Questionnaire Preliminary Advice The primary focus of the larger part of the following questions is on the “law in action”, i.e. on court decisions. If courts are reluctant to make public their views on the relationship between insurance and liability, the reporter should then shift his attention to legal doctrine, exploring the “culture” in which domestic courts thrive in order to identify the “hidden” considerations on which court decisions might be based. In both cases, scholarly discussions on the subject should be presented in addition, but not without indicating that their influence on legal practice is uncertain. I.
General
(1) Within the legal and economic literature of your country, is there a discussion about the relationship between tort liability and insurance? What are the major subjects and ideas of such discussion? II. Compulsory and Voluntary Insurance (2) Compulsory liability insurance: To what extent does it exist outside the automobile accident sector? (3) Basic features of mandatory insurance schemes: Are bank guarantees accepted as substitutes for insurance policies? Is the action directe (direct claim by victim against insurer) available generally or in the motor insurance area only? Is a party who fails to comply with its obligation to insure subject to sanctions? (4) To what percentage is the population in fact protected by liability insurance contracts? III. The Influence of Liability Insurance on Court Decisions in Tort Cases – Focus on the Courts 1. Insurability (5) Legislation: Is the insurability of a particular risk, e.g. environmental liability, a relevant policy consideration when it comes to lawmaking in the area of tort law? Would lawmakers refrain from imposing strict liability for uninsurable risks?
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Vice versa: Is the rise of strict liability in modern times – to the extent that there was one in the particular jurisdiction – thought to have any connection with the establishment of a vibrant insurance industry able to pick up the attendant risks? In this sense, may it be said that the availability of liability insurance “drives” the demand for responsibility in tort generally and for strict liability in particular? (6) Jurisprudence: Do courts either tacitly or openly take the issue of insurability into account when holding a defendant liable? In particular, are there decisions where a court has denied a damage claim for the reason that it thought the ensuing liability to be uninsurable? Are judges reluctant to impose a liability regime that was not anticipated by the parties, e.g. in cases of “new risks” like dangerous substances, electromagnetic fields and the like? Vice versa: Is the fact that a risk may be insured or was in fact insured against an argument counselling for strict liability? Are there decisions suggesting that liability may be strict rather than fault-based or that its scope may be broader or the damages award higher because insurance coverage was thought to be unavailable? Do judges draw a distinction between compulsory insurance schemes and voluntary insurance, even if the latter seems widespread among the public? (7) Are there any examples where it is thought that the courts have overstretched tort liability such that the insurance industry was cast into crisis? (8) Literature: What is the position of commentators on the issue of insurability: Should it be taken into account in the practice of tort law or is it beyond the legitimate pale of tort law? Do commentators voice concerns that expansion of liability may some day exceed the scope of insurable risks? 2. Costs and Benefits of Insurance (9) To what extent do courts base their judgments on the objective of risk spreading, i.e. to place the loss on the party better able to absorb it, either through self-insurance (which amounts to deep pocket liability) or through market insurance, i.e. by buying coverage from a professional risk carrier? Are there judgments which explicitly accept risk spreading as a relevant policy consideration to influence court decisions in individual cases? Do courts implicitly take risk spreading into account (without saying so)? Is it advisable for a party to argue that the other side was in a better position to insure against the risk and thus should bear the ensuing loss? 3. Standard of Care (10) What is thought to be the influence of liability insurance on actual care levels? Is moral hazard a well-received concept in legal circles? (11) In setting the standard of care, do courts take into account if the defendant is insured, imposing a stricter standard in case he is? Similarly, is the standard of comparative negligence more lenient in areas where the defendant
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is protected by liability insurance? In both cases, do courts draw a distinction between voluntary and mandatory insurance schemes? (12) Do courts take first-party insurance into account in setting the standard of care? Is there a tendency to set the standard high in case plaintiff is compensated anyway under a first-party insurance policy and low if plaintiff does not enjoy such coverage? (13) Might a party be held to have acted negligently for the sole reason that it delegated the duty of care incumbent upon itself to an independent contractor who in turn was not protected either by an insurance policy or by sufficient equity against which potential victims could have executed their claims? 4. General Duty to Insure (14) Does it constitute negligence if a party failed to transfer the risk of liability to an insurance carrier? If so, what is the sanction in case of such failure? (15) May parents be held accountable for the torts of their children because they failed to buy liability insurance for the whole family, including the child? (16) Are employers under a duty to take out liability insurance covering the torts of their employees? If so, what is the sanction in case of default, both visà-vis the employee and the third party victim? (17) Vice versa: May a plaintiff be thought to be guilty of contributory negligence for the sole reason that he failed to protect himself by means of firstparty insurance? For example, where a potential buyer of a car embarks on a test drive and causes damage to the demonstration car: Is the automobile dealer under a legal obligation to supply first-party insurance such that the client is protected against tort liability in case of an accident? 5. Insurance and Damages (18) Does the fact that the defendant is insured influence in any way the assessment of damages? (19) To the extent that the particular legal system provides for exemplary or punitive damages: Is the fact that the defendant has transferred the risk to an insurance carrier relevant to the decision on imposing punitive damages? If so, does it tend to aggravate or to mitigate the amount granted? (20) Insurance and non-pecuniary loss: To the extent that courts enjoy discretion to set the amount of damages for non-pecuniary loss; is insurance a relevant factor worth considering when it comes to the assessment of such damages? If so, does it aggravate or mitigate the amount allowed? 6. Privileges (21) To the extent that the law allows for privileges, dispensing certain classes of parties from the ordinary standard of care, do such privileges apply even where the privileged party is insured? In particular, in cases where one spouse
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harms another in a road accident, may the tortfeasor invoke any privilege he might enjoy generally also against his or her partner? 7. Insurance and Agreements to Limit or Exclude Tort Liability (22) Assuming that the particular legal system allows for the derogation of tort liability by contractual agreements: Do courts take the issue of liability insurance into account when examining whether there is an implicit agreement excluding or limiting tort liability? For instance, do courts hold owners of horses to be strictly liable even if the animal hurts someone who was allowed to take it for a ride gratuitously because horse owners are usually protected by liability insurance? (23) Vice versa: What impact does first-party insurance have on the willingness of courts to find a tacit agreement excluding liability in tort? For example, as house owners in most countries are compelled to insure against fire, does this insurance policy also extend to tenants of the same dwelling such that the insurance company has no rights of recourse against a tenant setting the house on fire negligently? 8. Procedural Issues (24) What is the relationship between court proceedings and judgments on the issue of liability on the one hand and on the issue of insurance coverage on the other? May an insurer refuse coverage although the policy holder has been found liable in a final judgment on the torts claim? In practice, who defends a claim for damages brought against another: the potential tortfeasor himself or his insurer? IV. Blank Space (25) Any other topic relevant to the relationship between tort liability and insurance that has not been addressed in answering the questions posed above?
Country Reports
TORT LIABILITY AND INSURANCE: COUNTRY REPORT AUSTRIA Attila Fenyves and Daniel Rubin I.
General
(1) Within the legal and economic literature of your country, is there a discussion about the relationship between tort liability and insurance? What are the major subjects and ideas of such discussion? To both questions: The relationship between liability law and insurance (law) mainly is a topic of jurisprudential discussion de lege ferenda:
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a. Repeated attempts have been made to exclude from classical tort law personal injury in certain areas of life in which injury occurs as a mass phenomenon. The reason for this is the fear that liability law, which is based on the individual responsibility of the tortfeasor, is not suitable in order to provide sufficient protection of the victim. Instead, a no-fault accident insurance system as a solution is and has been proposed – in any case at least within the framework of a basic protection, i.e. a maintaining of the standard of living through regularly limited sums of compensation for treatment costs and loss of earnings. In such a system, the victim has recourse for compensation solely from an insurer who has provided cover as opposed to the tortfeasor.1 Such a model has been realised within the area of traffic accidents, in particular in the no-fault insurance models which operate in approximately half of the U.S. states.2 The adoption of this system for damages arising from traffic accidents was intensively discussed3 in various European states, in particular in the 1970s, but was, however, rejected within the
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An instructive overview of this trend in the doctrine in its various forms is offered by B. Schilcher, Theorie der sozialen Schadensverteilung (1977), 103 et seq. Cf. from recently, H. Koziol, Österreichisches Haftpflichtrecht I (3rd edn. 1997), no. 1/21. For a generally critical view, above all due to reasons of lack of damage prevention and financing ability of an insurance system of the tendency described, see, in particular, F. Bydlinski, System und Prinzipien des Privatrechts (1996), 106 et seq., and H. Koziol (supra this fn.), nos. 1/21 et seq. Cf. M. Reimann, Einführung in das US-amerikanische Privatrecht (1997), 120–121. On the system of no-fault insurance cf. in particular W. Posch, Systemwandel im Recht des Unfallschadenersatzes?, [1979] Die Versicherungsrundschau (VR), 256 et seq.
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Austrian literature.4 This discussion did not have any impact on the national legislation either.5 This is due to the fact that Austrian law, contrary to that of the U.S.,6 already provides basic protection which is independent of any fault, even without the described no-fault insurance for traffic accidents:7 First, the existing general system of social insurance8 which takes care of the necessary treatment costs 9 as well as the duty of the employer to continue payments to his employee when the latter is temporarily unable to work secure a minimum living standard.10 Second, in the area of motor vehicle accidents, basic protection is specially granted in the form of strict liability of the keeper of any vehicle permitted in public traffic according to the Eisenbahn- und Kraftfahrzeughaftpflichtgesetz (Statute on liability for keeping railways and motor vehicles, EKHG).11 Moreover, the ability of accident victims to enforce a claim is guaranteed12 through the compulsory liability insurance of the keeper of the motor vehicle.13
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Recently, a comparable discussion has emerged on the exemption of medical malpractice from fault liability and instead to introduce an insurance solution, in line with the Scandinavian model. Other than in the case of traffic accidents, patients who suffer damage from medical malpractice do not have de lege lata any claims arising from strict liability in addition to those arising from fault liability.14 Therefore, it has been proposed in Austrian literature that 4
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H. Koziol, Ersatz der Haftpflicht bei Verkehrsunfällen durch Unfallversicherung?, [1970] Zeitschrift für Rechtsvergleichung (ZfRV), 19 et seq.; W. Posch, [1979] VR, 256 (276 et seq.); see also E. Deutsch, Haftung und Versicherung, [1980] Juristische Blätter (JBl), 298 (302). H. Koziol (supra fn. 1), no. 1/21. Cf. W. Posch, [1979] VR, 256 (283). Cf. W. Posch, [1979] VR, 256 (278 et seq.); assenting H. Koziol (supra fn. 1), no. 1/21. This is – very roughly speaking – regulated in various laws according to occupational groups e.g. above all the Allgemeines Sozialversicherungsgesetz (ASVG, General Social Security Act) for employees and the Gewerbliches Sozialversicherungsgesetz (GSVG, Social Security Act for the Self-Employed); cf. here, for example, K. Grillberger, Österreichisches Sozialrecht (5th edn. 2001), 19. This concerns benefits within the framework of medical insurance (cf. §§ 133 et seq. ASVG and §§ 90 et seq. GSVG). Whose rules are valid for all accidents – and, therefore, also traffic accidents – which are not to be qualified as occupational accidents. On the extent of benefits in medical insurance see K. Grillberger (supra fn. 8), 34 et seq. On this point see H. Floretta/K. Spielbüchler/R. Strasser, Arbeitsrecht I (4th edn. 1998), 290 et seq. Further, subsidiarily to the duty of the employer to continue remuneration, the employee has a right in social law to sickness benefit, which should compensate the loss of earnings as a minimum maintenance; cf. to this claim K. Grillberger (supra fn. 8), 36 et seq. The EKHG, in addition, is to be applied to accidents which have been caused by railways, ski tows and cableways (cf. § 2 EKHG). Gaps in cover of this liability insurance are closed by the Bundesgesetz über den erweiterten Schutz der Verkehrsopfer (Federal law on the Extended Protection of Traffic Victims); see, for example, M. Schauer, Das österreichische Versicherungsvertragsrecht (3rd edn. 1995), 441. The obligation to conclude liability insurance is laid down in § 59 Kraftfahrgesetz (Motor Vehicles Act, KFG). In addition the Kraftfahrzeug-Haftpflichtversicherungsgesetz (Motor Vehicle Liability Insurance Law, KHVG) states the minimal standard, as regards content, of the insurance protection (e.g. in particular the substantive description of the risk; cf. §§ 2 et seq. KHVG). However, no-fault claims are indeed imaginable also in the area of medical treatment. In particular one can think of the product liability of a manufacturer of defective medical equipment but also of blood infected with, for example, HIV or Hepatitis; cf. H. Koziol, Verschuldensunabhängige
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an insurer could compensate patients for treatment errors, independent of any fault on the part of the doctor responsible.15 According to the model which has most often been discussed, the fault of the doctor who has caused the damage will be considered at the recourse level whereby, in case of slight negligence, the recourse of the insurer against the tortfeasor should be excluded. As such, it is hoped that the damage of the patient is compensated in a simplified and, thereby accelerated procedure in comparison to a liability trial. Moreover, as a result of the exclusion of a direct compensation claim towards the doctor, the treatment relationship between the doctor and patient should be relieved.16 Against such arguments, it has been proposed that also in the case of the waiving of the fault requirement, the causality of a treatment error for the damage suffered by the patient would be necessary and, therefore, the simplified access to compensation which is hoped for, would hardly be feasible.17 Moreover, as pointed out by H. Koziol, the fault of the doctor would henceforth be relevant in a recourse procedure so that the desired relief of the doctor-patient relationship arising from the insurance model would not occur. H. Koziol points out that, because of the impending recourse claim a doctor, even in the proposed model, would not be prepared to cooperate in proofing a treatment error.18 Further, it is argued, taking the currently existing demand for compensation as a result of treatment errors as a basis, that the proposed compensation system, which aims to encompass a greater number of cases than the current liability model, cannot be financed.19 At 14
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Ersatzansprüche bei Behandlungsfehlern?, [1994] Recht der Medizin (RdM), 3 (4); M. Preslmayr, Handbuch der Produkthaftung (2nd edn. 2002), 58–59. As for the fault-based claims for compensation of plasma donors against the producers of blood samples as a result of lack of hygienic measures and the concomitant implications for insurance law see, recently A. Fenyves, Die Behandlung der Hepatitis-C-Fälle in der Haftpflichtversicherung, [2002] JBl, 205 et seq. H. Barta, Medizinhaftung (1995); H. Barta, Punktation für einen Gesetzesentwurf betreffend die Haftung für Behandlungsschäden, [1996] Journal für Rechtspolitik (JRP), 1 et seq.; H. Barta, Grazer Thesen für eine neue Medizinhaftung (1997), 14 et seq.; in the same direction J. Pichler, Privatwirtschaftlich organisierte und privatrechtlich strukturierte Patientenversicherungssysteme, [1997] VR, 6 et seq. Contrary to H. Barta, who advocates a model based on social insurance law, J. Pichler supports a model based on private insurance law. Cf. H. Barta (supra fn. 15). H. Koziol (supra fn. 1), no. 1/23; W. Holzer, Austria, in: U. Magnus (ed.), The Impact of Social Security Law on Tort Law (2003), no. 44; B.A. Koch/H. Koziol; Austria, in: J. Dute/M. Faure/ H. Koziol (eds.), No-Fault Compensation in the Health Care Sector (2004), nos. 111 et seq. H. Koziol (supra fn. 1), nos. 1/122 et seq.; H. Koziol, [1994] RdM, 3 et seq.; H. Koziol, Die Arzthaftung im geltenden und künftigen Recht, in: A. Radner (ed.), Haftungsrechtliche Perspektiven der ärztlichen Behandlung (1997), 21 (30 et seq.); H. Koziol, Deficiency of Regulation and Approach to Solutions: Conclusions from the Comparative Research, in: M. Faure/H. Koziol (eds.) Cases on Medical Malpractice in a Comparative Perspective (2001), 311 (316 et seq.). G. Aigner, Thesen zum Vorhaben der Schaffung einer verschuldensunabhängigen Entschädigung bei Behandlungsfehlern im Medizinbereich, [1997] VR, 45 (46); F. Lauer, Der Patient im derzeitigen Schadenersatzrecht, [1997] VR, 1 (4–5), who points out that no-fault compensation systems, for reasons of financing, will result in drastic excesses and maximum limits to compensation. It is, therefore, merely a question of taste if “several should receive less or if few should receive everything” as is currently the case. It can be mentioned here that the model proposed by H. Barta is not totally no-fault based in as far as it is partially financed from the regress requirements against grossly negligent tortfeasors. Apart from this, the increased financial demands of the proposed system in comparison to the currently existing compensation system cannot be dismissed.
