Offsetting risks.

• Author: Porat, Ariel
• Position: Tort law

Under prevailing tort law, an injurer who must choose between Course of Action A, which creates a risk of 500 (there is a probability of .1 that a harm of 5000 will result), and Course of Action B, which creates a risk of 400 (there is a probability of .1 that a harm of 4000 will result), and who negligently opts for the former will be held liable for the entire harm of 5000 that materializes. This full liability forces the injurer to pay damages that are five times higher than would be necessary to internalize the risk of 100 that his negligent choice actually creates. This Article argues that tort law should recognize the Offsetting Risks Principle, under which courts would take into account the risks decreased by the wrongdoing as a mitigating liability factor. The injurer in our example would thus be liable for only 1000, which is twenty percent of the harm that actually materialized. This outcome not only differs from the result under prevailing tort law but also diverges from that mandated by a probabilistic recovery principle. Under that principle, if, in our example, the risks of both Course of Actions A and B relate to the same victim, the injurer should be liable for 4600.

The failure of tort law to cause injurers to internalize the actual risks created by their negligence, as illustrated by the example above, emanates from the law's disregard for the positive externalities generated by wrongdoings. In our example, the injurer's negligent choice creates two opposite effects: one negative (increasing risks by 500) and one positive (decreasing risks by 400). Because the law imposes liability for the negative effects when harm materializes but ignores the positive effects, the result is that the injurer bears liability for risks that far exceed the actual risks he negligently created.

The Offsetting Risks Principle is suitable mainly for those cases in which the injurer must balance the various conflicting interests of his potential victim. It also applies to cases where the injurer must balance the interests of the victim against the interests of third parties or society as a whole. This Article focuses on the Offsetting Risks Principle's potential application in medical malpractice cases. Adopting the Offsetting Risks Principle in such cases and reducing liability in accordance with offsetting risks would result in a huge--and desirable--decrease in the damages awarded in medical malpractice suits. Doctors would then pay for no more than the social harm actually generated by their negligence, practice less defensive medicine, and refrain from overinvesting in precaution. But patients are the main beneficiaries: they would pay less for medical services and receive improved care in return. The apparent problem of undercompensation for patients could, and should, be solved outside the framework of tort law, either by social insurance or by private insurance.

TABLE OF CONTENTS INTRODUCTION I. INTRODUCING THE OFFSETTING RISKS PRINCIPLE II. THE OFFSETTING RISKS PRINCIPLE IN ACTION A. The Different Interests of the Victim B. The Victim's Interests versus Third-Party Interests C. The Victim's Interests versus Societal Interests III. OFFSETTING RISKS AND PROBABILISTIC RECOVERIES IV. THE COSTS OF REFUSING TO APPLY THE OFFSETTING RISKS PRINCIPLE A. Defensive Medicine B. Overinvestment in Precautions C. Overburdening the Negligence-Producing Activity and the Relevance of a Contractual Relationship V. CRITICISM AND OBJECTIONS A. Undercompensation of Victims B. Curing Underenforcement C. Information and Application D. Other Alternatives CONCLUSION INTRODUCTION

Tort law mandates that injurers bear liability for the harm caused by their negligence. In conventional law and economics theory, this liability threatens the potential injurer with the expected harm resulting from his negligence in order to provide him with an efficient incentive to take precautions. Liability for either less or more than the harm inflicted by the injurer leads to underdeterrence or overdeterrence, respectively, and results in inefficient levels of precautions. (1) Corrective justice theories also justify imposing liability on a negligent injurer for the harm he causes, based on the notion that the wrongdoer should rectify the injustice created by his wrong. doing by way of compensation. (2) Thus, prevailing tort law's mandate of compensation is consistent with both efficiency and corrective justice considerations.

