The Differential Effects of Noneconomic Damage Cap Levels on Medical Malpractice Insurers

• DOI: http://doi.org/10.1111/rmir.12005
• Author: Patricia Born,Faith Roberts Neale
• Date: 01 September 2014
• Published date: 01 September 2014

Risk Management and Insurance Review

C

Risk Management and Insurance Review, 2013, Vol.17, No. 2, 163-181

DOI: 10.1111/rmir.12005

THE DIFFERENTIAL EFFECTS OF NONECONOMIC DAMAGE

CAP LEVELS ON MEDICAL MALPRACTICE INSURERS

Patricia Born

Faith Roberts Neale

ABSTRACT

This study examines the effect of tort reform on medical malpractice insurers

with an emphasis on the effect of cap levels on noneconomic damages. While

previous research finds that caps on noneconomic damages have a beneficial

effect on insurer performance, these studies do not evaluate the effects of caps

of varying size. Examining insurer data from 1997 to 2007, we test whether

cap levels matter. We find that insurer performance generally improves when

the cap is set at $250,000, but caps exceeding $250,000 are not associated with

improved performance, as they are possibly not binding on award amounts.

INTRODUCTION

Beginning in the early 1970s the professional health care industry has experienced three

distinct hard markets, commonly known as crises, when the availability of medical

liability insurance was limited and/or premiums were so high as to be perceived

as unaffordable by health care professionals. The second crisis occurred in the mid-

1980s and the third, most recent crisis occurred in the early 2000s culminating in 2001.1

Although medical liability crises have a broad impact on our national health care system,

solutions such as tort reforms are implemented at the state level. Each crisis is mani-

fested differently depending on local conditions, with some states incurring significant

distress while others experienced no obvious crisis. Accordingly, attempts at solutions

vary widely across states.

This article was subject to double-blind peer review.

Patricia Born is at Florida State University,821 Academic Way, Tallahassee,FL 32306-1110; phone:

850-644-7884; e-mail: pborn@cob.fsu.edu. Faith Roberts Neale is at University of North Carolina

at Charlotte, 9201 University City Boulevard, Charlotte, NC 29223-0001; phone: 704-687-7636;

e-mail: frneale@uncc.edu. This research is supported by the John H. Biggs Faculty Fellowship

Program established at the University of North Carolina at Charlotte by TIAA-CREF.This article

and its contents do not reflect the views or beliefs of TIAA-CREF.

1Neale et al. (2009) find the medical malpractice market deteriorated significantly between 1993

and 2001 when the market began to improve. For further discussion of indications of these

crises, see Thorpe (2004).

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164 RISK MANAGEMENT AND INSURANCE REVIEW

With the most recent medical liability crisis, the federal and many state governments

recommended placing caps on noneconomic damages in medical malpractice claims at

some level, most commonly $250,000. As in the past, there is a recurring discussion as

to the efficacy of caps on noneconomic damages.

In the event of medical malpractice, monetary damages are generally paid to a third party

as a result of the negligence of an insured medical provider.These damages are typically

paid at settlement contingent upon full and final release of all claims by the injured party.

The amount paid to settle the claim may result from negotiations between parties before

litigation or during trial proceedings, or settlement may be made after trial based on the

amount determined by a jury.A claim for bodily injury consists of two types of damages,

special damages and general damages. Special damages, or economic damages, are

damages that are measurable, out-of-pocket expenses such as past and future medical

bills and lost wages, expenses for medical devices and extra assistance needed as a

result of the bodily injury. General damages, also called noneconomic damages, are very

hard to measure and, as a result, can be very contentious. General damages include, but

are not limited to, pain and suffering, loss of consortium, embarrassment, humiliation,

disfigurement and emotional distress. A spouse or family member may file a claim

for general damages, particularly for loss of consortium and emotional distress, as the

result of an injury or death of their loved one. An additional type of damages, punitive

damages, are not generally allowed but may be claimed when the defendant’s conduct

has been willful and wanton or grossly negligent.2Punitive damages are used to first,

“punish” the defendant and second, deter them from engaging in the offending conduct

in the future. Depending on the financial size of the defendant and the offensecommitted,

punitive damages may be much higher than compensatory amounts awarded under

general and special damages.

Special damages may be complex especially when future expected values are estimated

and discounted back to present value; however, they are still measurable. In contrast,

general or noneconomic damages are very difficult to measure and subject to wide

variation depending on the jurisdiction and the composition of the jury.3

There is also a great deal of concern regarding the use of noneconomic damages by

juries. Noneconomic damages, including pain and suffering, are meant to compensate

2States vary widely on the use of punitive damages with some states setting a very high require-

ment that must be breached in order to claim punitive damages. In addition, some states allow

punitive damages to be insured and some states do not.

3http://www.judicialhellholes.org/wp-content/uploads/2011/12/Judicial-Hellholes-2011.

pdf, “2011/2012 Judicial Hellholes.” Each year the American Tort Reform Association (ATRA)

evaluates regions within the United States and publishes a report ranking areas based on the

performance of their judicial system. The worst performing regions, those in which ATRA feels

defendants have a high probability of not receiving a fair trial, are named “Judicial Hellholes.”

Several factors are used by ATRA to evaluate these areas including the ability of plaintiffs

to “shop around” for the best venue with the largest probability of receiving a high award:

the history of the courts and use of “novel legal theories,” appropriateness of class action

certification and working relationships between plaintiff attorneys, and the judges that they try

their cases in front of as well as the attorney generals of their states. ATRA also examines the

credibility or abuse of the discovery process, the methodology used in trial and how consumer

protection acts are used.