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the moment there are no signs that the legislator would like to replace the current liability of doctors based on tort law with an insurance solution. This is apparently linked to the financing difficulties which are feared.20
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b. Independent of the discussion concerning a (partial) replacement of tort law, a supplement to tort law in the form of an expansion of the range of compulsory liability insurance is repeatedly demanded. For example, F. Harrer recently proposed the implementation of such insurance for skiing accidents similar to the compulsory insurance model for motor vehicles.21 This is justified on the ground that skiing has become a “dangerous” mass phenomenon which can cause considerable problems when tortfeasors are either illiquid or when they are foreigners whose home country has not concluded an enforcement agreement with Austria. The victim would then be forced to file his claim abroad. According to F. Harrer, both problems could be solved by the introduction of compulsory liability insurance. In his view, the already existing facilities of the insurance industry, which grants insurance coverage in the case of damage by a foreign motor vehicle for which no domestic liability insurance exists, could than be accessed. Finally, the conclusion of liability insurance could be realised so that it is incorporated into the contract of carriage which is regularly concluded prior to skiing.22
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Further, doctrine supports, for example, a compulsory commercial liability insurance in favour of employees who injure their work colleagues. Thereby a gap in the system of the Dienstnehmerhaftpflichtgesetz (Employees’ Liability Act, DHG), which aims to protect the financial interests of an employee caus20
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Currently every federal province is establishing Patient Compensation Funds which should compensate damage in those cases in which liability of the hospital according to tort law, in particular due to reasons of proof, “does not unequivocally exist”. As for the Viennese Compensation Fund, see M. Faure, Economic Analysis, in: J. Dute/M. Faure/H. Koziol (supra fn. 17), nos. 164–165. For a rough overview of these funds see G. Bachinger in: G. Aigner/M. Kletecka-Pulker/A. Kletecka/M. Memmer (eds.), Handbuch Medizinrecht für die Praxis II, 71 et seq. F. Harrer, Reformerfordernisse im österr Schadenersatzrecht, [1996] JBl, 19 (22). F. Harrer, [1996] JBl, 19 (22). In principle, these remarks seem appropriate. However, it should be borne in mind that the proposed recourse to the existing facilities of the insurance industry is currently not possible for damage by a foreign vehicle: F. Harrer mentions the special joint and several liability of the motor liability insurers represented by the Verband der Versicherungsunternehmen Österreichs (Association of Insurance Companies Austria, VVO). As a result of this liability, an injured party who suffers damage (in his home country) caused by a foreign motor vehicle will be treated as if the tortfeasor had concluded domestic liability insurance. This liability concept is based on the “Green Card System” of the London Model Convention or – for the EC area – on the Multilateral Guarantee Convention between the national insurance offices (Amtsblatt der Europäischen Gemeinschaften, ABl 1991 L 177/27). According to both conventions, the joint and several liability of the domestic motor vehicle insurers is effected for the account of the national insurance office of the respective foreign authorisation state (cf. on this M. Schauer (supra fn. 12), 417). The adoption of this liability concept for skiing accidents would, therefore, require an appropriate agreement between the VVO and foreign national insurance offices which would regulate the financing of the settlement of claims.
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ing damage, could be filled. This gap is said to be otherwise hardly bridgeable.23 II. Compulsory and Voluntary Insurance (2) Compulsory liability insurance: To what extent does it exist outside the automobile accident sector? In addition to motor vehicle liability, there is a relatively comprehensive catalogue of cases of compulsory liability insurance. The most important examples can be divided into three groups:
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a. In the majority of strict liability laws, a compulsory liability insurance is provided, examples being §§ 6 f and 10 Abs 2 Atomhaftungsgesetz (Nuclear Liability Act, AtomHG)24, § 163 Luftfahrtgesetz (Aviation Act, LuftfahrtG)25, § 13 Rohrleitungsgesetz (Pipelines Act, RohrleitungsG)26, § 37 Gaswirtschaftsgesetz (Gas Economy Act, GWG)27 § 103 Seilbahngesetz (Cableways Act) and § 79j sec. 1 sentences 2 und 3 Gentechnikgesetz (Gene Technology Act, GentechnikG)28.29
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b. The second “block” encompasses those cases in which the legislator requires compulsory liability insurance for the exercise of a certain profession
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F. Kerschner, Dienstnehmerhaftpflichtgesetz (2nd edn. 2004), § 1 no. 34. The gap in protection mentioned by F. Kerschner has the following background: In the case of damage to a colleague an employee can by all means transfer a part of his “liability damage” to the employer; see § 3 in connection with § 2 Dienstnehmerhaftpflichtgesetz (Employee Liability Act, DHG). This, however, is not applicable in case of bodily injury as far as the so-called liability privilege of the employer towards the injured work colleague exists; cf. F. Kerschner, ibid, § 3 no. 11. On this liability privilege see infra nos. 90 et seq. The AtomHG requires a strict liability regime for the operators of nuclear facilities, transporters of nuclear material and keepers of radionuclides. They all have a duty to insure according to the regulations stated in the text. A milder form of provision for cover is, however, provided for keepers of radionuclides below a certain radiation value; cf. infra fn. 42. §§ 146 et seq. LuftfahrtG provide strict liability of the keeper of an aircraft or of a motorised model aeroplane; on the liability regime of the LuftfahrtG cf. B.A. Koch/H. Koziol, Austria, in: B.A. Koch (ed.), Terrorism, Tort Law and Insurance. A Comparative Survey (2004), nos. 25 et seq. §§ 10 et seq. RohrleitungsG standardise strict liability for certain types of pipelines, in particular for crude oil piplelines; cf. B.A. Koch/H. Koziol (supra fn. 25), no. 35; D. Pauger, Gewerberecht, in: B. Raschauer (ed.), Österreichisches Wirtschaftsrecht (2nd edn. 2003), no. 446. §§ 34 et seq. of the GWG order strict liability for the operators of pipeline facilities for natural gas. The GentechnikG has established a strict liability regime for work with genetically modified organisms as well as their release; see B.A. Koch/H. Koziol (supra fn. 25), nos. 32–33. The norms mentioned in the text order compulsory liability insurance for the named activities when they exceed a certain level of dangerousness. For milder provision of cover according to § 79j Sentence 1 GentechnikG for less dangerous activities see infra no. 13. Strict liability regimes without compulsory liability insurance have been put in place: §§ 160 et seq. Mineralrohstoffgesetz (Mineral Resources Act) for damage to mountains, the Reichshaftpflichtgesetz (Imperial Liability Act, RHG) for facilities for the conduction and release of electricity and gas (excluding natural gas), finally § 53 Forstgesetz (Forest Act, ForstG) for certain facilities which cause air pollution to forests.
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or activity. This concerns cases which are solely subject to the fault liability regime of the Allgemeinen Bürgerlichen Gesetzbuches (Austrian Civil Code, ABGB).30 Examples are § 21a Rechtsanwaltsordnung (Lawyers’ Regulation, RAO), § 30 Notariatsordnung (Notaries’ Regulation, NO), § 11 Wirtschaftstreuhandberufsgesetz (Conventional Trustee Profession’s Act, WTBG)31, § 82 sec. 1 lit 2 Versicherungsaufsichtsgesetz (Insurance Supervisory Act, VAG) for auditors of insurance undertakings, § 63 sec. 8 Bankwesengesetz (Act on Banking Matters, BWG) for auditors of banks, § 8 sec. 2 Kapitalmarktgesetz (Capital Market Act)32, § 138 sec. 2 Gewerbeordnung 1994 (Industrial Code, GewO) for insurance brokers, § 2a Sachverständigen- und Dolmetschergesetz (Experts and Interpreters’ Act), § 21a Patentanwaltsgesetz (Patent Lawyers’ Act), § 19 Bundesgesetz über Mediation in Zivilrechtssachen (Federal Law on Mediation in Civil Law Matters)33 and § 7 Flughafen-Bodenabfertigungsgesetz (Airport Ground Handling Law).34
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c. In our opinion, a third group includes those cases in which the law requires an obligation to take out cover which is not exclusively to be fulfilled by the conclusion of liability insurance; as for this form of coverage, compare supra no. 12 and 13. (3) Basic features of mandatory insurance schemes: Are bank guarantees accepted as substitutes for insurance policies? Is the action directe (direct claim by victim against insurer) available generally or in the motor insurance area only? Is a party who fails to comply with its obligation to insure subject to sanctions?
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1. Question: Austrian civil law recognises two different, if also not similar, ways to ensure that possible claims for damages of third parties are fulfilled. The first possibility, which is more often chosen by the legislator, is the requirement of compulsory liability insurance. In this case the legal obligation can only be fulfilled by the conclusion of an appropriate insurance contract.35 Bank guarantees or other forms of cover for possible claims for damages are, therefore, out of the question. 30
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Although it should be borne in mind that a tortfeasor, in violating occupational duties which require special knowledge is active as an official expert in the sense of § 1299 ABGB. To his fault, therefore, a purely objective standard is to be applied regarding his knowledge and abilities; see, for example, H. Koziol (supra fn. 1), nos. 5/39 and 5/44. Obliges tax consultants, auditors and self-employed accountants to a minimum cover of approx. € 72,000 per event insured against. The insurance obligation of auditors has particular practical relevance, above all within the framework of their activities as auditors of stock corporations and companies limited by shares; cf. also infra no. 26. Provides an annual minimum cover of € 3.65 million for auditors who act as prospectus auditors at the issue of securities. Entered into force on 1 May 2004. It is interesting to note that there is no compulsory liability insurance for doctors and hospitals, cf. F. Lauer, [1997] VR, 1 (4). Cf. M. Schauer (supra fn. 12), 392; Justizausschussbericht (Judicial Committee report, JAB) to the Produkthaftungsgesetz (PHG), 438 Beilagen zu den stenographischen Protokollen des Nationalrates (Supporting Documents to the Stenographic Protocols of the National Assembly, BlgNR) 17. Gesetzgebungsperiode (Legislative Period, GP), 2.
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The situation for the second means for securing potential claims is, however, different as here the law does not limit the obligation to provide cover only by means of conclusion of liability insurance, examples being § 16 Produkthaftungsgesetz (Product Liability Law, PHG)36 and § 7 sec. 1 lit 6 Signaturgesetz (Signatory Law, SigG).37 As such, the historical documents to the PHG mention that § 16 PHG would also suffice “through a confirmation of cover (...) of a sufficiently financially strong person”.38 In the same way, the historical documents to § 7 sec. 1 lit 6 SigG clarify that “also other means of security, such as bank guarantees or surety (can) be considered, whereby the degree of security must be comparable to that of liability insurance”.39 An important aspect of this type of cover is that the securing of future duties to compensate must occur merely in a “suitable manner”.40 Therefore, the chosen means of security must be appropriate in order to satisfy any claims for compensation which arise without any delays in time.41
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Further examples of this second type of cover can be found in §§ 17a and 60 Eisenbahngesetz (Railways Act), § 10 sec. 1 AtomHG42, § 79j sec. 1 sent. 1 § 79j GentechnikG43, § 20 sec. 4 Wertpapieraufsichtsgesetz (Securities and Investments Supervisory Act, WAG) for financial services and, as for insurance brokers, in § 137c GewO44 which entered into force on 15 January 2005.
