consumer's or a third party's person or damage to their property. It should at the outset be noted, as it was stressed by Mr. Begam yesterday, ^ that there would be no product liability problem if manufacturers did not put any products on the market which are defective and cause injury or damage to the con- sumer. Unfortunately, manufacturers continue to place unsafe prod- ucts on the market— televisions that catch fire, garments that ig- nite, hammers that chip, ladders that break, just to mention some of those unsafe products recently found by the White House Interagency Task Force on Product Liability. As manufacturers continue to place unsafe products on the market, we consumers are continuously exposed to the risk of products causing personal injury or damage to proper- ty. This risk has increased with the rapid development in the con- sumer market with its constant introduction of new articles. Today the consumer has to face an unlimited and still increasing number of products of a highly artificial and complex nature, also one of the probable causes mentioned by the Interagency Task Force. 2) When a product-caused injury is sustained by a consumer, an economic loss will arise. The law cannot do away with this loss. First World Congress on Product Liability, London, January 20, 1977, The Insurance Question: The Plaintiff's Lawyer's View- point, Attorney Robert G. Begam. 466 332 THE RESEARCH GROUP INTERNATIONAL But the law can remove it from the individual consumer. Up until now European law on product liability has mainly been based on faults. The notion of fault does not constitute an appropriate basis for a product liability system. A fault liability system places to a very large extent the risk of product damage on the consumer. This is not a fairly balanced solution in a modern industrial society which should guarantee the consumer the right to safety by ensuring that production is adapted in such a way that the products will not cause harm during use and by securing compensation for the consumer in case of product damage. The problem is one of social policy, the main question being whether the risk of product damage should be borne by the consumer or the producer/supplier. Placing the risk on the producer/supplier through strict product liability is the only adequate answer to this question. Just as Lloyd George maintained at the beginning of industri- alization that the cost of the product should wear the blood of the workman, the cost of the. product should, as a matter of social poli- cy, wear the blood of the consumer. The manufacture of a particular product should pay for itself. It is only equitable that the cost of product damage should not remain with the injured consumer on whom it fortuitously falls, but should be spread among all the consumers. Such a spreading of the loss connected with product damage is generally most aptly ob- tained by transferring the loss to one or more links in the chain of production and supply through a strict liability system. This will make the loss to a cost of production and supply, a cost which may or may not influence the price of the product. Furthermore, strict product liability will increase consumer protection by encouraging those links in the chain of production and supply on which this liability is placed to improve the safety of their products or their quality control. Strict product liability provides in this way for a very important supplement to statutory product safety regulation aimed at preventing product damage. Up un- til now, manufacturers have paid all too little attention to the question of total quality control. It is only recently that the heated product liability discussion and the growing awareness as stated by the White House Interagency Task Force are becoming effective spurs towards inducing manufacturers to produce safe prod- ucts. The European consumers understood, as has the Consumers Con- sultative Committee of the Commission of the European Communities.; therefore, it strongly supports the new developments in the product liability field initiated by the Council of Europe and Commission of the European Communities which aim at introducing a strict product 467! I: I FIRST WORLD CONGRESS ON PRODUCT LIABILITY 333 liability system. 3) It is, however, a question not sufficiently looked into, whether, and to which degree, the product liability law and insurance might be replaced by a no-fault system providing consumers injured by products with compensation directly from an insurer regardless of fault or defect. When regulating the law of product liability, the question of how the victim in fact gets compensation cannot, be ne- glected. It is the intention of the strict product liability system pro- posed by the European Community and the Council of Europe that the costs of product liability shall be borne by the consumers. In return they should be assured compensation in case of liability. The con- sumers should not collectively spend their money to the benefit of the individual victims unless the victims effectively are secured compen- sation. The question of securing the victim compensation at the time the product is placed on the market cannot be ignored. Otherwise the consumer injured will be without protection in case of a "fly-by-night" producer, in case of bankruptcy of the producer, or in case of a cata- strophic damage where the producer is unable to pay all the damages. We agree to the principle that primarily the manufacturer should be liable for damage caused by products not duly safe. This primary liability should be an incentive for the producer to improve the quality of his products and to avoid the marketing of products not sufficiently subjected to quality control, thus preventing prod- uct damage. Establishing a state fund compensating product damage would entail the danger of taking this incentive from the producer unless such a fund were fed by the producers. Considering the variety of products, the number of producers, the different geographical situations, and the varied financial characteristics of enterprises, we admit that it would probably not be feasible to have a uniform, general system of compulsory insur- ance. For one thing, it might be difficult to ensure that all pro- ducers take out insurance. However, it should be emphasized that as to the practicability of a system of compulsory insurance, this will vary considerably from one line of trade to another. While a system of compulsory insurance might be impracticable in the area of food- stuffs, it seems quite practicable in the area of drugs, motor cars and other products, the marketing of which needs a sort of adminis- trative authorization. A study of the practicability of a system of compulsory insurance in a different line of trade should be under- taken in order to complete the proposed strict liability with pro- visions on compulsory insurance in those lines of trade where such a system will be practicable. Recently, a Swedish Government Commis- 468 334 THE RESEARCH GROUP INTERNATIONAL sion proposed in the field of medically-caused injuries a kind of compulsory accident insurance to be paid for collectively by drug producers and importers. In order to secure compensation of the victimized consumer in cases where this cannot be obtained through a compulsory insurance system, the European consumer asks for the initiation of a public fund, either in the form of a general state fund fed by industry or in the form of a number of funds, one fund for each of the different branches of industry. The establishment of such funds seem to be the only way to ensure that the victim is paid the damages he is entitled to in cases where this cannot be obtained through a compulsory insur- ance system. 4) As you will all know, the EC-draft Directive does not give the manufacturer the benefit of a state of the art defense. The European consumer welcomes the inclusion of development risks under the strict liability. It should be pointed out that the legal concept of develop-^ ment risk is questionable, as the concepts of "scientific undiscover- ability" and "technological feasibility," as Mr. Bloch clearly said this morning,^ are themselves very doubtful. At any rate, modern in- dustry, with its tremendous research facilities, should not be en- couraged to give up the search for safer products as the case would be if development risks were not included under the strict liability. Furthermore, the principle of equitable allocation of the risk ap- plies as much to undiscoverable as to discoverable defects. The burden of those scientific limitations of modern industrial society which might exist should not be cast on the individual consumer hit thereby but should be borne by all consumers. 5) According to the EC-draft Directive, the victim must prove the damage, the defect and the causal link between the defect and the damage. It is not fair to the consumer to place the burden of proof for causation and defectiveness on him. This was also implied in the statement we heard today made by Ralph Nader. ^ The producer is the one who best knows the features of his product. The pro- ducer is in a position both economically and scientifically to be able to provide evidence more easily which proves the absence of a defect as well as the absence of a causal link between a defect and 2 Id. , January 21, 1977, Product Liability and the Injured Party: Product Safety, Mr. Byron "Bloch. 3 Xd. , January 21, 1977, Product Liability and the Injured Party: Product Liability and the Consumer, Mr. Ralph Nader. 469 FIRST WORLD CONGRESS ON PRODUCT LIABILITY 335 the damage. On the other hand, it will be, in most cases, a very hard task for the average consumer to prove the presence of a defect as well as a causal link between the defect and the damage. The questions of defectiveness and causation are very complex, and plac- ing the burden of proof on the consumer in cases involving modern industrial products of a highly complicated nature means that strict liability will hardly be any better as a consumer protection remedy than is fault liability. The consumer should only prove the damage and render probable the existence of a causal link between the product and the damage. If the consumer is able to do so, the producer should prove that the product was not defective or did not cause the damage. 6) The strict liability system in the draft Directive does not provide the allergic consumer with any protection. However, adverse reactions to products should be seen as an inevitable cost of the availability of products. The risk is universal that persons will react adversely to cosmetics, drugs, dyes, rubber, polishes, or to any manufactured item, but especially those intended for use as, or in, clothes, or for application to the human body. This problem was also mentioned by Mr. Belli today when he mentioned the case with the rose dust that for years had been used on Mexicans by immi- gration officials.^ The existence of a marginal group of allergic consumers is known or should be known to the producer, while the in- dividual consumer yery often does not know of his allergy. The risk of allergic reactions will be foreseeable to the producer, who nor- mally will be in the best position to evaluate the risk. It will not be of deterring proportions on an overall basis, while it will be a heavy burden to the individual consumer hit by it. Since the risk can easily be covered by the producer through his price policy or by means of insurance, it is not equitable that the consumer, with whom this risk happens to manifest itself, shall carry the risk inherent in the particular production. Cases of allergic reactions lend themselves particularly well to be covered by the strict lia- bility system in the draft Directive, the basic idea of this lia- bility being to remove the economic consequences of accidents from the victim who is unprepared to bear them and to place the risk on the enterprise in the course of whose business they arise so that the loss can be efficiently distributed among the community of con- sumers. Many of the adverse reactions to products that do occur might be prevented, often without sacrifice of the benefits of the 4 Id. , January 21, 1977, Product Liability and the Injured Party: The Move Towards Larger Awards, Attorney Melvin M. Belli. 470 336 THE RESEARCH GROUP INTERNATIONAL products, if the producer would do further testing or provide the consumers with more accurate information about the hazards and how to avoid them. Strict liability for allergic reactions would cer- tainly put a strong incentive on the producer to do his best to pre- vent such reactions. 7) The national laws of almost all countries traditionally have developed an important distinction between sales and services. All countries have a rather detailed system of statutory rules governing the sale, of goods, while services to a large extent are left unreg- ulated by statute, although some statutory rules have been intro- duced for specific types of services— for instance, transportation. A different regime for sales and services in the field of product liability is, from the consumers' point of view, irrational. A com- prehensive product liability system should cover all sorts of prod- ucts and services. It is difficult to see how the movability of a product may be a convincing basis for a distinction between products which should or should not be exposed to strict liability. Products and services, movables and immovables, all have to function in con- nection with each other and will be used in complex situations of which they all are integrated parts. To place a strict liability on the manufacturer of an article, which has to be installed, without placing such a liability on the craftsman, who installs it, is a way to enable both to evade liability bv claiming that the damage is due to a product defect or defective installation, respectively. To the injured consumer it is just the same whether the damage was caused by a movable, an immovable, or a service. The policy reasons for imposing strict liability for damage caused by movables are equally applicable to damage caused by immovables or services. That immovables should be exposed to the same strict liability as movables seems especially obvious in the case of mass-construction houses. It is a fundamental defect in the proposed European strict product liability that it is limited to movable-caused product damage. 8) The proposed European strict product liability system is not— as it ought to be— a comprehensive product liability system but mainly a producer's liability system. It is, however, of vital im- portance to the consumer to view as a whole the liability of the producer and the liability of the distributor as well as the other links in the chain of production and supply. As Professor Prosser has maintained, there are sellers other than the producer of the product. It will pass through the hands of a whole line of other dealers, and the consumer may have a good reason to sue any or all of them. The producer is often beyond the jurisdiction of the con- sumer. He may have left the market-place, and- it is often impossi- ble to pin liability upon him. Even where there is a proved defect, the maker will not be liable if the article was not defective when it left his plant. And the cracked bottle may have been cracked 4711 FIRST WORLD CONGRESS ON PRODUCT LIABILITY 337 long after it left the producer's plant. And even when the defect is fixed upon the producer, he may turn out, in these days of chain stores and large supply houses, to be a small concern, operating on a shoestring, and financially the weakest link in the whole chain of production and supply. Limiting liability to producers provides an inadequate remedy to injured consumers. It is a step away from the goal of an optimal system of compensation for injuries from defective products. In view of the trend towards increasing specialization and the consequently growing need for cooperation, the question at issue should not be whether a single link in the chain of production and supply, say the producer, is too weak, but whether the chain, as a whole, is strong enough. When damage is caused by a product not duly safe when passing from the chain of production and supply to the consumer, "strict" liability should apply. The chain of produc- tion and supply must function as a whole. In case of any malfunc- tion, strict liability should apply. Allowing the manufacturer to evade liability by proving that the product was not defective when it left his plant means that the consumer in many cases will have to run from pillar to post with his claim. The consumer will normally not know whether the defect arose at the one link or the other. The different links in the chain will, in relation to the consumer, have a common interest in trying to evade liability for any link by pass- ing the buck from one link to another. The consumer should not be burdened with taking part in resolving at which link the defect arose. Mr. Belli 's example this morning of the several persons who r could have fired the shot in question illustrates this yery clearly. I also want to stress that it is just as important to put a strong incentive through strict liability onto the supplier as onto the producer, in order to prevent the marketing of products not duly safe. Although the great majority of products leave the producer in the state in which they reach the ultimate consumer, it is an over- simplified approach to regard the function of the distributor or supplier only as one of distribution or supply. Production and marketing structures vary a great deal from one line of trade to another and are in ho way stable. Sometimes the producer is the commercially dominating link in the chain. In other cases it may be the supplier. The relationship between the large supply houses and chain stores and their suppliers is very much the same as between the motor car manufacturers and their deal- ers. The risk of the inability of the producer to pay. compensation should not be placed on the individual consumer but on the supplier, 472 338 THE RESEARCH GROUP INTERNATIONAL who will be in a better position to absorb and distribute the costs of injuries. On the whole it cannot be urged strongly enough that any link in the chain of production and supply— not only the producer- should be strictly liable for damage caused by a defective product, provided that the product was defective when it left the link in question. It might be argued that the inclusion of suppliers under the strict liability approach is uneconomical, because- an arbitrary inflation of the retail price of the product would result from the duplica-tion of insurance premiums paid for similar protection by the two different classes of potential defendants— the producer and the supplier. However, the supplier's insurance policy will not be similar to the producer's. A supplier will only have to pay ulti- mately for an injury when the producer cannot be found liable or cannot pay or did not cause the product to be not duly safe. The probability of a supplier's ultimate liability will be consider- ably lower than a producer's and the level of his insurance pre- miums will be correspondingly lower. Rather than duplicating charges for social costs of injuries, it fixes a charge for the social costs involved if a producer cannot pay. Thus, the cost- spreading goal of the strict liability approach is furthered by the inclusion of the supplier within the strict liability approach. 9) From a consumer point of view,, it is not acceptable that the proposed strict liability system holds compensation for pain and suffering and other non-pecuniary loss unrecoverable. The law of tort generally allows a victim to get compensation for such loss. A change in the basis of liability does not justify a change in the types of losses recoverable. And I was therefore^happy to note that Professor Diamond also brought out this issue. 10) While the ministers in the Council of Europe did not find justified any limitation as to the amount of compensation to be paid by the producer, the Commissioners holding office in the Commission of the European Communities have ventured to suggest to the Council of Ministers such a limitation. It has to be realized that any limitation as to the amount of compensation to be paid by the producer deprives t'he injured con- sumer of his right to receive full compensation. Such a limitation Id. , January 21, 1977, European Product Liability Develop- ments: European Product Liability Developments Other Th^n EEC, Professor Aubrey L. Diamond. 473 FIRST WORLD CONGRESS ON PRODUCT LIABILITY ^39 is, therefore, in itself, detrimental to the interest of consumers. Furthermore, it should be noted that an upper limit will not make the strict product liability more calculable and thus more in- surable. Strict liability is just as insurable as fault liability. It is a technical matter for insurers to evaluate the risk and to assess the premium accordingly. A clause in an insurance policy covering the product liability of a producer limiting the total amount of money to be paid under the insurance during one year serves not only the interests of the insurer but also the interests of the producer. By paying a higher premium the producer can obtain a higher limit in the policy. At which amount the limit should be fixed in the policy depends on the risk involved. An evaluation of the risk will have to take into account a lot of concrete circum- stances such as the type of product manufactured by the producer, the yearly output of that product, the total turnover of the pro- ducer's enterprise, number of persons employed, etc. Through a cor- rect evaluation of the risk, the producer pays a fair premium which may be reflected in the price of the product. No matter which amount is proposed as the upper limit, the upper limit will only be, in extremely few cases, from an insurance point of view, the rele- vant upper limit. In some product liability insurance policies, the upper limit when evaluating the risk of this producer correctly will be considerably lower, and in some policies the upper limit should have been considerably higher. A statutory upper limit will certain- ly also be the limit in product liability insurance policies in those cases where a correct evaluation of the risk would have led to a higher upper limit in the insurance policy. This means that the price of the product will not reflect the risk involved, which con- tradicts the policy behind the strict liability. A statutory upper limit may also force producers to take out insurance with a corre- spondingly high limit, although a correct evaluation of the risk would have led to a lower upper limit in the insurance policy. This means that the price of the product will increase to an extent which is not justified by the strict liability imposed on the producer. The argumentation put forward by the EC-Commission in support of an upper limit is not valid. Such a limit only deprives the consumer of his right to get full compensation. It should therefore be total- ly abolished. 11) A rule on limitation according to which the limitation peri- od does not begin to run before the injured consumer could reason- ably have become aware of the damage provides for the better admin- istration of justice and avoidance of abuses without sacrificing the interests of the consumer. According to the EC-draft Directive the liability shall, however, be extinguished upon the expiration of 10 years from the 474 340 THE RESEARCH GROUP INTERNATIONAL end of the calendar year in which the defective article was put into circulation. The European consumer disagrees completely with this rule. Of course, products wear out. They cannot be expected to last forever, but only in accordance with normal expectations and with customary maintenance. But according to this, a certain length of life^can be fixed to any product. And the producer should definitely be exposed to liability as long as the product may reasonably be ex- pected to last, thus leaving it to the area of contributory negli- gence whether the damage is due to the consumer's use' of a worn-out or not normally maintained product. The producer should not be exposed to liability for an unduly long period, but' it is impossible to lay down a general rule deciding for all products which period of time will be the appropriate length, as the lifetime of products varies considerably from one product to another product— as eggs to bricks, for instance. It should also be mentioned that in some cases, as for instance in case of injuries caused by side-effects of drugs, the lifetime of the victim is more relevant than the lifetime of the product. This may be so also in case of development risk. Therefore, this proposal on limitation should be deleted altogether. Such a limitation rule does not only serve as a procedural device, but it is a means to hamper the con- sumer's unquestionable right to fair compensation for product-caused injuries. And a's Mr. Farwell answered the question yesterday, it doesn't make the product liability more insurable. It is more or less an American idea aimed at limiting the defect in the special American system, defects that we do not have in Europe. 12) I should like to close my speech with some remarks on quite another type of limitation of product liability. As you all know, legislation on industrial injuries insurance normally makes a dis- tinction between, on the one hand, personal injuries occurring by accident and, on the other hand, occupational diseases. This dis- tinction between injuries caused by a single momentary occurrence and injuries sustained as a result of a continuous, steady, adverse action is pertinent to the law of product liability. A distinction may be drawn between, on the one hand, momentary product damage re- sulting from an accident and caused by a single product, and on the other hand, accumulated product damage developing gradually during the constant use of one or more- products of the same or different kinds. Frequently, the accumulated damage cannot be specified, nor can the causality be completely clarified. The development is slow and cumulative,, so that the presence of danger and injury may not manifest itself for many years or for generations to come. Id. , January 20, 1977, The Insurance Question: Product Liability Insurance, Mr. Frank L. Farwell. 475 FIRST WORLD CONGRESS ON PRODUCT LIABILITY 341 It will be difficult, if not impossible, for the consumers to prove any causality between the injury and its source. Who is to be held responsible when the causal factors are numerous, unidenti- fied and anonymous? Just before lunch I was asked by a journalist whether I did not think that the gruesome pictures we saw this morning were not overdoing it; and during lunch I was also asked whether I was not shocked by them. Sure they're gruesome; most people get shocked. But we have to realize that this is what lies behind the legal ter- minology of ^'damage to persons" or "personal injury." This is what we are talking about. This is the background for the discussion. Nobody's interested in ending up blind or partially maimed. So the best thing a strict liability system could bring is to make pro- ducers more concerned with safety measures in manufacture and design, so that we shall not see defective products to the same extent in the future. Thank you. 476 Part V; Product Liability Trade Association Surveys Approximately 20 trade associations supplied data on the product liability problem from surveys they conducted within their industries. These surveys were analyzed by the Task Force's industry contractor in the Industry Study, and some of them were referred to in the Final Report. (See Industry Study, pp. IV-62 - IV-88.) Two trade association surveys which were not previously available to the Task Force for reproduction but which were frequently cited in the Final Report are included in Part V. The first survey is "Products Liability: A MAPI Survey-' ' (August 1976) , conducted by the Machinery and Allied Products Institute, together with MAPI's follow-up to that survey entitled "Dimensions of the Products Liability Problem" (April 25, 1977). The second survey included below is the "NFIB Survey Report on Product Liability" (January 1977) , con- ducted by the National Federation of Independent Business. The latter should be of particular interest to those persons interested in the impact of product liability on small manu- facturing firms. The Task Force wishes to acknowledge the cooperation of MAPI and NFIB in granting the Department permission to reproduce these surveys. 477 flpi A\ACHINERY8 Allied Products INSTITUTE (202) 331-8430 iiD^WMPy^ 1200 EIGHTEENTH STREET, N.W. • WASHINGTON, D. C. 20036 G-87 August 1976 PRODUCTS LIABILITY: A MAPI SURVEY Machinery and Allied Products Institute 479 Machinery & Allied Products Institute and its affiliated drcanization, Council forTechnolocical Advancement, are encaged i^research in the ecdnohics of capital goods, (the facilities of production, distribution, transportation communication AND COMMERCE), IN ADVANCING THE TECHNOLOGY ANO FURTHERING THE ECONOMIC PROGRESS OF THE UNITED STATES cTfl NTIS is authorized to repradace andsellthit iBport. Permission for furtlier leproductiof mast be obtained from the copyriiht proprietor Copyright ® 1976 Machinery and Allied Products Institute and Council for Technological Advancement Single copies of this memorandum have been distributed without charge to those member company executives who participated in the products liability survey and to the presidents of those companies sur- veyed. The price for additional single copies for those participating companies is $3.00. The price of a single copy for all other !4API member companies is $6.00. For nonmembers , a single copy is available ab $10.00. 