The Law and Economics of Tort Damages
| Publication year | 1996 |
| Pages | 8 |
August, 1996
Mark A. Click, J.
The author wishes to thank Alex Page, University of Chicago, for her helpful comments on this manuscript.
It has become fashionable these days to rebuke the tort system for overcompensating the victims of accidents. "Runaway litigation, " it is said, is increasing costs to businesses, and, in particular, insurance costs. In my opinion, economic analysis can support an opposite view. The approach taken by most courts, including Utah courts, to computing tort damages inherently under compensates victims of accidents. Such under compensation also encourages socially inefficient behavior and thus subverts a fundamental goal of the tort system.
An example will illustrate the basic problem. Suppose that a law professor earning $100, 000 is offered a position at a downtown law firm at a salary of $200, 000. He decides to turn down the offer because he values the lifestyle he has established at the university. At the university, the professor works 40 hours per week, but at the law firm, at least 70 hours would be expected. Unfortunately, shortly following his decision to stay at the university he is killed by a negligent driver. At trial, economic testimony establishes that the value of this life is $1 million, based on the fact that he had ten additional years to live (i.e., 10 x $100, 000, and ignoring discounting). His spouse is therefore awarded $1 million. However, had the professor accepted the downtown job, the very job that he believed would have reduced the value of his life, the value of the professor's life for purposes of compensation would have been calculated at $2 million (10 x $200, 000). Obviously, something is wrong! What is wrong is that the economic testimony in my example valued only the 40 hours per week that the professor worked, and did not include any value for the 128 hours that he did not work. Put differently, the general method of damage calculation accepted by Utah courts underestimates the real value of life by failing to include the value of non-work related activities. Thus, under current law, an important individual interest, "the enjoyment of life" lacks an adequate legal and economic basis for compensation. See Neil Komesar, Toward a General Theory of Personal Injury Loss, 3 J. Leg. Stu. 457 (1974).
This typical approach to valuing injuries or valuing life clearly conflicts with a central objective of the tort system itself. One fundamental goal of the tort system is to deter risky or dangerous behavior by creating incentives to take proper precautions. Economic analysis suggests that precaution should be taken up to the point where the cost of any additional precaution is equal to the expected damage that would result in the absence of such precaution. For example, suppose that increasing driving speed from 50 to 60 MPH results in a .001 increased probability of an accident causing $10, 000 of damage. The expected damage is there fore $10 (.001 x $10, 000). If the cost to the driver of reaching his destination a few minutes late is $8, then it is socially efficient for him to drive slower.
The law of negligence embodies this very logic. In United States v. Carroll Towing Co., 159 F.2d 169, 173 (2d Cir. 1947), Judge Hand held that an injurer is negligent only if the cost of precaution "B" is less than the probability of injury "P" multiplied by the amount of the potential damage "L", or when B
CALCULATION OF DAMAGES IN INJURY
At present, an injured plaintiff in Utah can recover for (1) out of pocket expenses such as medical costs, property damages and the cost of household help, (2) lost income, (3) pain and suffering, and (4) disfigurement or loss of bodily functions. See Duffy v. Union Pac. R.R. Co., 218 P.2d 1080 (Utah 1950); Paul v. Kirkendall, 261 P.2d 670 (Utah 1953).[3] Under Utah law there is no recovery for loss of consortium. Utah Code Ann. §30-2-4 (1995); Hackford v. Utah Power & Light Co., 741 P.2d 1281 (Utah 1987).
The focus of the damage phase in most accident cases is lost income. My experience has been that even the calculation of lost income is typically not performed in an appropriate fashion. The approach endorsed by most labor economists begins with the construction of an "age-earnings profile." Studies of lifetime earnings reveal that income and productivity rise at a diminishing rate to a point and then decline, reflecting the fact that productivity is related in part to experience and training. Specific age earning profiles vary from job to job. In some occupations, work experience adds very little to an individual's skills after a relatively short initial period of learning. Other jobs (think trial attorney) provide valuable learning experiences over many years, resulting in continued earning increases.
Moreover, it is improper to assume that injured persons would have remained in a single occupation. Occupational data...
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