Unintended Consequences of Tort Reform: Rent Seeking in New York State's Structured Settlements Statutes

By Spizman, Lawrence M.; Schmitt, Elizabeth Dunne | Journal of Forensic Economics, Winter 2000 | Go to article overview

Unintended Consequences of Tort Reform: Rent Seeking in New York State's Structured Settlements Statutes


Spizman, Lawrence M., Schmitt, Elizabeth Dunne, Journal of Forensic Economics


I. Introduction

Discounting future economic losses was one of several legal issues addressed by the state tort reform movement of the 1980s and 1990s and is also an important research topic among Forensic Economists.(1) During this period, almost 90% of the states enacted some type of tort reform legislation (Schmit et al., 1997). These reforms include laws affecting the assignment of liability, the size of potential damage awards, and allowable methods for discounting future economic and non-economic losses. Most tort reforms were in response to increasing liability insurance costs and therefore designed to reduce the amount of litigation (Viscusi et al., 1993). However, some tort reform laws may have had the opposite effect. States mandating specific discounting procedures may distort settlement negotiations and actually increase the incentive to go to trial.

New York State's provisions for structured judgements, while passed as tort reform in the 1980s in the hope of reducing litigation costs, actually overcompensate the plaintiff, resulting in awards up to three times higher than the present value of the jury award (Wolkoff and Hanushek 1995, Lambrinos and Harmon 1995).(2) The purpose of this paper is to examine the unintended consequences of New York State's Articles 50-A and 50-B tort reform by demonstrating how the post-verdict discounting requirements result in a pro-plaintiff bias and how this bias impacts settlement negotiations. We argue that New York State ("NYS") tort reform, rather than reducing tort litigation, may have contributed to an increase in litigation and litigation costs.

Inflationary pressures of the late 1970s and early 1980s precipitated dramatic increases in the cost of liability insurance, which led to the tort reform movement of the 1980's (Viscusi, Zeckhauser, Born, and Blackman 1993). Viscusi et al., point out that general liability premiums rose from $3.1 billion in 1975 to $19.1 billion in 1988. State legislatures, including those in New York, responded to intense lobbying by the insurance and medical industries by passing tort reforms intended to reduce insurance costs.(3)

An injured party's decision to bring a legal claim depends on the costs and benefits associated with that claim (Cotter and Rubinfeld 1989); tort reforms change the political and economic calculus of whether cases are pursued and/or resolved prior to trial. Several authors have examined the empirical link between tort reform and the decision to file. Schmit, Browne, and Lee (1997) find a negative relationship between per capita claim filings and certain types of tort reforms. Browne and Puetz (1998) conclude that accident victims will not seek a legal remedy as often as they did prior to state tort reforms. Neither of these papers specifically address structured settlements.

State tort reforms may have unintended consequences, in particular, overcompensating plaintiffs relative to the true present value of future damages. Such reforms may result in an increase, rather than a decrease in litigation. Rolando Pelaez (1995) examines the error rate of the Pennsylvania offset rule, which requires a zero real interest rate in discounting all damages. Pelaez claims that the simplicity of this rule comes at the price of overcompensating the plaintiff between 30% and 100%, depending on growth rates and worklife expectancies. The size of settlement offers and the decision to file in Pennsylvania is affected by the overcompensation.

NYS law has a unique feature in that the court, not the jury, reduces future damages to present value.(4) Consequently, economists in personal injury and wrongful death cases are permitted to testify only to the nominal value of the future loss stream (including an inflation factor), not its present value. All damage awards in excess of $250,000 must be structured by the judge under the guidelines of Civil Practice Law & Rules (CPLR) Articles 50(a) (CPLR 5031-5039) in 1985(5) and 50(b) (CPLR 5041-5049) in 1986. …

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