480 Products Liability: A MAPI Survey Foreword Few problems confronting American industry have grown as swiftly as products liability. For a considerable number of companies this phenom- enon has now reached a crisis stage. The interest of the Machinery and Allied Products Institute in products liability dates back some 15 years and originated with the work of the institute's Insurance Council. Our work in the field, encouraged by the MAPI Executive Committee, has included the continuing and enlarging attention of the Insurance Council, the publication of two fuJLl-length books — Products Liability and Reliability: Some Management Considerations (1967) and Company Programs To Reduce Products Liability Hazards (1972) — and a series of memorandums on the subject, frequent consultation with member companies, and, most recently, creation of a MAPI Products Liability Council. I think it is fair to say that no business organization has devoted more attention, research,' and documentation to this subject than has MAPI. Some months ago, in accordance with discussions with the MAPI Executive Committee, the Institute staff undertook the identification and development in some detail of possible alternative approaches to solution of the problem. In considering how best to embark upon this search, we enlisted the aid of certain members of the Insurance Council and the Products Liability Council who were — and are — possessed of unusual exper- ience and expertise in the field. They agreed unanimously that an appro- priate starting point for this quest would be a comprehensive survey of member company experience and* attitudes respecting products liability. A comprehensive MAPI questionnaire on this subject, developed with the aid of those member company executives who first suggested a sur- vey, was transmitted to Institute member companies on March U, 1976 and followed up late in April. This memorandum is devoted to a full report of the survey . On behalf of MAPI, I want to express our keen sense of appreciation to all those member companies who completed and returned the long, detailed^, and complicated questionnaire and especially to those member company exec- utives who were so very helpful in the questionnaire's development. We hope that the full report which follows j by providing a badly needed data base, may prove of some assistance in the ultimate solution of the increas- ingly serious problem of products liability as a part of !>4API's continued and intensive work on the subject. Charles W. Stewart President August 1976 ^- -, 481/ Introduction As detailed more fully in the report itself, the MAPI survey on products liability produced 210 responses across a broad range of industry with by far the greatest concentration in the capital goods industries. Given the size and the representativeness of the sample of companies responding to the MAPI questionnaire, we know of no other survey of products liability of comparable size or comprehensiveness. Moreover, with both the Congress and the Administration actively studying the products lia- bility phenomenon, it seems to us that the release of survey results is most timely and a part of an essential prerequisite to designing a solution or solutions. Certain difficulties were foreseen by those member company executives who assisted in the preparation of the questionnaire. It was suggested, for example, that — save for casualty insurance company reserves — there is no standard and accepted method of recording data pertinent to products liability claims. In whatever form such data is maintained, more- over, it will be retained for varying periods of time by individual companies, Again, it was pointed out, the greatly differing arrangements by which such companies insure against the products liability hazard — differences accentuated by company size and product line — might well produce noncom- parable data. And as for suggested solutions, it was noted that any ideal solution .or solutions — if such exist — face the uncertain hazards of legis- lative and judicial action. In some measure, all these difficulties — and others — were evidenced in the course of the survey. We do not believe they have impaired the survey's usefulness. Indeed, by helping to illuminate the breadth and depth of the problem, its extraordinary complexity and its rather obvious resistance to any easy solution, they may well have made a positive contribution. The results of this survey of company experience with products liability contain few surprises for people who have lived with the problem over the years of its rapid growth. For the most part it supports and extends projections made from lesser bodies of data — although it is con- siderably broader in scope and deeper in sample of respondents than most earlier surveys — it verifies preexisting suppositions, and it confirms intuitive conclusions with objective fact. In addition it will provide, we believe, a new and broader perspective and, one hopes, some new iinder- standing of a problem of surpassing complexity. For those interested in the subject a careful reading of the full report is recommended. However, because the full report is a long one and by way of an introduction and overview, we have summarized the survey's main findings below. 'fiial - 2 - ' Highlights The highlights of the full report are summarized below. Some 210 MAPI member companies, representing a broad cross-section of industry, participated in the MAPI survey. The experience of respondents indicates a sharp rise in both the niimber and amount of products liability claims over the past decade.' For the period 1965 through 1975, 156 companies reported products liability suits filed against them in the amount of $826 million by plaintiffs' estimates; at the end of this period, I62 companies reported suits pending of $259 million with this figure based not on plaintiffs' evaluations but on amounts reserved against such claims by insurance carriers. The majority of respondents have attacked the products liability problem by assigning special responsibility therefore to an individual or a committee; most such individuals or committees report to general management either at corporate or divisional level. Almost all respondent companies carry primary products liability insurance coverage; a slightly higher percentage carry excess products liability coverage. The majority of respondents consider insurance coverage adequate, but nearly half con- sider the cost unreasonable. More than 9^ percent of those companies which answered the question indicated that their products liability premium rates had increased over the past five years, in addition, more than one-third of these companies were required to accept a deductible of a large retrospective ^ retention. In percentage terms, the premium rate increase ranged from to more than U,000 percent with some 58 percent of the companies responding to this question reporting increases between 100 percent and 1,000 percent. A significant minority of responding companies (16 percent) believe that the upsurge in products liability claims has inhibited the development of new products or contributed to the discon- tinuance of existing products*.. - 3 - — Less than 10 percent of respondent companies believe that products liability can be solved without legis- lation. Of those who believe legislation is necessary, the great majority think federal or federal and state legislation is necessary. — The more important of respondents' suggestions for solving the products liability problem in descending order of popularity include the following: (1) Eliminate contingent lawyers' fees. (2) Make employer responsible where a work-related injury is caused by his negligence. (3) Enact statutes of limitation concerning products liability which would restrict liability to a specified time period, limit liability to owner- ship by original purchaser, and free the manu- facturer of liability where product has been altered or misused. {k) Limit the amount of awards in products liability cases for damages other than medical and hospital expenses. (5) Make workmen's compensation the sole remedy for a work-related injury. (6) Improve product quality. (T) Apportion fault between manufacturer and employer and other defendants in a work-related injury. (8) Limit or eliminate altogether the doctrine of strict liability. In concluding this introduction to the MAPI survey of products liability, it seems necessary to reemphasize the complexity of the problem and the elusiveness of any final solution. As in the fable of the blind men and the elephant, it is very possible to see products liability as a legal problem, or an engineering problem or a manufacturing problem or a marketing problem — or whatever kind of problem it is that an individual's personal blinders permit him to see. Products liability is, of course, each of these things. It is also all of them and therein lies the diffi- c\ilty of solution and the improbability of clearing up the products lia- bility mess by a single stroke, however inspired. Just as the blind men, one by one, described the elephant according to what it was that each was able to feel of this strange creature so do approaches to the solution of products liability differ 484 - h - according to the individual's vision of the problem. A good sized group holds that legislation is indispensable to the solution, some look to the courts, others insist that better products are the principal, if not the sole, solution. One important element of any final solution is already in being and takes the form of individual company programs to eliminate or mitigate the products liability hazard. Still others preach — and practice — the doctrine of vigorous and unyielding defense of products claims. One can only say--with some confidence — that there is no one solution to the burgeoning problem of products liability, a conclusion whichr seems fully borne out by the results of the MAPI survey. i. 485 - 5 - Breakdown of Companies By Product Line and Size Product Line Representation Frinaipal Product Line(s). (Please identify by 3-digit Standard Industrial Classification (SIC) Code^ 1972 Manual. ) A total of 210 companies out of U80 surveyed took part in the survey. Respondents were asked to identify "principal product lines" by 3-digit Standard Industrial Classification (SIC) Codes. Activity in some 98 such codes, concentrated principally in "Manufacturing" but with limited representation in "Mining," "Construction," "Transportation and Public Utilities," "Wholesale Trade," "Retail Trade, Finance, Insurance and Real Estate" and "Services" was reported by survey participants. Within these general classifications, 618 "principal product lines" — or an average of slightly less than three for each of the respondent companies — were represented in the survey. To give some measure of the survey's scope, shown below by SIC code number and title are the numbers of principal individual product lines represented in the survey: 3-digit SIC Code No, 331 332 336 3^2 3U6 3U9 351 352 353 35^+ 355 356 357 358 Title Blast Furnaces, Steel Works, and Rolling and Finishing Mills Iron and Steel Foundries Nonferrous Foundries (Castings) Cutlery, Hand Tools, and General Hardware Iron and Steel Forgings Miscellaneous Fabricated Metal Products Engines, and Turbines Farm and Garden Machinery and Equipment Construction, Mining, and Materials Handling Machinery and Equipment Metalworking Machinery and Equipment Special Industry Machinery, Except Metal- working Machinery General Industrial Machinery and Equipment Office, Computing, and Accounting Machines Refrigeration and Service Industry Machinery Number of Respondents 10 16 11 10 10 30 T 6 59 59 53 62 9 16 486 - 6 - 3- digit SIC Code No. Title 359 361 362 363 36U 366 367 371 372 373 37^ 381 Miscellaneous Machinery, Except Electrical Electric Transmission and Distribution Equipment Electrical Industrial Apparatus Household Appliances Electric Lighting and Wiring Equipment Communication Equipment Electronic Components and Accessories Motor Vehicles and Motor Vehicle Equipment Aircraft and Parts Ship and Boat Building and Repairing Railroad Equipment Engineering, Laboratory, Scientific and Re- search Instruments and Associated Equipment Measuring and Controlling Instruments Number of Respondents 7 5 17 n 6 9 Ik 19 lU 3 5 382 Company Size Sales volume (please eheck one) Volume of Sales , 5 Under $10 million $10 million - $50 million $50 million - $100 million $100 million - $500 million $500 million - $1 billion $1 billion and over Number of Respondents 25 53 29 59 18 26 210 I THE ANATOMY OF THE PROBLEM I ndustrial Products vs. Consumer Products A. Is your company's output limited primarily to industrial products? (210)/1_ Yes No 191 19 \J The figures immediately following the questions indicate the number of tabulated replies. 487 - T - B. If your company manufactures consumer goods, would you Range please indicate roughly what percentage they represent of total sales. % 9% to 95^ /l How Serious Is the Problem? Yes No C. Does your company have a products liability "problem" 7 If so J how would you describe it. (Ilease check one) (205) l83 22 Nixmber of Respondents serious 38 potentially serious 96 costly, but not of great magnitude 36 de minimis 13 183 II PRODUCTS LIABILITY CLAIMS EXPERIENCE A. Total claims paid and reserved (for years identified) (1) number of claims and (2) dollar value The years "identified" were 1965, 1970, 19T3, and 1975- As to each the respondent was asked to indicate both the number and dollar value of claims paid and reserved. The results follow with the number of com- panies responding to each question shown parenthetically after the answer. number dollar value 1965 6,6iil $11,U90,971 (159) 1970 7,08U 51,UlU,l+21 (192) 1973 11,182 76,250,157 (193) 1975 9,865 81,236,281 (191) The abrupt increase in amount of claims from I965 to 1970 and beyond is accounted for in part, but only in part, by the disparity in numbers of companies reporting in the first of these years versus the last three. That difference, incidentally, is accounted for by the fact that a substantial number of respondents no longer have 1965 claims records. Notwithstanding this difference, a clear pattern of increase is shown in the dollar amount of claims paid and reserved ^by reporting companies over the period from which these years were selecte;d. As for the number of such claims, the pattern of increase would appear to have been interrupted in 1975 for which some 1,300 fewer claims were reported than for the next earlier year of 1973- The appearance is an illusion, a false dawn. The !_/ Only 15 respondents or 7 percent of the total reported consumer goods sales of 20 percent or higher. 488 fact is that the 1975 figures reported — and to a lesser extent the 1973 figures — are preliminary only; more — and probably considerably more — claims assignable to 1975 will be reported in the future. A typical comment on the point says, "Many claims are not reported to us until two to four years have elapsed from the date of accident; this is particularly true of those claims involving industrial products. These claims have also been the company's largest claims." To consider these figures from another standpoint, the average claim in 1965 was $1,730; in 1970 it was $7,258; in 1973 it was $6,8l9; and in 1975 it was $8,23^. Thus, although the averages do not represent an unbroken pattern of increase the trend line is clearly upward. (2) Size of claims (18U' under $1,000 $1,000 - $10,000 $10,000 - $100,000 $100,000 - $500,000 $500,000 - $1 million over $1 million Number of Claims Paid and Reserved 1965 1970 1973 1975 U,285 U,l8l U,)492 2,58U 906 1,^76 1,898 1,291 195 530 8U9 U92 19 6U 169 90 2 11 15 Ul k 17 11 Again, the trend in products liability claims over the period is clear and, consistent , with our observations above, the figures reported for ■1975 must be considered preliminary. Two comments of respondents deserve repeating. One says in respect to the pattern of claim activity, "The number of lawsuits filed against the company in the product liability area increased from slightly over 100 lawsuits in I965 to over 1,200 law- suits in 1975- " Another, quoting the "Cook County Jury Verdict Reporter" and addressing the size-of-claim matter on a comparative basis says, "Our Cook County court system here in Chicago recently compiled figures for a one-year period extending from September 1, 197^ through and including September 1, 1975- Such compilation of statistics reflected that $6.7 million was awarded to traffic collision litigants involving 225 collisions whereas $6.9 million was awarded in I8 cases of product liability litiga- tion. In other words, there was an average award in Cook County last year in product liability litigation of $383,000 per case." An analysis of the rise in the amount of claims over the period covered reveals some interesting numbers. Excluding 1975 figures for reasons already indicated, consider what has happened over the period I965 to 1973 within the dollar brackets on which responses were classified. Claims under $1,000 (many of them doubtless "nuisance" claims) have remained at substantially the same level. But claims in the $1,000-$10,000 bracket rose from 906 to 1,898, or 109 percent; claims in the $10,000 to $100,000 bracket rose from 195 to 8U9, or 335 percent; claims from $100,000 to $500,000 rose from 19 to I69, or 789 percent; claims from $500,000 to $1 million rose from 2 to 15, or 750 percent; and claims over $1 million rose from to 17, or by an infinite percentage. No doubt some part of this is inflation, but that alone cannot explain these phenomenal percentage increases, 489j - 9 - B. Claims data for the period 1970-75 This question, subdivided into nine parts, sought both to summarize and analyze total claims data for the respondent company over the period 1970-75 • Either because the data was not available at all or, if avail- able, was not readily translatable into the form requested, some companies did not answer the question. Moreover, not every company which did respond answered every part of the question. The summary of responses, classified in accordance with the question's several parts and with the number of responses to each part of the question shown parenthetically, appears below. Number of Claims Paid and Reserved Amount of Claims (1) total claims presented in the five-year period (1970-75) 16,785 $366,905,OUl (176) (2) claims paid by your company administratively without court action i+,396 8,675,282 (175) (2) claims rejected by your company /1_ 2,858 35,UiU,537 (138) (4) claims pending 3,272 176,663,709 (159) (5) suits filed on claims against your company 11,768 828,U65,205 /2(156! 2 ,858 3 ,272 11 ,768 212 1 ,218 U6U 3 ,203 (6) judgments for claimants 212 22,059,978 (152) (7) suits settled out of court 1,218 115,79^,838 (156) (8) judgments for your company /_3 U6U 75,12U,013 (133) (9) suits pending 3,203 113,8Ul,101 (161) These are impressive figures. The enormous sums shown as "total claims presented" and "suits filed" represent in most cases the plaintiffs' demands and hence include a goodly measure of blue sky. However, the amount shown for "suits pending" represents not the plaintiffs' demands — or dreams — but the sum of established insurance company reserves or the company's best estimate of what the total of products liability suits against it are actually 1_/ Many respondents simply indicated the number of claims rejected and showed no amount for such claims. Thus, the "Amount of Claims" in this case is derived from only 892 of the total of rejected claims reported. 2j Some 3^ percent of this total is attributable to one company. _3/ Here again many respondents reported judgments for the company without specifying the amount of claims involved. In fact, the amount of claims thus disposed of involves only 197 actual claims. 490 - 10 - worth. The figure, incidentally, was checked directly in most cases with any company whose answer left any question on the point. In a few remaining questionable cases where it was impossible to verify the figures with companies involved, sums which were rather obviously the total of plaintiffs' demands were arbitrarily deflated on a ratio of 1 to 10. As originally conceived, the 9 parts of this question were supposed to represent this equation: (l) - (2) through (8) = (9). However, the frajners of the question did not reckon with the creativity of respondents who did not consider a lawsuit first brought to their attention as a "claim presented." Thus the balance intended to be struck is not achieved. C. Produots liability claims first presented during 1975 by type of claimant and class of product This question comes at claims data from still another direction. It seeks to determine for the most recent complete year the comparative importance of three general sources of products liability claims: (l) employees of other companies; (2) members of the general public; and (3) insurance companies via subrogation. Typically, products liability claims involving capital goods are work-related. They frequently involve a suit against a machinery manufacturer by an employee of the manufacturer's customer who is injured on the job and alleges that the manufacturer's product was at fault. Thus, one may infer that most if not all claims arising under this classification are "capital goods cases." Moreover, employees injured on the job are compensated by workmen's compensation and where in the usual case such benefits are paid by an insurance carrier, the latter is subrogated — to the extent of benefits paid — to any rights the injured employee may have against a machinery manufacturer. This is, of course, situation (3) above. As for the second of these categories of products liability claims, those by members of the general public, the majority of such claims are against manufacturers of consumer goods whose products are sold directly to, and are used by, members of the general public. A lesser, although still substantial, number of such claims may involve capital goods which come into contact with the general public (e.g., transportation equipment, construction equipment, etc.). The summary of survey responses to this question appears below. Claims by employees of other companies . — In this case, as in the case of responses to all three subparts of this question, more companies reported claims falling in this category than reported dollar amounts of such claims. A total of 1,385 claims from this source was reported by 187 participating companies. Only I6U of these companies reported dollar amounts of such claims amounting to $128,50U,U25. There were 80 U-digit SIC product codes represented here with the vast majority in the following 2-digit SIC codes: 3^ — Fabricated Metal Products, Except Machinery and Transport Equipment; 35 — Machinery, Except 491 - 11 - Electrical; 36 — Electrical and Electronic Machinery, Equipment and Supplies; and 37 — Transportation Equipment. Among the specific U-digit SIC codes showing the greatest activity (and it must he remembered that this ques- tion was limited to "Products liability claims first presented in 1975") were: 3531 — Construction Machinery and Equipment (15); 3535 — Conveyors and Conveying Equipment (7); 3536 — Hoists, Industrial Cranes and Monorail Systems (6); 3537 — Industrial Trucks, Tractors and Stackers (U); 35Ul — Machine Tools, Metal Cutting Types (ll); 35^2 — Machine Tools, Metal Forming Types (6); 3559 — Special Industry Machinery, Not Elsewhere Classified (7); and 3568 — Mechanical Power Transmission Equipment, Not Elsewhere Classi- fied (h). Claims by members of the general public . — There ■ were a total of 1,0^7 products liability claims falling in this category reported by I60 companies. Only 15^ of these companies reported the amounts of such claims, the total of which is $176,068, 86U. (It should be noted, however, that this figure would be reduced to $79,787,011, if claims against lU reporting companies whose sales are 20 percent or more in consumer goods were eliminated from the total.) Respondents reported claims involving products in 72 U-digit SIC product codes. Those with the heaviest representation included: 3Ui+3 — Fabricated Plate Work (Boiler Shops) (U); 3531 — Construction Machinery and Equipment (lO); 363^ — Electric Housewares and Fans (3); 371^ — Motor Vehicles Parts and Accessories (5); and 3823--Industrial Instruments [etc.] (3). Claims b y insurance companies . — There were 153 responses to this question covering 229 claims. Of this number of participating companies, IU5 reported claims totaling $3,2^3,652. The great disparity in amounts between those reported here and those involving claims by employees of other companies and members of the general public is accounted for by the fact that any subrogation claim is limited to the amount of workmen's com- pensation benefits paid and includes no claims for pain and suffering, loss of consortium, etc. Moreover, a niimber of claims were reported as to which respondents indicated "no amount yet stated." Responses to the last of the three categories into which respondents were asked to put products liability claims first presented during 1975 involve 53 different U-digit SIC product codes. Inasmuch as claims by insiorance companies via subrogation originate in on-the-job injuries which lead to allegations of faulty design or manufacture of some product used in the workplace, one may properly assume that such claims will be concen- trated in the capital goods -area. The summary of respon-ses to this question bears out that assumption. Although claims classified in this category extend across the whole range of machinery and equipment and allied indus- trial products, the greatest number of reported claims were in the following: 3^9^ — Valves and Pipe Fittings, Except Plumbers' Brass Goods (3); 3531 — Construction Machinery and Equipment (5); 3536 — Hoists, Industrial Cranes and Monorail Systems (5); 35^1 — Machine Tools, Metal Cutting Types (5); and 3559 — Special Industry Machinery, Not Elsewhere Classified (5). 492 - 12 - D. How many products liability suits and/ov claims does your company now have pending? There were 191 responses to this question and 15,131 suits and/or claims now pending were reported. This amounts to somewhat more than 79 suits and/or claims for each of these 191 companies. Ill ORG AM ZING TO DEAL WITH THE PROBLEM Yes No A. Does your company have any individual(s) or committee having special responsibility for products liability? (208) l6U hk B. Where are they located? Almost 80 percent responded affirmatively, a statistic which rather clearly indicates the widespread concern in industry with the problem of products liability. As for location, 117 companies have such an individual or committee at headquarters with this total subdivided as follows: commit- tee — 38; individual — 79- Of those companies who responded affirmatively to the first question, ^7 indicated placement of such an individual or committee at division or subsidiary- level. Here the preference is for the committee approach with 28 favoring that and 19 having an individual perform the job. A total of 50 respondents indicated coverage at both corporate and division levels. C. To whom (title only) does any such individual or committee report? A total of IU2 companies answered this question with 113 indi- cating the reporting line at headquarters and 29 at division or subsidiary level. Some companies, as we have seen, have such organizational arrange- ments at both locations. Of the 113 replies pertaining to corporate headquarters, the summary of executives to whom any such individual or committee reports breaks down as follows: Number of Title Respondents President 32 Vice President (including those with and without special titles such as "VP-Engineering" ) 27 Senior Vice President 7 Executive Vice President 6 Secretary (including some who are General Counsel) 5 493 - 13 - Number of Title Respondents Treasurer I4. Chairman 3 Chief Executive Officer 3 Group Vice President 3 General Counsel 3 Counsel 3 "Top Management" 2 Director of Insurance and Safety 2 Director of Product Integrity (or Product Assurance) 2 General Manager 1 Assistant Treasurer 1 Assistant to the President 1 General Counsel and Treasurer 1 Assistant Controller 1 "Senior Corporate Manager" 1 Director of Research and Development 1 Director of Financial Staff 1 Director of Engineering Staff 1 Director of Risk Management 1 Product Liability Coordinator 1 113 As is obvious from this array, in the vast majority of cases the reporting line for any individual or committee at corporate headquarters charged specifically with responsibility for products liability runs directly to a member of senior management. This would appear to evidence top manage- ment's commitment to the problem's solution. The pattern is the same at division or subsidiary level. Responses break down as follows : Number of Title Respondents Division President (including "CEO") T Vice President . 