–Sebastian
This post is inspired by, but not directly a response to, this WashingtonMonthly post on a book by Tom Baker. Whenever a discussion about the costs of legal insurance comes up, I get really frustrated because the focus is typically on settlements and verdicts. Tom Baker writes:
Fourth, we know that “undeserving” people sometimes bring medical malpractice claims because they do not know that the claims lack merit and because they cannot find out what happened to them (or their loved ones) without making a claim. Most undeserving claims disappear before trial; most trials end in a verdict for the doctor; doctors almost never pay claims out of their own pockets; and hospitals and insurance companies refuse to pay claims unless there is good evidence of malpractice. If a hospital or insurance company does settle a questionable claim to avoid a huge risk, there is a very large discount. This means that big payments to undeserving claimants are the very rare exception, not the rule.
This has two huge errors in understanding how the legal system costs businesses money. First it fails to notice how expensive it can be to get rid of an undeserving claim. Second it fails appreciate how a claim can be deserving in general without being deserving as pertaining to many defendants, and such a situation is common.
Generally plaintiff’s lawyers don’t take completely awful cases. They don’t want to spend lots of time and energy with no hope of getting paid. This fact is almost always mentioned in debates about the tort system, but the analysis doesn’t go far enough. When a lawyer has decided to take a kind-of-good case against one defendant it often doesn’t cost them much to add many other defendants. The laywer already has to spend many hours drafting the complaint, talking to experts and understanding his case. This is underwritten by their hope that they have a good case against the main defendant(s). The marginal cost of adding scores of other defendants is very small once you have decided to take the case on.
Let’s see how this works with a hypothetical:
Bob is a 68 year-old man who has developed a rare and nasty form of cancer. Some studies have suggested that the chances of getting this cancer are increased by exposure to a chemical which I will call ‘Icky’. Icky was commonly used in the 1960s and 1970s but has been banned as a formal ingredient for decades. It occurs naturally in very small amounts, so it might be found in some products. Icky wasn’t banned because of the cancer which Bob has, but for causing other nasty problems. Bob worked at a local newspaper from 1955-1957. He worked at an ice cream factory from 1958-1962. He worked at Ford from 1963-1995. He worked at Age Hardware from 1996-1999He worked at WalMart from 2000-2003. At that point his cancer was discovered. It is well known that Icky was commonly used at Ford from 1950-1978 in a number of compounds such as AJ’s Formula B, Flickenstuffen and NastySmellyVapour.
Bob probably has a non-awful case against Ford for exposure to Icky. He probably has a non-awful case against the producers of AJ’s Formula B, Flicenstuffen and NastySmellyVapour. These four companies will be the main targets of the suit. It will be expensive to go after these companies, since all but the producer of NastySmellyVapour have lots of money and large stables of lawyers. The plaintiff’s lawyer is going to put a lot of work into the case against those companies.
Now that the lawyer has decided to take the case, he will add other defendants. Most of the hard work has already been committed to against the main defendants. Adding the local newspaper, the ice cream factory and Age Hardware won’t cost much more time even though Icky isn’t known to be used at any of these. Walmart uses a new version of NastySmellyVapour in their warehouses. This new version allegedly doesn’t have Icky in it, but who knows? Bob never worked in the warehouse, but the lawyer might want to add Walmart just in case. (He also might prefer to pick on the medium level companies rather than subject himself to the chance of an avalanche of paper from WalMart’s lawyers. The decision really comes down to how much time he is putting into the main defendants and how much crossover he expects between that work and the work of the minor defendants. Most of the time he will add more defendants.)
It doesn’t stop there. Bob used lots of products at Ford. SpringVapour does lots of the same things as NastySmellyVapour. Bob’s lawyer doesn’t know that it has Icky in it, but maybe it does, better include it. SodaNStuff looks a lot like Flickenstuffen, better include them. STDGlue uses a similar chemical pathway, better throw that in there. Bob’s wife once bought a can of BT’s Formula A which contained Icky in the 1960s. It is unopened in their garage, but perhaps they bought other cans and used them earlier. That should go in too.