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43 44
§ 16 PHG states that producers and importers of products are obliged “by means of insurance or in another appropriate manner to make provisions that will be able to satisfy the duty to compensate according to this federal law.” This norm obliges certification service providers who provide safe electronic signatory proceedings to “make provision for the satisfaction of compensation claims, for example by means of liability insurance”. The formulation of § 2 Sec. 2 Signaturverordnung (Signatory Regulation, SigVO) is, therefore, problematic as it seems that, according to § 7 lit 6 SigG liability insurance has to be taken in any case. However, this does not seem to have been the intention of this provision; cf. C. Brenn/R.W. Posch, Signaturverordnung (2000), 13–14. JAB to the PHG 438 BlgNR 17. GP, 2. JAB to the SigG 2065 BlgNR 20. GP, 2. Wording of § 16 PHG. Cf. Preslmayr (supra fn. 14), 102. It is, hence, correctly pointed out that balance sheet reserves are not sufficient; cf. C. Brenn, Signaturgesetz (1999), 87; the historical documents of the PHG are of another opinion (supra fn. 38). This norm relates only to keepers of radionuclides below a certain radiation value. All others liable according to the AtomHG must conclude liability insurance; cf. supra fn. 24. The obligation of these to take out insurance also partially approaches the second form of insurance cover: For operators of nuclear facilities and transporters of nuclear material there is no obligation to conclude liability insurance if the state or a federal state has delivered a contract of suretyship to the benefit of this person (cf. §§ 6 Sec. 3 and 7 Sec. 4 AtomHG). Cf. supra fn. 28. § 137c GewO is based on Art. 4 Sec. 3 of the Insurance Broker Directive (2002/92/EG); cf. in detail A. Fenyves, Überlegungen zur Umsetzung der zivilrechtlich relevanten Bestimmungen der Vermittlungs-Richtlinie, in: A. Fenyves/K. Koban/M. Schauer (eds.), Die Versicherungsvermittlungs-Richtlinie (2003), 65 (70); A. Fenyves, Zum Begriff der “gleichwertigen Garantie” gemäß Art. 4 Sec. 3 der Vermittler-Richtlinie, in: R. Bork/T. Hoeren/P. Pohlmann (eds.), Festschrift H. Kollhosser I (2004), 105 et seq; A. Fenyves, Zur „uneingeschränkten Haftungserklärung” des Versicherers nach Art. 4 Abs. 3 der Versicherungsvermittlungs-Richtlinie, in: T. Bielefeld/S. Marlow (eds.), Festschrift H. Schirmer (in print).
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14
2. Question: A third person who has incurred damage does not, in principle, have a direct claim against the insurer even in the area of compulsory liability insurance.45 The action directe is provided by law to the victim in only three cases: In compulsory motor vehicle insurance according to § 26 KHVG (Kraftfahrzeug-Haftpflichtversicherungsgesetz, Motor Vehicle Liability Insurance Act), in § 166 LuftfahrtG und finally in § 27 AtomHG.46
15
3. Question: The sanctions for the failure to conclude legally required liability insurance can be divided into three groups:
16
a. The performance of an activity without the legally required cover through liability insurance is often an administrative offence. As such, the use of motor vehicles on public roads without the legally required liability insurance is prohibited47 and, therefore, an offence according to § 134 Kraftfahrgesetz (Motor Vehicles Act, KFG). Further, the operation of a nuclear facility or the transport of nuclear material without appropriate liability insurance is an offence according to § 25 AtomHG. Performing an activity which requires compulsory liability insurance (in the technical sense)48, according to the GentechnikG is also an offence under administrative law (§ 109 sec. 2 lit 3 GentechnikG). A further example can be found in the GewO – insurance brokers who have not taken out the legally required liability insurance may not carry on this trade.49 A breach of this prohibition will be subject to an administrative penalty.50
17
b. Further, the law often provides that the prohibition of certain activities, which arises as a result of the non-existence of liability insurance, can be officially enforced, an example being found in the field of motor vehicle liability insurance: The qualified non-existence of insurance can result in the removal of the registration plates by the appropriate authorities.51 A further conse45
46
47 48 49
50 51
Outwith obligatory liability insurance, the law, without exception, does not provide for action directe: Contrary to the German Supreme Court (Bundesgerichtshof, BGH) the Austrian Supreme Court (Oberster Gerichtshof, OGH) does not assume that the insolvency of the insurance holder can justify a direct claim of the injured party against the liability insurer; cf. H. Baumann, in: Berliner Kommentar zum VVG (1999), § 157 no. 5. In this context we also have to point to § 20 Sec. 5 WAG: This provision requires that the liability insurance contract mentioned in § 20 Sec. 4 WAG (cf. supra no. 13) grants the action directe to the injured party. Thus, in this case the action directe does not directly derive from the law but from an agreement – albeit mandatory – between the parties to the liability insurance contract; cf. M. Schauer, Rechtsprobleme der Haftpflichtversicherungen im KMG, WAG und ÜbG, in: W. Bernat/E. Böhler/A. Weilinger (eds.), Festschrift H. Krejci II (2001), 1269 (1287–1288) and A. Fenyves, Versicherungsvertragsrechtliche Grundfragen der Pflichthaftpflichtversicherung, [2005] VR, 70 (78). See § 36 lit d KFG. Cf. supra fn. 28. Cf. § 138 sec. 2 in connection with § 92 sec. 1 GewO. On the future provision for coverage for insurance brokers according to the Insurance Brokers Directive see, A. Fenyves, in: Festschrift H. Kollhosser I (supra fn. 44), 105 et seq. § 367 lit 28 GewO. If the insurer reports that there is no liability insurance for a motor vehicle, the authorisation of this vehicle for public traffic is to be officially revoked (§ 44 Sec. 1 lit c KFG). If the registration plates are not returned after this judgment, the authorising authority is to arrange their removal; cf. H. Grundtner, KFG (5th edn. 1998), § 44 no. 14.
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quence of this is the official removal of the vehicle from public roads.52 Further examples: Notaries (and notaries’ substitutes) may only perform their profession when they have taken out adequate liability insurance. If a notary fails to fulfil his duty to take out liability insurance despite a demand from the Chamber of Notaries to do so, he will be suspended from his “office” as notary until he has fulfilled this duty (cf. § 30 sec. 2 NO).53 A comparable regulation also exists for lawyers in § 21a sec. 2 RAO. c. Finally civil law sanctions for the failure to meet the legal (according to administrative law54) duties to conclude liability insurance exist in the form of duties to compensate; cf. infra nos. 69 et seq.
18
(4) To what percentage is the population in fact protected by liability insurance contracts? In 2002 approximately 30% of the Austrian population were covered by general liability insurance (excluding motor vehicles) and approximately 68% had motor vehicle liability insurance. These figures are based on the number of contracts which exist in general liability insurance (2.4 million contracts) and in motor vehicle liability insurance (5.5 million contracts) in a population of 8.05 million.55
19
III. The Influence of Liability Insurance on Court Decisions in Tort Cases – Focus on the Courts 1. Insurability (5) Legislation: Is the insurability of a particular risk, e.g. environmental liability, a relevant policy consideration when it comes to lawmaking in the area of tort law? Would lawmakers refrain from imposing strict liability for uninsurable risks? Vice versa: Is the rise of strict liability in modern times – to the extent that there was one in the particular jurisdiction – thought to have any connection with the establishment of a vibrant insurance industry able to pick up the attendant risks? In this sense, may it be said that the availability of liability insurance “drives” the demand for responsibility in tort generally and for strict liability in particular? 1. Question: The insurability of liability risks is in tort law legislation, above all in the area of strict liability, relevant in various contexts. 52 53
54
55
Cf. § 89a Sec. 2 lit a) Straßenverkehrsordnung (Road Traffic Act, StVO) 1960. Cf. more precisely K. Wagner/G. Knechtel, Notariatsordnung (2000), § 30 no. 3 and § 180 nos. 1 et seq. Norms which require an insurance obligation are assigned to public law; cf. M. Schauer, Einige Rechtsfragen der obligatorischen Haftpflichtversicherung für Notare, [1999] Notariatszeitung (NZ), 305 (306). These figures are based on information from the VVO (cf. supra fn. 22). Figures for 2003 are not yet available.
20
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21
a. The insurability of liability risks is particularly significant for the concept of strict liability of the PHG: According to the ideas of the legislator, the benefits of industrial production are enjoyed by all users and they are therefore regarded as a risk community in respect of defective products.56 It would, therefore, be unfair that the disadvantages of a defective product rest on the concrete victim – rather they should be distributed to the risk community of end-users through no-fault product liability. According to the legal concept, this occurs in a manner whereby the “additional insurance costs of the producer” resulting from the implementation of product liability are transferred from the liable enterprise to the users. According to the legislator, the premium increase which results from the liability insurance will be met by “slightly increased prices”57 for the “risk community” of consumers (to be more precise, the end-users).58 This consideration seems to be the supporting reason behind § 16 PHG, which – deviating from the Product Liability Directive, which does not contain a comparable regulation – obliges producers and importers of products to take out appropriate cover.
22
In this context, it is mentioned in the doctrine that the concept of a risk community is only relevant when the victim as buyer of the defective product belongs to the risk community,59 whereas in the case of damage to a third party ultimately only those in whose interest a danger to a third party has been accepted, should bear the disadvantage.60
23
b. According to the view of the legislator, the aspect of insurability is also a leading criterion for the question of whether, in concrete strict liability laws, liability should be limited by maximum limits. It is interesting to note that the argument of insurability of liability risks is considered at one time as a reason for the implementation and, at other times for the omission of maximum liability caps:
24
On the one hand, the maximum limits of liability for damage as a result of traffic accidents are to be found in §§ 15 f EKHG. On the occasion of the last rise of these maxima, the legislator stated that their removal would lead to un56
57
58
59 60
Cf. the explanatory commentaries on the Government Bill (Erläuternde Bemerkungen zur Regierungsvorlage, EB RV) 272 BlgNR 17. GP, 6. In the adoption of the PHG, the legislator also had a concrete idea of the extent of the expected increase in premiums. The EB RV (cf. supra fn. 56) namely refer to estimates for the (then) EC-Area, whereby the premium for the commercial third party liability insurance after the adoption of the Product Liability Directive would, on average, increase from 0.07% of the turnover (apparently of all producers) to 0.09%. Cf. in turn the EB RV 272 BlgNR 17. GP. 6. Critical of the possibility of transferring the costs of the product liability to the end-user is T. Mayer-Maly, Österreich als Vorreiter der Produkthaftung?, [1987] Recht der Wirtschaft (RdW), 153 (155), who doubts a sufficient elasticity of the product prices. H. Koziol, Grundfragen der Produktehaftung (1980), 60–61. Cf. in another context H. Koziol, Die Haftung für kreditschädigende Berichte in Massenmedien, [1993] JBl, 613 (619). More details on this aspect (e.g. strict liability of the owners of mass media) can be found infra no. 48.
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desired consequences in traffic policy since “an unlimited insurance is still not given.”61 The legislator is even clearer on the occasion of an older amendment of this regulation: “As in current times strict liability in motor traffic without the appropriate insurance protection is unthinkable, care has to be taken of the insurance law situation. In Austria there is no insurance for an unlimited sum. Therefore, precisely because of this, the EKHG cannot introduce unlimited liability. If insurance were possible for an unlimited amount, the insurance premiums would have to be significantly increased. Such a measure would considerably disrupt motor vehicle traffic. As today a motor vehicle is not a luxury object, rather an important means of transport, this would not be responsible.”62 On the other hand is the justification given by the legislator for not introducing the possibility provided by the Product Liability Directive of a maximum limit of liability of (at least) 70 million Ecu in the PHG: “The amount with which this maxima (...) is to be assessed would not ease the insurability of product liability risks (...); for the average enterpriser, cover of a liability insurance with such an insurance sum would be completely uneconomical. The situation with a no-fault liability limited to this extent would result as with – unlimited – fault liability whereby the entrepreneur would only cover his liability risk to a certain amount and would accept the risk which exceeds this liability.”63
25
c. The insurability aspect also plays a role in the context of norms of fault liability – one can think, in particular, of the liability privilege of the auditor according to § 275 Handelsgesetzbuch (Commercial Code, HGB): The liability restrictions of the auditor, which have been in existence since the compulsory audit, are supported by the legislator on the grounds that, without appropriate liability limits, this activity, as a result of its potential to cause damage, would raise problems regarding insurability.64 The significance of uninsurability for the form of this provision was once again recently confirmed. As a result of an amendment from 200165, the liability caps of § 275 HGB were significantly raised, whereby for the audit of non-listed enterprises a maxima of € 2 million in case of slight negligence of the auditor and of € 10 million in case of gross negligence of the auditor were set.66 An outcome of this for smaller auditing companies were difficulties in raising the existing liability insurance sums to economically meaningful premiums. This led the legislator to delay the enter-
26
61 62 63
64
65
66
Cf. the EB RV zur Wertgrenzen-Novelle 1997, 898 BlgNR. 20. GP, 50 et seq. Cf. the EB RV 620 BlgNR. 11. GP, 3 et seq. Cf. the EB RV 272 BlgNR 17. GP, 7. Apparently the legislator mistakenly equates maximum limits of liability with minimal insurance sums as by no means is it said that an entrepeneur, in the case of an appropriate lack of subjective risk, is obliged to take out insurance protection to the maximum limit of liability. Cf. here the supporting documents in M. Holoubek/M. Karollus/P. Rummel, Die Haftung des Abschlußprüfers im Lichte des Gleichheitsgrundsatzes, [2002] Österreichisches Bankarchiv (ÖBA), 953 (962, fn. 82). Finanzmarktaufsichtsgesetz (Financial Market Supervisory Act), published in Federal Law Gazette (Bundesgesetzblatt, BGBl) I 2001/97. For the auditing of companies listed on the stock exchange, twice as high liability limits apply.