7 Division (Subsidiary) Manager 5 Group Vice President 2 "Division Head" 2 Senior Vice President 1 Group Manager 1 Division Controller 1 Director of Engineering 1 ~ Product Safety Manager 1 "Varies by location" 1 29 494 - Ik - D. If a committee has responsibility ^ what oovpovate functions ave represented? There were 93 companies which responded to this question. Among these companies are representation on such committees of management functions identified in the question as follows: Function Number of Respondents Engineering 82 Manufacturing (quality control) tu Risk Management/Insurance 68 Design 65 Law 60 Research and Development 58 Safety 55 Marketing 5^ Advertising 1+1 Pixrchasing 28 Industrial Relations IT Beyond those functions listed in the questionnaire, commeets of respondents indicated representation on such committees of other management responsibilities including: Service, Parts Department, Product Support, Chief Administrative Officer, Training, Finance, Environmental Engineering, Toxicology, and Industrial Hygiene. E. If a committee structure^ who acts as chairman? As executive director? (Title only) (Title only) Chairman . — Some 77 companies responded to the first of these two questions. Their responses reveal a remarkable diversity of approach to the chairmanship of any corporate or division committee with special responsibilities for products liability. As indicated by the subdivision of the summary of responses which appears below, 25 of these 77 companies have appointed a member of general management as chairman and 22 have en- trusted the post to an engineering executive. Of the remainder, distributed largely on a functional basis, 9 quality control executives chair such com- mittees as do 7 marketing and customer service executives and 5 risk (insurance) managers. Chairman of "Products Liability" Committee General Management President Senior Vice President Group Vice President Vice President Treasiorer Secretary Nximber of Respondents 8 3 1 6 5 _3 26 495 - 15 - Number of Respondents Engineering Vice President - Engineering Vice President - Technical Director Chief Engineer Manager of Engineering Manager, Engineering Standards Director of Engineering Analysis Field Engineering Manager 8 2 2 7 1 1 _1_ 22 Marketing and Service Vice President, Marketing Vice President, Consumer Affairs General Sales Manager Director of Customer Affairs Director of Customer Service and Quality Assurance General Manager, Service Operations Quality Control Manager of Product Quality Manager of Product Safety Product Safety Engineer Product Safety Coordinator Safety and Health Director, Occupational Health and Safety Safety Engineer Law and Insurance General Counsel Risk (insurance) Manager Attorney Miscellaneous Director of Planning Products Liability Coordinator Assistant to the President Assistant to General Manager 496 - 16 - Executive Director . — A considerable lesser number of companies — 35 — answered, the query concerning the executive director of any "products liability committee" than answered the preceding question on the chairman- ship. As will appear from the summary of responses below, one may infer that the question was not completely understood and that there was at least some confusion between the function of organizing and directing the affairs of any such committee and the managerial post to which the committee reports. Notwithstanding the relative paucity of response to this question, one further — and important — inference is at least suggested. Adding the total of senior executives — 10 — represented to be "Executive Directors" (and one doubtfS if they are in fact preparers of agendas and carriers of paper on committee matters) to that number of responses — 8 — indicating that there is "none" [i.e.. Executive Director], the result is l8 or more than half those companies which answered this question. From this, one could conclude that some such committees have an occasional or ad hoc rather than a continuing existence because an "Executive Director" devoting all or most of his time to committee affairs would seem to be essential to a continuing committee life. Although it is not clear from answers to the question, it must be concluded that the function of "Executive Director" may be performed without that title or any title being assigned. Executive Director of "Products Liability Committee" Number of Respondents General Management President Executive Vice President Vice President - Operations Division President Division General Manager k 3 1 1 _!_ 10 Research, Development and Engineerin g Vice President, Research and Development Director of Research, Development and Engineering Plant Engineer Quality Control Manager, Product Safety Product Safety Engineer Division Manager - Product Integrity Miscellaneous Vice President, Corporate Development Controller Insurance Coimsel "Industrial Relations" "Same" (i.e., same as Chairman) "None" • ' 1 1 1 1 6 _8 18 4971 - IT - (1) does either devote full or substantial time to this function? (87) If sOy which one ? (ik) Yes No 28 59 F\ill-time to committee function . — This question was concerned with whether or not any "products liability committee" has a day-to-day existence which would seem most likely only if someone devoted all or a substantial part of his time to the affairs of the committee. Of 8T responses to the first question, 28 said "Yes" and 59 said "No." There were only 1^+ responses to the second question, of which 3 indicated that, respectively, the chairman, the president and the corporate secretary devoted "full or substantial time to this function." One doubts it. The remaining responses, as sxmmiarized below, seem more likely to represent situations in which full or substantial time is so devoted. Number of Respondents Senior Executives Chairman President Secretary Quality Control and Engineering Manager of Product Safety Director of Engineering Analysis Chief Industrial Engineer Safety Engineer Law and Insurance Corporate Risk Manager Director of Safety and Insurance Attorney Miscellaneous Assistant to the President F. Does any such committee or individual have special responsibility for: approval of product design (12T) approval of a product for manufacture (i27) approval of advertising (l28) recall of a product (125) settlement of product claims (130) control of product Hability litigation (130) insurance coverage (1'31)'' approval of instruction manuals (126')- other: Yes No 73 ^h 66 61 Ih 5k 69 56 85 h3 93 37 87 kk 83 k3 - 13 - (1) special responsibility for regulations and codes (2) approval of warning signs and labels (3) tracking claims; investigating claims (U) accident investigation; selection of defense counsel; authority to try or settle; selec- tion of expert witnesses; determination of whether to cross-file against suppliers or dealers In pursuing the general question of how a company may be organized to anticipate and deal with products liability questions, we asked whether or not any committee or individual assigned to this area had special respon- sibility for a variety of pertinent management decisions. Beyond these decisions, which are covered in the summary of responses appearing above, respondents were asked to indicate additional areas of decision or action for which any such committee or individual might have responsibility. (Slightly differing numbers of companies answered the individual questions; the number of respondents to each is shown in parentheses.) G. Have you a written corporate potiay on the retention of records (e.g.^ design, manufacturing , purchasing , testing. Yes No inspection, pertinent standard operating procedures, etc. ) which may affect potential products liability claims? (181) 106 75 Any manufacturer may one day face the necessity of proving in court the care with which his product was designed, manufactured, tested, etc. On such an occasion corporate records are an indispensable element of the necessary proof — hence this question. There were I8I responses including IO6 companies who said "Yes" and 75 companies who said "No." Yes No_ H. If the answer to "G" is "Yes, " is such policy strictly enforced? (lOl) 77 2U Accompanying comments provide at least some suggestion that companies which have no such policy or, if they do, do not enforce it, are reexamining the question. And one says "Enforcement is a never ending battle." * IV PRODUCTS LIABILITY INSURANCE COVERAGE Yes No A. Does your company have primary products liability insurance coverage? (188) 180 8 If answer is "No, " please comment m - 19 - From those who said "Wo," we received such comments as these: . . . service policy with excess coverage above a sizeable deductible. Retro-rated policy with $25,000 retention for each occurrence. Funded self-insurance, $250,000 per occurrence. After February 19T6 the company will self- insure primary coverage. Self-insurance retention of $100,000 plus expenses. Self-retained risk of $250,000 per occurrence. Company has substantial self-insurance retention. One respondent which affirmed that it had primary coverage qualified its response by saying, "But 'retro,' so really not primary coverage." Insurance coverages, like pickles, come in a wide variety. As an example of this, all products liability coverage is not provided by the products endorsement on the standard CGL policy. There are special forms of coverage for risks excluded by that endorsement or amounts of coverage beyond that provided by the basic policy. To obtain some general profile of products coverage among respondent companies, a series of additional questions, beyond that pertaining to primary coverage, was asked. Those questions and the responses appear below. Does your company have excess products Z-tab-ility insurance coverage? (187,) Does your company have aircraft products liahility insurance? (186) Does your company have nuclear liability insurance? (187) Does your company -have other specialized forms of insurance coverage involving the products hazard? (i8t) 27 160 Yes No_ B. If you have such insurance ^ do you consider it to provide adequate coverage? (173) 159 1^ (1) if answer is "No^" in what respect is it inadequate? 500 Yes No 178 9 78 108 2k 163 - 20 - Negative comments were accompanied by such comments as the following: Inadequate because of restrictive language. Limits now available in the m.arket may be inadequate. Loss or damage to company's products not covered. Does not cover design error. Based on recent trends we have no idea what is adequate. les /I/O (2) do you consider the cost reasonable? (1T3) 93 80 (S) are you satisfied with the performance of your insurance company as to — preventing accidents (150) 102 48 — defense of actions (165) 135 30 C. Have your products liability premium rates increased over the past five years? (205) 19^ 11 If so J for what reasons? As might be expected, not all those companies which said "Yes" commented on the reasons. Hoyever, i6T did comment — with each company usually suggesting several reasons — and their comments conform to a pattern with the same reasons being assigned repeatedly. An array of those reasons appears below with an indication of how many companies felt each such reason applied to them. Number of Respondents Increased claims against, and losses by, respondent 51 General insurance market conditions 37 General rate increase 29 General experience in respondent's industry 20 Inflation I8 Generous jury 'awards 15 Increasing volume of litigation 11 "Consumerism" (including social and legal attitudes) 8 Increased sales volume 6 Increased severity of claims 5 501 - 21 - Number of Respondents Strict liability doctrine 3 Increased aircraft hazard because of increased payload 2 More product units in the field 2 Increased subrogation by insurance companies 1 New products 1 Greater insurance reserve requirements 1 Governmental emphasis on safety 1 Growing antibusiness attitude 1 It should probably also be pointed out that this recital is made no less gloomy by the voluntary observations of several companies that fur- ther substantial premium rate increases are anticipated. D. Does your products liability insurance carrier Yes No require acceptance of a deductible or_ large retrospective retention? (205) 77 128 If so J what amount $ Of those who responded affirmatively, 73 indicated the amount of the deductible required or the dollar limit of claims subject to retrospec- tive rating. The number of companies responding to the first question does not jibe with responses to the question concerning a deductible or retro. This is because some companies have two or more deductibles, varying by product, and other companies have both a deductible and are subject to a dollar limit on claims which, if exceeded, requires a retrospectively rated increase in premium. A summary of responses to the question concerning deductibles and/or retro follows: Deductible Required (per occurrence) through $U,999 $5,000 through $2U,999 $25,000 through $U9,999 $50,000 through $99,999 $100,000 through $2^9,999 $250,000 through $U99,999 $500,000 through $999,999 $1,000,000 and above Retro Limit 6 $270,000 1 10 $500,000 1 9 $750,000 1 15 $1,000,000 2 21 $1,200,000 1 6 $2,000,000 1 6 7 k 77 502 - 22 In addition to those responses summarized above, one respondent, whose answer is not included, indicates a "corridor deductible" from $25,000 to $100,000. Still other respondents, having answered "No" to the basic question, indicate that they have deductibles on their products coverage by choice. No doubt this is literally true, but one cannot fail to ask if the choice may not have been influenced by the premium that would have been required without the deductible. Yes no_ E. Have you had produots liability insurance coverage cancelled? (19^) 30 l6i+ If so J why! (Please comment) An analysis of the reasons assigned for cancellation — and some companies assigned more than one reason — reveals a recurrent pattern. Of the 30. companies responding in the affirmative, 9 indicated cancellation was the result of the carrier withdrawing from insurance of the products liability risk. "Poor claims experience" was reported by 7 companies whose products coverage was cancelled. An additional 7 companies, indicating generally that no reason for cancellation by their carriers was cited, have suggested that it resulted from an obvious reluctance on the part of carriers to insure the products risk. Three other respondents reported cancellation by the excess or umbrella carrier. Other reasons, which are in part variants on the themes already noted, appear in respondents' remarks quoted below. Insurance company did not want to continue on risk even though there were no reported losses at time of cancellation. Reinsurer cancelled on basis carrier. Insurance cancelled even though company had no claims. Carrier got out of business in our State. Several refusals to renew despite accident- free record for lU years. Insurance carrier moving away from unprofit- able lines. V THE COST OF PRODUCTS LIABILITY A. Some jurisdictions appear to Have adopted the theory of "enterprise liability" on the assumption that the product manufacturer is the one best situated to distribute costs associated with injuries resulting from use or consumption of a product. It seems probable that little has been done in the direction of identifying and 503 - 23 - segregating the totatity of costs thus to be "distributed. " As a step in that direction^ would you please give us your best estimates J expressed as percentages ^ of the following costs including damage to the product itself and recall and retrofit. (1) products liability insurance premium? (As a percentage of total sales) 7o (ITT) More than half of the 177 companies which answered this question fall in the range of .1% through .9%- The full summary of responses, arranged by category, is as follows: Range .00001^ through .00009^ • OOOlf. through .0009/^ .001^ through .009^ .01% through .09^ .1% through .9% 1.0% through 1.9^ 2.0^ through 2.9^ 3.0^ and above Number of Respondents 2 6 11 29 105 17 U 3 177 (2) uninsured costs paid to others? (As a percentage of the insurance premium) % (108) Of the 108 responses to this question, 57, or more than half, indicated no uninsured costs paid to others. The full s-ummary of responses follows : Range - - less than ifo l.Of. through li.9^ 5.0^ through 9.9^ 10.0^ through 2)4.9$^ 25.0^ through i+9-9^ 50.0^ through 99-9^ 100.0^ through 199- 9f« 200.0^ through U99.9^ 500.0^ and above Number of Respondents 57 lU 10 1 k 8 6 2 3 3 108 504 - 2i4 - (3) internal oosts not covered by insurance? (As a percentage of the insurance premium) % (126) NOTE: "Costs not covered by insurance" might include the amount of any insurance deductible, staff salaries and overhead, costs of investigation and claim settle- ment, costs of litigation, etc. Of the 126 responses, 23, or nearly a fifth, indicate zero internal costs covered by insurance. The full summary appears below. Range - - less than 1% 1.0^ through h.9% 5.0^ through 9.9^ 10.0^ through 2U.9^ 25.0^ through U9.9^ 50.0^ through 99.9^ 100.0^ through 199-^ 200.0^ and above Number of Respondents 23 27 16 8 2k 13 6 5 U 126 B. By what percentage, if any, has the total of such costs increased over the past five years? 7o (159) There were 159 responses to this question with 93, or 58 percent of the total, distributed between the 100^ and 1,000^ marks. The full summary of responses follows: Range - - less than 10% 10.0% through 2U.9^ 25.0$? through 1+9.9^ 50.0^ through 99.9^ 100.0^ through 199-9^ 200.0$ through U99.9$ 500.0$ through 999.9$ 1,000$ through 1,999$ 2,000$ through 3,999$ U,000$ and above Number of Respondents 10 1 T 13 16 3i^ 27 32 13 3 3 159 505 - 25 - VI VIEW PRODUCT DEVELOPMENT A. Have you any evidenoe that the upsurge in products liability claims has inhibited the development of Yes No new products or the discontinuance of an existing product or product line within your company? (206) 33 173 If answer is "YeSj " please explain. As evidence of inhibitions created by the continually enlarging products liability hazard, respondents offered such comments as the follow- ing: We have discontinued manufacturing two that were used in aircraft. Generally no, but several instances have resulted in discontinuance of certain product developments, [No, but] . . . certainly an item for increasing consideration. Not inhibited 13ut has caused greater care in design, quality control, etc. We are considering dropping several products from our division. A few new products have been limited in scope of distribution (i.e., not sold to consumer market) to prevent availability to "do-it-yourselfers." Made engineering personnel overly conscious to point of restricting and stagnating product development . Products risk is a consideration in continuation [of present products] and introduction of each new product . Engineering effort was diverted from product improvement to retrofit 25 to 50 year old machines. Certain tools are being phased out of the market. We have discontinued a line of controls . . . because of the products liability claims generated. We have discontinued selling (and joint develop- ment of) products which operate in line with ours. We also will not import products developed and made by our licensee. 506 - 26 - We considered products liability insurance costs and potential claim costs in the development of advanced medical to be such that we redirected product development into other fields. [No] . . . however, serious consideration has been given to eliminating some products and acces- sories to products. Products liability experience with a line was the impetus for disposing of the product line. In future, other product lines may be affected. Have reviewed products in group and discontinued products. Some old products are being redesigned. While this is a discontinuance it has placed emphasis on new product development. Several examples wherein customers have shown need for new products . . . and which we could have developed . . . but which were delayed or abandoned because of products liability. Present research expenditures are being allocated towards areas of less exposure to consumer and lia- bility problems. VII POSSIBLE APPROACHES TO A SOLUTION f/e ape aware that many member' companies have already considered 'possible legislation or other solutions to the products liability problem. MAPI is not committed to a particular solution at this time. A variety of proposals which have been advanced are listed below following two general questions. We would appreciate your reaction to them^ but we are particularly interested in your suggestions as to how this continually enlarging problem may be solved^ or at least made manageable. A. If products liability is a problem for your company 3 do you believe it can be solved without legislation ■ Yes No (e.g. 3 through contractual indemnification^ court- made law, etc.)? (i8t) i8 169 If so 3 how? Although comments were specifically requested only in the case of an affirmative response, those who believe no solution is possible without legislation also had their say. Representative comments, both pro and con , appear below. 507 - 27 - Legislation Not Required Attorneys through Defense Counsels' Association should try to change rules of procedure to require acceptance of presumptions in favor of manufacture in event product has long since left its control or that product has been significantly modified by employer. Provision for these presumptions provided for in Restatement [of Torts] Ind, Section U02(a) but discarded or ignored by courts. Existing insurance mechanism will adjust to distribute costs. Total costs will be passed along as part of product cost. Contract indemnification better than legislation, Any legislation would involve social conse- quences as a result of consumerism. Rather than look to that to minimize the problem, companies should improve quality control, install design review, maintain in-line inspections, maintain adequate records, review advertising methods, etc., to be in a position to know the products and be able to defend. Legislation Required Largely a third party problem. Therefore, solvable by contract indemnification only in a • limited way. As a supplier of OEMs we cannot require indemnification successfully. Contractual indemnification ineffective. Federal legislation is the only way out. B. If you think legislation is necessary, should it be Federal 8l / / Federal or /_ / State? /_ / Both Federal and State? , ' '(175) ^° ^' Comments : An analysis of accompanying comments reveals that 31 respondents favoring federal legislation stress the need for uniformity in the law as it affects products liability. A representative collection of comments appears below. Specific suggestions for legislative action appearing at this point in many responses are not quoted here, but rather are reserved for inclusion in the compilation of suggestions appearing at the end of this report. 508 - 28 - Favoring Federal Legislation or Federal /St ate It would be difficult and expensive to operate under 50 state laws. State legislation would be non-uniform and result in "forum-shopping." Federal Products Liability Act administered by- State and Federal Courts. [Favor federal legislation] . . . providing federal statutes could override state laws. Federal legislation for uniformity but State legislation is required for limitation of actions. Favoring State Legislation Preferably State, but State and Federal if necessary. No additional legislation. Government regulations are a Pandora's box. Most applicable statutes (statutes of limi- tation and workmen's compensation) are state matters. May require federal legislation for uniformity. Local problems should be resolved at local level. "Consumerism" too deeply embedded in antici- pations for federal legislation .to do whole job. [Editor's note: This is reminiscent of another comment on the locus of possible legislation which asserted that it is " . . . necessary to curb 'welfare-consumerism' do-gooder ' philosophy which is poisoning the country."] C. Cevtain proposals for solution of the products liability problem ai>e listed below. l^ould you please indicate your reaction by a "favorable" or "unfavorable" answer and any comments you may have on any or all such proposals. Favor- Unfavor- — making "no-fault" legislation — either able able mandatory or elective- -applicable to products liability (195) 79 116 509 - 29 Comments: Again, there were strongly held opinions both pro and con , but mostly con , as reflected in the sample of accompanying comments which follows. (To ensure that the respondent's sometimes cryptic observation is fully understood, we have indicated in each case whether the vote was "favorable" or "unfavorable.") Cost benefits of "no-fault" are illusory. Will not solve problems fairly since it will not penalize the party at fault. (Unfavorable) Social implications would dominate and our costs would be loaded by underwriters to provide for claims which should be defensible. (Unfavorable) Massachusetts' "no-fault" auto experience too unfavorable to consider "no-fault" here. (Unfavorable) ["No-fault"] . . . tends to reward people who disregard safe practices. Duplicates workmen's compensation and unemployment compensation and would permit double recoveries. Would also increase insurance premiums. (Unfavorable) "No-fault," with addition that workmen's compen- sation and all collateral sources be treated as an offset. (Favorable) Cost of defense of products liability actions is usually far greater than court awards. This has contributed to insurance cost. "No-fault" will eliminate much costly litigation. (Favorable) "No-fault" should have a trial period of evaluation. (Favorable) Desirable to continue to adjudicate fault. (Unfavorable) . . . if basis of payments is clearly defined and aunounts are reasonable. (Favorable) While this would reduce cost of defense, it would increase number of claims. (Unfavorable) No solution if it works as poorly as no-fault auto insurance has worked in Massachusetts. (Unfavorable) 510 - 30 - In the history of the world, removal of respon- sibility from a person for his acts has never solved a problem. (Unfavorable) If limits can be set, it would be very helpful. ( Favorable ) Recommend "no-fault" products liability legis- lation to cover where the product is certified as having met acceptable standards; otherwise common law to prevail. (Favorable) Do not favor low-risk companies subsidizing others. (Unfavorable) Preferably mandatory. (Favorable) changes in workmen's aompensation legislation to: (1) limit products liability exposure (187); (2) make possible a contribution from a negligent employer (191); or (S) provide that recoveries under work- men's aompensation or hospital /medical insurance by injured workmen should be permitted as an offset against recovery (i8t) Please describe changes you would recommend: Favor- able Unfavor- able 161 26 153 ^ 38 16U 23 Changes recommended were numerous and wide-ranging and, to some degree, contradictory. For the most part, certain suggestions recur. Each such general recommendation is stated below indicating the number of respon- dents who support it. Recommendations The employer should be made responsible where a work-related injury is caused by his negligence. Workmen's compensation should be made the sole remedy for a work-related injury. Subrogation to an injured workman's rights by a workmen's compensation insurance carrier should be prohibited. Workmen's compensation benefits should be raised to realistic levels. Manufacturers should not be permitted to sue employers. 511 Nximber of Respondents 33 21 15 11 - 31 - Recommendations Number of Respondents Workmen's compensation benefits should be offset against products liability re- coveries. 5 If an employer violates state or national safety requirements, joining him as a defendant in a products liability case should be permitted. 3 Beyond this summation of general comments, a number of individual comments are of interest. Contributory negligence should be available as a defense against both employee and employer. Workmen's compensation is the original "no- fault" concept. [Ergo, it should be the sole remedy and the subrogation of rights to insurance carrier should be prohibited. ] All parties potentially responsible — employer, employee and manufacturer — should be given a single hearing to determine relative responsibility and liability. — immunitij to products liability suits upon Favor- Unfavor- oertifiaation by a quasi-publia agency that able able a product satisfied established safety and health requirements (189) 92 97 Comments: A sampling of comments with "favorable" and "unfavorable" grouped separately appears below. Favorable Fine for those [products] which can be certified if at reasonable cost. Immunity may be too strong but; certificates should be recognized and given strong weight. Composition of quasi-public agency is critical. [Favorable] provided realistic standards are drawn. Legislation would be helpful. Even though meets Federal safety standards, there is no immunity from suit, since these are considered minimum stan- dards. Evidence that standards are met should be conclusive. 512 - 32 - Unfavorable Do not believe approach is feasible. Such agencies have rarely accomplished their objectives. Manufacturers do not need additional agencies regulating them. A setup for bribery. Also impossibly bureau- cratic. Of doubtful practical value and probably not legally permissible. No agency could possibly possess required expertise in all areas. Favov- — proof of oomiplianae with applicable safety and able health legislation regulations to serve as a defense in a products liability suit (19T) l66 Comments : Unfavor- able 31 In this case there was a clear, indeed overwhelming, majority in favor of the proposal as stated. A representative selection of respondents' comments on this suggestion — classified according to the view expressed by the commentator — follows. The comments chosen reveal not only solid con- viction but dubiety and a considerable element of hope. Favorable Federal standards would be preferable to state standards . Should be accepted as a defense to design defect allegations — not to defective workmanship or materials, Leave as a jury question whether or not safety and health regulations are in keeping with the state of the art . Certification by recognized testing laboratories (e.g., UnderTf/riters ' Laboratories) should be admis- sible. Should be more than a defense. It should create a conclusive presumption. An affirmative defense but not an absolute defense. 9131 - 33 - , . , getting jural recognition of state-of- the-art is extremely difficult. If it can be accomplished legislatively, good! Excellent in concept, but who approves? Do we want such approval? Unfavorable [Even] with full compliance all possibilities would not be covered and thus compliance would be an inadequate defense. Such certification might be viewed as prima facie proof of compliance to be rebutted by plaintiff. An administrative nightmare. Impractical. Should not be an absolute defense but should be admissible to show the diligence of the manufacturer . Not politically feasible or practical. Too much power in a bureaucracy. — legislation vestrioting Favor- Unfavor- (a) the amount recoverable by reason of products liability in any case (201) l62 39 (b) the period of time following sale during which a manufacturer may be sued for an allegedly defective product (202) 195 T (c) the liability of the original manu- facturer for injuries attributable to a substantial alteration or modi- fication of the product by a third party (203) 195 8 Comments: The consideration of these proposals evoked a considerable number of comments by respondents. Inasmuch as the vote is overwhelmingly "favor- able," those comments reproduced below have not been segregated according to the individual view of the respondent-commentator. (a) Such legislation might be declared uncon- stitutional; (b) A statute of. limitations is a must. No product will remain safe forever. '■ » 5141 - 3i^ - Prime manufacturers should assume liability for entire product, including components, to eliminate duplicate insurance and expense. Recovery should be sufficient to make the injured party whole. [However, there should be] . . . limitations on pain and suffering, loss of consortium, etc. (a) Where a maximum recoverable amount is set, the maximum is generally sued for regardless of injury; (b) and (c) are already provided for in Restatement of Torts (2) . It is unreasonable and ridiculous that we had to defend ourselves in 1971 on a machine our prede- cessor shipped in 1929 which had changed hands several times. The user must be made responsible for safe operation whether he modifies machine or not. (a) Amounts of recovery should be set by appointed fact-finding panel based on the injured person's current earnings and future earning capacity- not by a court; (b) a reasonable period from first use; and (c) comparative negligence principle should apply. A ceiling is undesirable under (a). The jury would always give the maximum. (a) Limit to amount obtainable under workmen's compensation; (b) liability should be limited to some percentage of estimated or actual life cycle; (c) only if causal connection can be shown between alleged defect and modification or alteration. This is a very difficult area involving many issues of public policy and cannot be dealt with in summary fashion. (a) Specific limitations by law on amount.s re- coverable for pain and suffering is needed to pre- vent run-away verdicts based on sympathy; (b) This type of legislation is definitely needed to permit insurers to foresee the risk and set rates accord- ingly and to eliminate unforeseen liabilities when transferring ownership of companies; (c) Needed is legislation limiting the judicially imposed rule of "foreseeable misuse." 