Outlook promising for tort reform initiatives

Risk & Insurance, Jan, 2004 by Ken Silverstein

When a West Virginia coal miner drilled through a thin wall and accidentally injured another worker, J.H. Fletcher, the firm that manufactured that drill, laced a huge lawsuit. The company, which didn't operate the drill, says it did install the required headlight to warn workers of its approach. To avoid a costly legal battle, the company settled the case for $25,000, about $50,000 less than what it would have cost to try the claim in court. Businesses of all sizes all across America face the threat of lawsuit everyday. Now, because of a friendly administration in Washington, companies have a chance to ward them off.

The issue of product liability reform has been on the national agenda since the mid-1980s. After years of being defeated, filibustered and vetoed, the matter now has a decent chance of getting passed by both chambers of the legislature and then signed by President Bush. The notion of legal reform has bipartisan support, although Republicans typically favor more stringent measures than Democrats. "The current legal system hurts companies and therefore hurts the economy by diminishing jobs and product innovation," says Jack Klim, president of coal equipment maker D&E Industries in Huntington, W.Va. "It furthermore hurts true victims because most of the awards go to lawyers and transactional costs--not those who are hurt."

Power equipment manufacturers, for instance, could be at risk if they sold products that had problems to utilities. While the lawsuits targeted at FirstEnergy Corp. over the blackout are less about product liability and more about general liability, it's an easy stretch to try and link others with deep pockets to any suit. That's because provisions in the current law like joint-and-several liability allow anyone with a tangible connection to be held liable for an event--even if their involvement is only negligible.

Specifically, previous legislation has targeted lawsuits involving products in which a jury makes awards to the victims for both economic damages (lost wages) and non-economic damages (mental duress). Typically, companies are on the hook for the whole award if any of the other accused parties can't pay up. Past measures in Congress would not change that for economic damages but would do so for non-economic damages; it would only make responsible parties pay their fair share.

"The current doctrine of 'joint-and-several' liability should be changed so that a party is responsible only for the percentage amount of the harm that the party causes," says the National Association of Manufacturers. "Currently a defendant can be held 100 percent liable for damages even if the jury finds the defendant only one percent responsible.

Consider McJunkin Corp., which, after a coal mine explosion in Colorado, was forced to sell off its units and settle a lawsuit, even though it was proved not culpable. It cost the company 25 high-paying jobs, says Mac McJunkin, vice president of the West Virginia-based coal equipment manufacturer. "We were in the wrong place at the wrong time," says McJunkin. "Because of the amount of insurance we carried, we were an easy target for lawsuit abuse."

Meanwhile, manufacturers' liability insurance premiums have risen considerably since 2001, when stocks started to falter, corporate abuses were revealed and threats of terrorism surfaced.

However, the Washington-based American Trial Lawyers Association says that any changes in the present legal system would shield negligent companies and deny consumers their constitutional right to sue. It also says that manufacturers distort reality since product liability suits have remained just 4 percent of all legal cases filed in state courts where most are tried.

Sen. Ernest Hollings, D-S.C., is on the side of trial lawyers. He lays much of the blame at insurers' feet for the current liability crises and says that it is they that push so hard for product liability and other types of "tort" reform. When the stock market was booming, they went out of their way to sell policies, he says. But, when investment performance falters, the insurers become risk averse and say that underwriting decisions are based on fear of lawsuits. That's when their lobbying to change tort law intensifies, he says.

"(R)ate increases were likely fueled by unjustifiably high profits, rather than a legitimate increase in insurer costs," says Robert Hunter, director of insurance for the Consumer Federation of America.

The risks posed to utilities, manufacturers and ultimately their customers are real. The threat of frivolous lawsuits impedes business, and therefore harms company profits and jobs. The economy may be rebounding but it had suffered roughly 36 months of job losses whereby 2.7 million positions were eliminated. The Bush administration is sympathetic to principles behind product liability reform. The trial lawyers, meanwhile, are ready to do battle.

Excerpted with permission from an article by Ken Silverstein, director of Energy Industry Analysis, UtiliPoint International