SodaNstuff never had Icky. It will spend $15,000 defending the suit but will get dismissed early in the discovery phase. SpringVapour never had Icky but some of their records were destroyed in a fire in 1981. That looks suspicious to the lawyer, so he keeps them around a bit longer. They eventually settle for $5,000 (nuisance value) and have spent $30,000 otherwise proving that they never had Icky in their product. Walmart spends $50,000 crushing the plaintiff’s attorney in paper in the first six months. Since Bob never worked in the warehouse anyway the attorney dismisses them so he doesn’t have to deal with them. STDGlue never had Icky, but they have something that is sort of like Icky but has never been linked to illness. They don’t want to risk getting rhetorically linked to Icky because it would be bad for business. They have never been sued for anything remotely related to Icky, and they would prefer not to have their name linked in any way with it. They pay $10,000 to settle the case as early as they can. That is after spending $35,000 in defense costs. The ice cream factory and the newspaper have some trouble coming up with witnesses and documents from more than 40 years ago. In reality they never used Icky, but they don’t get dismissed until they have gone through a nasty round of discovery or two. They each settle for a minimal $5,000 but the plaintiff isn’t convinced enough to let them off until they have spent $25,000 each on defense costs.
That is $205,000 in extra costs (usually to insurance companies) that probably aren’t furthering the case. The plaintiff’s lawyer adds them because it costs him very little extra time to do so, and some of them will pay him to go away. On a table of settlements and verdicts it would only show $25,000
BT’s Formula A almost certainly didn’t cause Bob’s injury. But Formual A did once contain Icky, so they will probably pay a bigger settlement to avoid trial. Since they did once have Icky, they will probably be forced to stay in the case longer before settling. Their legal costs might be more in the $60,000 range.
Bob’s claim as a whole may not be undeserving (depending on the actual link between Icky and his cancer). But even if it is deserving as a whole, it isn’t a good case as to about half of the defendants. They all have to defend themselves against the claim. He’s dying of cancer so if you don’t defend well, you could get stuck with a really ugly judgment. So even the defendants who really don’t have anything to do with the cancer end up paying quite a bit of money.
Since adding defendants (even those only tenuously connected to the case) costs the plaintiff’s attorney little so long as he has a good case against someone, vast defense costs are incurred even though there is very little chance of being found liable for most of the defendants. When insurance companies are paying these vast costs, it is going to be reflected in the premiums. If you aren’t talking about defense costs, you don’t really understand the burden litigation can put on even blameless corporations.
So it’s lawsuits or greater government oversight. Pick you poison. Considering the behavior of several large companies, I like the fact they can be sued, they’ll pass that cost on to me anyway, I’d prefer to pay a little more for such oversight. I wouldn’t mind paying it to the government either, but if every 4-8 years a republican administration is going to gut regulatory oversight, they can have some lawsuits. Seriously. Wah.
“This has two huge errors in understanding how the legal system costs businesses money. First it fails to notice how expensive it can be to get rid of an undeserving claim. Second it fails appreciate how a claim can be deserving in general without being deserving as pertaining to many defendants, and such a situation is common.”
I’m entirely possibly missing something crucial, but I don’t see how these are “errors.”
“Not discussing points about the subject I think are very important” is not, as I understand the term, an “error.”
On the other hand, if you’d said something like “Tom Baker’s comments piss me off no end because they neglect to mention that…,” then that would be fine. I’m not arguing with any of your points. I just don’t see how they reflect any “error” in what you’ve quoted. (Maybe the errors were in some other, non-quoted, part, or maybe I’m just missing the actual error part in what’s quoted.) “Omission,” maybe.
Or maybe it’s your use of “has,” (“this has two huge errors”) that makes the assertion not work for me. If you wrote “this reflects two huge errors,” for instance, that would make perfect sense to me (although the points might still be arguable). But that’s really a rather different statement.
This is the actual piece Sebastian quotes, FWIW.
So, is there data on what percentage of tort cases this happens?
Seb –
1) While, as a litigator who defends corporations, I can’t really argue your main point about defense costs (they ARE enormous, and they DO rise due to scattershot pleading), I’m not sure how this shows “huge errors” in , or even relates to, Baker’s analysis. Medmal suits are pretty simple; you sue the doctor, the hospital, and if there was a drug involved, the big pharma. That’s about it. The other players in the suit (nurses, other med techs) tend to be covered by the hospital’s insurance and get covered by the same defense team. There may be other defendants perhaps related to the original cause of the injury (Icky-related cancer, say), but those defendants’ costs don’t relate to the medmal problem, which is what Baker’s book is, y’know, about. So, while your point may be relevant to a discussion of tort reform in general, not sure how it relates to the Baker book.