515 - 35 - Favor- Unfavor- — the imposition of defense costs on the able able plaintiff if he is unsuooessful in his suit (196) 156 UO This Is a very popular suggestion. Despite the proposal's popularity, there are a number of thoughtful dissents among the selec- tion of respondents' comments appearing below. Definite deterrent to "shotgun" attorneys working on a percentage. Highly recommended to reduce number of spurious claims. Would be unfair to many individuals who have no other way to seek a remedy. Injured employee should not be responsible but attorney who took his case should be. This would eliminate about 75 percent of claims filed. Such action would be unduly restrictive and would prevent plaintiffs with legitimate complaints from seeking legal redress. Would eliminate nuisance suits. Conversely, plaintiff ought to recover costs if he is successful. This would encourage more settlements and less trials. Charge defense costs to unsuccessful plaintiffs. Have plaintiffs' attorney's fees determined by court in accordance with quality and quantity of legal work done — not a flat percentage. So long as contingent fee system exists frivolous suits will continue. D. What is your suggestion for solution of the products liability problem? Please discuss There were 130 respondents who made specific suggestions for solution of the products liability problem. As in the case of proposals for change in workmen's compensation legislation, a majority of responses voiced recurrent themes. In attempting fairly to summarize this outpouring of suggestions, we have, first, summarized below in our own language common recommendations together with the number of responses which agreed to each, and, second, we have quoted a number of other suggestions which follow no pattern but nevertheless deserve to be noted. - 36 - General Recommendations Eliminate contingent lawyers' fee, Number of Respondents 38 Make employer responsible where a work-related injury is caused by his negligence. Enact a statute of limitation governing manu- facturer's liability. (included suggestions: (l) 10 years from date of first sale to first user; (2) make time coincide with depreciation schedule for particular machine; (3) alteration or misuse of machine should free manufacturer of liability; (U) limit liability to ownership by original purchaser; (5) apply higher stan- dard of proof if product has performed satis- factorily for a specified number of years.) Limit the amount of awards. (Including three who specifically noted limiting awards for pain and suffering. It seems likely that others intended this in calling for a limi- tation on "arwards.") 33 26 2k Make workmen's compensation the sole remedy for a work-related injury. Improve product quality. Apportion fault between manufacturer and employer and other defendants in a work- related injury. 21 20 11 Limit or eliminate altogether the doctrine of strict liability. Negligence should be punished. 10 5 Educate public to seriousness pf products liability problem. Defend all products liability claims vigorously. Abolish punitive damages (including suggestions that any punitive damages awarded should be to State and not the Plaintiff and no contingent legal fees should be allowed thereon). There is no one solution. 517 37 Niimber of Respondents Settle products liability cases by administra- tive rather than judicial action (including related suggestion to eliminate jury trials for products liability cases). Arrange to pool products liability risks in a "captive industry." Authorize judgments for continuing support rather than present value of future support. Close at least half the law schools in the country. Individual Suggestions The solution lies in prevention at the design, development and pre-production evaluative phases as well as traditional quality control associated with manufacturer . Since the problem is really a social and legal attitude which is becoming increasingly antibusiness and will probably not reverse, we recommend a "no- fault" approach. Should differentiate between personal injury and property damage claims/lawsuits. 1. Personal injury claims/lawsuits a. Eliminate the collateral source rule except for individually purchased insurance cover- ages. b. Eliminate workmen's compensation subrogation and/or recovery. c. Allow a manufacturer a right of action against employer for its negligence without defense of workmen's compensation being an exclusive remedy. 518 - 38 - d. Modify strict liability (Restatement U02a) to allow comparative negligence to reduce damages in accordance with plaintiff's failure to act prudently. e. Statute of Limitations to run from date of first sale to first user. 2. Business or corporate property damage a. Eliminate all causes of action except those under the UCC or negligence actions.' b. Statute of Limitations to run from date of sale in negligence cases. (UCC Statute is now from date of sale.) « « « Consider a simple piece of equipment — a knife. Who cuts fingers with them? Obviously, the user. If knife manufacturer must be responsible for use he has two choices: One is to liquidate before going broke or going broke. No class action suits without permission of claimants. Entire punitive damages award goes to state, no attorney's fees allowed. Reduce attorney's fees as claim increases. Strict liability rule only to first purchaser. Legislation counteracting the strict liability theory as propounded in the Restatement of Torts [2] and case law would be desirable. If we move back toward a negligence-contributory negligence stance, . . . much of the product liability problem would be solved .... If a strict contributory negligence theory is considered too harsh, a comparative negli- gence theory can be considered. Although Federal legislation appears to be needed to help correct a worsening product liability situation, I am disturbed by some of the suggested types of legis- lation heretofore mentioned. Striking out in a number of directions with immunity, no-fault , amending work- men's compensation legislation and setting up new 519 - 39 - quasi-public bodies is not the answer. These suggestions are either impractical to implement through legislation or potentially undesirable if implemented. Attempts at obtaining clearer standards for manufacturers to comply with and use of compliance as a defensive tool would go a long way toward correcting the present situation. If this vere coupled with a legislatively endorsed return to the negligence-contrib- utory negligence theories, the defensive posture of a manufacturer would be considerably improved. This approach would not alleviate all product liability cases. No approach could, or should attempt such a sweeping change. If we face facts, we will have to admit that some product liability cases are justi- fied. This approach does, however, have attributes to commend it. First, manufacturers would have clearer standards to comply with. Some such standards now exist thru OSHA, ANSI, and other bodies and others could be promulgated. Second, manufacturers would be more likely to comply with the standards if non-com- pliance could be used as evidence of negligence, but compliance could be used as evidence of non-negligence. Third, it would make the claimant responsible for his/her irresponsible acts that contributed to the injury. In other words, it keeps "fault" in the system. Fourth, it is clearly workable within our present judicial set- up and has, in effect, worked in the past. The Federal government and states set limits on awards for damages other than property and medical. States [should] have a body which consists of five regular members and four outside "ejcperts" in a particular case to act as judge and jury. Remove emo- tional decisions and awards. Appeals may be made through the state or federal court system at the appellate level. Loser pays all costs. Place heavy evidentiary burden on plaintiff alleging a product defect if product has been in use ten years or more without prior sign of defect, General insurance like automobile "no-fault" plus workmen's compensation tied to cost of living 520 - uo - index and adjusted to provide reasonable compensation, Go back to doctrine of privity and proved negligence rather than strict liability. If management has the resources to design, produce and market its products, then it can also manage its liability exposure. If public demands quality and safe products, manufacturer should price accordingly. 521 MACHINERY AND ALLIED PRODUCTS INSTITUTE DIMENSIONS OF THE PRODUCTS LIABILITY PROBLEM A Status Report and Follow-Up MAPI Survey Supplementing the Comprehensive Survey Published in August 1976 April 25, 1977 522 April 25, 1977 DIMENSIONS OF THE PRODUCTS LIABILITY PROBLEM; A STATUS REPORT AND FOLLOW-UP MAPI SURVEY SUPPLEMENTING THE COMPREHENSIVE SURVEY PUBLISHED IN AUGUST 1976 The Dimensions of the Products Liability Problem It is not uncommon to hear the twin declarations that there has been a significant increase in both the number and amount of products liability claims and a corresponding — and perhaps more than a corresponding — increase in products liability insurance costs. In August 1976, MAPI published the results of its survey on products liability which indicated that as of the end of 1975 (the latest data included by respondents) , this kind of increase was indeed documentable. To determine whether the problem had worsened since 1975 — a conviction of many — MAPI undertook a telegraphic survey (copy attached) of some 55 member companies. The responses are clear: 1. Over 90 percent of the respondents (53 companies) indicated that since publication of the MAPI survey their companies had experienced an increased products liability problem. 2. About 98 percent of those respondents with an increased problem specifically cited higher insurance costs as one of the causes. 3. Slightly over 40 percent of these same respondents cited the increased number and amount of claims as contributing causal factors. 4. About 31 percent of the respondents with an increased problem indicated the lack of availability of insurance as a factor. 5. As to the magnitude of the cost increases for Insurance, the range of responses includes one company which exper- ienced an insurance cost increase of 2000 percent while the average cost increase was 262 percent. The detailed responses follow. 523 - 2 - Responses I n Det ail 1. Since publication of the MAPI survey in August 1976, on the basis of your company's experience, has the products liability problem - No. of Respondents (a) Increased? 41* (b) Decreased? (c) Continued at same level? 12* Total 53 Com ment : *Seven of the 12 respondents indicating the problem was continuing at the same level specifically noted that their Insurance cost has increased. One of the remaining five observed his company is unable to determine if its insurance cost has increased since "our products liability coverage is part of a comprehensive liability policy and separate premiums are not available." To sum up, the problem; when broadly defined to include insurance cost increases, has increased for over 90 percent of the survey respondents. 2. Not e: 47 of 48 respondents, in effect indicating that the problem had increased, provided answers to question No. 2. If the problem has increased, was this because of - No. of Resp ondents A. Increased number of claims? B. Increased amount of claims? C. Increased insurance costs? D. Unavailability of insurance? E. Other reasons Other reasons Include the following: -- An influx of claims involving occupational disease 19 21 43 15 12 524 - 3 - No. of Respondents Insurance carrier pressuring to settle virtually every claim — Vendors and distributors can't get insurance and want us to protect them 1 — Unable to buy anything but excess coverage 1 — A jury award of $403,300 in a products liability lawsuit 1 — Insurance carrier going out of business 1 — Jury awards have increased considerably on products we manufacture 2 — Tightening of umbrella market 1 — Increased amount of standardized discovery with questionable relevancy or materiality and judicial relief totally lacking 1 — Both increased judgments and settle- ments and increased types of claims, e.g., punitive, economic loss 1 — Most of the claims against us seem to occur because of the physical adjacency of our product rather than any reasonable or logical tie-in with the injury 1 Comment ; Several respondents indicated they did not have data on hand re amount and number of claims so the responses may understate the frequency of these problems as causal factors. As to the unavailability of insurance, respondents inter- preted "unavailability" to mean either a forced switch to umbrella liability over self-retained limits or the lack of availability at "reasonable" costs. 3. Note : 37 of the 43 respondents reporting increased Insurance costs provided data on those Increases: 30 respondents provided a single figure which is assumed to be the Increased percentage in costs overall . - A - Seven respondents provided data showing cost increases broken down between primary and excess coverages. Overall Increases Percent Increases 0-10 11-25 26-50 51-100 101-200 201-500 501-1000 1001 and over No. of Respondents 3 6 7 A 7 2 _l 30 — Avg. for 30 respondents: 262% — The nedlan for respondents: 82% — Almost half had Increases over 100% — The low was 19% while the high was 2000% Primary and Excess — Separate No. of Respondents Percent Increases 0-10 11-25 26-50 51-100 101-200 201-500 501-1000 ' Over 1001 Primary 1 Excess 526/ - 5 - Comment : Among the pertinent comments offered by the respondents are the following: — Our extreme increase in the premium for our umbrella insurance — which we have never had to call upon — brings a dramatic new dimension to the problem. — It is very obvious that liability underwriters no longer wish to assume any kind of risk for any price. Rates and retentions have gone out of sight with very little consideration being given to a company's prior experience. — Despite a 15-year accident-free record, we have no assurance at this date of continued avail- ability of insurance coverage. At a rate of over 2-1/2 percent of sales, we question our ability to continue to compete with others in our basic industry with a different product mix and product insurance costs reported as one per- cent or less of sales. — We switched to a captive insurance company, in part, to avoid increased insurance costs. — Unavailability of insurance at reasonable cost prompted us to go self- insured for primary level. — We increased pur self-retention 400 percent in order to retain desired broad insuring agreements and approximately the same premium. Conclusion The responses make it very clear that insurance coverage presents a growing and significant cost burden. On the other hand, no attempt was made here to adjust either for increased sales or inflation. Such adjust- ments might affect the magnitude of the increased cost problem. ^ 527 TELEGRAPHIC SURVEY ADDRESSED TO 55 MAPI MEMBER COMPANIES TO PROVIDE CERTAIN CURRENT INFORMATION ON PRODUCTS LIABILITY AS A SUPPLEMENT TO THE PRINCIPAL SURVEY PUBLISHED BY TH E I NSTITUT E IN AUGUST 1976 April 19, 1977 YES NO YES NO YES NO AS BACKGROUND FOR MAPI'S APPEARANCE APRIL 27 IN SENATE COMMERCE COMMITTEE HEARINGS ON PRODUCTS LIABILITY WE WOULD APPRECIATE A PROMPT TELEX REPLY TO THE FOLLOWING QUESTIONS: 1. SINCE PUBLICATION OF THE MAPI SURVEY IN AUGUST 1976, ON THE BASIS OF YOUR COMPANY'S EXPERIENCE HAS THE PRODUCTS LIABILITY PROBLEM - (A) INCREASED? (B) DECREASED? (C) CONTINUED AT SAME LEVEL? 2. IF THE PROBLEM HAS INCREASED, WAS THIS BECAUSE OF - (A) INCREASED NUMBER OF CLAIMS? (B) INCREASED AMOUNT OF CLAIMS? (C) INCREASED INSURANCE COSTS? (D) UNAVAILABILITY OF INSURANCE? (E) OTHER REASONS (PLEASE IDENTIFY AND EXPLAIN) 3. IF INSURANCE COSTS HAVE INCREASED IN THE PAST YEAR, BY WHAT PERCENTAGE? YES NO YES NO YES NO YES NO IF THIS QUICK AND INFORMAL SURVEY PRODUCES USEFUL RESULTS ONLY AGGREGATE DATA WILL BE USED IN SENATE HEARINGS; NO INDIVIDUAL COMPANY WILL BE IDENTIFIED. . THANK YOU FOR YOUR ASSISTANCE, CORDIALLY. CHARLES I. DERR SENIOR VICE PRESIDENT 928 RKPORT m puomjCT LIABILITY JANIJAllY lim NATIONAL FEDERATION OF INDEPENDENT BUSINESS ma NFIB Survey Report on Product Liability 530 \SAFr> FIKE METAL PRODUCTS CORP. BLUB SPEINGS, IIISSOURI 64013 Mr. Wilson S. Johnson, President National Federation of Independent Business 150 West 20th Avenue San Mateo, California 94403 Dear Mr. Johnson: AC 8l6-229-3'<05 VPire Telex 04-2263 Cable Address FIMEPROD 704 South 10th Street Nov. 10, 1976 We have an extremely serious product liability situation affecting not only our company, but threatening all major industry in the United States. Our company manufactures pressure relief devices called rupture discs and is one of only four in the country producing similar relief devices. The design of safety devices for over-pressure relief of all pressure vessels manufactured in the U.S. is established by law and design criteria. These criteria pertain to every chemical plant, refinery, power plant, boiler, and every storage container which potentially can be placed under pressure. We manufacture these safety devices for all U.S. industries and many times the product has saved lives as well as extremely expensive plants and equip- ment. Insurance companies inspecting the various plants require these safety devices on all pressure vessels before they will write fire and general liability coverage. OSHA standards also require the use of these valves. Even though we have never, in 31 years of operation, had any liability suits or judgments against us, our insurance company and all others we are negotiating with now tell us that, at best, our product liability will go from a 1975 rate of $5,000 to $100,000 plus; and at worst they will not underwrite our product at all. Their concern is not in defending our product as being safe and reliable but with the number of risks that they may have to defend and the prohibitive costs involved should they lose only one case. If we are forced out of business because we cannot obtain product liability insurance then the entire U.S. industry collapses because it cannot obtain fire or liability insurance. We feel that exemption of certain products from liability suits or mandatory compensation for all legal fees and expenses to manufacturers who are defen- dants in suits where it is proven that the product is not at fault are two possible answers so that reliable products could still be manufactured with- out threat of product liability insurance cancellation. Yours truly, FIKE METAL PRODUCTS CORP, President 931 TABLE OF CONTENTS Page Introduction Why an NFIB Product Liability Survey? 3 Focus of the NFIB Product Liability Survey 3 Methodology and Limitations of the NFIB Product Liability Survey. . 3 Summary 3 Small Manufacturers Carrying and Not Carrying Product Liability In- surance 4 Small Manufacturers Not Carrying Product Liability Insurance 4 Small Manufacturers Carrying Product Liability Insurance 7 Claims Against Small Manufacturers 8 Premiums and Claims Paid — A Substantial Difference 9 The Economic Impact 10 Competition 10 Inflation 1 1 Employment 12 Commentary on Two Proposed Solutions 12 An Appeal 13 Appendix 14 sai INTRODUCTION Why an NFIB Product Liability Survey? NFIB became aware of the product liability "crisis" as a result of letters from its membersfiip. Originally, tfie volume of correspondenc® more closely resembled a periodic drip than a flow, but through the spring and summer of 1976 it became a stream. Even then it was not the volume that spurred interest so much as the substance. Virtually every piece of correspondence was filled with urgency. It was not even uncommon for a member to advise the NFIB staff to forget taxes (a reference to NFIB's work on the Small Business Growth and Job Creation Act and later the Estate and Gift Tax legisla- tion) and do something about product liability. Most correspondence focused directly on the rapidly escalating rates of product liability insurance. Experience after experience was received reporting rates Increasing by 500%, 1000%, or substantially more. Invariably such reported ex- periences were accompanied by phrases as 'and I have never had a claim filed against me', or 'and only one claim amounting to less than $1 ,000'. (See the backpiece for example letters.) NFIB was gratified when the Department of Commerce in concert with the Small Business Administration produced a preliminary product liability report and devoted a rather sub- stantial chapter exclusively to small business.' This recogni- tion of small business as a distinct entity and the concern over any product liability problems or consequences unique to small business was one of the more encouraging Executive Branch initiated actions to occur in recent memory. But after reviewing the Inter-Agency Task Force on Product Liability's proposals for the systematic collection of data on product liability, NFIB became concerned that the Task Force could not provide suffi- cient information on gradations or degrees among small firms. "Small business" was to be considered by the Task Force a separate classification without distinguishing possible differences between larger small firms and smaller small firms. NFIB had no prior proof such differences existed and recog- nized that the Task Force must concern itself with all business, not just small business. As a result, the conduct of this survey shoufd not be construed as tacit criticism of the Task Force's work. But it was this concern and the general urgency that moti- vated NFIB to undertake the survey. NFIB hoped to complete the survey report in time to provide the Task Force with pertinent data and conclusions for incor- poration into the Task Force's scneduled December report. Regrettably, the time consumed in analyzing NFIB's raw data prohibited such input. This survey report, however, is being widely distributed in the interest of providing decision makers with a greater understanding of the impact of product liability on small business. Focus of the NFIB Product Liability Survey At the outset, the decision was made to survey only NFIB's small manufacturer members. While it was recognized that the product liability problem extends considerably beyond manufacturers, it was feared that a survey beyond the manufac- turing sector would so dilute the sample that the figures derived would permit little cross tabulations and, thereby, be of limited utility. Ideally, of course, all business sectors would have been included in the survey but the implication was tripling or quad- rupling the sample size. Financial constraints prohibited such a massive undertaking. It was NFIB's purpose in undertaking the survey to focus on many of the areas suggested by the Department's preliminary report as ones particularly in need of systematic data collec- tion. Thus, the questionnaire (see Appendix for a copy of the questionnaire) was designed to elicit responses that would measure the economic impact of product liability on small manufacturers. But in so doing, the data provided an unintended dividend which shed light on additional questions. ' "Product Liability Insurance Assessment of Related Problems and issues IMethodology and Limitations of the NFIB Product Liability Survey NFIB has over 31 ,000 small and independent manufacturer members. A sample of one out of every seven was drawn from NFIB membership lists and a questionnaire was mailed to these firms October 8th, 1976. Of the 4,214 questionnaires mailed, 1 ,296 responses (30.8%) were received prior to tabulation. Due to urgency and the unsuccessful attempt to make NFIB data available to the Task Force prior to their deadlines for pre- paration of the December report.the questionnaire was not field-tested. Fortunately, the problems experienced as a result were minimal. However, certain changes would have occurred, most notably division of some reponse categories and substitu- tion of one or two questions. Precautions must be taken when surveying small business by mail in order to ensure a sufficient response. The question- naire must be short and not demand such precise responses that the respondent will be forced to check his books or call his accountant. The result is a necessary, but regrettable limita- tion on the information's precision and depth. This is of particu- lar concern should one attempt to extrapolate specific figures from the survey to the entire small business population. The text of this survey report recognizes these limitations. Despite them, however, the information presented is valuable in that it provides trends, makes distinctions, allows comparisons, and generally gives a reasonable idea of size. SUMMARY 1 . Approximately three of five small manufacturers surveyed carry product liability insurance. Propensity to carry such coverage is directly related to firm size. 2. One in twelve, about 9%, of all firms surveyed, cannot afford product liability insurance and another 1 7% cannot afford desired limits. However, less than 1 % cannot find anyone to in- sure them for any price. Almost 3% have "gone bare ". once hav- ing had insurance and now not being able to afford it. 3. Product liability insurance rates are escalating at an alarming rate. 4. By the end of 1976, product liability claims against sur- veyed small manufacturers will have doubled over the past five years. Insurance payments to claimants will have risen signifi- cantly over the same period as well Most claims settled that in- cluded some payment to a claimant are relatively small. However, a substantial difference exists between mean pay- ments and median payments due to a few very large financial settlements. "5. Estimated premium payments of surveyed firms for the coming year will be approximately six times larger than pay- ments made by insurers to claimants over the last 4^/4 years. 6. The most significant finding of this survey is that one in eight surveyed small manufacturers have failed to develop a new (new for the firm) product and one in twenty is drjDpping a product due to the inability to obtain product liability insurance, the cost of product liability insurance premiums, or the threat of product liability suits. This type of impact is predominant in the "Fabricated Metal Products, Tools and Machinery " and the "Chemicals, Petroleum, Rubber and Plastics" sectors. 7. Prior increases in product liability insurance premiums caused 25% of the surveyed firms paying premiums to raise the price of their goods, and another 21 % have raised or will raise their prices due to expected premium increases. 8. Claims filed against surveyed small manufacturers involv- ing products over 1 5 years old, substantially modified, or not given routine maintenance account for less than 10% of all claims, but more than 50% of ail dollars paid to claimants. Bureau of Domestic Commerce US Deoartment of Commerce March '976 533 NFIB SURVEY REPORT ON PRODUCT LIABILITY SMALL MANUFACTURERS CARRYING AND NOT CARRYING PRODUCT LIABILITY INSURANCE Almost three of five (58.5%) small manufacturing firms sur- veyed carry product liability insurance. Ttie existence of coverage is directly related to firm size (see Table 1). As firm size grows, so does the percentage of firms carrying product liability insurance. At the two extremes of firm size, the very largest small manufacturers are nearly three times as likely to carry product liability insurance as are the very smallest. Table 1 SMALL MANUFACTURERS CARRYING PRODUCT LIABILITY INSURANCE BY FIRM SIZE (in percent) Gross Receipts (in thousands) Carry Dont Carry N/A Under $50 $50-$100 $100-$250 $250-$500 $500-$750 $750-$1 ,000 $1 ,000 and over N/A All Firms 28.2 35.3 47.0 52.3 59.0 62.1 78.1 34.4 58.5 70.5 64.7 53.0 45.5 41.0 37.9 19.9 53.1 40.0 1.3 2.3 2.0 12.5 1.5 Given the amount of publicity many trade journals have devoted to product liability and the varying risks assumed by different manufacturing sectors, it might be expected that cer- tain manufacturing sectors would be more prone to carry pro- duct liability insurance than would others. Somewhat surprisingly, marked contrasts appear minimal (see Table 2). While "Fabricated Metal Products, Tools and Machinery" (generally 34-37 2-digit SIC code), and "Chemicals. Petroleum, Rubber, Plastics" (generally 28-30 2-digit SIC code) are higher than average, only "Food and Apparel" (generally 20-23 2-digit SIC code) and "Wood and Paper Prod- ucts" (generally 24-27 2-digit SIC code) are substantially different. Table 2 SMALL MANUFACTURERS CARRYING PRODUCT LIABILITY INSURANCE BY MANUFACTURING SECTOR (in percent) Sector Carry Don't Carry N/A 51.7 48.3 54.8 43.0 40.0 40.0 20.0 Food and Apparel 75.3 24.7 Wood and Paper Products 35.2 63.6 1.2 Chemicals. Petroleum. Rubber Plastics 65.3 31.6 3.1 Stone. Clay, Glass, Concrete 54.4 43.9 1 .8 Fabricated Metal Products, Tools and Machinery 66.9 32.8 0.2 Instruments, Clocks, Photographic and Medical Goods Other N/A All Firms 58.5 40.0 1.5 SMALL MANUFACTURERS NOT CARRYING PRODUCT LIABILITY INSURANCE There exist three primary reasons why 40% of the small manufacturing firms surveyed do not carry product liability in- surance: "Don't Need Any", "Never Considered It", and "Pre- miums Too High " (see Table 3). To the question. "Why don't you carry product liability insurance? ". 