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Attila Fenyves and Daniel Rubin
ing into force of the mentioned liability limits on two occasions67 and for the time being to instead implement limits of € 1 million and € 5 million respectively.68
27
The examples cited above in a. to c. show that the insurability aspect is taken into consideration by the legislator.
28
2. Question: a. On the one hand, there are concrete indications of the reluctance of the legislator to install a strict liability regime also for non-insurable risks – here the RohrleitungsG can be quoted. This law removes from the strict liability provided by it any damage which “has been caused as a result of war, a warlike activity, civil war, revolt, rebellion or a terror attack” (§ 12 lit 3 leg cit). This concerns risks which are particularly difficult to calculate and, therefore, difficult to insure and for which an exclusion of risk in the current model conditions for liability insurance exists.69 Comparable liability exclusions as in the RohrleitungsG can also be found in § 36 lit 3 GWG, § 79c lit 1 GentechnikG.
29
b. On the other hand, an indication in the opposite direction could be that the GentechnikG as well as the AtomHG provide for unlimited strict liability whereas the duty to insure is numerically fixed.70 As a result, the possibility of a splitting of liability and insurance protection in (unforeseeable) cases of large scale damage (in particular, in cases of accumulated losses) is opened. A conclusion in terms of the lawmaker’s willingness to standardise non-insurable risks, or at least risks which are difficult to insure, cannot, however, be drawn. The legislator chose the minimum insurance amounts so that their level would suffice, in its opinion, in imaginable cases of damage.71
30
However, important in the context of this question is the fact that the AtomHG contains, as it were, the “mirror-inverted” rule to the regulations mentioned above in a.: The AtomHG, namely, does not recognise any substantive exclusions to liability but it excludes the above-mentioned war and terror dangers from the insurance duty precisely because of the difficulty in insuring against such risks.72 As such, the legislator recognises that a divergence between substantive strict liability and insurance protection is not to be objected to when this situation is based on the fact that insurance protection is difficult to attain.
67
68
69
70
71 72
Cf. instructively the report of the Economic Committee (Wirtschaftsausschuss) (1150 BlgNR 21. GP, 2–3) on the motive of the legislator to react to the difficulties in insurance cover. Cf. the first amendment BGBl I 2002/108 and the second, currently not yet published amendment 347 BlgNR 22. GP, 1. See Art. 7 lit 8 of the Allgemeine Bedingungen für die Haftpflichtversicherung (General Terms of Liability Insurance, AHVB) 1997. Cf. on the one hand the liability norms of § 79a GentechnikG, §§ 3 and 4 AtomHG, and, on the other hand, the insurance obligation according to § 79j GentechnikG, §§ 6 and 7 AtomHG. On the AtomHG, cf. the EB RV 1357 BlgNR 20. GP, 24. Cf. the EB RV 1357 BlgNR 20. GP, 24.
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Vice versa: 1. Question: The majority of cases of strict liability are subject to compulsory liability insurance. As such, the supposition – also expressed in the doctrine73 – that the development of strict liability law is closely connected to the establishment of a vibrant insurance industry could be drawn. This could be true in individual cases. That this is a general phenomenon – at least currently – however, cannot be recognised. This can be shown with the historical development of motor vehicle liability: Strict liability was already introduced in this field as a result of the Motor Vehicles Act of 1908 while compulsory liability insurance was introduced only in 1930.74 A further indication can be found in the law concerning the respective interests of neighbours: § 364 sec. 2 ABGB provides liability of the owner of property for immissions which emanate from his property when these exceed the usual standard of immissions in this neighbourhood and which lead to a significant impairment of the normal use of another property in this neighbourhood. This fault liability is transferred to a no-fault claim for compensation of the neighbour incurring damage when such immissions emanate from a plant with state permission whose immissions are, therefore, allowed (§ 364a ABGB).75 Characteristic for such immissions is that they typically have a damaging effect only through their permanent nature. Such damage, in particular, however, is excluded in the standard conditions for liability insurance through the Allmählichkeitsklausel (clause excluding liability caused gradually over time).76 Insurance protection here must be procured through the considerably more expensive additional cover for “property damage as a result of disturbances to the environment” (Art. 6 Allgemeine Bedingungen für die Haftpflichtversicherung [General Terms of Liability Insurance, AHVB] 1997). This cover is, however, incomplete. It does not cover damage resulting from the normal operation for which normal liability regulations are nevertheless applicable.77 The same problem exists for strict liability according to § 53 Forstgesetz (Forest Act, ForstG) for damage to forests as a result of air pollution which is also often caused by immissions.
31
The examples above show that a connection between strict liability and liability insurance does not necessarily have to exist for the legislator.78
32
2. Question: In this context, at the level of legislation, it cannot be seen that the availability of liability insurance increases the demand for tortious responsibility. However, a comparable phenomenon can be recognised in the area of factual enforcement of laws. It has been pointed out that the existence of lia-
33
73 74 75
76
77 78
B. Schilcher (supra fn. 1), 183. On this development see W. Posch, [1979] VR, 256 (279). In this point see also infra no. 38. On liability according to law concerning the respective interests of neighbours cf. G. Iro, Sachenrecht (2nd edn. 2002), nos. 4/5 et seq. Cf. Art. 7.11 AHVB 1997. This clause only refers to damage to property. Therefore there is no gap in cover insofar as the encroachment of the use of the property leads to damage to health. Cf. W. Achatz et al., Verbandskommentar of the VVO to the AHVB 1993 (1993), 83. Also in the doctrine it is pointed out that liability for a non-insurable risk can be justified; cf. M. Gimpel-Hinteregger, Grundfragen der Umwelthaftung (1994), 78.
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bility insurance significantly increases the willingness to sue (alleged) tortfeasors. Because of this, managers, for instance, when concluding a (for them, non-compulsory) professional liability insurance (directors’ and officers’ liability insurance) place great value on their confidentiality.79 (6) Jurisprudence: Do courts either tacitly or openly take the issue of insurability into account when holding a defendant liable? In particular, are there decisions where a court has denied a damage claim for the reason that it thought the ensuing liability to be uninsurable? Are judges reluctant to impose a liability regime that was not anticipated by the parties, e.g. in cases of “new risks” like dangerous substances, electromagnetic fields and the like? Vice versa: Is the fact that a risk may be insured or was in fact insured against an argument counselling for strict liability? Are there decisions suggesting that liability may be strict rather than fault-based or that its scope may be broader or the damages award higher because insurance coverage was thought to be unavailable? Do judges draw a distinction between compulsory insurance schemes and voluntary insurance, even if the latter seems widespread among the public?
34
1. Question: a. The insurability aspect of a liability risk plays a prominent role in the decisions of the Austrian Supreme Court (Oberster Gerichtshof, OGH) for the justification of the so-called risk liability of the employer: § 1014 ABGB obliges the principal vis-a-vis his agent to be liable on a nofault basis for any damage which results from the typical dangers of the business in question. From this regulation, the OGH, by analogy, derives a liability of the employer for activities performed in his interest80. According to the opinion of the OGH, this risk liability also extends to the “liability loss” of the agents or employees.81 These can, therefore – taking into account the contributory negligence proportion82 – demand compensation from the employer on the grounds that duties to compensate third parties have arisen as a result of their performing their tasks. In the “bicycle courier case”, the leading decision in this line of the judicature, the OGH stated that the duty of the employer to compensate is justified by the fact that the employer could exclude the economic risk which is connected to the bearing of such liability loss, through the conclusion of liability insurance.83 79 80
81
82
83
Cf. F. Aust, Haftpflicht als Marktregulativ, [1992] NZ, 194 (197). Overviews of this judicature are provided by, for example, H. Krejci, in: P. Rummel (ed.), Kommentar zum ABGB I (3rd edn. 2000), § 1157 nos. 41a et seq. and B. Oberhofer, in: M. Schwimann (ed.), Praxiskommentar zum ABGB VIII (2nd edn. 1997), Nach §§ 3 und 4 DHG nos. 1 et seq. Cf. here the overview by P. Apathy, in: M. Schwimann (ed.), Praxiskommentar zum ABGB V (2nd edn. 1997), § 1014 no. 12; critical of this judicature, F. Kerschner (supra fn. 23), § 1 no. 21. Here the liability privilege of the employee according to § 2 DHG, which can lead to the full liability of the employer in case of merely slight negligence of the employee, can be analogously considered; cf. OGH (infra fn. 83). On § 2 DHG see also infra no. 54. OGH in [1991] Das Recht der Arbeit (RdA), no. 12 (with cmt. by F. Kerschner). On the argument of risk allocation according to § 1014 due to more favourable insurability cf. W. Faber, Risikohaftung im Arbeits- und Auftragsrecht (2001), 147 et seq.
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b. It is difficult to establish to what extent the OGH implicitly draws on the insurability of a liability risk in affirming a duty to compensate. To the “disguised” consideration of an existing liability insurance see infra no. 56.
35
2. Question: The uninsurability of – or at least a difficulty in insuring – a certain liability risk does not, in our opinion, deter the OGH from allowing claims to compensation. An example is provided by the decision of a widened senate from 1990. Here, the OGH, for the first time, decided that not only claims arising from the guarantee but also claims for compensation can be considered for deficiencies of a good rendered.84 This is noteworthy because such damage represents the core area of enterprise risks which are not covered by the (enterprise’s) liability insurance. They fall under the risk exclusions of the “performance clause” (Art. 7 lit 1.3 AHVB 1997)85 or the “production or delivery clause” (Art. 7 lit 9 AHVB 1997)86. In addition, the OGH allows claims for compensation due to immissions, not only to the in § 364 sec. 2 ABGB named owner of the property, but also to its in rem beneficiaries and the tenants.87 As such the OGH extends the circle of hard-to-insure compensation claims in this area (cf. supra no. 31). In this manner, the OGH shows that the lack of insurability of a certain risk is not a relevant aspect when it deems the liability of a tortfeasor appropriate on other grounds.
36
3. Question: The starting point for the answer to this question is that fault liability is excluded for unforeseeable “new” risks (including development risks) so that only strict liability can be considered.88 In contrast to the German BGH, the OGH is prepared, in principle, to establish strict liability also in cases which have not as yet been regulated by law by means of analogy to already existing legal matters.89 In this way, the judicature of the OGH opens the possibility of imposing liability on a tortfeasor for damage which has been caused by risks which were previously unknown. Admittedly the OGH is extremely reserved in the application of analogy in this area.90 It demands that an opera-
37
84
85
86
87
88
89
90
OGH in [1990] JBl, 648 (with cmt. by R. Reischauer). The compensation for such damage due to non-fulfilment have in the meantime been legally anchored in the latest amendment to the default law (§ 933a Sec. 2 ABGB). Cf. to this A. Fenyves, Gewährleistungsklausel, Erfüllungsklausel und „Nachbesserungsbegleitkosten“ in der Haftpflichtversicherung, [2001] NZ, 246 et seq.; A. Fenyves, Unternehmerrisiko und arbeitsteiliger Prozess in der Betriebshaftpflichtversicherung, in: M. Gruber (ed.), Festschrift E. Migsch (2004), 75 (77 et seq.). Cf. to this W. Mecenovic, Die Herstellungs- bzw Lieferklausel in der allgemeinen Haftpflichtversicherung (1999). Cf. the supporting documents in M. Gimpel-Hinteregger (supra fn. 78), 324 and K. Spielbüchler in: P. Rummel (supra fn. 80), § 372 no. 5. In the previous question it was put whether the liability regime was foreseen by the parties. The fact whether a liability regime is indeed foreseen by the concrete parties is without significance in the Austrian liability system. Cf. for example, OGH in Entscheidungen des österreichischen Obersten Gerichtshofes in Zivilund Justizverwaltungssachen (SZ) 46/36 with further reference; cf. also F. Harrer in: M. Schwimann, Praxiskommentar zum ABGB VII (2nd edn. 1997) § 1315 nos. 15 et seq. and H. Koziol (supra fn. 1), no. 1/5 fn. 14. Cf. B.A. Koch/H. Koziol, Austria, in: B.A. Koch/H. Koziol (eds.), Unification of Tort Law: Strict Liability (2002), no. 25.
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tion exists whose danger in the legally regulated case is sufficiently similar. According to the OGH, this is the case when either a high probability of damage occurring exists or when the damage whose occurrence can be expected would be extraordinarily high.91 In addition the normal operation must already be sufficiently dangerous. It is, therefore, not sufficient when the operation only becomes dangerous as a result of special circumstance (i.e. a breakdown).92 This means that the dangerousness of the operating facility causing liability must be recognisable for the operator.
