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Thursday, September 10, 2009

Tort Reform - Loser Pays

TheFundamentals supports reasonable tort reform. In past postings we have supported the “loser pays” rule and caps on noneconomic damages. Today, we will discuss the reform known as “loser pays.”

“Loser pays” places the economic test of risk/reward on litigants entering into a lawsuit. Under “loser pays” the party losing the case will bear the burden of paying not only their legal fees and costs but will also pay the winning parties legal fees and costs, including witness fees. At present, in the US, the winning party must still pay for their legal fees and costs. This is not the case in most every other advanced country. Court jurisdictions in advanced free societies expect the losing party to pay for all legal fees and costs. Included in “loser pays” are most, if not all, European countries, Canada, England and Japan. They seem to do just fine with the concept. They also find the reduction in frivolous, emotional and petty litigation much to their liking. Their lawyers and litigants are disciplined.

The most compelling argument to support loser pays is that most lawsuits settle out of court. So, most lawsuits never reach the point at which a judge or jury determine who won and who lost and many decided cases are never entirely determined to one party over the other. Instead the parties calculate the cost of proceeding and the likelihood of the outcome and then settle in a range that provides a cost/benefit/risk analysis based on those factors. This is the very logic that needs to be applied a bit earlier in the process. With a “loser pays” rule the parties will enter into a cost/benefit/risk analysis before filing and fighting claims. This discipline exists in virtually all economic decisions except litigation. Without a “loser pays” rule a party can roll the dice that they will get a favorable judge/jury decision and also rely upon the emotional aspects of certain litigants over certain other litigants. And, even if they read the case as too weak to proceed further, they can expect the other side to settle for some amount because the winning party still ends up incurring significant costs in proceeding and will settle to mitigate those costs.

The “loser pays” concept is simple and is the practice in most democracies. It works well. It adds a level of discipline to potential litigants and their attorneys that produce a careful evaluation of the merits of each claim prior to it becoming a lawsuit. The courts will have time freed up so that the costs to the public can be reduced which is vital in this time of deficits and debt. Lawyers will find their reputations and regard skyrocketing in the public view. Well, maybe not skyrocketing but, at least, a significant cause of disdain and derision will be removed. Some lawyers can be retrained and become productive society participants. The public will notice lowered insurance rates. It is a big win – win.

Loser Pays. It’s time for it to be an American fundamental.

2 comments:

NDDillon said...

Norm,

I don't know what empirical evidence suggests that having the loser pay will lead to a careful evaluation of the merits. The attorney filing a case on a contigent basis, which is the overwhelming percentage of cases that fall into your sample only gets paid on winning or settling. What changes in the attorney's analysis. It is more likely that the plaintiff is detered from filing suit based on the potential ruin to his or her finances in having to pay the insurance company's fees. I do not see that as a decision based on the merits of the lawsuit. Since few cases get tried, is there really going to be a large change. I don't know how the system works on a practical basis in England, which has the loser pays rule. Based on your post, I am not sure you have any of the empirical evidence at hand. You generally post such information when you have it. It might be worthwhile for you to look at it.

Finally, I question whether a change in the rule would have any effect on insurance rates. Tort reform over the past several years that has curtailed judgments in a number of jurisdiction. Insurance companies have continued to increase their rates in those jurisdictions nothwithstanding reform.

Have a great day.

Greg

Patrick Flynn said...

SO, IF MCDONALD'S LOSES ANOTHER $700,000 HOT COFFEE CLAIM, THEY THEN MUST PAY THE WOMAN'S LAWYERS THEIR FEE? IN ADDITION, TO THE 700K?
IT SEEMS THAT THEY WOULD SETTLE OUT OF COURT, I AGREE, BUT WOULDN'T FRIVOLOUS CLAIMS MULTIPLY? I CAN SEE SLIMEY LAWYERS ENCOURAGING LAWSUITS AGAINST BIG CORPS., THE NOTION BEING THAT ANY SETTLEMENT MEANS THEY GET PAID BY THE DEEP POCKETS.

AS AN ALTERNTIVE,IF THE PLAINTIFF LOSES, THEY MUST PAY THE FEES INCURRED BY THE DEFENDANT. THE SPECTRE OF HAVING TO PAY IF ALL YOU ARE TRYING TO DO IS USE THE SYSTEM AS A CASH COW, SHOULD SERVE AS A BARRIER TO WASTEFUL, TIME CONSUMINNG, COURT CLOGGING SUITS.

BETTER STILL,PASS "COMMON SENSE" LEGISLATION THAT STIPULATES THAT IN INJURIES, COMMON SENSE WOULD HAVE TOLD THAT DUMB BROAD THAT THE COFFEE WAS HOT,OR THE MORONS DOING THE YARD WORK THAT YOU CANNOT TRIM THE HEDGES WITH A LAWN MOWER,ETC.

COUPLE COMMONSENSE WITH PLAINTIFF PAYS AND FRIVOLOUS SUITS ARE HISTORY.

FINALLY, DO YOU REALLY THINK THAT IF LAWSUITS ARE CURTAILED THAT INSRANCE RATES WILL GO DOWN? MORE LIKELY,THE BOTTOM LINE WILL IMPROVE, SINCE INS.COMPANIES RARELY PASS ON SAVINGS TO CONSUMERS.