86.3% responded with one of the three aforementioned reasons. Tables REASONS FOR NOT CARRYING PRODUCT LIABILITY INSURANCE (in percent) Don'tJ^Jeed Any 38.9 Premiums Too High 20.2 No Insurer Will Carry Me 2.1 Never Considered It 27.2 Self-Insured 2.1 Other 3.1 N/A 6.4 Smaller small manufacturers give the same reasons in roughly the same proportions as do larger small manufacturers for not carrying product liability insurance (see Table 4). Yet, each of the cited reasons for not carrying product liability in- surance can be found more frequently arnong smaller small manufacturers selected at random than larger small manufac- turers selected at random (see Table 5). The reason for this difference simply is due. as seen in Table 1 , to the fact that larger small manufacturers firms have a greater propensity to carry product liability insurance. Thus, the variance between smaller and larger firms in this regard is one of degree and not kind. 934 Table 4 REASONS FOR NOT CARRYING PRODUCT LIABILITY INSURANCE BY FIRM SIZE— FIRMS NOT CARRYING PRODUCT LIABILITY INSURANCE (in percent) - REASONS No insuror Gross Receipts Don't Need Never Con- Premiums Will Carry Self- (in thousands) Any sidered It Too Higti Me Insured Other N/A under $100 40,5 24.8 26.4 2.5 1.7 1.7 2.5 $100-$750 40.6 29.7 15.2 1.5 2.3 2.7 7.8 $750 or more 34.4 22.4 27.2 2.4 2.4 5.6 5.6 N/A 35.3 41.2 — 5.9 — — 17.6 Table 5 REASONS FOR NOT CARRYING PRODUCT LIABILITY INSURANCE BY FIRM SIZE— ALL FIRMS (In percent) REASONS No Insuror Gross Receipts Don't Need Never Con- Premiums Will Carry Self- (in thousands) Any sidered It Too High Me Insured Other N/A under $100 27.2 16.7 17.8 1.7 1.1 1.1 1.7 $100-$750 19.2 14.0 7.2 0.7 1.1 1.3 3.7 $750 or more 7.9 5.2 6.3 0.6 0.6 1.3 1.3 Sl/A 18.8 21.9 — 3.1 — — 9.4 The reason most frequently cited for not carrying product liability insurance is that none is needed (see Table 3). 1 5.6% of the entire survey sample hold that vievtr. While the data fails to provide sufficient instances to correlate this response to pro- duct liability claims filed against firms responding in this man- ner, small manufacturers not now carrying product liability in- surance have had significantly fewer product liability claims filed against them over the past five years than have their coun- terparts carrying such insurance (see Table 6). Table 6 FIRMS CARRYING AND NOT CARRYING PRODUCT LIABILITY INSURANCE EXPERIENCING ONE OR MORE CLAIMS IN A YEAR (in percent) Year Carry Don't Carry 1 976 (1 St nine months) 1975 1974 1973 1972 7.5 7.9 6.6 3.8 5.0 1.9 1.2 1.5 1.2 1.2 Even then the data contained in Table 6 could be somewhat misleading in that the horizontal variable is based on one point in time (the present) while the vertical variable is five different time periods. Thus, the data is not adjusted for a firm which may have either picked up or dropped coverage within the last 4^/4 years, and the survey provides no ability to do so. Individual firms responding "Don't Need Any " may or may not have an accurate perception of their vulnerability to product liability claims. Obviously, product liability claims have not been a problem for these firms or their response would have been different. But the data seems to indicate many of these firms may be laboring under a false perception, thereby court- ing disaster. Table 5 indicates only 7.9% of the firms grossing $750,000 or more don't feel in need of product liability in- surance, while over three times that percentage of firms gross- ing $100,000 or less don't feel a need. Since need for product liability insurance coverage is a function of risk, and product liability risk would seem to be more a function of product(s) manufactured than firm size, it is very possible there are a large number of smaller small firms which stand in peril and don't real- ize it. The second most frequently cited reason for not carrying product liability insurance is that the firm "Never Considered It". One in ten (1 1 .0%) of all small manufacturers surveyed simply hasn't thought about product liability insurance. This response indicates a low level product liability awareness is found among a healthy minority of small manufacturers. One probably would suspect the "Never Considered It" response is predominant among the very smallest firms as a low level of awareness is generally associated with that size group. ^ The data does lend credence to this suspicion. 30.9% of firms not carrying product liability insurance and with gross receipts of $50,000 or less have "Never Considered It ", in con- trast to 18.0% of the firms not carrying product liability in- surance and with gross receipts of $1 ,000,000 or more. But in consolidating size classifications from seven to three for pur- poses of expanding the number of respondents in each classification, it is found that the middle sized classification ($100,000-$750.000 in gross receipts) most frequently, 29.7% The term "low level of awareness" is not perjorative and should not be equated with a low level of intelligence 539 of the time, cite this reason (see Table 4). The smallest of the three classifications ($100,000 or less in gross receipts) cited it 24.8% of the time, and the largest ($750,000 in gross receipts) cited it 22.4% of the time. As previously discussed, it is very possible there are a goodly number of smaller small manufacturers who mistakenly feel they "Don't Need Any" and, therefore, stand in peril of product liability claims. But the substantial number of firms re- sponding "Never Considered It" virtually guarantees there is a significant percentage of small manufacturers with their heads in a noose. While "Don't Need Any " and "Never Considered It " are not mutually exclusive responses, there is no reason to believe firms which have never considered carrying product liability insurance are significantly less vulnerable to product liability claims than the sample generally. Regrettably, the survey provides no data to determine whether or not the percentage of firms which have never con- sidered product liability insurance has decreased in the past few years. With increasing attention focused on product liability, it is probable this percentage has decreased and will continue to do so. But that is speculation. The third most frequently cited reason for not carrying prod- uct liability insurance is that the premiums are too high. This reason is cited by one in five firms not presently carrying such insurance (8.5% of all firms surveyed). The significance of this datum is compounded when we recognize that there are firms carrying product liability insurance incapable of affording coverage with higher limits. The question "Are you satisfied with the limit (ceiling per claim) you now have?" was asked of all firms carrying product liability insurance and 29.8% (16.9% of all firms surveyed) responded, "No, but can't afford higher limits " (see Table 7). Thus, adding the two responses, we find exactly one in four small manufacturers surveyed can't afford the product liability insurance coverage desired. 1 5.0% of the firms currently not carrying product liability in- surance did so at one time. Half of that number dropped their in- surance because premiums were too high. To date 2.9% of all small manufacturers surveyed have dropped their product liability insurance due to cost. And if reports from NFIB mem- bers scattered throughout the country remotely come to frui- tion, that percentage will escalate rapidly. All small businesses as a general rule are restrained from raising prices by large businesses dominating the market. As a result, the ability of small businesses to pass through cost in- creases whether they be insurance or raw materials is subject to the behavior of large firms. This condition is particularly troublesome to small manufacturers as after tax earnings per dollar of sales are substantially less than for large manufac- turers. ^ Reviewing Tables 4 and 5, it is found that firm size has little relevance to affordability of insurance if a firm does not carry product liability insurance with the exception of the middle size classification; but it has substantial relevance when consider- ing all firms, again with the middle size classification being an exception. These data are corroborated in Table 7. This Table reveals a sharp contrast by firm size among those small manufacturers carrying product liability insurance over satisfaction with existing limits. Column "No, but can't afford higher limits " is the item of immediate interest. Affordability is an important factor in determining the product liability in- surance limits of small manufacturer, but it is most pronounced among the very smallest. Note in Table 5 and Table 7 firms with annual gross receipts of $100,000-$750,000, the middle size classification, far more closely resembles the larger classification than the smaller classification in terms of affording desired coverage. The data provides no explanation for this phenomenon. It might be hy- pothesized that up to a certain break-point, e.g., $100,000 in annual gross receipts, any non-productive cost is substantially more difficult to bear than beyond that break-point. There is evidence that non-productive costs do weigh much more heavily on small businesses than large businesses.^ but similar evidence comparing smaller small firms and larger small firms is not existent. The phenomenon in Table 5 anB Table 7, therefore, requires further investigation if it is to be explained. An inability (or possibly a refusal) to pay high insurance pre- miums dwarfs the response "No Insurer Will Carry Me" (see Table 3). But these two responses are not mutually exclusive. The difference between the two may only be a willingness by an insurer to quote a price. If a price quoted is preposterous, then a serious question arises as to whether the premium is too high or whether in effect no insurer will carry the firm. While the point may appear esoteric, it is not; for any action undertaken by an appropriate body must recognize that quotation of a premium price per se is not significant. The significance lies in the affor- dability of the price quoted. Table 7 SATISFACTION WITH EXISTING LIMITS BY FIRM SIZE— FIRMS CARRYING PRODUCT LIABILITY INSURANCE (in percent) Gross Receipts (in thousands) SATISFACTION No, but can't No, but insurer afford higher won't give me Yes limits higher limits Undecided N/A 29.3 41.3 1.7 22.4 5.1 43.8 28.1 5.0 18.1 5.0 51.5 27.2 3.7 14.2 3.4 36.4 27.3 — 9.1 27.3 46.7 28.6 4.0 16.2 4.5 under $100 $100-$750 $750 or more N/A all firms ^ See Quarterly Financial Report for Manufacturing Corporations. Federal Trade Commission; series ' Differential Impact o( Pollution Control Requirements on Small vs Large Business in Grain ana Stone Industries. Small Business Adminislralion. prepared by JACA Corp . (Fl Washington. PA ). May, 1975 536 For example, an NFIB member in Oregon last year carried $1 ,000,000 coverage for a premium of $344.00. The best quote obtainable for tfie firm in 1976 was a premium of $150,000 for $300,000 coverage and a $25,000 deductible. The firm's his- tory shows one claim filed against it over the past five years with a settlement of $12,000. Not surprisingly, this small manufacturing firm elected to drop its product liability coverage. In responding to the survey the NFIB member cited "Premiums Too High" as the reason for not carrying product liability insurance. But were the premiums too high or effec- tively would no insurer carry him? Self-insurance is another reason small manufacturers may not carry product liability insurance, but not surprisingly very few small firms opted for this form of protection. The problem for most small firms is the lack of capital, a problem that Is not likely to be mitigated in the near future. (For more information on self-Insurance see "Commentary on Two Proposed Solu- tions".) SMALL MANUFACTURERS CARRYING PRODUCT LIABILITY INSURANCE With increases in product liability insurance premiums ignit- ing concern over the entire area of product liability, firms carry- ing product liability insurance were asked what their next pre- mium increase would be. considering the volatility of premiums and carriers dropping lines of product liability insurance. However, a mathematical quirk in the data" and the fact that smaller small firms are con- siderably more inclined not to know than are larger small firms, would seem to indicate the degree of uncertainty attributable to the product liability "crisis ' is not as great as the 35.9% figure would lead one to believe. t^anufacturers expecting the smallest percentage of pre- mium increase do not vary by firm size. But, practically all firms expecting the largest percentage increase are the largest small manufacturers. This is offset by the disproportionately large percentage of smaller firms which simply "Don't Know ". The data offers no explanation for this difference. If it is given, however, that smaller small manufacturers are generally less aware of the product liability problem, and evidence does exist to support this contention (see "Small Manufacturers Not Carrying Product Liability Insurance "), then uncertainty may translate into naivete among a number of firms, thereby, skew- ing Table 8 in a conservative direction. Table 9 shows most small manufacturers will pay less than $5,000 in product liability insurance premiums. While the im- pact of that premium significantly varies between firms grossing $50,000 or less annually and those grossing over $1 ,000,000 annually, the extremely large premium is certainly the excep- tion rather than the rule. Table 8 NEXT PRODUCT LIABILITY INSURANCE PREMIUM INCREASE Percent of Firms — Factoring ou* "Don't Know" and "N/A" Amount Percent of Firms Responses 24.4 35.5 21.4 14.0 3.4 1.3 no major change 15.2 less than 50% 22.0 50-100% 13.3 1 00-500% 8.7 500-1,000% 2.1 1 ,000%, or more .8 Don't Know 35.9 N/A 2.0 Table 9 NEXT PRODUCT LIABILITY INSURANCE PREMIUM Percent of Firms — Factoring out "Don't Know" and "N/A" Amount Percent of Firms Responses less than $5,000 55.8 $5,000-$1 0,000 11.9 $10,000-$25,000 8.2 $25,000-$50,000 3.0 $50,000-$1 00,000 2.4 $100,000 or more 3.0 Don't Know 13.1 N/A 2.6 66.4 13.9 9.7 35 2.8 3.7 The data on Table 8 indicates that premium increases of 1 00% or more are the exception rather than the rule. In fact, pre- mium increases during the next premium period will be moder- ate considering what we have been led to believe. Neverthe- less, by any other measure, premiums will escalate at an in- credible rate. Over 75% of the small manufacturing firms which knew (or thought they knew) their next product liability insurance pre- mium face major percentage increases; over 40% of these firms face an increase of 50% or more. But the real horror stories to which we have almost become accustomed are not now com- mon. 35.9% of the firms don't know what percentage increase to expect. A large degree of uncertainty should not be surprising * A striking difference is found between ttie percentage 0( firms not knowing ftle percentage of ttneir next product liability premium increase (35 9"-l and ttie percentage of firms generally not knowing ttie dollar amount of ttieir next premium increase (1 3 6%) (see Table 9) Ttie difference in some degree is attributed to firms witti relatively small premiums Any dollar increase may substantially affect ttie percentage of increase, but not substantially affect tfie dollar amount For example, a firm may currently tiave a $300 premium and be told tfie next premium will be anywhere between $600 and $1 ,200 Under ttiese circumstances, tfie respondent would not know tfie percentage increase witfi sufficient precision to answer but would know ttie dollar increase witfi sufficient precision to answer Furtfier, ttie failure to adequatefy refine ffie smallest response category in tfie question leading to development of Table 9 (size of next premium) probably gives a false impression over tfie degree of certainly existing as to dollar amount increases (see "Introduction f^effiodology and Limitations of ffie NFIB Product Liability Survey ) There exists an obvious correlation between size of firm and size of premium. Yet, significant numbers of larger small manufacturers still will pay less than $5,000 in premiums. Of the small manufacturers grossing $1,000,000 or more annually 39.8% fit into the lowest premium classification. The surprise, however, is the low correlation between industry sector and premium paid. While 28-30 and 34-37 SIC codes generally ap- pear to be paying higher premiums, the difference is relatively small. Cross-tabulating data on latest rate change and next policy renewal with premium increases (data on Tables 8 and 9) was completed for the purpose of determining whether responses to premium increase questions were influenced by the period when current rates were established or the period the policy is scheduled for renewal. The determination was negative. Those 537 Tabia 10 SMALL MANUFACTURERS EXPERIENCING A PRODUCT LIABILITY CLAIM* Year (in percent) NUMBER OF CLAIMS FILED 2-3 4-5 6-10 10 + Total 1976 (1st 9 months) . 1975 1974 1973 1972 ' Adjusted (or firms in business less than five years 3.3 1.2 .4 .1 .2 5.2 3.1 1.5 .2 .2 .3 5.2 2.6 1.5 .2 .2 .2 4.6 1.6 .5 .4 .2 2.9 2.5 .8 .1 .1 .2 3.8 firms whose rates were established more than twelve months ago do not differ in anticipated premium increases (either per- centage or dollars) from those whose rates were established less than twelve months ago. Similarly, those firms scheduled for renewal in the next twe'lve months do not differ in this regard from those scheduled for renewal in more than twelve months. Most current product liability insurance rates have become effective for the individual firm within the past twelve months. More than two-thirds (68.6%) of the surveyed firms carrying product liability insurance are in this position. 22.0% reported current rates became effective more than 12 months ago and another 9.4% either didn't know or didn't respond. At the same time, 82.8% of these firms indicated their product liability in- surance is scheduled for renewal within the next twelve months. Only 10.3% of the respondents are scheduled to have their in- surance renewed in more than twelve months with 6.8% either not knowing or not responding. (Note — These two pieces of data measure similar, but not identical activity, for two different time periods. While it is assumed rates will be reviewed whenever the policy is renewed, it is not always true that rates remain unchanged for the duration of a policy.) These data cor- roborate the apparent growing trend in the industry to sell prod- uct liability policies on an annual basis. CLAIMS AGAINST SMALL MANUFACTURERS Over the last 4 3/4 years the number of surveyed firms ex- periencing a product liability claim filed against them has in- creased dramatically (see Table 10)*. Just five years ago, in 1972, 3.8% of the surveyed firms had a product liability claim filed against them. In the first nine months of 1976, 5.2% ex- perienced such a claim. This increase has been steady with the sole exception of 1973. Given the sharply increasing number of firms experiencing a claim, it is not at all surprising that the total number of claims is also sharply increasing (see Table II). In fact, it is probable that by the end of 1 976, the number of claims filed against surveyed firms will be more than double the number filed just five years ago. Over the past 4 3/4 years, insurers have paid approximately $1,110,000 to persons filing product liability claims against surveyed manufacturers. (Another $1 66,000 or 1 3.0% of all dol- lars received by claimants was paid directly by the firm. These figures simply confirm the generally accepted premise that small manufacturers are highly dependent on insurance to cover their product liability losses.) Each succeeding year with the exception of 1973 has found more and more dollars being paid out by insurers. Note in Table 13 that most claim settlements involve a relatively small number of dollars. Settlements of less than $1 ,000 are common throughout the period data was gathered. But the mean is significantly larger than the median in each of the last five years simply because of a few large settlements. In fact, of the $1,1 10,000 paid by insurers to claimants over the surveyed period, $375,000 or 34.1% was directly attributable to just three claim settlements — one for $1 75,000 and two for $100,000 each. Many claims filed against small manufacturers are either dropped or thrown out of court. For example, one respondent resolved eighteen product liability claims over the past 4 3/4 years without one claimant receiving a nickel. Another has had eight resolved with similar results. While the data provides no specific information on claims dropped or thrown out of court, it is known that the average settlement per claim filed (whether successful or not) has been $2,600. Compare that figure with the "Mean " column in Table 13 and note the difference. While as later mentioned, settlements used in the construction of Table 13 tend to involve a disproportionate number of larger claims, the $2,600 average payment per claim lies in stark con- trast to tlie "Mean " column. The implication, of course, is that a Table 11 PRODUCT LIABILITY CLAIMS FILED AGAINST SMALL MANUFACTURERS BY YEAR* Year Number of Claims Increase from Previous Year The survey provides no data on the size of claims being filed. Comments from individual NFIB members as well as information from other sources lead to the belief they are sharply increas- ing just as are the number of claims filed. However, the survey provides a more significant piece of data — dollars paid clai- mants (see Table 12 and Table 13). ^Claims and suits are not synonymous Claims exist without suits, but suits don't exist 1976 (1st 9 months) 1975 1974 1973 1972 150 158 122 85 83 36 37 2 ' Not adjusted (or firms in business less than five years 13 4% of the sample firms are five years old or less $38 Substantial percentage of claims filed are either dropped or thrown out of court. While the data reveals a trend toward a substantial increase in the number of product liability claims filed and aggregate payments to claimants by insurers, the data is inconclusive as to the trend in size of settlements. In fact, a plausible argument could be made from the survey data that increased insurer costs (assumed to be the basis for premium increases) are a function of increased claims filed and not of increased settle- ment sizes. Table 12 INSURANCE PAYMENTS TO CLAIMANTS BY YEAR* Year Aggregate Payments Increase from Previous Year 1976 (1st 9 months) 1975 1974 1973 1972 $387,551 281,703 204,883 83,171 152,166 $ - 77,532 121,712 -68,995 ' The dollars in thts Table represent resolution ot421 claims Twenty-six additional claims were resolved during the period but the payments to claimants, if any were not ascertainable PREMIUMS AND CLAIMS PAID— A SUBSTANTIAL DIFFERENCE (This portion of the survey report is included with a great deal of trepidation. The fear stems not from presentation of the data, but that the data will be lifted out of context and without essential caveats. When drafting the questionnaire for this survey, the relationship between premiums paid and claims paid was not considered an area of fruitful investigation. Therefore, the data on this topic is not as complete as desir- able. Yet in analyzing the survey results, the difference in pre- miums to be paid and claims previously paid is in such extreme contrast, it could not be ignored.) Small manufacturers surveyed will pay six. times as much in product liability insurance premiums during the next year as was paid to all claimants of all surveyed firms over the past 4 3/4 years. It is conservatively estimated that those surveyed firms will pay $6 1/2 million in product liability insurance pre- miums in the next year contrasting to estimated claims paid of only $1.1 million (see footnote for method of deriving these estimates)^ over the period for which data was gathered. While the latter figure only represents amounts paid to claimants and does not include such administrative expenses as fighting suc- cessful or unsuccessful claims, paperwork in processing Table 13 SIZE OF RESOLVED CLAIMS* Year Range Range Mean Median High Low Number of 14,768 $2,000 $175,000 $100 25 5,700 2,966 37,000 30 20 8,093 2,500 .47,000 100 23 5,974 3,000 22,000 100 11 9,323 1,200 100,000 50 15 1976 (1st 9 months) 1975 1974 1973 1972 ' Table 1 3 was constructed by hand directly from the survey questionnaires Since several respondents were compelled to lump more than one claim and possibly more than one settlement into single response columns, only 94 resolved cases could be located where a claimant received a payment that was directly attributable to a specific claim As will be discussed subsequently (see "Commentary on Two Proposed Solutions ) this isolated claim settlement tends to be larger than the average settlement ^From data available in Table 9. it is estimated surveyed firms will pay over $6 '/» million in annual premiums during the coming year, This estimate was derived by multiplying the number of re- spondents by the assumed average premium for each response classification and totaling the resultant figures (see Table A). Table A ESTIMATING PREMIUMS PAID Response Classification Assumed Ave Number ol Dollars in Table 9 Premium Respondents Paid less than SS.OOO $ 1 .000 431 $ 431.000 $S.000-$1 0.000 6.500 90 585,000 $10.000-$25.000 1 5.000 63 945,000 $25.000-$S0.000 32.500 23 747,000 $50.000-$1 00.000 65.000 18 1 .1 70.000 $100,000 or more 110,000 24 2,640,000 Don't Know - 102 $6,518,000 The 1 02 surveyed firms that responded "Don't Know" obviously will pay an average premium, but since there is no basis for estimation of that premium they have been omitted from the total of estimated premiums paid. Their incorporation would increase the estimate. Since it is known smaller small manufacturers were far less likely to know what their premium will be than larger small manufacturers, and since it is known premiums are related to firm size, the omission of the substantial number of 'Don't Knows ' from the estimate is not as drastic as it may seem (Footnote continued on page 10) 539 claims, etc., the difference is too substantial to be accounted for by such overhead costs. Insurance premiums are based on specific actuarial assump- tions. These assumptions are rooted in historic patterns. If con- ditions rapidly change, mooting or at least substantially altering these historic patterns, then actuarial assumptions must change and a new basis must be found for development of new assumptions. Product liability insurers have been confronted with such rapidly changing conditions. Table 11 and Table 12 illustrate these types of changes. But despite this actuarial nightmare, the data suggests that current actuarial assumptions may be overly pessimistic. Two NFIB members provided unsolicitated experiences serving to confirm that which the data suggests. The first mem- ber, from Arizona, was originally quoted a 1976 premium of $1 0,000, but according to the proprietor, "The figure was even- tually whittled down to a more reasonable figure of $2,500." A similar experience was reported by a member in Ohio. Originally he was quoted a premium of $11,093, and after screaming "bloody murder" had it reduced to $4,492. While a number of factors may have been responsible for insurers in these two instances reassessing rates, it is difficult to believe the magnitude of reduction would have been possible if in- surers were confident of the risk upon which their assumptions are made NFIB recognizes the difficult straits within which the in- surance industry now finds itself. But small businessmen are going bare and being forced out of business by the high rates of product liability insurance. So // unwarranted caution is being demonstrated by the Industry, then thousands of small businessmen are paying an incredible and unfair price for the industry's insecurity. THE ECONOMIC IMPACT The economic impact of the product liability problem can be segregated into three areas: competition, inflation, and employ- ment. Each is discussed separately. While it would be desirable to place a dollar figure to the economic impact of product liability on small manufacturers, the data available does not permit responsible persons to offer such estimates. Suffice It to say there already is an unfavorable impact on competition, in- flation, and employment that, if allowed to grow, could have im- portant consequences not solely for the individual firm directly affected, but for the economy as well. Competition The inability to obtain product liability insurance, the cost of product liability Insurance, and the threat of product liability suits already have reduced the competition of and among small business. This phenomenon can be seen in two ways: product or product lines dropped and failure to develop new products or product lines. (For the remainder of the discussion on economic impact, the word "product" will also refer to "prod- uct line".) 4.6% of all firms responding to the survey report they have dropped a product or plan to do so as a result of product liability considerations. This Is compounded by another 3.9% indicating they are actively considering dropping a product and a further 5.5% reporting Indecision on such action. Thus, one in twenty small manufacturing firms will take a product out of the market exclusively due to the consequences of product liability and slightly less may follow. 