38
The OGH moves away from this restrictive viewpoint, however, in the area of liability of neighbours by means of excessive analogy to § 364a ABGB. This regulation, as mentioned above, provides in its core area of application a nofault claim for compensation against the keeper of an operating facility, whose operation is permitted by authorities, for damage as a result of immissions which are not usual for the particular neighbourhood in question and which emanate from his facility.93 This liability is the compensation for the neighbour who has suffered damage because the action for an injunction, which is normally provided for by § 364a ABGB for immissions not usual for a particular neighbourhood, is legally excluded. The OGH, by analogy, now derives from this regulation strict liability in all those cases where the neighbour to whom damage has occurred is only excluded from filing an action for an injunction because he had no opportunity to do so before the damage occurred.94 This is, however, de facto the case with every damaging event.95 While the OGH places importance in some decisions on the fact that the consequences of damage are objectively calculable for the liable operator96, in other decisions in the area of the law concerning the respective interests of neighbours, the OGH arrives at a comprehensive strict liability.97 In the doctrine, it is rightly presumed that the foreseeability of the risk is no longer of significance for the question of liability for the OGH.98 As this judicature represents an exception – even if in practice in a very important area – it cannot be expected that the OGH would readily support a strict liability regime for non-recognisable risks.99 91
92 93
94
95
96 97 98 99
Cf. OGH in [1996] JBl, 446 (with cmt. by P. Jabornegg); cf. also the supporting documents in M. Schauer in: M. Schwimann (supra fn. 80), § 2 EKHG no. 13. See e.g. OGH in SZ 48/131; [1993] JBl, 113; [1999] Zeitschrift für Verkehrsrecht (ZVR), no. 51. Cf. supra no. 31 and M. Gimpel-Hinteregger (supra fn. 78), 316 et seq. as well as K. Spielbüchler in: P. Rummel (supra fn. 80), § 364a no. 2. Cf. the supporting documents in the decision, OGH in [1999] JBl, 520 (with cmt. by P. Rummel) and from P. Oberhammer in: M. Schwimann, Praxiskommentar zum Allgemeinen Bürgerlichen Gesetzbuch II (2nd edn. 1998), § 364a no. 5. Cf. F. Kerschner, Kausalitätshaftung im Nachbarrecht?, [1998] Recht der Umwelt (RdU), 10 (11). OGH in SZ 63/185; OGH in [1991] JBl, 580 (with cmt. by F. Kerschner). Vgl OGH in SZ 66/147; OGH in [1995] JBl, 317. B.A. Koch/H. Koziol (supra fn. 90), no. 141. For H. Koziol, for example, strict liability appears justified for development risks when it is at least not recognisable whether a certain operation poses a danger and when the insurability is eased as a result of limits to liability; H. Koziol (supra fn. 1), no. 1/9. Critical M. Gimpel-Hinteregger (supra fn. 78), 85.
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23
Vice versa: 1. and 2. Question: Both questions can be answered in the negative.
39
3. Question: Regarding the consideration of liability insurance within the framework of equity liability of minor tortfeasors, the judicature previously differentiated whether voluntary or compulsory insurance existed. This differentiation has, however, been abolished.100 On the subject of equity liability of minors cf. infra nos. 52–53.
40
(7) Are there any examples where it is thought that the courts have overstretched tort liability such that the insurance industry was cast into crisis? The system of Austrian liability law hardly contains – at least in its practical shaping by the judicature – potential for the granting of excessive compensation claims. As such, punitive damages are unknown in Austrian law.101 Further, the compensation of pure economic loss in the area of delictual law is only possible in special legally stipulated cases or – through application of general principles of tort law – in exceptional cases in which an opening of the floodgates of the duty to compensate is not to be feared.102 Finally, in the awarding of non-pecuniary loss, the judicature is significantly reserved when seen from an international comparison.103 All these examples explain why, to date, no court decisions have been passed which could lead to the fear that a serious crisis in the insurance industry could be provoked.
41
(8) Literature: What is the position of commentators on the issue of insurability: Should it be taken into account in the practice of tort law or is it beyond the legitimate pale of tort law? Do commentators voice concerns that expansion of liability may some day exceed the scope of insurable risks? 1. Question: a. Insurability in the form of the reasonableness of insurance plays a role in various contexts in tort law doctrine as a partial aspect of the ability to spread the economic impact of damages104: On a very general and basic level, it has been elaborated by W. Wilburg that the provisions of tort law are the result of the interplay of various elements of liability.105 He considers as one of these elements “the economic power of the tortfeasor or the reasonableness of insuring oneself against liability”.106 This element, however, must exist in conjunction with at least one further element in order to act as a justification for liability.107 100 101
102 103
104 105
106 107
Cf. the supporting documents in F. Harrer in: M. Schwimann (supra fn. 89), § 1310 no. 24. Cf., for example, A. Fenyves, Der Deckungskonkurs bei Kumulschäden mit Auslandsbezug, [2003] VR, 47 (53). Cf. F. Harrer in: M. Schwimann (supra fn. 89), § 1293 nos. 19–20, § 1295 no. 3. Cf. here E. Karner/H. Koziol, Der Ersatz ideellen Schadens im österreichischen Recht und seine Reform, Gutachten für den 15. Österreichischen Juristentag II/1 (2003), 17 et seq. Cf. here M. Gimpel-Hinteregger (supra fn. 78), 63–64 and 70 et seq. W. Wilburg, Die Elemente des Schadensrechts (1941), 1 et seq., 24 et seq.; W. Wilburg, Entwicklung eines beweglichen Systems im bürgerlichen Recht (1950), 11 et seq. W. Wilburg (supra fn. 105), 24 et seq., 81 et seq. W. Wilburg (supra fn. 105), 29.
42
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43
B. Schilcher, elaborating on W. Wilburg’s explanatory model, has developed a triaxial system of attributing damage, whereby the element of the ability to bear the loss – and thereby also the reasonableness of insurance – is more strongly stressed than in the model proposed by W. Wilburg. In B. Schilcher’s system this element equals the two other elements of attributing damage mentioned by him (dangerousness and deficiency).108
44
Further, F. Bydlinski pleads for a proportional distribution of loss between the injured party and the tortfeasor taking into account the respective assets – and thereby also a comparison of the possibility to absorb the risk. This, however, only when the other grounds for liability on the part of the tortfeasor are weak.109
45
In a similar vein is the proposal of H. Koziol, de lege ferenda, to consider the economic capabilities of both parties in an assessment of the damage. 110 Within the framework of this reduction clause, it should also be considered which of the parties can best insure against the risk of damage.111
46
There is widespread agreement in the doctrine that a high ability to distribute the damage alone cannot be a sufficient reason for the establishment of a duty to compensate.112
47
b. In the doctrine, the reasonableness of insurance for the establishment of concrete grounds of liability plays a role which is not to be misunderstood. This is evident, among others, in the creation of instances of strict liability by way of analogy:
48
As already mentioned, it is for the legislator an important aspect of strict liability according to the PHG, that all end users of a product benefit from the advantages of industrial production.113 The resulting idea of the risk community has, in a slightly altered way, been applied by H. Koziol to justify strict liability for pecuniary loss in case of damage to one’s creditworthiness by the mass media. He points out that, in the interests of the public in efficient and economically affordable information, it is accepted that mass media report news whose authenticity is not always accurately verified. The benefits of current and cheap information for all readers are recognised but are also detrimental to an individual who is the subject of incorrect information. According to H. Koziol, all beneficiaries together should bear the disadvantages which 108 109
110 111
112
113
B. Schilcher (supra fn. 1), 222 et seq. F. Bydlinski (supra fn. 1), 229; cf. also F. Bydlinski, Zur Haftung der Dienstleistungsberufe in Österreich und nach dem EG-Richtlinienvorschlag, [1992] JBl, 341 (347). H. Koziol (supra fn. 1), no. 6/25. H. Koziol, Mitigation of Damages under Austrian Law and Ideas for Future Regulations, in: J. Spier (ed.), The Limits of Liability. Keeping the Floodgates Shut (1996), 60–61. Cf. W. Wilburg (supra fn. 105), 29; H. Koziol, Grundfragen der Produktehaftung (1980), 55– 56; F. Bydlinski (supra fn. 1), 219 and 229; as well as B. Schilcher (supra fn. 1), 231; solely dissenting A. Ehrenzweig, Versicherung als Haftungsgrund, [1950] JBl, 253 (254 et seq.). Cf. supra nos. 21–22.
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are generated. In the case of coverage in the mass media, this could be achieved if the damage of the victim be borne by the owner of the media in question who would shift the increased production costs, which arise as a result of the liability, onto all buyers.114 According to H. Koziol, this would open up the possibility of an analogy with §§ 6 and 7 Mediengesetz (Media Act, MedienG), which regulate a strict liability of the owner of the media for nonpecuniary loss in case of certain serious forms of damage to one’s reputation.115 Further, Canaris advocates for Austrian law strict liability by virtue of analogy for piste equipment and uses for this as a supporting argument the regularly existing operation liability insurance.116
49
Moreover, the insurability aspect also plays a role in the concretion of the general boni mores clause for the control of contractual contents (§ 879 ABGB): It is argued that a contractual exclusion of liability, which is based upon the consideration for which of the parties the insurance of the risk in question is more reasonable, seems unobjectionable.117
50
2. Question: As already mentioned (supra no. 41), the Austrian liability system in its present form can be described as moderate. Accordingly, an intensification of the attribution of damage to the tortfeasor tends to be supported in the doctrine. In particular, this concerns the abolition of the existing maximum limits of liability in the area of strict liability118, a stricter form of vicarious liability in the delictual area which is unanimously regarded as too limited119 and also an increase of the compensation amounts for serious forms of bodily injury120. Therefore, in the literature, there is no tendency which is anxious that an extension of liability in the near future would lead to non-insurable risks.
51
114
115
116
117 118 119
120
H. Koziol only speaks here of a transfer of the costs of bearing the damage to the user and not – as the historical documents to the PHG – of a transfer of the related insurance costs. This does not, however, make a difference in practice as in both cases, the strict liability of the company underlies the better ability to distribute the damage. In addition, the risk distribution in the mass media will also, de facto, amount to a transfer of the premiums for liability insurance. The particular danger of the mass media also for the occurrence of economic loss, which is necessary for the analogy, stems, according to H. Koziol, from the high exposure of media and from the fact that the media is accorded a particularly high degree of credibility; cf. H. Koziol, [1993] JBl, 613 (618–619 and 621–622). To §§ 6 and 7 MedienG see infra no. 86. C.-W. Canaris, Die Gefährdungshaftung im Lichte der neueren Rechtsentwicklung, [1995] JBl, 2 (12). H. Koziol (supra fn. 1), no. 18/18. Cf. H. Koziol (supra fn. 1), no. 6/26; F. Bydlinski (supra fn. 1), 204. Cf. U. Magnus, Einheitliches Schadenersatzrecht – Reformüberlegungen für das österreichische Haftpflichtrecht, Gutachten für den 12. Österreichischen Juristentag II/1 (1994), 80–81. E. Karner/H. Koziol (supra fn. 103), 134 et seq.
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2. Costs and Benefits of Insurance (9) To what extent do courts base their judgments on the objective of risk spreading, i.e. to place the loss on the party better able to absorb it, either through self-insurance (which amounts to deep pocket liability) or through market insurance, i.e. by buying coverage from a professional risk carrier? Are there judgments which explicitly accept risk spreading as a relevant policy consideration to influence court decisions in individual cases? Do courts implicitly take risk spreading into account (without saying so)? Is it advisable for a party to argue that the other side was in a better position to insure against the risk and thus should bear the ensuing loss?
52
1. and 2. Question: a. The judicature gives ideas regarding “risk spreading” considerable significance within the framework of the equitable liability of those incapable of tortious capacity: If a minor or mentally ill person illegally causes damage, the judge can, despite a lack of fault, “with respect to the assets of the claimant and the defendant award the total compensation or a part thereof” (§ 1310 Variation 3 ABGB). The OGH also often takes account of existing liability insurance in this comparison of assets. The insurance is regularly considered as an “asset” of the tortfeasor by the judicature.121 Recent decisions formulate that liability insurance, although not an asset, does make the compensation up to the limit of the insurance cover bearable.122 As such, the OGH distributes the damage between the victim and the tortfeasor depending on the level of the insurance sums if the liability insurance of the tortfeasor stands vis-a-vis a property insurance, for example, fire insurance, on the part of the victim.123
53
This practice is strictly rejected by parts of legal doctrine. The criticism being that, as a result of the consideration of liability insurance when assessing the cause and the extent of the damage, the relationship between liability and liability insurance will be turned on its head. According to this opinion, the duty to cover, emanating from liability insurance, assumes namely an already existing liability of the insurance holder and is, therefore, not appropriate as a means for establishing liability.124
121 122
123 124
Cf. OGH in Versicherungsrechtliche Entscheidungen (VersE), 1374. Cf. recently OGH in VersE, 1836. In doctrine, the opinion has therefore been advanced that § 1310 Variation 3 ABGB has to be applied analogously to these cases: cf D. Rubin, Billigkeitshaftung Deliktsunfähiger und Versicherungsschutz, in: K. Koban/D. Rubin/A. Vonkilch (eds.), Aktuelle Entwicklungen im Versicherungsrecht (2005), 85 (105). Cf. OGH in SZ 72/59. Cf. F. Kerschner, Freiwillige Haftpflichtversicherung als „Vermögen“ iS des § 1310 ABGB?, [1979] Österreichische Juristenzeitung (ÖJZ), 282 et seq.; R. Reischauer in: P. Rummel, Kommentar zum ABGB II (2nd edn. 1992), § 1310 no. 9; approving the OGH, F. Harrer in: M. Schwimann (supra fn. 89), § 1310 no. 23; D. Rubin (supra fn. 122); differentiating H. Koziol, Österreichisches Haftpflichtrecht II (2nd edn. 1984), 313. H. Koziol’s solution basically conforms to that which the OGH argued for the liability relief of the employee according to § 2 DHG. This will be dealt with immediately in the following text.