Negligence law is built around the paradigmatic case where the injurer's precautions reduce the expected harm to potential victims and generate no adverse effects, either for the victim or for third parties. In this case, both efficiency and corrective justice considerations support liability for the entire harm. In many instances, however, this paradigm does not apply. Frequently, precautions reduce expected harm of one type at the expense of increasing expected harm of another type, either to the victim or to someone else. An injurer who fails to take these precautions creates a net risk equal to the difference between the risks he negligently failed to reduce and the risks he would have created had he taken the necessary precautions. I call the latter risks offsetting risks. Although courts take into account such offsetting risks when they set the standard of care, they ignore these offsetting risks when awarding damages. (3) Corrective justice principles support the current approach, while efficiency principles challenge it. Example 1 below illustrates the presence of offsetting risks.

Example 1: Doctor and Patient. A doctor must decide what treatment to pursue for his patient: Treatment A or Treatment B. (4) Each treatment creates different risks but produces the same utility if the risks are not realized. This utility is much greater than the risks involved. Treatment A entails a risk to the patient's left arm of 500 (there is a probability of .1 that the treatment will produce a harm of 5000), and Treatment B entails a risk to patient's right arm of 400 (there is a probability of. 1 that the treatment will produce a harm of 4000). The risks of Treatments A and B are not correlated: the realization of the risk from one treatment has no bearing on the probability of the realization of the risk from the other treatment. The doctor negligently chooses Treatment A, and a harm of 5000 materializes. Should the negligent doctor's liability be 5000, or should it be a different amount? (5)

Under prevailing tort law, the doctor's liability in Example 1 would amount to 5000. The potentially negligent doctor bears a liability risk of 500 (.1 x 5000) if he makes the wrong choice. Yet the net risk the doctor creates when he does make a wrong choice is only 100 (500-400).

In a sharp departure from prevailing tort law, this Article argues that the extent of the injurer's liability in cases such as Example 1 above should be determined not only by the harm suffered by the victim but also in light of the risks reduced by the injurer's wrongdoing. Specifically, the damage award should be reduced to reflect the true social cost of the injurer's negligent behavior. I refer to this as the Offsetting Risks Principle ("ORP"). In Example 1, this principle would require that the court award only 1000 in damages, not 5000. Liability in the former amount would set a liability risk of 100 (.1 x 1000), which equals the net risk that the doctor would create with a wrong choice. This outcome not only differs from the result under prevailing tort law but also diverges from that mandated by a probabilistic recovery principle. Under that principle, the injurer in Example 1 should be liable for 4600 (5000 -. 1 x 4000). (6)

The failure of prevailing tort law to cause the doctor to internalize the net risk created by his negligent choice emanates from its disregard for the positive externalities that the wrongdoing may generate. The doctor's negligent choice in Example 1 creates two opposite effects: one negative (increasing risks by 500) and one positive (decreasing risks by 400). Since the law imposes liability for the negative effects when harm materializes but ignores the positive effects, the doctor bears liability for risks that are much higher than the net risks he negligently created.

Failing to take into account the offsetting risks makes the injurer liable for risks that not only exceed the risks created by his negligence but, more importantly, risks that are higher than the risks created by his activity. Thus, in Example 1, liability for 5000 would impose on the doctor liability for a risk five times greater than the risk he actually created. Such excessive liability results in overdeterrence, which is especially destructive in fields where offsetting risks are common and lawsuits frequent. Medicine is particularly illustrative. In the medical field, as this Article will demonstrate, courts' failure to consider offsetting risks as a mitigating liability factor contributes to the flourishing practice of defensive medicine and overinvestment in precautions, both of which are detrimental to patients. (7)

The principal objective of this Article is to illuminate the significance of offsetting risks in setting tort liability and to identify the distortions produced when courts systematically ignore these risks. The Article proceeds to propose a means of correcting these distortions and suggests that legislatures--guided by the actual harm caused to the plaintiff, the risk that was realized into harm, and the magnitude of the offsetting risks--should offer courts a menu of damages from which they can choose. Part I introduces the Offsetting Risks Principle and sets its parameters. Part II applies the ORP to various cases, including those in which the offsetting risks relate to third parties or to society at large. Part III discusses the relationship between the ORP and the probabilistic recovery principle. Part IV elaborates on the drawbacks...