17.2% of the firms having plans to drop a product or actively considering such action Indicate sales would be reduced less than 5%, while 6.4% report a reduction of 51% or more (see Table 14).' The relatively small number of cases in each category does not permit breaking down Table 1 4 to determine whether impact on the individual firm varies by firm size or in- dustrial classification. * Table 14 IMPACT ON SALES OF FIRMS DROPPING, PLANNING TO DROP, OR ACTIVELY CONSIDERING DROPPING A PRODUCT (in percent) Affected Sales Firms Affected less than 5% 5-10% 11-25% 26-50% 51 % or more N/A 17.2 30.0 29.1 10.0 6.4 7.3 (Footnote 6 continued) The "Assumed Average Premiums" are arbitrary figures. Note they do not "split the difference" of a response classification's extremities Each is on the lower side The reason for this deterimination quite simply is that the higher the response classification, the smaller the number of respondents Therefore, the scatter of responses within a particular response category proba- bly coagulates toward the tower extreme Estimates of dollars paid claimants are more precise simply due to the method of data collection Respondents indicated their msurors paid a total of $1 ,1 09,474 to claimants over the last 4 3/4 years Six firms with a total of 26 resolved claims could not recall the amount insurers paid claimants Since these 26 claims represent only 5 4% of all claims resolved over the period in question and since any significant amount paid would probably be remembered by the respondent, these claims were omitted from the estimate It is likely the omission of "Don't Knows" from the estimate of premiums paid far outdistance the omission of the 26 claims in question ' Firms indicating they have dropped plan to drop or are actively considering dropping a product due to product liability considerations were asked to estimate the percentage o( sales affected {see questions ft 7, ^7a, and ft 7c of the questionnaire located in the Appendix) Despite clear directions that response to the sales impact questions was contingent on a positive response to the previous question over twice as many respondents claim an impact on sales from product liability as stated they have dropped planned to drop or were actively considering dropping a product The immediate thought was that directions to the respondents were no! as clear as they may have originally seemed (see Introduction tviethodotogy and Limitations ol the NFIB Product Liability Survey ) but in reviewing identical directions in other parts ot the questionnaire (Note— questions ti i Oe '-■ 1 Oel - lOf and '• lOfl) similar problems were minimal The question then became if directions are identical why should respondents toMow them on one portion ot the questionnaire and not on another "> The answer logically appears to be that product liability is having a sales impact on some firms not involv- ing elimination of a product If this answer is correct, then the impact on sales of product liability would be substantially greater than the data reveals Table i 4 provides sales impact data oniyior those firms which indicated they have dropped plan to drop or are actively considering a product Other respondents to the sales impact questions have been filtered ou' 540 These data should be considered in light of two important facts: many small manufacturing firms are single product or single line firms. They don't possess the flexibility to shift from manufacturing one product to another. The consequence for these firms dropping a product, therefore, is going out of busi- ness. The second fact to consider is that the survey sample does not include any firms that recently may have gone out of business due to product liability. While NFIB has received only isolated reports from its members of firms actually going out of business due to product liability, it is happening. A second aspect of competition is failure to develop or in- troduce new products. 1 2.8% of respondent firms, one in eight, failed to develop a new product (new for their firm) due to in- ability to obtain product liability insurance, the cost of product liability insurance or the threat of a product liability suit. That is a large percentage even though the question required a projec- tion of intentions which may have been unduly optimistic. (Op- timistic in the sense that the small manufacturer may assume potential for a new product that may not exist for reasons of market conditions, inability to acquire sufficient capital, etc.) Regrettably, the impact on competition cannot be measured as there are too many unknown market factors which would have to be considered. However, the substantial number of affirma- tive respondents demonstrate that product liability stifles initia- tive to develop new products. Reduction in competition due to product liability is con- centrated in "Chemicals, Petroleum, Rubber and Plastics " and "Fabricated Metal Products, Tools and Machinery". As Table 15 demonstrates, those firms generally classified 28-30 and 34-37 2-digit SIC code are two to three times more likely to drop a product or fail to develop a product as a result of pro- duct liability than is the average small manufacturing firm. This data is not surprising and is in accord with general impressions. Table 15 EFFECT ON COMPETITION BY INDUSTRIAL CLASSIFICATION (in percent) SIC Code Dropped or considering dropping a product Didn't develop a product 28-30 34-37 All Firms 18.4 12.6 8.5 24.8 17.8 12.8 Contrasting the data found in Table 1 4 to estimated sales, it appears that small manufacturers surveyed have lost or will lose very roughly 1 % of their sales due to product liability con- siderations. But the impact on competition varies so greatly from industrial sector to industrial sector as seen in Table 15 that it appears virtually non-existent in some industries and rather substantial in others. The implication is that competition is being significantly reduced for the 28-30 and 34-37 SIC codes. Further, failure to develop new products in these areas warrant concern that competition will be reduced even more In the future. Establishing the general extent to which product liability considerations have stifled the initiative to develop new pro- ducts is the most significant finding in this survey and one with profound implications for the entire economy. The American standard of living and the economy's ability to absorb increas- ing numbers of its citizens into the work force is highly depen- dent on the ability to provide new products and technology. Small business is a major source of such advances. Yet, because of product liability considerations small business is inhibited from developing the new products and technology es- sential to the growth of the American economy. This point can- not be overemphasized and may be in the long term the most detrimental macro-economic effect of the current product liability "crisis". Inflation 25.3% of all firms carrying product liability insurance (1 4.8% of all firms surveyed) report they have raised prices due to the cost of product liability insurance. Another 21 .7% (1 2.7% of all firms surveyed) report they have or will raise prices due to ex- pected increases in the cost of product liability insurance. Considering 14.2% (8.3% of all firms surveyed) have not yet decided whether to raise prices due to expected premium in- creases (the indecision is probably a function of the substantial numbers who do pot know what premium increase to expect), it is fair to assume that more than 21 .7% of the firms will raise prices due to the next premium increase. Most price increases due to product liability insurance costs are relatively small. (Data gathered, however, measured the impact on price increases for all products sold by a firm, not on a specific product or line of products.) Table 16 indicates the vast majority are (will be) 5% or less with very few firms ex- periencing (or expecting to experience) increases of 11% or more. The survey attempted to discern other product liability re- lated costs that have had an impact on a small manufacturer's sales prices. Responses were too few and too sketchy to pro- vide any systematic analysis. Some firms did report an impact, e.g., a deductible, a small claim paid out of pocket, or an unin- sured claim paid. But, it appears such costs have not been a major problem nor have they contributed to price increases. Table 16 PRICE INCREASES DUE TO PREMIUM INCREASES FOR PRODUCT LIABILITY INSURANCE Amount of increase for all products sold by the firm Due'to previous premium increases All firms Firms with insurance Due to expected premium increases II firms Firms with insurance 5.0% 8.6% 4.5% 7.7% 2.1% 3.6% .4% .7% 5.8% 9.9% I -2% 3-5% 6-10% I I % or more Not Yet Determined 8.1% 4.8% 2.1% .3% 1 3.9% 8.2% 3.6% .5% 541 With the increasing use of large deductibles and the growing number of firms "going bare", non-insurance covered product liability costs will rise. However, it is doubtful these will trans- late proportionately into price increases. When a large portion of a competitive milieu takes on a non-productive cost such as insurance, the ability for the individual firm to pass on the cost is enhanced. But should an individual small firm solely en- counter a non-productive cost, such as a non-insurance covered claim settlement, the ability of that firm to pass it on is low; the firm generally must either absorb the cost or not be competitive. Therefore, premium increases probably will con- tinue to be the factor directly responsible for price increases rather than non-insured costs. Price increases appear to be more closely related to in- dustrial sector than firm size, but firm size is also a factor. Again, as with competition, the 28-30 and 34-37 two-digit SIC codes are substantially more affected than the average small manufacturer. Differing from competition, however, there exists a low but direct relationship between firm size and having raised prices due to product liability insurance premiums. Employment While it is obvious that a product not developed results in unrealized jobs, the survey provides no data that allows the estimation of such lost opportunities. Similarly, the survey is not capable of estimating jobs lost because of product liability- induced price increases causing an inability to compete. However, employment lost due to product liability-induced lost sales is ascertainable (see Table 17).^ An estimated 300 employees will lose or may lose their jobs among all 1 ,296 firms surveyed due to sales lasses directly at- tributable to product liability. This total is approximately 1 % of all persons employed by all surveyed firms which roughly cor- responds to'the estimated loss in total sales. Obviously, the estimated 300 employees losing or possibly losing their jobs among surveyed firms is not necessarily a net loss of employment. Part or even all of the lost sales which caused lost jobs could have been picked up by other* firms with a resultant employment increase in those firms. Such informa- tion simply cannot be ascertained from a survey of this nature. Nevertheless, the survey shows employees are being released and employment opportunities are not being realized simply because of the product liability problem. COMMENTARY ON TWO PROPOSED SOLUTIONS While the purpose of this survey was not to attempt to dis- cover solutions, two questions directly bearing on proposed solutions were included in the questionnaire. The first was addressed to a frequently voiced complaint of small manufacturers. The question read, "How many of these claims involved products over 15 years old, products substan- tially altered since you sold them or products not given routine maintenance?" Three conclusions resulted: a relatively small number of claims involving these conditions are made; these claims tend to be singular and are filed against firms with a generally "clean" product liability history; and, payments to claimants for this type of claim are generally large and result in a substantial portion of total dollars paid. Thus, a "statute of limitations" as well as changes in the location of responsibility seem to offer significant potential for gaining control over the "crisis ' in product liability. Of the 598 claims lodged against surveyed firms over the past 4 3/4 years, only 52 were attributed to products more than 15 years old, substantially modified after sale or not given routine maintenance. This amounts to a relatively small 8.7%. Thirty-nine such claims were filed with the 1 64 firms experienc- ing only a single claim in any one year. Of the 71 firms ex- periencing 2-3 claims in any one year, only 1 2 had claims of this nature. The remainder — one — was filed against the 34 firms ex- periencing 4 or more claims in a single year. But in stark contrast to their low numbers is their very high dollar value (see Table 18). Of the estimated $1,110,000 in claims paid by insurers to individuals making claims against surveyed firms over the last 4 3/4 years, an estimated $581,150 or 52.3% was attributed to products over 15 years old, substantially modified after sale or not given routine main- tenance. While the data does not permit distinction among these three causes, unsolicited comments frequently accom- panying responses seem to indicate the former — products over 15 years old — is the real culprit. A second proposal, apparently being "kicked about" in government circles, involves a type of self-insurance where specified sums would be set aside for use in payment of claims not covered by insurance, claims in excess of limitations or to cover a large deductible. The questionnaire suggested such a contingency fund might range from $10,000 for very small manufacturers to $100,000 for larger small manufacturers. Table 17 LOST SALES AND LOST EMPLOYMENT DUE TO PRODUCT LIABILITY (those reporting losses or expecting losses) Sales Amount of loss Firms affected Employment iployees loss Firms affected none 30.0% 1-5 44.5% 6-10 8.2% 11-25 1 0.0% 26 or more — N/A 7.3% less than 5% 5-10% 1 1 -25% 26-50% 51% or more N/A 17.2% 30.0% 29.1 % 1 0.0% 6.4% 7.3% ^ The same phenomenon arose in the number of respondents to questions relating to employment as did on questions relating to sales affected (see "The Economic Impact Competition ) It was analyzed in the same manner and similar conclusions were reached Likewise, Table 17 was constructed in the same manner as Table 14 542 Year Table 18 AGGREGATE PAYMENTS TO CLAIMENTS BY NATURE OF CLAIM AND YEAR Total payments to claimants Payments to claimants caused by longevity, modification or maintenance 1976 (1st 9 months) 1975 1974 1973 1972 $387,551 281,703 204,883 83,171 152,166 $319,100 45,700 63,300 20,150 132,900 Not surprisingly, surveyed small firms threw cold vi^ater on the proposal. 42.8% of the respondents reported they could not establish such a fund and another 24.8% reported they could do so, but with difficulty. Only 5.9% indicated such a fund was readily possible with 8% already possessing a similar fund. The remainder were either undecided or did not respond. Among those reporting they could not establish such a fund, firms with gross receipts of $50,000 or less were three times less likely to respond affirmatively than those with $1 ,000,000 or more in gross receipts. Yet only 10.5% of the latter size classification of firms indicate a capability to establish such a fund without difficulty. These results should not surprise anyone. Small firms already lack access to capital and establishment of such a non- productive fund would exacerbate an existing serious problem. Therefore, proposals revolving about, some type of product liability fund, e.g., tax deductions or credits to help compensate for the non-productive use of capital, are absolutely superfluous for small manufacturers. AN APPEAL The unavailability and high cost of product liability insurance is having a major impact on small manufacturers as well as other small businesses not surveyed. But, it must be remembered that unavailability and high cost are generally the effects of the pro- duct liability problem — not the causes. While an immediate and short-term solution needs to be found in order to mitigate the effects of product liability, any real solution lies in rectifying the causes. It would, therefore, be tragic if an immediate short-term answer for the effects were assumed to be a final solution. Product liability is not a problem that will disintegrate from lack of attention. It will continue to prey on small business until a final solution is implemented. Why not then resolve it with the sense of urgency it deserves? 543 Appendix SURVEY OF NFIB MANUFACTURERS ON PRODUCT LIABILITY Please circle the appropriate answers or fill in the blanks 1 What is your form of business organization? [T\ Proprietor [T] Partnership [3] Corporation 2. How many employees do you have (full and part-time, including yourself)? 3 In what range were your gross receipts during your latest calendar year? (IN THOUSANDS)? [7] Under $50 [3] $100 to $250 [7] $500 to $750 [7] $1 ,000 — over jT] $50 to $100 [T] $250 to $500 [e] $750 to $1 ,000 4. Which of the following best describes the type of product you manufacture? Food and Apparel [4] Stone, Clay, Glass, Concrete Wood and Paper Products [5] Fabricated f^/1etal Products, Tools & Machinery Chemicals, Petroleum, Rubber, Plastics (T] Instruments, Clocks, Photographic and Medical Goods [7] Other (please explain) 5. How long has your firm been in business? Years 6, Do you cany product liability insurance?. — 1 y 1 — 1 ^ (If YES, please complete Part I; if NO, please skip Part I and complete Part II) If your product liability insurance is part of "umbrella" coverage, i e.. fire, theft, casualty, etc., try to separate product liability from the others, and answer as best you can. PARTI a. When did the current rates for your product liability insurance become effective? |T] Over 1 2 months ago [T] Within the last 1 2 months [3] Don't recall b. When is your product liability insurance scheduled for renewal? [T] In the next 1 2 months [2] In more than 1 2 months [T| Don't recall c What do you expect your next product liability insurance premium increase to be? (If your policy extends more than one year, what will be the year/y average increase?) [7] No major change [3] 50-100% [5] 500-1 ,000% [7] Don't know [Tj Less than 50% [T] 1 00-500% [i] 1 ,000% or more d Approximately how much will your product liability insurance premium be for the coming year? □ Less than $5,000 [7] $ 1 0,000 to $25,000 [7] $50,000 to $1 00,000 [7] Don't know $5,000 to $1 0,000 [4] $25,000 to $50,000 (T) $1 00,000 or more e Will you or have you already raised the price of your products due to expected increases in your product liability insurance premiums? (7] Yes [7] No (T| Undecided I. If YES, what will be (has been) the price increase (assume the increase was spread over all your products)? |7] 1 to 2% [7] 6 to 1 0% [5] Not yet determined [2] 3 to 5% [4] 1 1 % or more f Have you raised the price of your products due to previous increases in your product liability insurance premiums? jTj Yes [7| No I. If YES, what was the price increase (assume the increase was spread over all your products?) G] 1 to 2% [3] 6 to 10% H] 3 to 5% 011% or more g. Are you satisfied with the limit (ceiling per claim) you now have? 17] Yes [7] No, but insurer won't give me higher limits [T| No, but can't afford higher limits [Tj Undecided Please move on to Question 7; skip Part II 544 PART 1 1 fs] Self-insured [6] Other a. Why don't you carry product liability insurance? m Don't need any [3] No insurer will carry me [T] Premiums too high [T] Never considered it b. Did you ever carry product liability insurance? \T\ Yes [2] No Please move on to Question 7 7. Have you already dropped, or do you plan to drop a product or line of products due to the inability to obtain liability insurance, the cost of product liability insurance premiums, or the threat of product liability suits? [7] Yes [T| Actively considering [3] No [T| Undecided If YES, what part of your sales were (would be) affected? \T\ Less than 5% [3] 1 1 to 25% [2] 5 to 1 0% jT] 26 to 50% If YES, how many employees were (would be) laid off? n None [3] 6-10 01-5 jTj 1 1 -25 If ACTIVELY CONSIDERING, what part of your sales would be affected? [5]51%( s Less than 5% 5 to 1 0% E] 1 1 to 25% E) 26 to 50% H 26-50 fel 51 or more (T[ 51% or more d. If ACTIVELY CONSIDERING, how many employees would be laid off? rn None (T]6-10 1-5 [t] 1 1 -25 [5] 26-50 fe] 51 or more If NO or UNDECIDED, please move on to Question 8 8. Have you decided not to develop or produce a new (new for your firm) product or line of products due to potential product liability suits, inability to obtain product liability insurance, or the cost of product liability insurance? [T] Yes [2] No [T| Undecided 9. It has been suggested that all manufacturing firms be required to establish a contingency fund ranging from $10,000 for very small firms, to $100,000 for larger small businesses, to be set aside for use in payment of product liability claims not covered by insurance, in excess of limitations, or to cover the "deductible " How would such a suggestion affect your firm? rn Currently have a similar fund [T| Could establish such a fund Could establish such a fund, but with difficulty Could not establish such a fund Undecided 10. How many product liability suits or claims have been filed or made against your firm over the past five years? (Fill in the blanks. If none in the last five years, leave Question 10 blank and move on to the "Optional Comments ' on page 4.) il) How Ivlany of the Foregoing Claims i) Number of Claims Filed During Indicated Year 1976 1975. 1973 1972. Were Resolved During the Indicated Year 1974 1976 1973 1975 1972 1974, iii) Total Dollars Paid to Claimants During Year (No Ivlatter When Claims Filed) iv) What Amount of Total Dollars Paid to Claimants was Paid by Your Insurance Carrier During Year (No Matter When Claims Filed) 1976 $. 1973 $. 1975 $. 1972 $. 1974 $ , 1 976 $ _ 1973 $ 1975 $_ _ 1972$. 1974 $ a. How many of these claims Involved products over 1 5 years old. products substantially altered since you sold them, or products not given routine maintenance? (Fill in the blanks) 1 976 $ 1 975 $ 1 974 $ 1 973 $ 1 972 $ b. Estimate your direct cost including attorney fees, additional clerical work, time lost in testifying, the insurance deductible, etc , that were not paid by insurance resulting from product liability suits filed against your firm. (Fill in the blanks) Year 1976 1973 Cost $ $ Year 1975 1972 Cost $ $ Year 1974 Cost $ Have these direct costs resulted in a price Increase for your products? |T| Yes [2] No I. If YES, what was the price increase (assume the increase was spread over all your products?) [T] 1 to 2% [2] 3 to 5% [3] 6 to 1 0% [4] 1 1 % or more 545 In 1974 our premium was $1,150; in 1975, $7,432; in 1 976 they threw us to the wolves and our cost with a new carrier is $40,500. We cannot, and will not, go on like this. We intend to do something before the end of the year •■egarding closing out our business. Seattle, Washington Until last year we paid $165 per year for product liability insurance. This year we are asked to pay $6,300. Our in- surance agent wrote, "We have had only one company accept this risk and give us a quote even though we were quite flexible in limits and deductibles desired. I know this is a terrific increase but it is our only offer available..." Priest River, Idaho The Federation is made up of a group of small business- men who, if this problem isn't solved, will become no businessmen. Toledo, Ohio Reform is a must! The products liability problem is by far the worst single threat to the existence of our company in the last twenty years. Boston, Massachusetts If we do increase prices to compensate for our 400% in- crease in insurance costs we could very possibly lose customers due to uncompetitive prices. We are caught in a dilemma not of our own making but certainly highly negative in results no matter which way we react. Hackensack, New Jersey We always carried products insurance coverage. However when the premium increased 700% we decided to cancel the coverage. Peabody, Massachusetts A major claim would put us out of business. Over the life of the company we haven't had a major claim. However, until this year we always carried a $1 million deductible ■policy at $3-$5 thousand premium. Today this premium is approximately $40,000 (prohibitive). Saugus, California We manufacturers who still have the intestinal fortitude to try to remain in business are begging everyone who will listen for help on this matter. ..do something before it is too late. Lubbock, Texas 546 mui NATIONAL FEDERATION OF INDEPENDENT BUSINESS 490 L'Enfant Plaza East, S.W. / Suite 3206 / Washington, D.C. 20024 or 150 West Twentieth Avenue / San Mateo, CA 94403 547 APPENDIX Reproduced below are the text and Appendix I of the "Report of the Senate Select Committee on Product Liability" (December 30, 1977) to the Missouri State Senate. This report is the most recently completed state study of the product liability problem that has come to the attention of the Task Force, and it presents a complete and balanced study of the product liability problem in Missouri. The Missouri report was completed after the publication of the Task Force's Final Report and therefore was not utilized by the Task Force staff. The Task Force wishes to thank the Missouri State Senate, Senator Warren Welliver, Chairman of the Senate Select Committee, and the other members of that committee, for granting the Department of Commerce permission to reproduce this report. 548 Report of the Senate Select Committee on Product Liability Committee Members Senator Warren Welliver, Chairman Route 1, Hartsburg, Mo. 65039 Senator Norman Merrell, President Pro Tern Monticello, Mo. 63457 Senator Don Manford Suite 1000, Commerce Bank BIdg. K-ansas City, Mo. 64106 Senator John Dennis Benton, Mo. 63736 Senator George E. Murray 763 New Ballas Rd. So. Crave Coeur, Mo. 63141 Senator John T. Russell P.O. Box 93, Lebanon, Mo. 65536 Senator Gerald Winship 3613 S. Delaware Drive Independence, Mo. 64055 549 December 30 » 1977 TO THE SECRETARY OF THE SENATE; In accordance with Senate Resolution No. 293, adopted by the Senate in the 1st Regular Session of the 79th General Assembly on June 15, 1977, the duly appointed members of the Senate Select Committee on Product Liability respectfully submit herewith their report and recommendations for legislation they deem appropriate for enactment at this time. District 19 Route 1 Hartsburg 65039 ITT Pro Tern Norman L. Merrell t 18 V I1« COACC \ Pres^i dln^Pro Tern Norman Distrilt 18 Monti cAllo 63456 Senator Donafd L. District 8 Suite 1000, Commerce Kansas City 64106 ank Building STTnTieni nnis urray /^ )rge E. Murray District *26 763 New Ballas Road South Creve Coeur 63141 Sej^tor John T. Russell District 33 Lebanon 65536 Senator Gerald E. Winship District 16 119 E. 23rd, P.O. Box 289 Independence 64051 550 ACKNOWLEDGEMENTS E. C. Walker B«tty« Qlbton L«orM Kor*m«y«r Mary Lou Scott Committee Staff Research Anatyst, Senate Research Staff Committee Secretary Secretary, Research Staff Recording and Transcribing Special Note Tom Sullivan Ron Kirchoff David Valentine Larry HaH W. Bradford Connor Deborah Bennington Director of Research Senate Research Staff Senate Administrator Research Analyst, Senate Research Staff Senate information Officer Statistical Analyst Division of Insurance National Conference of State Legislatures The committee would lilce to aclcnowtedge, and express gratitude for, the cooperation of the Missouri Chamber of Commerce, Associated Industries of Missouri, Missouri Retailers Association, Missouri Division of Insurance, Missouri Department of Consumer Affairs, Regulation and Licensing, Office of State Courts' Administrator, Missouri Supreme Court Library Staff, Insurance Companies responding to survey and the following memt>ers of the Senate staff: Yvonne Angerer, Dan Berendzen, June Burgess, Roy Green, Roger Henley, Betty Houston, Norma Hughes, Eileen Johnson, Sue Jungmeyer, Diane Kalaf, Agatha Maasen, Faye Mooney, Dixie Nebel, Betty Pratt, Mark Rhoads, Mary Shockley, Terry Speller, Virginia Tranbarger, Jill Weiss, Hazel Willet. 551 TABLE OF CONTENTS Introduction 1 The Hearings 2 Articles, Survsys, Reports 13 The Committee's Surveys 16 Conclusions 18 Recommendations for Immediate Action 19 Recommended further Study 20 Footnote to Industry 21 APPENDICES 552 REPORT OF THE SELECT COMMITTEE ON PRODUCT LIABILITY INTRODUCTION The problem of product liability is one of the more complex and serious problems facing businessmen and consumers today, not only in Missouri, but in the nation. In an effort to deal with this problem, the Missouri Senate, on June 15, 1977, adopted Senate Resolution No. 293 establishing a Select Committee on Product Liability. The Committee, created in part because "the cost of product liability insurance . . . has become an intolerable burden on consumers and small businessmen in the State of Missouri," was charged to. identify the nature of the problem, determine its causes, consider proposed solutions and "prepare a report together with its recommendations for any legislation it deems appropriate for submission to the Second Regular Session of the Seventy-ninth General Assembly." The Committee pursued three primary methods of gathering information: 1) Holding a series of public hearings in various parts of the state; 2) Obtaining and reviewing materials - including reports, articles, and surveys -being compiled by others studying this problem; and 3) Conducting its own surveys to compare with and supplementthose done by others, and to obtain data not otherwise available. 