Coordinating Sanctions in Torts

This Article begins with the standard Law and Economics account of tort law as a regulatory tool or system of deterrence, that is, as a means of giving regulated parties the optimal ex ante incentives to minimize the costs of accidents. Building on this fairly standard (albeit not universally accepted) picture of tort law, the Article asks the question how tort law should adjust, if at all, to coordinate with already existing non-tort systems of regulation. Thus, if a particular activity is already subject to extensive agency-based regulation (whether in the form of command-and-control requirements or in the form of a costinternalizing Pigovian tax), which presumably already addresses any negative externalities associated with the activity, what regulatory role remains for tort law? The answer: Sometimes there is a regulatory role that tort law can play, sometimes not, depending on the situation. For example, if the non-tort regulatory standard is already fully optimizing, in the sense that the regulatory standard (a) sets both an efficient floor and an efficient ceiling of conduct and (b) is fully enforced by the regulatory agency, then tort law should be fully displaced, in the sense that no tort remedy should be available. If, however, the regulatory standard is only partially optimizing (for example, it is only an efficient minimum or efficient floor or it is only partially enforced), then tort law continues to have an important regulatory role. This framework can be used to explain how such tort doctrines as negligence per se and regulatory compliance should be applied. It also helps to explain recent federal preemption cases involving overlapping tort and regulatory standards. In addition, the framework produces insights for how tort law might efficiently be adjusted to coordinate with overlapping social norms, which are also considered within the Law and Economics tradition to be a form of regulation

Encouraging Insurers to Regulate: The Role (If Any) for Tort Law

Insurance companies are financially responsible for a substantial portion of the losses associated with risky activities in the economy. The more insurers can lower the risks posed by their insureds, the more competitively they can price their policies, and the more customers they can attract. Thus, competition forces insurers to be private regulators of risk. To that end, insurers deploy a range of techniques to encourage their insureds to reduce the risks of their insured activities, from charging experience-rated premiums to giving special premium discounts to insureds who make specific behavioral changes designed to reduce risk. Somewhat paradoxically, however, tort law discourages insurers from engaging in the direct regulation of their insureds’ behavior. Under longstanding tort principles, if an insurer “undertakes” to provide serious risk-reduction services to an insured, the insurer can be found to have a duty of reasonable care and, should that duty be breached, held liable for any harms caused to third parties. This application of tort principles to insurance companies could be contributing to the moral hazard problem often associated with insurance — the tendency of insurance to cause risk to increase rather than decrease. This Article explores this problem and analyzes a number of ways to encourage insurers to regulate — from insurer-specific Good Samaritan statutes (which we might call a “carrot”) to the expansion of tort principles to create an affirmative duty on the part of insurers to regulate (which would definitely be a “stick”). What combination of carrots and sticks produces the optimal insurer incentives to regulate their insureds’ behavior? That is the question the Article addresses

The Current Life Insurance Crisis: How the Law Should Respond

This article explores some of the issues raised by the new evidence of underinsurance. Part I explores the initial theoretical question: why do people buy life insurance? Put differently, what function does life insurance serve? Part II provides some background on the life insurance market as it currently exists. Thus, Part II summarizes the major types of life insurance that are currently offered and summarizes the main elements of the current regulatory regime for life insurance companies. Part III then provides support for the claim that households tend to drastically underconsume life insurance. Section A of that Part summarizes the existing empirical evidence, which finds substantial and widespread underinsurance. As I will point out, however, the scholars conducting those studies take pains to avoid reaching any normative conclusions based on their findings. In other words, although they do find substantial and widespread underinsurance, (almost paradoxically) they assert that such a finding does not imply that too little insurance is being bought. There is no paradox, however. The economists are simply demonstrating their awareness of the theoretical difficulty of specifying the right amount of life insurance coverage. Although it is impossible to answer that question definitively, in section B, this article favors a baseline that defines adequacy as that amount of life insurance necessary to maintain the survivors\u27 standard of living, which happens to be the baseline that the researchers used in their empirical studies. That standard-of-living baseline will be controversial in some circles and, after a period of public debate, may be ultimately rejected. That outcome would be perfectly acceptable, so long as the debate takes place and households are forced to think seriously about what the right amount of life insurance is for their needs. Indeed, the main objective of this article is to start such a discussion. However, this article seeks to push the debate one step beyond the adequacy question. Therefore, Part IV reviews a number of theoretical reasons why the economists\u27 empirical evidence should be given a normative slant; that is, why the evidence should be interpreted as indicating a true underinsurance problem and why, therefore, further government intervention may indeed be appropriate. These reasons to be worried include the same sort of externality and behavioral rationales that have been offered for government intervention in other contexts

