Book review: Tort Reform by Contract

Abstract

Tort Reform by Contract, by Paul H. Rubin, is reviewed.

Tort Reform by Contract by Paul H. Rubin, The AEI Press, Washington, D.C., 1993.

Paul Rubin's Tort Reform by Contract is intended to make a strong case for allowing producers of goods and services to make enforceable contracts that limit the liability of producers for harms suffered by consumers in using the good and services. On the surface, such an argument seems far removed from the focus of a practicing forensic economist, who is normally concerned with measuring damages under tort law as it exists now, not as it might be reformed in the future. However, Rubin's short (84 page) monograph provides a surprisingly useful introduction to the law and economics of tort damages in general. Many practicing forensic economists have only a casual understanding of the kinds of issues that are central to debates in law and economics but could greatly benefit from increasing that understanding. Rubin's short monograph is an easy first step for persons with no background and is a cogent work for those who have already acquired some background in these issues, even where the reader might disagree with Rubin's conclusions.

Rubin notes at the outset that there are two types of situations involving accidents that cause harms relevant to tort damage recoveries: situations in which the injurer and the victim are strangers and situations in which the two parties have some relationship before the injury. His thesis that many problems with the tort system could be reduced by private contracting is restricted to the second category in which some kind of prior relationship exists, though insurance relationships extend the usefulness of the private contracting model into areas involving harms caused by strangers, especially in cases like automobile accidents. Such private contracting is now prevented by the fact that many signed waivers of liability are not acknowledged by the courts. Rubin attempts to show that there are many areas in which efficiency gains could accrue to both producers or insurers and to potential tort victims from allowing enforceable restrictions on liability to be made through private contracting.

Rubin does an excellent job of introducing arguments in the literatures of both law and law and economics for and against this proposal. Here, one finds Richard Posner and Steven Shavel on the opposite side of this issue, with Richard Epstein, Patricia Damson, Peter Huber and George Priest on the same side, and W. Kip Viscusi in the middle. This provides one significant benefit for a forensic economist who read's Rubin's treatise. Much of the literature of law and economics is much less accessible than Rubin's treatment in the sense that much of the literature presumes extensive prior knowledge. Rubin's treatment provides a straightforward and easy to follow introduction to both his own arguments and also the arguments against his proposal.

The second significant benefit to a forensic economist lies in Rubin's careful distinctions concerning the types of tort compensations potential tort victims would desire and not desire. Rubin ties this discussion closely to the distinction in law between tangible versus intangible damages, or pecuniary versus nonpecuniary damages. (Normally, "tangible" and "pecuniary" have the same meanings.) Rubin suggests that potential tort victims would desire compensation for "pecuniary damages" but not for "nonpecuniary damages." Rubin frames this choice in the context of assuming that potential tort victims could reduce either direct product prices or insurance costs by contracting with producers or insurers to eliminate various types of damage claims in the event of injuries. Rubin assumes that costs of tort liability are passed on to consumers in the form of higher prices. If private contracting to eliminate the possibility of certain types of damage awards were to occur, costs of tort liability would fall, and producers could sell products and services at lower costs to consumers. Thus, the benefit to consumers of lower damage awards through private contracting would be lower prices for products and services.

The reason consumers would contract to eliminate damage payments for "pain and suffering" and for "loss of love and society" and for "lost enjoyment of life," which are nonpecuniary values, is that these losses cannot be replaced by payment of money. In this area, Rubin becomes involved in arguments against awards for hedonic damages, but only in the broader context of awards for losses that are not primarily monetary in character. No sum of money can replace the love a person feels for a spouse or a child in the same way that medical costs can be paid and lost future earnings can be replaced, nor would there be any point to an individual purchasing "lost enjoyment" insurance to make payments to his or her estate in the event of his or her death. Thus, Rubin believes that consumers would be willing to contract to have rights to sue for damages of these types eliminated if they were able to save the price increments that are now going to pay for liability for damages of this type. Rubin believes that individuals would not want to contract to eliminate the right to sue for pecuniary damages because such damages would directly translate into monetary needs in the event of accidents.

Rubin also discusses more complex types of insurance effects that arise from adverse selection and moral hazard that might result in further gains in efficiency through private contracting. Rubin even reviews a quite interesting scenario developed by Jeffrey O'Connell in which purchasers of automobile insurance might contract to eliminate certain types of damage awards for themselves to obtain lower automobile insurance costs. This proposal would involve insured motorists obtaining lower coverage costs if they contracted not to be compensated for nonpecuniary damages when they were in accidents with other motorists who had likewise given up those rights. This proposal was advanced by President Bush unsuccessfully at the federal level.

Tort Reform by Contract provides excellent discussion of several major court decisions that are of special interest to forensic economists, including Henningsen v. Bloomfield Motors (1960), Greenman v. Yuba Power Products Co. (1963) and Molzof v. United States (1992). Rubin teaches economics in Emory University's Law and Economics Program.