553 THE HEARINGS The Committee held hearings in St. Louis, Kansas City, Springfield, Cape Girardeau and Jefferson City. Witnesses included businessmen, consumers and lawyers from the plaintiff's bar, th-^ defendant's bar and from judicial administration. There was somewhat reluctant participation by the insurance industry. Representatives from the Missouri Department of Consumer Affairs, Regulation and Licensing and the Division of Insurance appeared in the interest of both industry and consumers. In all, the Committee heard testimony from over seventy witnesses, representing a broad cross section of Missouri's citizens. Soaring Product Liability Premiums The most clearly demonstrable fact to emerge from these hearings was that premiums for product liability insurance have soared in recent years. Businessman after businessman presented figures to substantiate this fact. Our company's liability premiums have increased more than 1,000 percent in three years — $69,000 in 1974 to $742,000 this year. We have had only moderate growth in business activity In that period. In addition, and this hurts even more, we now have, for the first time, a $100,000 deductible In our policy. William Schierholz, President Chemtech Industries July 28, 1977 - St. Louis Our concern regardlrrg product liability is the increased cost that it represents to us as a manufacturer. In our specific case, we were buying $5,350,000worth of protection for a premium of $2,807 back In 1975. In 1976. this rose to $1 1 ,000 per year and In our current fiscal year our premium is $18.000 In addition to the premium having gone up 541 percent In the last three years, our protection has gone down from $5,350,000 to $3.500, 000, at our own choice In order to keep the premium down. So when you look at it that way our cost has gone up ten times for each dollar of protection. Rolf Albers, Vice-president Brasch Manufacturing July 28, 1977 - St. Louis In . . . 1976 . . . and for five years prior to that we carried ... a rate . . . of approximately $3,000 for our product liability coverage. [Our insurance company] notified us of cancellation of that product liability coverage, and we attempted to seek a carrier . . . . IVe could not find a standard carrier that would even quote us and had to go to what I believe they call the excess market . ... We finally received about six or seven quotes from this marketplace and accepted the lowest quote, which was . . .$39,000. Howard Bobroff, Owner Lawnmower Parts Manufacturing Co. August 11, 1977 - Kansas City 2 554 / want to appear here today to comment on one facet of product liability, and that is the problem supply distributors, cooperatives in particular, have in attempting to obtain product liability or umbrella insurance coverage. Because of the product liability risk, most companies have attempted to obtain umbrella or excess insurance coverage. In 1974, Missouri Farmers' Association had a policy [covering its milling operations] providing $15 million in coverage at an annual cost of only $17,1 50. Thecost of this policy was the same in 1975, and again in 1976. However, in 1977, the company that carried this coverage . . . refused to renew the policy - even though we had not had a claim under the policy: in fact, have never had an umbrella claim. In 1977, our company, IVlissouri Farmers' Association, sought to obtain a new umbrella insurance carrier. We were finally able to obtain a policy at an annual cost of $840, 000 . . . with a one million dollar deductible. We cancelled this policy after one month 's coverage when we discovered that it did not cover marine risks Our company has been without umbrella coverage since February of 1977 .... Now the experience of the l^issouri Farmers' Association and the f^FA Oil Company is not unique. I am familiar with lawyers of other cooperatives and they are having similar problems. Alfred J. Hoffman Vice-president and General Counsel Missouri Farmers' Association October 20, 1977 - Jefferson City Witnesses at each of the hearings testified to huge premium increases, some as great as 5,835 percent in a single year. With these huge increases coming so rapidly, many small companies ar^faced with a choice of doing without product liability insurance, "going bare," or placing themselves in a non- competitive pricing structure in order to pass costs on to consumers - which threatens their abil''y to stay in business. Consumer Crisis? If the cost of product liability insurance forces a company to "go bare," it may create a situation where a consumer who is injured by a defective product will not be able to recover the damages to which he is entitled. In fact, many witnesses, and many of the articles reviewed, pointed out that the real threat in product liability is the threat of a consumer crisis. One manufacturer, who saw his premiums go from $4,000 in 1974-75 to $12,000 in 1975-76. put it this way when he got a premium quote of $60,000 for 1976-77: We have manufactured 3,650 units and we have never paid a products liability claim. Now when you compare zero out of 3,650 units produced to a $60,000 premium for only effectively $95,000 worth of coverage, those odds . . . from an insurance company's standpoint ought to be pretty good. Since we are a small company, we are not able to come up with $45. 000 to $60, 000 out of our pockets, so we are going to take that risk. That is a good risk for us. I am not so sure it is a good risk for the consumer because he might own a manufacturing company. We miyht have to hand him the keys-rather than give him a hundred . . . thousand dollars In damages. Robert J. Johnston, General Manager Newttyle Homes, inc. August 17. 1977 - Springfield 555 In all, 12 companies that are not carrying product liability insurance appeared before the Comnnittee. This does not include those companies that have resorted to a large deductible in order to maintain some insurance protection. One recent article, entitled "A Consumer Crisis Around the Corner?" warned: Perhaps it makes little sense to talk about a second-level "consumer crisis" in the product liability context when there is still no general agreement on the extent, [or even] the existence, of an insurance crisis for product manufacturers seeking product liability coverage. True, the full economic impact of a decision to "go bare' on a firm and its employees constitutes a crisis of its own. Too little is known today about the long-range consequences of bankruptcies expected to follow in the wake of decisions to go without commercial insurance coverage. Nevertheless, if there is an availability and affordability crisis, or "problem," can a consumer crisis be far behind? Simply put, "going bare, " whether by manufacturing firms or professionals, is not just an insurance or business problem. No one seems to know exactly how many firms are going without any commercial coverage for liability at the present time. Certainly some are. Some are compensating by establishing self-insurance reserve funds. Some are crossing their fingers. When consumers find themselves unable to recover damages for bona fide injuries because the product manufacturer has no commercial coverage or has inadequate self- insurance reserves, perhaps then we will hear about aconsumer crisis. That day may not be far off. — From Product Liability Trends, August, 1977 Published by — The Research Group International Economic Aspects of the Problem The threat of companies being forced to "go bare" is one problem growing out of the high premiums. Anotherthreat is the potential lossof jobs. Although the Committee did not hearfrom any witnesses who had been forced out of business due to high insurance costs, a few witnesses testified that they had drastically cut back on employees. One stated that he could bnly get a reasonable premium if he gave up certain of his plastic products. This meant people in that part of his operation were out of jobs. A St. Joseph manufacturer testified that he used to employ 8 to 10 engineers in research and development; now he has 1 or 2. This same manufacturer pointed to a related problem - the possible stiffling of innovation with the result that new products either are not developed or are not introduced. He stated that he had new products sitting on the shelf which he could not put on the market because of the current situation in product liability. The manufacturer is the first to see and feel the economic impact when he annually buys his product liability insurance policy for his company. Ultimately, this same cost will be passed through to the consumer. In an attempt to get this cost factor into perspective, the Committee asked each witness who appeared 556 to provide us with his cost of liability insurance expressed not only in dollars, but also as a percentage of his company's sales. Percentage of sales probably is the clearest and best indicator of cost to consumers. Table I is a listing for the percentages given by witnesses. TABLE I St. Louis Company Chemtech r Emerson Electric Brasch Manufacturing Gruendler Crusher and Pulverizing Co. Courin Industries Giiliom Manufacturing Watling Ladder Co. McCabe Powers Body Co. Kansas City Richards and Conover Steel and Supply Co. Lawnmower Parts Manufacturing Co. Butler Manufacturing Co. Kay See Dental Mfg. Co. Gray Manufacturing Co Product Liability Premium as % of Sales 1.5% .3% .4% 11%* 5% 5%* 4.25% 3% 2% 2.5% 2% 10%* 4% Springfield Aero Trailer Co. Anderson and Son, Inc. Texco Industries, Inc. Newstyle Homes, Inc. Atlas Plastics Corp. Dunlap Industries Mid-South Steel Corp. (Company not named - Insurance Agent example) Jim Wilson Company Southern Clay Cape Girardeau .9% 3%* 1.3% 1.5%* .06% 4%* .5% .7% 2.5% .3% 5571 Jefferson City DeLong's, Inc. 1% 'Perpentages based on quotes not accepted by the companies. These companies are now either totally or substantially self-insured. In addition to the testimony at the hearings, two other sources provide some insight into this aspect of the problem. The Final Report of the Federal Inter-Agency Task Force on Product Liability (exhibit 55) suggests that nationwide, in the problem industries, premiums as a percentage of sales ranged from one-half of one percent to two percent. Occasionally, percentages as high as 10 percent were found for specific businesses. This committee's survey of Chamber of Commerce members in Missouri (Appendix H) found a range of less than one-tenth of one percent in non-problem areas to over three percent in some cases, with an average of less than one-half of one percent. There is no agreement, either nationally or in Missouri, as to what constitutes a fair and reasonable rate. The social question which must ultimately be determined is: How much are consumers willing to pay for protection against defects in products and what is a reasonable cost for providing this protection? A great deal more study will be required before this ultimate question can be answered. Causes of High Premiums The problems resulting from skyrocketing insurance premiums- high costs to consumers, companies "going bare", loss of jobs, stiff ling of the incentive to develop and market new or improved products, and the threat of forcing small companies out of business - are readily visible. The true cause, or causes, of these soaring premiums are more difficult, if not Impossible, to identify and document. Several witnesses stated that, nationally, there has been an increase in the number of product liability claims in recent years. Many testified that the average amount of those claims has increased. Some witnesses cited huge awards being handed out by juries in products cases where the liability of the manufacturer was questionable at best. None of the cases cited, however, originated in Missouri courts. In fact, testimony indicated-that there are few product liability court cases in Missouri. In Jackson County, only eleven products cases were filed in 1976. The number which came to trial is even fewer. In the Kansas City area (counting two Missouri counties, two Kansas counties and two Federal District Courts) only ten products cases were tried in 1976. In 1976. in the 22nd Missouri Judicial Circuit (City of St. Louis) - which is the largest in the state- there was a total of 8,078 civil cases adjudicated. Of this number, four were product liability cases. Testimony also indicated that, since 1970, there has been little change in the number of products cases filed or heard. At the request of the Committee, State Courts' Administrator James Parkison surveyed alt of the circuit courts and reported his findings: 6 558 Our survey showed that very few products liability cases have been heard in Missouri's circuit courts. Only thirteen circuits reported hearing any products liability cases. The judges recalled verdicts for plaintiffs in only four instances with verdicts ranging from $1,250.00 to $50,000.00. However, the $50,000.00 verdict was subsequently set aside. James Parkison State Courts' Administrator October 20, 1977 - Jefferson City Exhibit 37 The testimony of the various witnesses indicates the multiplicity of the possible causes of, and explanations for, the rapid rise in premiums. It also shows the variety of the proposed solutions. At the same time, when our growth has gone up in the four years sixty-sorrje percent, our product liability has gone up 800 percent. And the basic reason for this is consumerism -Jhegrowing philosophy that when there is an accident, somebody pays; and it's the company who pays. L. K. Stringham Vice-president Emerson Eiectric July 28. 1977 - St. Louis What I would like to suggest is that perhaps something could be done to relieve the manufacturer of some of the liability if he has submitted his product to such a safety organization as Underwriter Laboratories and that this be considered in any cases against the manufacturer. In other words, there is a means here for determining whether or not a product has been safely designed. Why not use that as a criteria in handling liability suits ? Rolf Aibers, Vice-president Brasch Manufacturing July 28, 1977 - St. Louis Most merchandise sold by wholesale distributors passes through the distributor's warehouse to the customer with little, if any, change in the character of the product . . . Even though most wholesalers do nothing to change the character of the product, they are finding that they are becoming more and more involved in product liability law suits. Robert Dieltemper Treasurer, Hubbell (Metal, Member, Product Liability Task Force, Missouri Wholesalers July 28, 1977 - St. Louis The plaintiff's conduct is taken into account, of course, and under the general tort rules of the tort system when the plaintiff is the sole cause of the injury, there is no one to blame but himself and there is no recovery The problem is one of judicial erosion First in the open and obvious risk category, the plaintiff's conduct previously would be a bar to recovery. In products liability . . . courts have allowed a plaintiff, no matter in many cases what his activities have been regarding the use of that product, to- go forward and recover. Patrick Casey * American Insurance Assoc. July 28, 1977 - St. Louis 7 559 There is another intangible unknown because we haven't cost it. When a claim is filed, the amount of clerical and managerial time that goes into researching a job that was installed in 1955, if you will - and any related important data there - is of tremendous magnitude, a lot of hours and a lot of file-digging. And bear in mind that much of the information that might be on computer today . . . was manual entries and much of it in the normal process of cleaning out records is no longer available. M. A. Schweig, President Courin Industries, inc. Juiy 28, 1977 - St. Louis / am not worried about lawsuits, if I could ever get to the court. I am worried about the claims. The claims are what take up my time. The claims are what cost the insurance company the money, and the insurance adjustors and the lawyers that they hire. It's not the claims that this attorney . . .was talking about. He gave you a very small statistical figure of the suits that are brought . . . . That's giving you only part of the picture. The real picture is the claims and amount of paper work and the amount of lawyer's fees and the amount of effort of all people that are going into this thing is what has raised this sky-high One of my chairs was about eleven years old and one of the legs broke off. . . . This is fatigue, you know. All of us get older and as we get older we can't play handball, we can't play tennis as well as we used to when we were 21. Does everybody recognize that? I do. But do chairs? Chairs have fatigue and after 1 1 years a leg comes off. So the janitor went and put the three-legged chair back under the table. The next person that sat on it went and fell. Why am I held responsible? I am though. And they tie in everybody - everybody I even buy my steel and my tubing from, and the screws and the nuts and the bolts .... How would you guys like to go - you Senators - to bed at night, knowing that you made three million of these chairs and every one of them is a potential product liability lawsuit anybody tripping over a leg, or a drunk falling out and so forth. If a chair breaks, I have a responsibility, but tripping and drunkenness and silliness, I don't want to have to share that. And three million of them out there - 1 won 't be able to sleep pretty soon when it gets to four million or five million. And you just can't take me back into history, back to 1875or whenever [some] steel company was formed. Norman Polsky, President Fixtures Manufacturing August 11, 1977 - Kansas City In the last several years, courts have, and I put this in quotes, "enacted" certain new product liability laws and pressed upon manufacturers and sellers new laws which impose costly and unfair burdens on them. The courts have permitted persons to be compensated: By a manufacturer, despite the fact that the injury was incurred while the person was using the product improperly, completely ignoring all cautions and warnings .... By the original manufacturer, despite the fact that the injury was caused by a product which was rnodified after it left the control [of that manufacturer]. Monroe Taliaferro Butler Manufacturing Co. August 11, 1977 - Kansas City a 560 Just a fffw miles north of here, a man made a screw machine years ago Last fall he was sued for over a quarter million dollars. That machine has changed hands four times. ' It has been modified at least three or four times in that period of time. A man was injured on that thing and now he is suing for a quarter of a million dollars. The suit was filed, I think, in Atlanta, Georgia. This man has to take himself and some of his staff down there to spend maybe three or four days, or maybe a week or ten days, testifying on this thing and the amount of money involved in this thing, no one knows. And he is right to the point now of whether to continue buying product liability insurance or not buying and taking a chance of another lawsuit. If he has another lawsuit and loses it, he will be out of business. He has already closed a foundry with 25 people employed because of this thing. He cannot afford the product liability for the foundry. He has closed it down - there are 25 people out of work. Earl Uhler Associated Industries of Mo. August 17, 1977 - Springfield / think it is a twofold problem. I do think that there is a frightened attitude on the part of the insurance companies now, either that or they are trying to get out of the risk business, I am not sure which. But undoubtedly, I think that the premiums in many cases simply do not represent the facts. But also, as a lawyer who hasn't practiced law for a long time, I find it very difficult to recognize a tort anymore as compared with what it was described when I was in law school. Virgil Anderson President Anderson and Son, Inc. August 17, 1977 - Springfield •Now we have never had a tort judgement issued on a product liability claim, but one of the big problems is that as soon as there is an accident involving the tractor-trailer unit, the attorney runs out and writes down every trademark he can find on that tractor-trailer and names [them all] as parties to that suit, whether or not there was any failure of the product .... One qf the problems here is that it costs a minimum of ten to fifty thousand dollars just to defend yourself in these cases and wind up being released from the case. It still cost the insurance company from ten to fifty thousand dollars just to get out of this. Ralpli Looney, President Reyco, Inc. August 17, 1977 • Springfield A point that I would like to make as far as premiums are concerned is that not only are we paying one and one-half percent of our net sales dollars, but also the components that we have in the product that we manufacture — for instance, a mobile home has an undercarriage or a frame and we buy that from another manufacturer, and he buys his wheels and axles from another manufacturer. Assuming that they pay anywhere near the same percentage that we do, the first manufacturer pays a premium on the wheel and axle: then the frame manufacturer, he pays on his net sales, so he is also paying a premium on the wheels and axle. Then we buy the frame and we pay a premium on the wheels and axle because it is based on sales. Then we sell to a dealer who, again, pays a liability premium on the wheels and axle. Robert J. Johnston General Manager Newstyle Homes, Inc. August 17, 1977 9 The one closest to my world is the case of a young man preparing for a career in the diplomatic service who lost his right hand while in the part-time employ of a plastics molding firm. That individual was awarded 1.3 million dollars, some five or six years ago, in a suit against the manufacturer of the equipment involved, even though the equipment was over twenty years old, and had been sold and resold at least half a dozen times, and actually had been relegated to a salvage yard from where it was purchased by the last owner of the machine who, incidentally, made many modifications and to a large extent rebuilt the equiprhent in order to make it operational. Nonetheless, the original manufacturer of this equipment was held liable to the tune of 1.3 million dollars. The trouble is that horror stories are no substitute for facts. The plastics industry has been vitally aware of the overwhelming burden posed by the product liability issue and has been working at the national level for quite some time in an effort to develop the true nature of the impact of this issue on the plastics industry. As with many other industries, liability claims against plastics processing companies are growing in size and frequency at an alarming rate. The cost of insurance is soaring, and for some companies, insurance is already unobtainable. The fallout from this action is entirely predictable — consumers will be forced to pay higher prices which, incidentally, adds fuel to the fires of inflation; some products may disappear, some companies may be forced out of business with the resultant loss of jobs; and those unfortunate individuals whom product liability laws are intended to protect - the injured — may also suffer through inadequate or absent insurance protection, or by surrendering a disproportionate share of their damages in legal fees which now take away as much as half of the financial awards. M. L. Christensen President Atlas Plastics Corporation October 3, 1977 - Cape Girardeau Current Missouri Law Despite some stories at>out what may be happening in a few other states, testimony and exhibits indicate that current law in Missouri on product liability is reasonable. All of the defenses mentioned as desirable by businessmen are currently permissible in Missouri Courts. Thedoctrineof strict liability, as outlined in the Restatement (2nd) of Torts and adopted by the Missouri Supreme Court in Keener v. Dayton Electric, 445 S. W. 2d 535 (S. C. Div. 1, 1969) (Appendix E) has not been substantially altered or expanded in Missouri. An experienced defense attorney put it this way in testimony before the Committee: To put this in the proper frame of reference, their proposition . . . which would say that the manufacturer would not be liable if a change was made in the product by the user or the plaintiff, as the case may be, unless he was injured as a result of something which was in the original, despite some other change: Now that's the law in the State of Missouri. As far as I know, that's the law everywhere, with respect to product liability. If the product has been changed in some essential way and that change is the proximate cause of this guy's injury, the manufacturer has an absolute defense. And I say it really doesn't accomplish anything to have it said twice. It's the case law; it's an absolute defense; and to put it in the form of a statute, I, personally, don't think accomplishes anything. Thomas J. Wheatley Defense Attorney August 11, 1977 - Kansas City 10 962 Under Missouri law, the burden of proof clearly is on the plaintiff to prove that a defect caused the injury and that the defect was in the product when it left the manufacturer. However, the passage of time may In effect transfer the burden to the defendant. Again quoting Mr. Wheatley: A product in use for a period of years, wittiout incident or injury to the user stiould be presumed to be free of defect. Tlie pursuit of stale claims in this area causes a number of problems to the manufacturer and seller which tend to operate to its disadvantage in successfully defending itself in a case of products liability. And the considerations which I mention In this regard are practical considerations which I have run into in my own practice and experience. Records, drawings, pictures, specifications, purchase orders, manifests, order acknowledgments, and correspondence all concerning the development, and the design and what the design was, and what the components were and from whom the components were obtained, the assembly, and shipment of the product may be, and more often than not, are not available when lawsuits having considerable age are permitted. I have been called upon to defend products liability lawsuits involving products which left the hands of the manufacturer 25 years ago. The majority of product cases which I am now handling for this client involve sales which antedate the filing of suit by more than 5 years. The kinds of records indicated that are needed for a successful defense, because of the age of the claim, are more often than not unavailable. The availability of such documentation would have materially enhanced my ability successfully to defend the case and of providing the acceptability of the product. Although the case law is that the obligation rests with the plaintiff to prove that the product at the time of injury is in the same condition, with respect to that portion of it which caused injury, as it was at the time of the accident, my observation is that in reality this burden more often falls on the manufacturer to prove. It is easy for the plaintiff to offer enough testimony either by experts or otherwise to shift this essential burden to the manufacturer. Because of the sheer lapse of time and the absence of such essential records, this task can become most difficult for the manufacturer. Thomas J. Wheatley Kansas City There was clearly a feeling on the part of many witnesses that, whatever the law, there were instances where juries made awards to plaintiffs when they were not deserving. Again, no Missouri cases were cited to support this. It was pointed out at various times during the course of the hearings that, due to the complexities of technical issues and the fact that "experts could argue both sides of a question," juries often faced a difficult task. One witness stated the issue this way: There is one other thing - 1 am not a lawyer or anything, but from accounts that I have read of these things, and what I know, it seems that the courts are in a position to where they hive to instruct a jury as to what they can do and what they cannot do as to the letter of the law; but I feel that many times these juries hand down a verdict from their heart. Jim Wilson, President Jim Wilson Company October 3, 1977 - Cape Girardeau 11 ARTICLES, SURVEYS, REPORTS Due to the suddenness with which product liability insurance became a problem, the Committee initially faced difficulties with obtaining reliable information. Like much of the testimony at the hearings, the printed information was impressionistic and anecdotal rather than hard, factual data. Other than again documenting the remarkable rise in premiums, the publications reviewed by the Committee in its early days offered little in the way of facts. Since that time, however, there have been several publications which supply some of the needed data. A complete list of the publications reviewed by the Committee appears in the appendices. The two most extensive and significant reports became available on November 1, 1977: 1) The Final Report of the U.S. Department of Commerce interagency Task Force on Product Liability; and 2) Insurance Services Office Product Liability Closed Claim Survey: A Technical Analysis of Survey Results. The Task Force Report This is by far the most extensive and inclusive study to date on product liability. The final report is based primarily on studies prepared on contract by professional consultants from three perspectives: insurance, industry and legal. The final report identifies three primary causes of the current product liability situation: liability insurance ratemaking procedures, the tort-litigation system and manufacturing practices. Pointing out that there is " a tendency for each group that has a special interest" in the problem to blame it on the other groups, the report concludes "that the product liability problem is based on a confluence of causes," (Final Report, p. 1-16 and 1-17). The report documents the general conclusion of this Committee that: "In the overwhelming majority of cases, insurance company sources did not rely on data (either in terms of number or size of claims) to support premium increases that occurred in the 1974-1976 period,'' (p. 1-18). The report continues, "The burdenof proof would appear to fall on the insurers to justify increases of 200, 300or 400% in premiums where they do not have data based on claims experience that would suggest that increases of this type are proper," (p. 1-20). In its more than 500 pages the final report examines the pros and cons of most of the proposed solutions to the product liability problem. Generally, it avoids making specific recommendations contending that policy decisions should be made by policy makers, i.e., legislators. However, in one area the final report is very clear: There needs to be greater financial disclosure and accountability in product liability insurance. This means that state insurance departments must have access to a substantial body of data to monitor so they "can ensure that rates are fair, nondiscriminatory and reasonably related to product risk," {Final Report, p. 11-40). 