2) hospitals and insurers scorch the earth defending deserving claims, too, so it doesn’t exactly break my heart that they spend a bunch of money defending against undeserving ones.
As someone who has represented both sides, it is important to note that insurers intentionally make it very difficult and expensive to bring a deserving claim of low value. Instead of settling a $5,000 claim quickly, they force the defendant to hire a lawyer and spend $3,000.00 to get her $5,000.00.
Moreover, they convince many deserving, injured people to settle without a lawyer for well below the value of their injuries.
The insurance companies use the system to their benefit. I do not have any sympathy for them.
Sympathetic to both Sebastian’s post and the critical comments.
Note also that statutes of limitations create an extra incentive for plaintiffs to sue ’em all & let the court sort ’em out.
I do think courts could be more aggressive in fining the attorney (NOT the plaintiff) where defendants are frivolously attached to a complaint in the manner that Sebastian describes. But elected state judges have little incentive to tick off the plaintiffs’ bar.
Echoinh st.
Although your post may have many valid points, they are not relevant to the article to which your are referring.
For years the right has said that med malpractice claims are driving the increase in med costs and insurance costs. The book works to point out the fallacy in that argument.
It occurs to me that this is an issue dear to your heart and you found this to be a reason to make your points.
Kind of like 9/11 gave Bush a reason to invade Iraq. Still unrelated though.
It is possible that Tom deals with the defense cost problem later in the book, the excerpt is just the introduction. But I doubt it because the paragraph I quote is the main one where he deals with litigation costs and he tackles the problem from completely the wrong direction. The errors are to treat the settlements and judgments as the main litigation cost and to treat the question of deserving/undeserving claim as a unitary problem. When he says “This means that big payments to undeserving claimants are the very rare exception, not the rule.” he summing up his concept of the alleged problem in a susbstantively incorrect way.
Wholly undeserving claimants are indeed very rare. But claimants who are undeserving as to many or most of the defendants are incredibly common. Sorting it out is incredibly expensive for the defendants. Adding these defendants is not very expensive for the plaintiff if he is already suing a likely target. These high defense costs can lead to settlements solely to avoid the cost of litigation. This increases the incentive to file against people who aren’t at fault because 30 $5,000 settlements after they spend $20,000 in defense fees is pretty much gravy if you are already going to spend the time to pursue a case against someone else. So wholly undeserving claimants aren’t the issue.
Big payments are also not the main issue. With respect to the frivoulously added defendants (who often well outnumber the properly targeted defendants) the ultimate payments are almost certainly very small. If they go to trial with the properly targeted defendant they have a chance of getting spattered along with them, but so long as they settle the settlement itself is likely to be small. But it won’t be the main cost in the litigation. The main defense cost will be the cost of getting the plaintiff’s attorney to the point where he will give you a nuisance settlement.
If you were a researcher who was looking in to why malpractice costs are very high you would be in error to think you are debunking why the costs are high if you ignore defense costs.
“It occurs to me that this is an issue dear to your heart and you found this to be a reason to make your points.”
Please read sentence number one in the post.
When I reread the post the3 first sentence did strike me as a resposne to my critique. But you specifically state “This post is inspired by, but not directly a response to” the claims of the author.
But then your post is a direct response to something the author wrote. As st pointed out, and as I can attest to being peripherally involved in the medical profession, there are some major differences between malpractice suits and the type of suits you refer to.
I am not disputing the valdity of your arguments about the cost of defense involved for businesses.
The real question to ultimately be discussed is how to correct any abuses or problems within the field for both medical malpractice and other liability cases.
I think your argument would have been more more valid, as a response to the initial article, if you had used a plausible example within the medical malpractice field.
I basically agree with everyone. With Seb, that this is a serious problem. With others (at least implicitly), that it’s not the only problem out there, and that as far as I know firms and their attorneys have their little issues as well. With various people, that this is not particularly relevant to medical malpractice, though (with Seb) that he said it wasn’t a direct response.
But I also really agree with, and would like to highlight, Pinko Punko’s point. Sometimes, companies do bad things, and needlessly endanger people. Not all companies, etc. etc., but some. We might, I suppose, just decide that this was OK: that if my employer knowingly puts some toxin all over my workplace, one that I don’t know about, and I get poisoned, that’s just my tough luck.