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b. A further area in which the judicature has dealt with the ability to distribute damage by means of (compulsory) liability insurance is the liability of employees: If the employee causes damage to his employer in the fulfilment of his employment contract, his duty to compensate can be reduced by the judge for reasons of equity (§ 2 DHG). Whereas the aforementioned equity liability according to § 1310 ABGB concerns an exceptional reason for establishing liability, the equity aspect according to § 2 DHG has the converse significance of a reduction of liability. This also explains why here the OGH ascribes a different significance to the liability insurance of the tortfeasor. According to the present view of the Supreme Court, the existence of liability insurance leads namely to a situation where possible poor financial circumstances of the employee, which otherwise would be assessed as leading to a reduction of liability, remain unconsidered.125
54
c. Finally, the criterion of the ability to bear the loss plays a role in the judicature within the above-mentioned control of content according to § 879 ABGB: In an older decision, the OGH even saw the purpose in the limitation of liability clauses being that they (should) limit the extent of the duty to compensate to such damage which can be brought under insurance protection.126 In casu the OGH assumed the validity of the exclusions.127 On the other hand, the OGH rejected a clause of the current Banking General Terms and Conditions 2000 with the supporting help of the insurability argument. It assumed that sub-para. 3 sec. 1 sent. 1 of the mentioned terms and conditions is a violation of § 879 sec. 3 ABGB. This clause assigns the risk of falsification of transfer orders by third parties to the customers of the bank. The OGH justified the contra bonos mores of the clause, among others, on the argument that the bank could insure against such risks.128 This decision has been heavily criticised in the doctrine.129
55
3. Question: In the doctrine the speculation has been voiced that the judicature has –without saying so – repeatedly been guided by the aspects of the better ability to spread the risk and the better financing ability when passing decisions.130 Because of the nature of the subject matter, this can hardly be proven in a concrete case.131 However, in our opinion, objectively discernible clues for
56
125
126 127 128 129
130 131
OGH in [1987] JBl, 670. Following the OGH F. Kerschner (supra fn. 23), § 2 no. 55. Cf. further infra nos. 75–77, 78 on the question of to what extent a fault or a contributory fault of the employer can arise when he does not provide liability insurance or comprehensive insurance in the interests of his employees. This approaches Koziol’s view to § 879 ABGB stated supra no. 50. OGH in SZ 26/275. OGH in [2003] ÖBA, 141. H. Koziol/G. Iro, Risikotragung bei gefälschten Aufträgen an die Bank, [2003] ÖBA, 129 et seq.; G. Iro, OGH: Unwirksame Klauseln in den Allgemeinen Geschäftsbedingungen der Banken, [2003] RdW, 66 (67); approving the OGH, G. Graf, Jetzt schlägts aber (fast) 13!, [2003] ecolex-Script (Fachzeitschrift für Wirtschaftsrecht), 1 et seq. Cf. B. Schilcher (supra fn. 1), 56 et seq.; F. Harrer, Schadenersatzrecht (1999), 45. Accordingly, B. Schilcher (supra fn. 1) limits himself to the presentation of examples which are not closer defined. F. Harrer (supra fn. 130), in contrast, provides the decision OGH in [1990] ZVR, no. 156.
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this can be found in those cases in which compulsory insurance exists and where the judicature finds the tortfeasor liable although this patently cannot be reconciled with the telos of the liability regime in question. On this note, individual cases show the OGH’s extremely wide comprehension of the term “in operation of a motor vehicle” in § 1 EKHG, which is the requirement for the car holder’s strict liability. Thus, the duty of the motor vehicle insurer to perform is achieved.132 A clear example is provided in the decision where an aged pedestrian was awarded compensation because she fell over a hose which was lying on the pavement. This hose was being used to pump heating oil from a lorry.133 The OGH now assumed correctly that the driver who exercised the filling procedure could not be ascribed any fault but that nevertheless an accident “in operation of a motor vehicle” occurred. As such, according to the EKHG, the keeper of the lorry and, therefore also his liability insurer, were liable. It is evident that the risk arising from the hose had nothing to do with the operating danger of the motor vehicle. Precisely the same risk of pedestrians falling could have been caused by any other object lying on the pavement – as visible as the hose.134
57
4. Question: It cannot generally be said that the judicature, when awarding compensation, takes into account whether the injured party or tortfeasor is in a better position to insure themselves against the occurrence of the specific damage. However, it seems advisable, especially for employees, to appeal to this argument to support a claim arising from the risk liability of his employer (cf. supra no. 34). Further, this argument could moreover play a role in favour of the employee when he causes damage to a third party. Here, if the employer has not concluded liability insurance for his employees – which could be expected of him – he will be liable to pay compensation to his employee for the damage arising from the latter’s liability (cf. infra no. 75). Similarly, according to the judicature, where the employee causes harm to his employer directly, the failure to take out comprehensive insurance, which could be expected of the employer, is to be qualified as contributory negligence (cf. infra no. 78). 3. Standard of Care (10) What is thought to be the influence of liability insurance on actual care levels? Is moral hazard a well-received concept in legal circles?
58
Both Questions: It is pointed out in the doctrine that above all fault liability, but also strict liability has, in addition to a compensatory function, also a pre132
133 134
The insurer’s duty to provide cover consists of compensation claims which arise as a result of the “use of the insured vehicle” (cf. § 2 KHVG). Cf. OGH in [1987] ZVR, no. 82. The same tendency of the OGH to excessive application, with the assumable aim of providing the injured party with insurance protection, is reflected in the term “use of the insured vehicle” according to § 2 KHVG (cf. supra fn. 132). Examples being the decisions OGH in [1996] RdU, no. 93 (overfilling of an oil tank) and OGH in VersE, 1641 (the detaching of a hook inserted into a pile of wood).
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ventive function.135 Moral hazard describes the phenomenon that the mere existence of insurance coverage increases the subjective risk of the insurant because it can induce greater carelessness of the insured party.136 There is, as far as evident, consensus within doctrine that the existence of liability insurance greatly reduces the preventive effect of tort law.137 Moral hazard is, therefore, in our opinion, a “well-received concept”, in as much as it could also not remain hidden to the Austrian legislator that the requirement of compulsory liability insurance (for examples see supra nos. 8 and 9) runs contrary to the preventive function of duties to compensate. On this note, attention is brought to the fact in the doctrine that a legislator which requires a duty to insure in a system of (strict) liability, makes it known that it “wants to distribute certain operating risks different to before but it often regards their individual assignment basically (as in the case of motor vehicles) too often as intolerable”.138 Irrespective of the phenomenon of moral hazard, however, it is stressed that a liability regulation certainly cannot contend itself simply with the attribution of individual responsibility for causing damage.139 It is stressed that compulsory liability insurance significantly improves the protection of the legal position of the victim when a realisation of compensation claims is provided by the appropriate normative provisions. Moreover, the absorption of risks, related to liability insurance, avoids ruinous consequences of liability for the tortfeasor.140 Further it is highlighted that already the danger of being a defendant in a trial is an incentive – which should not be underestimated – to behave in a careful manner.141 Additionally the possibility – and also the necessity – of counteracting the moral hazard related to liability insurance by means of various insurance contract mechanisms is stressed. Incentives such as the agreeing of premium increases in the occurrence of the event insured against, bonus malus systems and recourse possibilities, in particular are mentioned to avoid damage despite the existence of liability insurance.142 Legal incentives to avoid damage, in our opinion, are the possibility of the insurer to terminate the insurance contract in case of the occurrence of the event insured against (§ 158 Versicherungsvertragsgesetz [Insurance Contract Act, VersVG]) and the risk exclusion in the case of causing the insured loss deliberately (§ 152 VersVG). 135
136
137
138 139 140
141 142
See, for example, H. Koziol (supra fn. 1), no. 1/15; F. Bydlinski (supra fn. 1), 115, 190 et seq. The prevention idea is naturally significantly less pronounced within the framework of strict liability, cf. e.g. F. Bydlinski (supra fn. 1), 114. On the term “moral hazard” cf. H.A. Cousy, Tort Liability and Liability Insurance: A Difficult Relationship, in: H. Koziol/B.C. Steininger (eds.), European Tort Law 2001 (2002), no. 61; W. Weigel, Rechtsökonomik (2003), 77. Cf. H. Koziol (supra fn. 1), no. 1/17; P. Rummel/F. Kerschner, Umwelthaftung im Privatrecht (1991), 72 et seq. P. Rummel/F. Kerschner (supra fn. 137), 74. F. Bydlinski (supra fn. 1), 113. F. Bydlinski (supra fn. 1), 114; cf. to both points of view also M. Gimpel-Hinteregger (supra fn. 78), 70–71. H. Koziol, [1994] RdM, 3 (5–6). H. Koziol (supra fn. 1), no. 1/17; F. Bydlinski (supra fn. 1), 115; M. Gimpel-Hinteregger (supra fn. 78), 72.
59
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(11) In setting the standard of care, do courts take into account if the defendant is insured, imposing a stricter standard in case he is? Similarly, is the standard of comparative negligence more lenient in areas where the defendant is protected by liability insurance? In both cases, do courts draw a distinction between voluntary and mandatory insurance schemes?
60
1. Question: It is not openly mentioned in the judicature that the measure of care for the tortfeasor is more severe if liability insurance in his favour exists. However, comparable tendencies which point in a very similar direction in the judicature are assumed by doctrine. In the passing of decisions, these are tendencies to grant the victim damages which he “as such”, i.e. detached from the concrete case, is not entitled to. For instance, a partial unconscious tendency of the judicature is alleged to overstretch duties of care, thereby leading the victim to enjoy the benefits of fault liability when especially high damages exceed the maximum limits of the strict liability norms to be considered.143 Also in the doctrine the critical assumption is voiced that the financial circumstances play a significant role in the determination of the duties of care and, in this manner, can lead to a cause of liability.144
61
2. Question: Regarding contributory negligence, an appropriately disguised privilege for the victim in case of insurance protection of the tortfeasor can hardly be proven. However, here the judicature offers less occasion for assumptions. For example, one can refer to those decisions whereby cyclists have claimed compensation as a result of accidents with liability insured motor vehicles. Here, the OGH regularly does not reveal, in any form whatsoever, any striking benignity with respect to the duties of care required from the cyclist who suffered damage.145
62
3. Question: That voluntary and compulsory liability insurance are treated in different manners cannot be recognised in this context. (12) Do courts take first-party insurance into account in setting the standard of care? Is there a tendency to set the standard high in case plaintiff is compensated anyway under a first-party insurance policy and low if plaintiff does not enjoy such coverage?
63
It cannot be recognised that courts take account of any first-party insurance of the injured party when establishing his duty of care. In this context it has to be considered that a stricter standard of care for the injured party would rather lead to contributory negligence and, therefore, to a reduction of the compensation of the injured party. The insurer of the injured party would then – in the case of slight negligence of the insurant – 146 have to compensate the total 143 144
145 146
Cf. H. Koziol (supra fn. 1), no. 6/26. See H. Koziol (supra fn. 1), no. 1/8, who rightly points out that the law does not provide for the objective duty of care to be considered differently according to the relative financial situations. Cf. e.g. OGH in [1961] ZVR, no. 1; [1983] ZVR, no. 74; [1995] ZVR, no. 13. Cf. the risk exclusion according to § 61 VersVG for gross negligence.
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damage. He would then, by means of legal assignment (§ 67 VersVG), only receive from the tortfeasor compensation reduced as a result of the insurant’s contributory negligence. The outcome of this would be the same as for a hidden co-insurance of the liability interests of the tortfeasor. That the OGH would tend to such a decision is less likely to be assumed since it is generally extremely reserved in the acceptance of an implied inclusion of the liability interests of the contractual parties of the injured party.147 In addition, it should be mentioned that often it is not the tortfeasor himself who, in end effect, has to bear the loss but rather his liability insurer. In these cases it is unlikely that the OGH would be prepared to benefit the tortfeasor and, therefore, in reality his insurer, at the expense of the insurer of the injured party. (13) Might a party be held to have acted negligently for the sole reason that it delegated the duty of care incumbent upon itself to an independent contractor who in turn was not protected either by an insurance policy or by sufficient equity against which potential victims could have executed their claims? There are no decisions whether the transfer of the duty owed to an independent contractual partner who is not sufficiently financially sound or insured represents a fault.148 For the answer to this question, a difference is made according to delictual and contractual compensation:
64
a. Tort Field: In the opening of traffic or in the creation (allowing the existence) of a source of danger, active duties of conduct for the protection of the endangered, absolutely protected legal interests of third parties arise (Verkehrssicherungspflichten).149 These duties of safe conduct can be transferred to independent third parties.150 In this case, the individual from whom the duties originally emanate is only liable for the choice he makes (culpa in eligendo).151 As the duties of safe conduct in tort law, as mentioned, are solely directed towards the protection of absolute legal interests of others, the possible culpa in eligendo can only refer to these. As such, liability for pure economic loss, which arises as a result of the non-fulfilment of compensation claims towards “subsidiaries”, is excluded.
65
b. Contractual Field: In this area, one is liable for pure economic loss, however, the (fault-exempting) transfer of existing duties of care is only possible in exceptional cases: Even if the party liable engages a contractor who can act independently to fulfil his contractual duties, he is completely responsible for
66
147 148
149 150 151
Cf. infra no. 106. The decision OGH in [2001] ecolex, no. 72, however, concerned a related case: A bank instructed by a customer to make a foreign transfer was liable towards the said customer due to a fault in selection: Because of the insolvency of the bank chosen by the first bank, the transfer could not be carried out. Therefore, in this case, the bank was already liable due to non-performance of the order. Cf. H. Koziol (supra fn. 124), 57 et seq. Cf. H. Koziol (supra fn. 124), 67. H. Koziol (supra fn. 124), 67 and 65.
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the latter’s fault (§ 1313a ABGB).152 A possible fault in the choice made by the liable party does, therefore, not have any independent significance as a rule. This is particularly true in the law of mandate: According to § 1010 ABGB, the appointee is liable towards his principals only for culpa in eligendo when he transfers the order to a third party in a manner allowed. The liable party’s duty of protection of interests obliges the liable party to protect his principal, above all, from avoidable economic disadvantages in a reasonable manner.153 In our opinion, culpa in eligendo of the party liable is only therefore possible under two conditions when the substitute chosen by him is insolvent: First, the party liable must be aware of the concrete possibility of the principals filing claims for compensation arising on the part of the principals against the substitute – in particular as a result of a high damaging potential of the transferred activity.154 In addition, he must be aware that the substitute will not be able to meet his duties of compensation towards the principals. As this will seldom occur, it can be concluded that fault in the context of this question will not be established in most cases.