Tax Transitions, Opportunistic Retroactivity, and the Benefits of Government Precommitment

What if the current federal income tax laws were repealed and replaced with a simple flat tax? What if the entire Internal Revenue Code (with its graduated rates and countless deductions, exclusions, and credits) were scuttled in favor of a broad-based consumption tax? Only a few years ago, such proposals would have seemed radical and extremely unlikely to be adopted. But times are changing. Calls for a drastic overhaul of the Internal Revenue Code have become commonplace, even at the highest levels in the tax-policy community. In addition, proposals that would replace the income tax with a flat-rate broad-based consumption tax have received substantial bipartisan support in Congress. And many commentators believe that Congress is likely to enact some version of these proposals in the not-too-distant future. One of the most important issues raised by the prospect of radical tax reform is that of transition effects. Each of the tax-reform proposals currently under consideration would eliminate many of the deductions, exclusions, and credits that individuals and businesses have come to rely upon. Therefore, unless Congress accompanies the repeal of those provisions with some form of transition relief (such as grandfathered, phased-in, or delayed effective dates) any taxpayer who made an investment in reliance on the prior rule will suffer substantial transition losses, losses in the value of pretransition investments

Encouraging Insurers to Regulate: The Role (If Any) for Tort Law

Insurance companies are financially responsible for a substantial portion of the losses associated with risky activities in the economy. The more insurers can lower the risks posed by their insureds, the more competitively they can price their policies, and the more customers they can attract. Thus, competition forces insurers to be private regulators of risk. To that end, insurers deploy a range of techniques to encourage their insureds to reduce the risks of their insured activities, from charging experience-rated premiums to discounting premium rates for insureds who make specific behavioral changes designed to reduce risk. Somewhat paradoxically, however, tort law discourages insurers from engaging in the direct regulation of their insureds’ behavior. Under long-standing tort principles, if an insurer “undertakes” to provide serious risk-reduction services to its insured, the insurer can be found to have a duty of reasonable care in performing such services and, should that duty be breached, held liable for any harms caused to third parties. This application of tort principles to insurance companies could be contributing to the moral hazard problem often associated with insurance—the tendency of insurance to cause risk to increase rather than decrease. This Article explores this problem and analyzes a number of ways to encourage insurers to regulate—from insurer-specific Good Samaritan statutes (which we might call “carrots”) to the creation of an affirmative duty on the part of insurers to regulate through the expansion of tort liability (which would definitely be a “stick”). What combination of carrots and sticks produces the optimal insurer incentives to regulate their insureds’ behavior? That is the question this Article addresses

Solving the Judgment-Proof Problem

A tortfeasor who cannot fully pay for the harms that it causes is said to be judgment proof. Commentators have long recognized that the existence of judgment-proof tortfeasors seriously undermines the deterrence and insurance goals of tort law. The deterrence goal is undermined because, irrespective of the liability rule, judgment-proof tortfeasors will not fully internalize the costs of the accidents they cause. The insurance goal will be undermined to the extent that the judgment-proof tortfeasor will not be able to compensate fully its victims and that first-party insurance markets do not provide an adequate response. Liability insurance can ameliorate these so-called judgment-proof problems in two ways: First, if liability insurance is experience rated or feature rated, the presence of such insurance can induce tortfeasors to take appropriate steps to prevent accidents.5 Second, the presence of liability insurance increases the amount of assets available to compensate plaintiffs. This is because when a judgment-proof tortfeasor has purchased liability insurance, not only the tortfeasor\u27s assets but also the assets of the insurance company can potentially be used to compensate tort victims. However, because virtually all liability insurance policies contain policy limits and because only some liability insurance policyholders have sufficient assets to cover tort judgments that exceed those policy limits, some liability insureds will nevertheless be judgment-proof