Suppose, however, that we think I should have some recourse — along with people who buy products whose makers knew they were dangerous, etc. What will that be? I suppose there might be lots of answers, but two leap out.
(1) Government oversight. Create decent regulations; fund the agencies who inspect for compliance at a decent level; in so doing, create a much greater incentive for companies not to do this stuff in the first place, since there will be an appreciable likelihood that they will get caught.
(2) Lawsuits. And all that they entail.
Personally, I favor (1), using (2) as a backup. It would help, of course, if we could count on the people who run our government to craft good regs, and also to make this a real priority: I always think that in my ideal world, there would be awards and celebrations of people who took a serious craftsman-like pride in coming up with maximally sane, minimally intrusive regulations that did the job in as straightforward, enforceable, and painless a way as possible.
But I definitely see oversight and lawsuits as two ways of solving a problem, so that weakening one tends to lead to a strengthening of the other.
What really annoys me are politicians who are just opposed to both, without counting the costs. (As though oversight and lawsuits had nothing but downsides.)
Nice to see Sebastian around. Please do post more.
Seconded.
Thirded. Fourthed. Nthed.
Yeah, well, in sentence one you said it wasn’t a direct response, but in sentence whatever you said that Baker had made “huge errors in understanding how the legal system costs businesses [presumably hospitals and doctors, in the case Baker is concerned with] money.” You then go on to describe a type of litigation cost that is not really germane to medmal litigation.
So, when you say “If you were a researcher who was looking in to why malpractice costs are very high you would be in error to think you are debunking why the costs are high if you ignore defense costs” I’m just not sure what you mean. Researchers in this field are right to ignore defense costs of the type you describe, as they are rarely found in the context under study. I don’t see any evidence in your post or in the Baker excerpts that Baker has ignored defense costs altogether.
My room-mates brother recently won an $800,000 judgement for an industrial accident that crushed both of his legs when he was 21. He is now 31 and has developed a heart condition that was in all likelihood at least partially caused by litigation related stress.
Insurance companies won’t get any sympathy from me. Their “exorbitant” litigation costs are frequently a self imposed cost of being more concerned about the pocket books of their shareholders than they are about the human costs of denying legitimate claims.
Of course a partial solution to a lot of our health care problems is Health Care For All.
“I’m just not sure what you mean. Researchers in this field are right to ignore defense costs of the type you describe, as they are rarely found in the context under study. I don’t see any evidence in your post or in the Baker excerpts that Baker has ignored defense costs altogether.”
I’m not sure I understand what you mean. I agree that they are rarely put into context during the studies. That is a huge design flaw not a laudable omission since defene costs represent a significant portion (I strongly suspect the majority of) the money spent pursuant to litigations. Over the life of a typical business insurance policy, defense costs are very likely to outstrip settlements and verdicts by a large multiple. These costs are not just absorbed by the insurance company. They are reflected in high premiums.
If someone investigates high premiums linked to litigation costs he isn’t really looking into the matter very well if he focuses on settlements and verdicts while ignoring defense costs. Settlements and verdicts are not the whole picture–they are probably not even the most costly part of the picture. A researcher isn’t addressing the problem of ‘undeserving claimants’ if he thinks the big problem is claimants wholly without a claim against anyone instead of claimaints who almost certainly don’t have a good claim against a large number (and often a very large majority) of the defendants. If you aren’t addressing those two important issues you aren’t really looking at why lawsuits are so expensive. If you don’t realize that defense costs outstrip judgments and settlements you can’t make good statements about why liability insurance costs lots of money because you don’t understand how to measure the spending.
If a researcher omits a negligible cost (say the cost of serving papers) that is one thing. But to ignore what is certainly a very large costs and very probably the largest cost means that you aren’t really dealing with the general issue of cost. Tom Baker (and Kevin Drum while reading him) seems to think he dealing with substantially all of the reasons why medical liability insurance is expensive. By focusing on verdicts and settlements in the litigation cost portion of his argument I strongly suspect that he either doesn’t understand the cost portion of the problem or he is for some reason ignoring the largest cost. Since ignoring defense costs is typcial in these discussions, I suspect the former.