67
However, the legislator has recently introduced the requirement of no-fault liability in a related constellation: Previously only company forms which involve the personal liability of lawyers were open to lawyers.155 Since 1999 firms of lawyers with limited liability have also been possible.156 Whereas before a lawyer could only conclude contracts with clients for which he was personally liable, he can now exclude his unlimited personal liability as a result of contracts which he concludes on behalf of his limited liability company. Through the creation of an instance of piercing the corporate veil, the legislator has counter-acted the danger related to the liability fund which serves the interests of the client: According to § 21a sec. 4 RAO, if a damage is incurred to a client as a result of the lawyer’s error, all lawyer-shareholders, independent of any fault, are liable for the damage caused by the lack of the legally required minimum liability insurance to the amount of € 2.4 million (per occurrence of the event for which insurance has been concluded), which is the minimal liability insurance required of the limited liability company.157 Within this framework, the individual lawyer is, thereby liable exclusively for the fact that he “passed on” his client to an insufficiently solvent or insured contractual party. 152
153
154
155
156 157
Regarding the duty to conclude liability insurance, the questions dealt with in nos. 69 et seq. can then be raised. According to the OGH, the administrator of a house must do all in his power to achieve the maximum possible profit from the house. For supporting documents to this decision and further examples from the judicature see R. Strasser in: P. Rummel (supra fn. 80), § 1009 no. 5. To the previous question under what conditions direct compensation claims of the principal against the substitute can arise see H. Koziol in: P. Avancini/G. Iro/H. Koziol (eds.), Österreichisches Bankvertragsrecht I (1987), no. 6/24 und F. Harrer in: M. Schwimann (supra fn. 89), Vorbem zu §§ 1293 et seq. no. 24. This concerns the partnership under the Civil Code and, since 1990, the “registered business partnership” (Eingetragene Erwerbsgesellschaft, EEG). Cf. § 1a Sec. 1 RAO in the version of the amendment BGBl I 1999/71. Cf. to this regulation M. Gruber, Die Rechtsanwalts-GmbH, [2000] RdW, 65 (69–70).
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4. General Duty to Insure (14) Does it constitute negligence if a party failed to transfer the risk of liability to an insurance carrier? If so, what is the sanction in case of such failure? Both Questions: The norms listed supra nos. 7 et seq., which require compulsory liability insurance, can be seen as statutes with a protective purpose whose breach leads to claims for compensation arising (according to § 1311 sent. 2, Variation 2 ABGB).158 These claims for compensation, however, bring no advantages for the injured party as they are only directed towards those who are obliged to take out liability insurance. However, this is the tortfeasor who is already liable and whose duties to compensate should be merely additionally secured through the liability insurance.159 Because of this, the judicature has not yet had to deal with the question of when liability insurance for possible future duties to compensate is to be concluded when a contractual secondary obligation of a party to a contract exists.
68
In contrast, the tortious sanction of a duty to conclude liability insurance seems reasonable as long as the cover of the tortfeasor’s already existing duties to compensate are not concerned. One can differentiate between two cases:
69
a. On the one hand, one can think of the constellation in which the “substantive” duty to compensate only arises when appropriate liability insurance for those duties exists. This is the case with the so-called employers’ liability privilege which will be elaborated on infra nos. 92 et seq. Here it suffices to point out that the employer, in principle, is not liable for injuries of his employee. However, with one exception: An injured employee has claims to compensation against the employer if these are covered by motor vehicle liability insurance. Therefore, if an employer breaches his legal duty to conclude liability insurance, the consequence is not only that (merely) no insurance protection exists, but also that the employee has no claims for compensation against the employer for the personal injury due to the traffic accident. In this case is, therefore, liability of the employer due to his failure to fulfil his duty to conclude liability insurance apt to improve the legal position of his employee. An appropriate claim for compensation of the employee is also supported in the doctrine.160
70
158
159
160
Cf. for instance for § 16 PHG, M. Karollus, Zivil- und Strafrechtliches zur „Deckungsvorsorge“ (§ 16 ProdHG) (1988), 186. Cf. in turn to § 16 PHG R. Welser/C. Rabl, Kommentar zum Produkthaftungsgesetz (2nd edn. 2004), § 16 no. 5. The employer’s duty to compensate due to the failure to take out insurance arises from the breach of the duty of care vis-a-vis the employee; see M. Neumayr in: M. Schwimann (supra fn. 80), § 333 ASVG no. 58; A. Vonkilch, Haftpflicht für Kfz-Schäden von Dienstnehmern, Arbeitgeberprivileg und Haftpflichtversicherung nach der 48. ASVG-Novelle, [2004] ZVR, 40 et seq.
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71
b. The compensation because of failure to conclude liability insurance also is of significance when the insurance should cover a third party liability interest. This is the case with § 9a Richterdienstgesetz (RichterdienstG): According to this provision, a lawyer has to co-insure a trainee judge, who concludes a part of his training with him, in his liability insurance. § 9a RichterdienstG is to be qualified as a protective law for the benefit of trainee judges. The faulty breach of the norm can justify claims to compensation which the trainee can raise against the lawyer which leads to an improvement of the liability situation to the benefit of the trainee.161 A corresponding duty in the labour contract of a lawyer is out of the question here as no contract of employment exists between him and his trainee (cf. sec. 5 leg cit). Regarding the respective employer’s duty, which arises as a result of the employment contract, to conclude liability insurance in favour of his employee see infra nos. 74–75.
72
Further it is conceivable that it is not the failure to conclude liability insurance to the benefit of a third party which is unlawful but rather the omission of informing the third party that no insurance protection for his liability risk exists although he could expect this in concreto.162 (15) May parents be held accountable for the torts of their children because they failed to buy liability insurance for the whole family, including the child?
73
As far as can be seen, there are no comments, neither in the literature nor in the judicature, on the question of whether parents are liable towards third parties because they have not concluded liability insurance for the damage which their children have caused. Here it should be borne in mind that parents are liable for damage suffered by third parties when they breach the duty of supervision of their children incumbent on them (§ 1309 ABGB). The protective purpose of this delictual duty relates, however, only to the absolute legal interests of injured third parties and not to the recovery of already existing claims.163 (16) Are employers under a duty to take out liability insurance covering the torts of their employees? If so, what is the sanction in case of default, both visà-vis the employee and the third party victim?
74
1. Question: Above, supra no. 34, it was pointed out that the OGH also imputes the liability damage of the employee to no-fault risk liability of the em161
162
163
Such claims can de facto only arise when the lawyer becomes liable to pay compensation to a client as a result of malpractice of the trainee judge. The trainee judge can counter the recourse claim which the lawyer can raise against him by raising his claim for damages compensando which he has vis-a-vis the lawyer. The OGH approved this in a case where the lender of a motor vehicle failed to inform the borrower that no liability insurance existed for the car. The OGH awarded damages to the borrower, who through his own fault caused an accident, for his liability damage. The OGH, however, only awarded a part of the damages due to the contributory negligence of the suing borrower. This is a comparable problem to the one already raised supra no. 65.
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ployer, being any damage which exists in the employee’s duty to compensate third parties. Even before this judicature, the OGH had developed a legal rule that the employer, due to his duty of care arising from the employment contract (§ 1157 ABGB), has to prevent compensation claims of third parties by conclusion of adequate liability insurance in the case of especially potentially dangerous activities.164 This was developed due to cases of damage which lorry drivers caused in the transport of particularly dangerous goods (e.g. chemicals, petrol) and which exceeded the mandatory liability insurance sum.165 In contrast to § 1014 ABGB, this concerns here a pure fault liability of the employer. 2. Question: Concerning risk liability of an employer for the liability damage of the employee, the unavoidable fault of the employee for the damage reduces the employer’s duty to compensate.166 On the other hand, the OGH indicates that, in case of breach of his contractual duty to conclude liability insurance, the employer is to bear the entire liability loss thus caused.167 A loss allocation with consideration of contributory negligence, therefore, will not take place to the extent that the damage would have been covered by liability insurance in the case of the employer’s compliance with his duty of care.
75
Concerning the responsibility of the employer towards the injured third party, it can be seen that the employer is regularly liable towards him. In the practically most important cases of lorry accidents, the fault of his employees is namely imputed to the employer as keeper of the vehicle which caused the damage.168 However, an injured third party cannot deflect any duty to compensate to the employer in the case of breach of the contractual duty of care as this is only aimed towards the protection of the interests of the employee.
76
(17) Vice versa: May a plaintiff be thought to be guilty of contributory negligence for the sole reason that he failed to protect himself by means of firstparty insurance? For example, where a potential buyer of a car embarks on a test drive and causes damage to the demonstration car: Is the automobile dealer under a legal obligation to supply first-party insurance such that the client is protected against tort liability in case of an accident? 1. Question: In the tort field, an obligation of the injured party to conclude reasonable comprehensive insurance – or, generally speaking, a first party insurance – is to be denied.169 However, there are cases in which the risk allocation of a contract leads to the owner of the damaged object being accused of negligence for failing to conclude reasonable comprehensive insurance. As 164 165 166 167
168 169
See the supporting documents at H. Krejci in: P. Rummel (supra fn. 80), § 1157 no. 43. See also OGH 9 ObA 129/90. Cf. to this already supra no. 34. Cf. to this, however, OGH (supra fn. 165); for the former diverging view cf. OGH in [1967] Zeitschrift für Arbeits- und Sozialrecht (ZAS), 142 (with cmt. by O. Edlbacher). Cf. § 19 Sec. 2 EKHG. See H. Koziol (supra fn. 1), no. 12/91.
77
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such, according to general principles, his claim to compensation is to be dismissed or at least reduced (cf. § 1304 ABGB for the case of contributory negligence). The judicature derives such an obligation to conclude comprehensive insurance in the case of employment contracts from the employer’s duty of care.170 The OGH correctly emphasises that a corresponding (contributory) negligence of the employer can only be accepted if the liability interest of the employee would be covered by comprehensive insurance.171 This is the case with the current standard form contract conditions for comprehensive motor vehicle insurance: If the vehicle is damaged by a driver entitled to drive by the insured owner, the comprehensive insurer, in principle, surrenders the assertion of the compensation claim against the driver which is transferred to it (according to § 67 VersVG).172
78
Nevertheless, once the employer’s duty to take out first-party insurance in the interest of the employee is established, then, in our opinion, he should bear the entire damage caused by breach of this duty. This result also complies with the OGH’s solution in the cases of the employer’s duty to take out liability insurance (cf. supra no. 75).
79
2. Question: In a recent case the OGH decided that a car dealer is not obliged to conclude (fully) comprehensive insurance for a test vehicle. However, he has to inform his customers, prior to the test drive, of the lack of such insurance. Otherwise the dealer himself has to bear the total risk of the customer damaging the vehicle through slight negligence.173 Though the result of this decision being correct, the OGH mistakenly derives an implied agreement of the exclusion of liability from the breach of the duty to inform. 5. Insurance and Damages (18) Does the fact that the defendant is insured influence in any way the assessment of damages?
80
The existence of liability insurance protection of the tortfeasor plays a role in the assessment of damage in the disputed equity liability according to § 1310 ABGB and in the already mentioned reduction clause according to § 2 DHG
170
171 172
173
Cf. OGH Arb 8.522; 8.728; SZ 64/62; approving of this judicature F. Kerschner (supra fn. 23), § 2 no. 20; disapproving however B. Oberhofer in: M. Schwimann (supra fn. 80), § 2 DHG no. 37. Cf. OGH in [1988] RdW, 359. To this decision see also infra fn. 228. See Art. 10 of the General Conditions for Motor Vehicle Comprehensive Insurance (Allgemeine Bedingungen für die Kraftfahrzeug-Kaskoversicherung, AKKB) 1995. The waiver exists in as far as the insurer would also have been obliged to perform if the insured owner himself had caused the accident. This means that the damage must only have been caused by slight negligence and there must not be any release from the obligation to perform due to delay in the payment of the premiums. OGH in [2003] RdW, 352.
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(to both cf. supra nos. 52 et seq.).174 In addition, the existence of liability insurance seems significant in the following cases: a. With the Kindschaftsrechtsänderungsgesetz (Child Law Amendment Act) 2001 a further reduction clause has been introduced which concerns the liability of trustees175 and certain persons176 who are entrusted with the care of minors: According to § 265 ABGB, the liability of these persons can be reduced or even waived if the consequences would affect the liable persons “in consideration of all circumstances (...) inequitably hard”. It has been argued that a corresponding reduction of liability is to be excluded if liability insurance in favour of the tortfeasor exists.177
81
b. If an employer has culpably caused his employee an occupational injury, the former is not, in principle, liable towards the latter178 but, in case of intent or gross negligence, he must replace all costs which were to be borne by the social insurance carrier (§ 334 ASVG). The social insurance carrier can, however, surrender his right of recourse towards the grossly negligent employer in total or in part if the economic situation of the employer justifies this (§ 334 sec. 5 ASVG). Here, liability insurance of the employer will be taken into consideration.179
82
c. In the case of personal injury, the reduction in the ability to work as a consequence thereof is, as a rule, to be compensated for with a periodic payment. If important reasons exist, the injured can demand a lump sum payment. Such a lump sum settlement, however, must be economically reasonable for the tortfeasor. This is, for the area of strict liability, expressly regulated in § 14 EKHG but is also accepted for general fault liability as well.180 In the doctrine it has been argued that the necessary economic reasonableness for the tortfeasor is normally already given when adequate liability insurance exists.181 This argument has been brought for § 14 EKHG but, however, in our opinion, must also be valid in the ABGB due to the identical situation of the interests involved.
83
(19) To the extent that the particular legal system provides for exemplary or punitive damages: Is the fact that the defendant has transferred the risk to an 174
175
176
177 178 179 180 181
Further one can refer to the examples presented infra nos. 88 et seq.: The extent of the removal of the liability privilege mentioned infra nos. 88 et seq. depends on the amount of the liability insurance. Liability insurance also appears to be influential in the compensation of non-pecuniary loss according to § 6 f MedienG (Media Law); (cf. infra no. 86). To this cf. M. Schauer, Rechtssystematische Bemerkungen zum Sachwalterrecht idF KindRÄG 2001, [2001] NZ, 275 et seq. To this see H. Koziol/R. Welser, Grundriss des bürgerlichen Rechts I (12th edn. 2002), 508 et seq. M. Schauer, [2001] NZ, 275 (284). On this employers’ liability privilege see infra nos. 90 et seq. Cf. M. Neumayr in: M. Schwimann (supra fn. 80), § 334 ASVG no. 40. Cf. F. Harrer in: M. Schwimann (supra fn. 89), § 1325 no. 39. M. Schauer in: M. Schwimann (supra fn. 80), § 14 no. 17.