13 565 ISO Closed Claim Survey One of the continuing problems in studying product liability is the lack of adequate statistical data. In an attempt to partially alleviate this, Insurance Services Office, an insurance industry statistical and rating organizaton, conducted a study of product liability claims closed between July 1, 1976and March 15, 1977. The complete survey results became available in November, 1977, (Exhibit 56). Before discussing this survey, it is necessary to point out some things it does not do. First, it includes no premium data. This means that there is no way to determine whether the insurance companies participating in this survey had a favorable product liability experience, or whether there is any relation between claims and premiums. Second, the survey covers a short time period and, therefore, does not indicate whether there has been an increase or a decrease in the frequency of products claims. Finally, for the same reason, it does not show whether the average payment for a products claim has increased or decreased. This survey merely provides a look at the facts surrounding products claims closed in a specific time period. Because of these factors, a question must be raised concerning the methodology used in displaying some of the data in the report. There is a technique used in analyzing insurance claims data called 'Irending." It is used to project information and trends in claims experience for recent years into future years to establish premium rates for the current year. While this is a perfectly acceptable and, indeed, necessary technique in establishing rates, there is no justification for trending data relating only to claims apart from premiums. The only apparent reason for trending in the ISO survey is to make the average claim payment appear higher than it was in actuality. This does not detract from the validity of the comparative information offered, but it does raise questions about the objectivity of the analysis. An example of the difference this can make can be gained by using the data from the untrended charts, found in Appendix E of the ISO study, and re-figuring the averages displayed in the body of their report. Table 2-1, pp. 23-24, indicates that the 23 insurance companies participating in the survey paid $113,685,985 closing the 8,017 bodily injury claims oh which they made payment, or a countrywide average of $14,181 (excluding claims where the state is unknown). In Missouri, it shows $1,794,51 5 being spent closing 227 claims for an average payment of $7,905. However, a different story emerges if the data from the untrended chart (pp. 333-334) are used. The number of claims closed with payment, 8,017, recnains unchanged - but the actual amount spent is $44,211,839 for an average payment of $5,515. The actual amount paid in closing the 227 claims in Missouri is $927,812 for an average of $4,087. These latter averages are significantly lower than the prominently displayed figures in the ISO Report and are a far cry from the $89,000 average payment figure cited by some witnesses at the Committee's hearings. There is a further problem with ISO's averages. They immediately exclude the one-third of the claims closed without payment. Although this is an acceptable practice when it is properly marked, as it is in the 14 566i I complete report, it opens the possibility for misuse of the figures. This is clearly illustrated by ISO's own display in Table 2 (p. 3) of the "Highlights" booklet (exhibit 39) widely circulated by ISO. This table displays as the average payment per bodily injury claim (including "both those in which insurance payments were made and those in which no payment was made") the figure $13,91 1. No indication is given that the amount is a trended average - which it is. Even using the trended data the figure displayed is not the average for all claims, as the table implies. The actual figure for the average payment made per closed claim (including those closed without payment), using untrended data, is $3,952. The corresponding figure for Missouri is $2,487. Despite the care which must be exercised when using the dollar figures displayed in th& ISO report, there is an abundance of information about products claims not available elsewhere. In light of the testimony and proposed solutions heard by the Committee, some of the more significant data are presented here, all of it based on nationwide data, because ISO did not report the data on a state-by-state basis. Employees injured in the course of employment account for 10.6% of the parties receiving bodily injury product liability payments, but they receive 42.0% of the dollars paid. Carrying this one step further 50. 1 % of the claims, representing 56.3% of the dollars paid as a result of workplace injuries, were caused by the negligence of the employer. These two factors taken together indicate that 21% of the dollars paid in bodily injury claims probably would have been recovered from the employers if employers were not protected by workmen's compensation rules. The ISO data indicate that old products are not a significant factor in product liability claims. Injuries accounting for 80.8% of payments occur within three years of the first purchase of a product, most in the first year. By six years this figure is 90.7%. Only 4.9% of payments are made on injuries occurring more than 10 years after the data a product is first purchased. Stated in a different way, a statute of limitation running six years from the date of purchase would save insurance companies less than 10% of their losses and one running ten years from that date would save less than 5%. On industrial capital goods, the amount saved would be somewhat higher. One point made in testimony at the Committee hearings and substantiated by the ISO survey is that defense costs run high in products cases. In bodily injury claims they equal 35% of payments and in property damage cases they add another 48% to the total cost. Despite statements that unreasonable jury awards are responsible for rising products premiums, only 3.5% of claims, accounting for 9.3% of the payments, reach a court verdict. Additionally, defendants win almost 80% of the cases which are tried to a verdict. About 8% of the bodily injury claims, accounting for 12% of the payments, involve product modification. However, modification by the injured party accounts for only V^ of' 1% of payments. Modifications by the insured accounts for 1.9% of payments and those by an employer account for 4.6% of payments. 15 567 THE COMMITTEE'S SURVEYS In addition to the previously cited survey completed at the Committee's request by the State Courts' Administrator, the Committee conducted several other surveys. A survey was taken of other states to determine what steps they have taken to deal with the product liability problem. The results of this survey are displayed in Appendix F. With the help of the Missouri Chamber of Commerce. Associated Industries of Missouri, and the Missouri Retailers, Missouri businesses were surveyed on various aspects of product liability. The Committee gratefully acknowledges the help given by those groups. The results of these surveys, along with a brief analysis, are presented in Appendix H. Their findings confirm those of other surveys. The most extensive survey conducted by the Committee, with the help of the Division of Insurance, was a survey of all insurance companies licensed to sell product liability insurance in Missouri. The data collected constitutes the most complete body of information available on product liability insurance in Missouri. Unlike the ISO survey, the Committee collected premium as well as claims information. A detailed look at this survey is given in Appendix I. This survey covered 830 claims on Missouri insureds since 1970. Most of these, 664, have been closed since January 1, 1976. This high proportion of recent claims is due to the fact that most of the large insurance companies responding to the survey found it cost-prohibitive to retrieve data concerning claims closed prior to 1976. Table II displays some of the basic findings on average payments. TABLE II Number Average Payment of all claims closed Claims closed since 1970 830* $1,614.00 Claims closed since January 1, 1976 664 1,207.00 Claims closed before January 1, 1976 146 1,996.00 Percent closed without payment 39% 42% 27% Average Payment on claims closed with payment $2,647.00 2,077.00 2,723.00 'There were 20 closed claims reported without the date of closing. They are included on the claims closed since 1970 figures. It is interesting to note that the average payment per claim is greater in the period prior to January 1, 1 976 than si nee that date in our state, though the data base for the earlier period is too small to draw any conclusions. Sixty companies responded to the portion of the survey requesting premium information. These sixty reported writing 1976 product liability premiums in Missouri totaling $9,703,058. Eliminating the eleven 16 568 companies which did not provide claims information, the remaining 49 companies, those which reported both claims and premiums, had written premiumsof $8,919,702. Allot the companies together, including those which did not report premiums, reported paid claims since January 1. 1976 of $915,601. Of the 830 closed claims, only 20 involved products which had been modified by the claimant, which represents 2.4%of the claims. Of these, 15 were closed without payment. The remaining five were closed with payment representing 1.6% of the total amount paid. There were no reported cases involving modifications where a jury found in favor of a plaintiff. There were 481 claims where the date of the injury and the date of the first purchase were both known. These 481 cases accounted for 78% of the total payments. Of these cases, 94.4% of the injuries, representing 89.8% of the payments, occurred less than two years after the purchase date. Only 2.5% of the cases involved products more than 5 years old, accounting for .6% of the payments. There were 8 cases (1.7% of the 481 claims) where the product was more than 10 years old. However, all but one of these were closed without payment. The amount paid on the remaining claim was $2,635 - or V*. of 1% of the total paid on the 481 claims. 17 569 CONCLUSIONS Product liability is a serious and continuing problem. There is no "magic" solution - no legislative wand the General Assembly can wave and cause the problem to disappear or go away. Though there is a crisis atmosphere surrounding product liability insurance, the committee could not substantiate a true "crisis." Therefore, it is imperative that the legislature not react in panic. For the business which suddenly finds insurance unavailable or unaffordable, the situation certainly assumes crisis proportions. If this continues and spreads there is a future threat - not only of an insurance crisis and a legal crisis, but also of a consumer crisis. The crisis will come if enough companies are forced, due to cost, to go without product liability insurance or to rely on substandard insurance companies. When that happens, consumers will find themselves unable to recover just compensation for injuries caused by defective products. Before that happens, someone must find the answer on the relation between premiums and losses. Testimony indicates that consumers are willing to pay increased costs to have safer products and to protect their right to recover for damages caused by defective products - but only if the increased costs are reasonable and justifiable ~ statistically and socially. The Federal Interagency Task Force concluded that "insurers have failed to justify the increases nationally." This Committee concludes that insurers have failed by an even wider margin to justify the increases in the State of Missouri. The hearings brought forth, primarily from industry, many broad categorical charges of breakdown and. deterioration of the existing legal system. Among the testimony of witnesses, the writings and the publications are found the usual suggestions of federal regulation of insurance companies, abandonment of the jury system in favor of handling of claims by judges without juries, arbitration of claims, or the establishment of a no-fault system and payments on a rated basis to all who are hurt by manufactured products. Many urged adoption of statutory defenses most, if not all, of which now exist within our common and case law. Industry related witnesses loudly denounced the allowance of punitive damages in product liability cases. In nearly all instances there was an almost total dearth of factual evidence to support the charges. There will continue to be insufficient factual information to pass on these matters until there is documentation of premiums and losses and further documentation of the manner in which these matters are being handled by our courts. In fairness to industry, and regardless of the truth or falsity of the general charges leveled against the legal system, the Committee had no difficulty sensing a general distrust of our jury system to make its awards based truly on facts and merit and not upon prejudice or sympathy for the alleged injured consumer. This sense of distrust is not unique with the product liability fiefd, having also been directed at the field of automobile liability and later at malpractice liability. The Committee is well aware that anything that can be done to restore confidence in the legal system, and particularly the jury system, would be a benefit to all of the people, whether manufacturer or consumer, and that such should be a major goal of this Committee. 18 570 RECOMMENDATIONS FOR IMMEDIATE ACTION The Committee makes the following recommendations for immediate action: 1. That the Insurance Industry, voluntarily and In cooperation with the Division of Insurance, establish a Market Assistance Plan to assist in finding coverage for those businesses unable to find coverage through normal channels. This program should follow the format outlined by the National Association of Insurance Commissioners and found successful in other states. 2. That the Seventy-ninth General Assembly adopt a Product Liability Insurance Reporting Act. Such an act would require insurance companies to report to the Insurance Division all premiums collected from Missouri businesses and all claims closed on Missouri insureds. (Proposed Act, Appendix A). 3 That the Seventy-ninth General Assembly adopt a statute of limitations for product liability actions. There was no possible way to analyze the data from our own surveys, the final report of the Federal Task Force, and the ISO survey prior to the beginning of the Second Session of the 79th General Assembly. Under these circumstances the Committee pre-filed the Statute of Limitations Bill as a 5-year statute with a rebuttable presumption of no defect in products over 5 years old. This was done with commitment among the members of the Committee that thequestion of an absolute cut-off in the statute would be left open in this report, to be finally determined by the appropriate Legislative standing committee based upon the data here accumulated and any subsequent data available (Pre-filed Bill, Appendix A). 4. That the Supreme Court of Missouri request or direct those charged with drafting Missouri Approved Instructions, namely the Supreme Court Committee on Jury instructions - Civil, to thoroughly review those instructions being used in Product Liability Actions. Specifically they should review and consider the effectiveness of those instructions in submitting for jury consideration the issues and defenses of this complex form of tort litigation. 5. That the Courts' Administrator of Missouri make further effort, overa'period of time, to document the origin and disposition of product liability cases within the State of Missouri for purposes of future study of the problem. 19 571 RECOMMENDED FURTHER STUDY In addition to the recommendations for immediate action, the Committee believes there are several areas that deserve further study and consideration for possible action in the future. 1. The General Assembly should watch with interest any federal action on product liability, even though the best information available would lead us to believe that the Federal Government will leave the solution of these problems to the individual states. In particular, current Congressional consideration of tax breaks for self-insurance and captive insurance companies should be followed with interest. It may be highly desirable for Missouri to enact legislation giving special consideration to captive insurance companies writing product liability insurance. 2. The possibility of reducing the volume of court litigation by elimination of subrogation rights in employers and insurers in workmen's compensation cases should be given further study and consideration. 3. The adoption of comparative negligence should t>e studied with particular respect to the effect of that doctrine on product liability cases. In this regard, the Committee noted with interest a Missouri Supreme Court decision of November 14, 1977 in the case of Epple v. Western Auto, (Mo. banc. Docket No. 59683, Nov. 14, 1977). The Court considered and rejected a suggestion that they adopt comparative negligence. While accepting that the court could take such an action, the majority refused to do so, arguing that - because of the complexities, the different forms it could take, and the "many policy decisions" involved - '1he issue seems suited for legislative action." 4. The Division of Insurance should study and explore thd possibility of requiring that all product liability policies issued within the state shall contain a vendor's endorsement in a form approved by the Division of Insurance. Further, the Director of the Division should encourage the National Association of Insurance Commissioners to investigate and study the possibility of developmg this concept in all states. The Committee belidves that nationwide adoption of a uniform vendor's endorsement in all product liability policies could substantially reduce the numbers of persons required to prepare defenses to the actions resulting in substantially lower defense costs and, ultimately, lower premiums. 20 572 FOOTNOTE TO INDUSTRY Some manufacturers testified during the hearings that they were able to lower their product liability premiums by developing safety programs, instituting proper recordkeeping methods and fighting their claims. These are steps all businesses can take. There is no law against telling your insurance company that you do not want them to settle product liability cases without your approval. Nationally, 80% of the cases tried to a verdict were won by the manufacturers (ISO Survey, Table 15-3). In Missouri, only 14 cases were reported which reached a verdict - and manufacturers won nine of these (Appendix I). The Committee respectfully requests industry to cooperate in this method of attacking this serious problem. 21 573 APPENDIX G October 4, 1977 Dear Senator Welliver: Pursuant to your request, we contacted each circuit judge in the state and asked that he provide us with his best estimate of the number of products liability cases he had heard during fiscal year 1977. It was necessary to accept estimates since records are not currently available which allow access to the precise number of a particular type of case that have been heard. Our survey showed that very few products liability cases have been heard in IVIissouri's circuit courts. Only thirteen circuits reported hearing any products liability cases. The judges recalled verdicts for plaintiffs in only four instances with verdicts ranging from $1250 to $50,000. However, the $50,000 verdict was subsequently set aside. It should be noted that several judges mentioned that they were aware of products liability cases that had been filed in their courts but had been settled prior to coming to trial. The highest incidence of products liability cases occurred in the 16th, 21st and 22nd circuits which are located in Jackson County, St. Louis County and the City of St. Louis respectively. Approximately 15 cases were disposed of in the 16th circuit by dismissal or sumrpary judgment. The number of products liability cases filed there is approximately 20 per year. About 17 cases were heard in the 22nd circuit. The only figure available from the 21st circuit was the number of products liability cases which had been filed which was approximately 50 to 60 cases. A sheet summarizing the information obtained from the circuit judges is attached to this letter. I hope it provides information that will be useful to you. If you have any questions or we can be of further assistance to you, please do not hesitate to contact this office again. Sincerely, (Signed) James M. Parkison 574 Number of Number of cases rcuit cases heard won by plaintiff Approx. verdict 1 3 4 12 1 $1,250 7 1 8 3 12 2 r 16 13" — 17 3 1 50,000"* 21 50-60 — 22 17 — 33 5 2 2.500 38 2 40 1 'Verdict was reported as "goodly sum" •'Disposed by dismissal or summary judgment *"Verdirt set aside 575 APPENDIX I Survey of Insurance Companies This survey was sent to the 453 insurance companies licensed to write product liability insurance in Missouri. Of these, 115 did not respond and 262 responded that they were not currently writing product liability insurance in Missouri. Of the 76 companies which responded that they are currently writing this insurance in Missouri, 64 supplied usable information. The responses of these 64 are summarized in Tables I-I and I-II. No. Giving Premium Information for 1976 60 TABLE I-I All Companies Responding with Usable Data Total Premium for 1976 $9,703,058 No. Giving Premium and Claims Information 49 No. Giving Total Claims Premium Information $8,919,702 54 Total Paid on Claims Since 1-1-76 $915,601 TABLE I-II Companies Providing Individual Claims Information (including those with no claims) No. Giving Premium Information No. Giving and Individual Individual 1976 Claims Claims Premium 50 46 $8,330,007 Total No. No. of of Claims Claims Reported Closed 1,321 830 Total Paid Average Payment $1,339,497 $1,614 576 The survey asked for information concerning coverage and premiums to be displayed in the following Tables: Table 1 - Market availability for the product classifications established by ISO. The responses to this section indicated that availability was not a severe problem in any of these broad classifications. However, for specific products or product lines, there was some indication of availability problems. Since the basic data acquired dealt only with the broad classifications, there is no way to quantify the availability problem from this survey. Table 2 - Company size by product classification. Almost every response indicated that the insurance companies did not retain this information in an easily retrievable manner. Table 3 - Deductibles Table 4 - Limits Most companies did not respond to either of these two tables or indicated they did not have the information. Those that responded showed a wide range and no consistency. Table 5 - Total premiums written in 1971 and 1976 by company size and classification Very few companies were able to supply premium information for 1971. Those that supplied the infor- mation for 1976 generally were unable to break it down either by company size or product classification. 577 Conseaiiently the only usable premium information is that displayed in Tables I-I and I-II of this Appendix. The remainder of the survey dealt with individual claims. The companies initially were asked to supply information on each product liability claim filed since January 1, 1971. Very few companies were able to respond for those claims prior to January 1, 1976, an(^ the bulk of the information received was on .claims- closed since that date or on open claims. In all, information concerning 1,321 claims was supplied. Of this total, 830 were closed claims. A copy of the portion of the survey concerning claims is attached at the back of this Appendix. Answers to questions 15, 16 and 17 were few and often obviou.sly inaccurate. Answers to question 12 were too incon- sistent to be useful. What information there was indicated pro- cessing and defense costs ran -from 30% to 45% of the amount paid on claims. The following tables display the relevant data from the remaining questions. Unless specifically noted the tables display only data concerning closed claims. 578 No. of Claims TABLE I-III Average Payment on Claims Closed Average Payment No. Closed Percent No. Closed On Claim Total Average without of Total with Closed With Paid Payment Payment Claims Payment Payment Claims Closed: Since 1-1-76 664 $801,731.75 $1,207.43 278 41.9% 386 $2,077.03 Prior to w 1-1-76 1A6 291,359.31 1,995.62 39 26.7% 107 2,722.98 Date Unknown 20 246, 405. 6A 12,320.28 7 35.0% 13 18,954.28 Total 830 1,339.496.70 1,613.85 324 39.0% 506 2,647.22 TABLE I- IV Average Amount Claimed No. of Claims for Specified Amount 825 Total Claimed $18,770,717.34 Average Amount Claimed $22,752.38 Percent Paid of Total Claimed 7.14% 579 TABLE I-V Proportion of Claims Closed and Money Paid at Each Stage of Legal Process Process Stage: Number of Claims 716 Proportion of Total Claims Number Closed without Payment 278 Proportion of Total Dollars Paid 42.3% Average Payment Before ^uit filed 86.8% $ 783.13 After suit, before judgement 88 10.7 34 49.5 7,457.33 After judgement without appeal 10 1.2 6 5.4 7,165.80 After appeal 4 .5 3 .3 1,000.00 After suit, not specified 7 .8 3 2.5 4,814.00 825 100.0% 324 100.0% $1,607.6.7 There were three claims closed with payments over $100,000. One for $254,276 and one for $109,000 were paid after suit was filed and before judgement. One for $209,000 was paid before a suit was filed. Although these three claims make up only .4% of the total claims, they account for 42.4% of the money paid. Of the ten cases settled after judgement and without appeal, 6 were won by the defendants. The largest plaintiff's verdict was for $62,500. The other three averaged $3,050. Of the four cases appealed, three were won by the manufacturer-defendant. The only plaintiff victory on appeal was for $4,000. 580 TABLE I-VI Average Number of Months for Time Factors by Claim Size (Numbers in parentheses are number of valid cases in each category) Claim Less than Greater than Size $1.000 $1,000-5,000 $5,000-10,000 $10,000-25,000 $ 25,000-100,000 $100,000 Time Factor: Manf. date to occurrence date*A (309) 18 (131) 15 (44) 54 (45) 40 (39) 12 (121) First sale date to occurrence date*3 (296) 13 (136) 10 (44) 50 (47) 35 (43) 14 (98) Occurrence date to date of notice of clalm*3 (496) 7.(206) ' 9 (66) 11 (72) 21 (66) 80 (152) Occurrence date to date closed 5 (414) 13 (111) 17 (26) 24 (24) 33 (18) 71 (25) * These three include open claims TABLE I-VI I Payments by Length of Time From First Purchase to Occurrence Length of time Percent Percent from first of of purchase to Total Average Valid Total Cumulative Total Cumulative occurrence Paid Payment Cases Cases Percent Dollars Paid Percent Less than 1 year $682,375 $1,537 444 92.3% 92.37. 64 . 9% 64. 9X 1-2 years 262,016 26,202 10 2.1 94.4 24.9 89.8 2-3 years 30,543 4,363 7 1.5 95.9 2.9 92.7 3-4 years 7,398 1,233 6 1.2 97.1 .7 93.4 4-5 years 62,500 31,250 2 .4 97.5 6.0 99.4 5-6 years 1 .2 97.7 99.4 6-10 years 3,361 1,120 3 .6 98.3 .3 99.7 Over 10 years 1 2,635 329 8 1.7 100.0 .3 100.0 Total $1,050,838.15 2,185 481 100.0 100.0 100.0 100.0 581 Although there were 8 closed claims where the alleged injury was caused by a product over 10 years old, payment was made on only one of them. The other seven were closed without payment. This table clearly indicates that, in Missouri, old products are seldom involved in product liability claims closed with payment. Less than one percent of the money is paid out on products over 5 years old. TABLE I-VIII Product Alteration: Amount Paid by Stage of Process Process Valid Stage Cases Before suit 15 After suit. before judgement 4 After judgement, before appeal After appeal After suit, unknown 1 Total 20 No. Closed Without Payment 13 _0 15 Amount Paid $ 220 5,750 (1 for $200) (1 for $20) (1 for $500) (1 for $5,250) 15,000 $20,970 The 20 cases represent 2.A% of total claims closed and 1.6% of total money paid. 582 Name of Insurance Company SECTION V The final portion of this survey inquires about claims filed. First, please enclose with your completed survey the annual "Schedule P" loss development statement pertaining to Product Liability coverage for each year since 1970. Secondly, please duplicate the remaining two pages of this survey (items 9 through 19) and supply the requested information for EACH Product Liability claim filed since January 1, 1971. Use separate sheets for each claim, ( Please staple separately survey pages 7 and 8 for each claim before returning this survey n 9. Dollar Amount of Claim 10. Dollar Amount Paid to Claimant (Write "None" if settled without paymen and "Open" if not yet settled) 11. When claim closed: After claim filed, before suit brought ^After suit filed, before judgement ^After judgement, without appeal After judgement and appeal Open Claim 12. Estimated cost of: Claim Processing Court Defense 13. Claim Factors: a. Date product was manufactured or operations completed b. Date product sold to first retail customer c. Date of purchase by whoever owned it at time of occurrence d. Date of occurrence causing claim e. Date of notice of claim f. Date of first known suit filed against anyone in distribution chain , a. Date claim closed 583 14. Was product altered or modified by claimant? Yes No If Yes, did alteration or modification contribute to occurrence? Yes ^No 15. Basis of claim: (e.g. bench error, inadequate testing, faulty design, failure to warn, etc.) 16. Were the following alleged or claimed: a. Breach of Express Warranty Yes No b. Breach of Implied Warranty ^Yes ^No c. Doctrine of Res Ipsa Loquitur ^Yes No 17. Theory of Liability used in settlement or award: ^Absolute Liability ^Negligence Liability Strict Liability Breach of Warranty ^Other (Specify) 18. Check appropriate class and category of company named in claim: Class Category Construction Largest ^Manufacturing Large Transportation, etc. ^Medium Wholesale and Retail Small Services ^A-Rated Governmental Agriculture, etc. Mining 19. Were (or Are) there any subrogation or cross-claims involved? Yes No If Yes, explain briefly (Thank you for your cooperation. "Please return this survey as quickly as possible to: Senate Research Staff, Senate Post Office, The Capitol, Jefferson City, Missouri 65101) 584 "Sffiir A000D70^St,13T