“I don’t see any evidence in your post or in the Baker excerpts that Baker has ignored defense costs altogether.”
Right. But he treats verdicts and settlements as if they were a good proxy for defense costs. This talks about one portion of the problem while ignoring the larger portion. He talks about the wholly undeserving plaintiff instead of the actually damaged plaintiff who sues the malefactor AND lots of tangentially related defendants. This talks about one portion of the problem while ignoring the larger portion.
Really nice post, Seb. Good to see you posting.
And really good responses from everybody.
And … I wish I had something to contribute that somebody hasn’t said already. But I don’t.
I have recently seen a claim that the field of medical malpractice has a much tighter payments to defense cost ratio than other lawsuits. I’m trying to follow up on that for discussion on the medical malpractice part of the discussion. It doesn’t effect the business litigation thrust of my post, nor does it change my non-medical malpractice hypothetical but it would be interesting for further discussion.
STDGlue never had Icky, but they have something that is sort of like Icky but has never been linked to illness. They don’t want to risk getting rhetorically linked to Icky because it would be bad for business.
If STDGlue is worried about its public image, it might start by changing its name.
He talks about the wholly undeserving plaintiff instead of the actually damaged plaintiff who sues the malefactor AND lots of tangentially related defendants.
Sigh. Again, yes, I understand your argument about plaintiff’s lawyers suing everybody and their mother, and the high costs to “tangentially related defendants” of defending even nuisance suits. However, as I said before, medmal suits don’t work like that, and thus you haven’t demonstrated that Baker has made any “huge mistake.”
Add me to the group who like both the post and the comments. I agree with st that SH’s complaints are an entirely different kettle of fish than the original post. Pennsylvania has been a major site of fights over malpractice insurance in recent years, and it is good to see some actual research on the claims of insurers (and the doctors groups who parrot them) that lawsuits are the cause of high insurance premiums.
Sebastian’s issue is important and I think it should be handled by courts policing pleadings (and imposing sanctions) more stringently.
Sebastian’s issue is important and I think it should be handled by courts policing pleadings (and imposing sanctions) more stringently.
I completely agree.
I’m only on the defense side in tort actions, and certainly agree that defense costs are very high, and made unnecessarily higher by proliferation of marginal parties and claims. I’d like to see judges get more aggressive, espacially state court judges: I don’t know how many of you read that Supreme Court decision on removal (what, two weeks ago?) but I found it particularly telling that the plaintiffs wanted to be in state court because the courts of that state do not allow summary judgment based on deposition testimony, and have not adopted Daubert. I know it’s inside baseball for many non-lawyers, but think for a moment what this really means: a state that would rather not allow cases to be dismissed, even when the testimony shows that the claim is invalid, and does not want to impose even the lightest restrictions of science.
Insurance companies share some blame, of course.
I have to add, though, that paying nuisance settlements to recurrent opponents is also a part of the problem. Developing a reputation for taking even a marginal claim all the way to total victory is one way to get dropped from the list of convenient defendants to sue.
I imagine that people are focusing on verdicts and settlements because that is what most of the “tort reform” you hear about focuses on. The most popular answer to the “malpractice crisis” seems to come in the form of limits on damages, so it’s not at all surprising that someone will focus on the role that damages play in the costs of insurance.
Ehhh, I agree that medmal suits aren’t quite as bad as Sebastian’s hypothetical, but still, the plaintiff definitely has an incentive to sue everyone who came close to his procedure. Many times, this will involve multiple hospitals, multiple doctors and nurses, independent contractors like the anesthesiologist, etc.
I would also note that almost every insurance policy has a deductible. A nuisance settlement often doesn’t even touch the insurance.
Sebastian has a good point overall and it makes me wonder if judges should be applying things like Rule 11 more broadly to require that a claim must have a good-faith basis as to each and every defendant. I can’t recall ever seeing a case where the plaintiff had a meritorious claim as to one defendant, but was sanctioned for joining a second defendant without a good-faith basis.
“The most popular answer to the “malpractice crisis” seems to come in the form of limits on damages,…”
How is this “reform” – limiting the amount of money a claimant with a valid claim can recover from the wrongdoer – an aswer to the problem of frivolous claims or scattershot claims?