Encouraging Insurers to Regulate: The Role (If Any) for Tort Law

Insurance companies are financially responsible for a substantial portion of the losses associated with risky activities in the economy. The more insurers can lower the risks posed by their insureds, the more competitively they can price their policies, and the more customers they can attract. Thus, competition forces insurers to be private regulators of risk. To that end, insurers deploy a range of techniques to encourage their insureds to reduce the risks of their insured activities, from charging experience-rated premiums to giving special premium discounts to insureds who make specific behavioral changes designed to reduce risk. Somewhat paradoxically, however, tort law discourages insurers from engaging in the direct regulation of their insureds’ behavior. Under longstanding tort principles, if an insurer “undertakes” to provide serious risk-reduction services to an insured, the insurer can be found to have a duty of reasonable care and, should that duty be breached, held liable for any harms caused to third parties. This application of tort principles to insurance companies could be contributing to the moral hazard problem often associated with insurance — the tendency of insurance to cause risk to increase rather than decrease. This Article explores this problem and analyzes a number of ways to encourage insurers to regulate — from insurer-specific Good Samaritan statutes (which we might call a “carrot”) to the expansion of tort principles to create an affirmative duty on the part of insurers to regulate (which would definitely be a “stick”). What combination of carrots and sticks produces the optimal insurer incentives to regulate their insureds’ behavior? That is the question the Article addresses

Toward a Tax-Based Explanation of the Liability Insurance Crisis

The so-called liability insurance crisis of 1985 and 1986 transformed the way we think about tort law and about liability insurance markets. The crisis phenomena, which first appeared in late 1984 and lasted until mid-1986, consisted of enormous increases in liability insurance premiums and alarming reductions in the availability of certain types of liability coverage. In the two principal liability lines of insurance (Other Liability and Medical Malpractice), premiums increased by hundreds (in some cases thousands) of percentage points in a matter of months. At the same time, the availability of liability insurance contracted sharply. The liability policies that were sold during this period contained large deductibles and unusually low policy limits. Moreover, for some specific liability risks-for example, coverage for day care centers-no insurance policies were sold at all; that is, no coverage was offered at a price consumers were willing to pay. In addition, as property-casualty insurers were raising their premiums by unprecedented amounts, the industry in the aggregate was posting its largest underwriting losses ever

Optimal Tax Compliance and Penalties When the Law is Uncertain

This article examines the optimal level of tax compliance and the optimal penalty for noncompliance in circumstances in which the substance of the tax law is uncertain - that is, when the precise application of the Internal Revenue Code to a particular situation is not clear. In such situations, a number of interesting questions arise. This article will consider two of them. First, as a normative matter, how certain should taxpayers be before they rely on a particular interpretation of a substantively uncertain tax rule? If a particular position is not clearly prohibited but neither is it clearly allowed, what is the appropriate threshold of confidence that the taxpayer ought to have before engaging in the transaction? Second, what penalty regime would give the taxpayer the right incentive with respect to relying on substantively uncertain tax law? With these questions in mind, this article shows that, applying standard assumptions from the economic literature on deterrence, the tax penalty regime that would induce the optimal reliance (or nonreliance) on uncertain tax laws depending on the circumstances would involve (1) a rule of strict liability with respect to taxes owed as well as to the penalty and (2) a penalty that roughly approximates the famous Bentham-Becker punitive fine, calculated by dividing the harm (the underpaid tax) by the ex ante probability that the harm would be detected. This article also explains why a fault-based approach to tax penalties, under the standard assumptions of the classical deterrence model, would not work as well as the strict liability approach. Reasons for the inferiority of the fault-based approach include its comparatively high administrative costs, its inability to properly regulate activity levels, and its relatively unattractive distributional consequences. This article concludes, however, that if Bentham-Becker level penalties or wide-spread use of tax liability insurance are not feasible, a second-best case can be made for using a fault-based penalty regime similar to the one currently in force. The framework used in this article may have implications for any area of law where the substantive law is uncertain