“The most popular answer to the “malpractice crisis” seems to come in the form of limits on damages,…”
How is this “reform” – limiting the amount of money a claimant with a valid claim can recover from the wrongdoer – an answer to the problem of frivolous claims or scattershot claims?
Good post, Sebastian. And good comments. There is a problem. It’s just that it’s not such an easy problem to solve.
hmmm. i’m extraordinarily skeptical of fact-based posts that fail to cite to authority. Computing “unfair” defense costs is very difficult and i have yet to see any study that i think has strong credibility.
let’s take a loot at different kinds of cases:
1. medical malpractice. apparently frighteningly common and arguably underlitigated. single plaintiff against a small and easily identifiable group of individuals and corporations. high degree of insurance coverage.
2. personal injury, aka slip-and-fall. single plaintiff / small, readily identifiable group of defendants. lack of insurance coverage / lack of sophisticated defendants may exist. highly studied area of case law, tending to show that wildly disproportionate judgments / settlements very rare (eg, McDonalds hot coffee case).
3. toxic tort. this is what SH is really complaining about. Multiple plaintiffs with a range of symptoms / multiple defendants with range of sophistication and insurance coverage. Can often have extremely high attorney / expert fees needed to prove causation. Here’s the thing, though. Toxic tort cases are, in fact, pretty rare. And there’s a number of ways that could substantially reduce the transactional costs of such cases, like universal health insurance coverage and manufacturers contributing to pain&suffering pools based on industry share.
No, it’s not the case that all plaintiffs (and their counsel) are blameless and all corporations are sociopaths.
frex, in the area of securities law, there are many who believe that the plaintiffs’ bar has it way too easy.
frex, its arguable that medical products liability cases (breast implants, fen-fen, any number of drugs) should be tried in courts with specially qualified jurors.
frex, its arguable that car accident litigation (which make up a huge percentage of the caseload nationwide) should be eliminated and true no-fault pay-at-the-pump car insurance exist instead.
but my experience (15 years as an actual lawyer) leads me to believe that the number of nuisance lawsuits / de minimis settlements is not so bad that we should be redesigning the system.
my experience also shows that both corporate in-house counsel and their hired guns often have a scorched earth mentality that contributes substantially to their own costs.
I’d like hilzoy to write about Don Ho. And about medical care outside of US govt regulations, whether that is good or not, who pays for innovations, what stem cell therapies seem to work, and whether the stem cells necessarily have to be embryonic stem cells versus other kinds, is there a real ethical issue when many people are opposed to embryonic stem cells versus other kinds, etc.
That may be a professional issue that has to be peer-reviewed and not blogged, but i am curious what she thinks. Sorry if OT.
If universal health insurance, must unproven therapies and drugs be eliminated? Clinton health care initiative pretty much stopped all R&D where I work at that time and people had to be fired,
I think my (somewhat small) company ditched interoperative neurological monitoring because of the threat of a catastrophic lawsuit (among other things), and of course that reduced competition and innovation in that field.
The game is tilted to the large corporations because the regulatory issues are diffficult, fear of lawsuits, etc. Are advantages given to foreign companies that are not so much in danger of litigation, or have markets that will be unaffected by the US legal system?
Sebastian: I understand and sympathize with your point. However, I don’t like the idea of simply making it harder to sue for damages. Suppose it were not possible for Bob to sue Ford and the makers of Icky. The immediate result would be that he would die of Icky-related cancer, leaving a huge medical bill that his survivors would have to deal with somehow. The larger scale problem is that, without the threat of lawsuit or strong and well enforced government regulations, Ford would keep using Icky, as would other companies, and Icky-related cancer would go from rare to common. Not a good outcome either. So, how could one design a law that would reduce the number of frivilous lawsuits (ie against the ice cream manufacturer) but still facilitate legitimate claims?
Also, I fourth or fifth or whatever the resolution to request that you post more often.
Dave C – go to bed. And speaking of Don Ho, I believe this to be his home.
I don’t disagree with Sebastian’s post, but he seems to overlook a closely related issue – the difficulty and expense facing an individual with a legitimate claim against a large company.
Insurance companies, as others have noted, are particularly difficult to deal with, but they are far from the only ones. It seems that, in general, delaying and forcing the plaintiff to incur expense is regarded as a legitimate and clever strategy. If you want to reform the legal system you won’t get my support until you do something to relieve unfair burdens on plaintiffs as well.