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insurance carrier relevant to the decision on imposing punitive damages? If so, does it tend to aggravate or to mitigate the amount granted?
84
Punitive damages are not known under Austrian law.182 (20) Insurance and non-pecuniary loss: To the extent that courts enjoy discretion to set the amount of damages for non-pecuniary loss; is insurance a relevant factor worth considering when it comes to the assessment of such damages? If so, does it aggravate or mitigate the amount allowed?
85
Both Questions: In the judicature, it seems that the existence of liability insurance has generally no relevance for the extent of compensation for non-pecuniary loss. This is shown in the judicature to compensation for pain and suffering where the OGH constantly passes decisions where the financial assets of the tortfeasor and, therefore, presumably the existence of liability insurance also, are not to be considered when assessing compensation for pain and suffering.183
86
However, it can be assumed that the OGH would consider the existence of liability insurance in assessing damage in a special case of non-pecuniary damages: The Media Law provides for no-fault liability of the media owner for non-pecuniary loss in two cases: First, if certain elements of criminal offences regarding insult to honour, e.g. defamatory statements, are (thus without fault) fulfilled in a media (§ 6 leg cit). Second, if the highly personal area of a person’s life is discussed in a revealing manner (§ 7 leg cit).184 The law provides maximum limits of liability with these norms. In addition, when assessing compensation, consideration is to be taken of ensuring the economic existence of the media undertaking.185 Here, it should be borne in mind that the existence of the media is not endangered if the compensation claim is covered by liability insurance. As such, the economic existence of the media is ensured. There is no relevant judicature to this question but, in our opinion, it could be expected that the OGH, when the occasion arose, would take the existence of liability insurance into consideration in the manner described. 6. Privileges (21) To the extent that the law allows for privileges, dispensing certain classes of parties from the ordinary standard of care, do such privileges apply even where the privileged party is insured? 182 183
184
185
See supra no. 41. Cf. OGH SZ 10/44; [1967] ZVR, no. 16; [1976] ZVR, no. 208. F. Harrer (in: M. Schwimann (supra fn. 89), § 1325 no. 79) assumes expressis verbis that insurance of the tortfeasor does not play a role here; of the same opinion K.-H. Danzl/K. Gutiérrez-Lobos/O. Müller, Das Schmerzengeld (8th edn. 2003), 82. On this regulation cf., e.g. H. Koziol (supra fn. 1), no. 1/8; E. Karner/H. Koziol (supra fn. 103), 100; A. Hanusch, Mediengesetz (1998), § 6 nos. 1 et seq.; § 7 nos. 1 et seq. To this cf. G. Hager/P. Zöchbauer, Persönlichkeitsschutz im Straf- und Medienrecht (4th edn. 2000), 40.
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In particular, in cases where one spouse harms another in a road accident, may the tortfeasor invoke any privilege he might enjoy generally also against his or her partner? 1. Question: In Austrian tort law, liability privileges can be found in various contexts.186 There are three cases in which the privilege is not applicable if liability insurance to cover the damage exists: The inapplicability of the liability privileges of the work colleague (a.) and of the employer (b.) of an injured employee is explicitly anchored in the law. Further, the family liability privilege in social insurance law can be mentioned (c.). Its existence and also its inapplicability are creations of the judicature and doctrine.
87
a. § 332 sec. 5 ASVG – the Liability Privilege of the Work Colleague In the case of personal injury187 the respective responsible social insurance carrier has to bear, above all, the costs of treatment.188 In return, possible compensation claims of the injured party ipso iure already at the occurrence of the loss are transferred to the social insurance carrier.189 This legal assignation follows to the extent of the insurer’s duty to perform (cf. § 332 sec. 1 ASVG).190 This means that, in particular a claim for non-pecuniary damage, which in principle is not included in social insurance, remains with the injured party.191
88
If an employee is injured by a work colleague, his compensation claims are likewise transferred to the social insurer as described. However, according to § 332 sec. 5 ASVG, the latter can only fulfil the compensation claim if the tortfeasor has acted at least in a grossly negligent manner.192 As such, the colleague is exempted from liability in the case of slight negligence for any damage which is covered by social insurance law.193 This privilege, however, is not
89
186
187
188
189
190 191 192
193
In addition to the privileges just mentioned in the text, one can, in particular, consider the legal liability exclusion in the case of slight negligence in favour of the keeper of paths (§ 1319a ABGB) and in favour of prospectus controllers of securities and investments (§ 11 Sec. 1 lit 2 Kapitalmarktgesetz). Further, one can consider the liability restrictions of auditors according to § 275 Sec. 2 HGB which, amongst others, are dependent on the degree of negligence (cf. supra no. 26). The liability privileges of work colleagues and also of employers only refer to bodily injury. The compensation of property damage is subject to general laws; cf. H. Koziol (supra fn. 124), 220; M. Neumayr in: M. Schwimann (supra fn. 80), § 333 ASVG no. 17. Currently, the great majority of the Austrian population is protected by social insurance; T. Tomandl, Sozialrecht (5th edn. 2002), no. 22. As such the legal assignment concerns only compensation claims against the tortfeasor which are congruent with the social insurance’s duty to perform. On the term “congruent” cf. in detail M. Neumayr in: M. Schwimann (supra fn. 80), § 332 ASVG no. 8, nos. 37 et seq. Cf. OGH in [2000] ZVR, no. 74. Cf. OGH in [1995] ZAS, no. 6; H. Koziol (supra fn. 124), 234. It is debatable whether the regulation mentioned is exclusively applicable to work accidents of the injured party according to § 175 ASVG; cf. the supporting documents in M. Neumayr in: M. Schwimann (supra fn. 80), § 332 ASVG no. 151. On the term “work accident” see T. Tomandl (supra fn. 188), nos. 193 et seq. Cf. OGH in [1991] ecolex, 638; H. Koziol, Probleme aus dem Grenzbereich zwischen Schadenersatz- und Sozialversicherungsrecht, [1980] RdA, 371 (375); M. Neumayr in: M. Schwimann (supra fn. 80), § 332 ASVG no. 150.
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applicable if the injury has been caused by a means of transport for whose operation legal strict liability is required.194 The reason for the maintenance of the liability lies apparently in the fact that here, as a rule, liability insurance which the social insurer can access, is available.195 As such, the lifting of the liability privilege is limited such that the social insurer can claim compensation “only up to the extent provided for by an existing liability insurance” (cf. § 332 sec. 5 ASVG).196 In this way, the liability insurer of the tortfeasor rather than the tortfeasor himself has to bear the economic consequences of the damage. The rule of § 332 sec. 5 ASVG lies at the root of the thought of freeing the social insurer of the costs caused by the injury at the expense of the liability insurer.197
90
b. § 333 sec. 3 ASVG – The Liability Privilege of the Employer The employer who causes his employee an occupational injury or an occupational illness is only faced with the compensation claims of the injured party if he acted with intent. Otherwise he is freed of any liability (§ 333 sec. 3 ASVG)198 towards the injured party – in contrast to a colleague who has caused damage according to § 332 sec. 5 ASVG. Instead, the injured employee receives the benefits from the legal accident insurance which is the responsible branch of social insurance for occupational accidents and work-induced illnesses. As such, in the case of personal injury by an employer, the legislator follows the concept of the replacement of individual fault liability of the undertaking with social insurance.199 This privilege of the employer, however, leads partially to a worsening of the legal position of the injured employee as social insurance law does not cover all losses to the same extent as tort law, examples being compensation for pain and suffering which, as a rule is not included in social insurance200 and loss of earnings.201
194
195 196
197
198
199
In particular, motor vehicles which are permitted on public roads (cf. § 1 iVm § 2 lit 1 KFG) and aeroplanes within the meaning of the Aviation Act; cf. also M. Neumayr in: M. Schwimann (supra fn. 80), § 332 ASVG no. 150, § 333 no. 60; H. Koziol (supra fn. 124), 222. H. Koziol (supra fn. 123), 234. The social insurer can, therefore, only bring claims as a result of strict liability and also due to slight negligence within the framework of the insurance sum (cf. OGH in [1995] ZAS, no. 6), additional claims only in case of gross negligence on the part of the work colleague. Cf. for more detail H. Krejci, Bemerkungen zum Rückgriffsrecht der Sozialversicherungsträger gegenüber haftpflichtigen Schädigern, [1978] VR, 345 (356); H. Koziol (supra fn. 124), 233; M. Neumayr in: M. Schwimann (supra fn. 80), § 332 ASVG no. 150. As the law exclusively wishes to relieve the work colleague who has caused the damage, it is, in our opinion, only significant for the exception of the liability privilege that the work colleague’s duty to compensate is covered by the liability insurance of the means of transport. It therefore has to suffice that the tortfeasor is a co-insured driver of the motor vehicle. However, he does not have to be its keeper. In the area of employers’ privilege, there exists no legal assignment to the social insurer (§ 332 subs. 3 ASVG). § 333 subs. 2 ASVG prevents a double liquidation of the damage by the injured party by reducing his compensation claim against the employer by the performances arising from social insurance. In turn, in the employer-social insurer relationship the latter has, as a result of at least gross negligence by the employer, an original recourse right towards the employer; cf. § 334 subs. 1 ASVG § 334 subs. 1 ASVG. (Working) accident insurance is exclusively financed by the contributions of the employer. This is the reason for his liability privilege; cf. H. Koziol (supra fn. 124), 221.
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This liability privilege of the employer, however, is not applicable if the occupational accident was brought about by a means of transport which is legally subject to strict liability.202 Here also the law rules – as in the case of damage caused by a work colleague – that the tortfeasor is liable to the extent that the personal injury which arises is covered by liability insurance (§ 333 sec. 3 ASVG).203 As such, the law aims to prevent the liability insurer of the employer being exculpated by his liability privilege.204 This leads to the injured party also being compensated for damage which is not covered by social insurance law (in particular, compensation for pain and suffering). Of economic significance – and also placed to the fore in the doctrine – is, however, that the tortious liability of the employer continues to allow the social insurer to fall back on the liability insurance of the tortfeasor.205
91
In practice, the liability privilege described is regularly lifted in the case of traffic accidents with motor vehicles. The OGH, according to doctrine, derives from the presented legal rules the principle that, in the case of motor vehicle accidents, cover by motor vehicle liability insurance – as the insurance of the dangerous area which is the source of the damage – should have precedence over the bearing of the damage by the social insurance carrier.206 This thought also plays a role for the scope of the family liability privilege which is not expressly regulated by law:
92
200
201
202
203
204
205
206
Cf. e.g. T. Tomandl (supra fn. 188), no. 303 with further reference in fn. 27 and M. Neumayr in: M. Schwimann (supra fn. 80), § 333 ASVG no. 14. Anyway, in accident insurance under very restrictive conditions, a comparable benefit – the integrity payment – is awarded; cf. W. Brodil/M. Windisch-Graetz, Sozialrecht in Grundzügen (4th edn. 2002), 110 et seq. In tort law this is often awarded to a higher amount than is the case according to social insurance law; cf. H. Krejci/E. Böhler in: T. Tomandl, System des österreichischen Sozialversicherungsrechts, chap. 3.3.3. Here one can point to § 3 sub-para. 3 EKHG, which excludes the application of strict liability according to the EKHG in the case of bodily injury when the injured party was being transported in a means of transport and was active in its operation. On the disputed meaning of this norm see recently A. Vonkilch, Haftpflicht für Kfz-Schäden von Dienstnehmern, Arbeitgeberprivileg und Haftpflichtversicherung nach der 48. ASVG-Novelle, [2004] ZVR, 40 et seq. In any case § 3 sub-para. 3 EKHG is, however, not suitable to exclude fault-based claims so that this norm cannot prevent the removal of the liability privilege in this case; cf. on this point OGH in [1994] RdA, no. 140/11 (with cmt. by P. Apathy). Here the compensation claim according to § 332 ASVG is transferred to the social insurance carrier; cf. OGH in [1994] RdA, no. 140/11 (with cmt. by P. Apathy). Cf. T. Tomandl (supra fn. 188), no. 300; W. Brodil/M. Windisch-Graetz (supra fn. 200), 116; K. Grillberger (supra fn. 8), 69. Cf. H. Krejci, [1978] VR, 345 (356); M. Neumayr in: M. Schwimann (supra fn. 80), § 332 ASVG no. 150. The compensation claim of the injured employee is here, according to § 332 ASVG, transferred to the social insurance carrier. OGH in [2000] RdA, no. 32 (with cmt. by R. Reischauer), which thereby follows the doctrine of R. Reischauer, Familienhaftungsprivileg im Sozialrecht, [1998] RdA, 1, 85 (88 et seq.). A. Vonkilch, [2004] ZVR, 40 (46 fn. 49) rightly, therefore, raises the possibility of a removal of the employers’ privilege for all cases in which the law connects strict liability with compulsory liability insurance.
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93
c. Family Liability Privilege in Social Insurance Law According to the wording of § 332 sec. 1 ASVG, the social insurance carrier can also assert claims against the tortfeasor which have been transferred to it when he is a relative of the socially insured injured party. The OGH, however, interprets this provision restrictively if the recourse of the social insurance carrier to a relative who caused the damage would burden the economic community in which the injured is in with the tortfeasor, therefore, if – as the OGH has often expressed – the “livelihood of the family” would be narrowed.207 In this case, the OGH negates the liability of the tortfeasor. Here, according to the Supreme Court, the recourse against the relative who caused the damage would have the same effect as a recourse against the socially insured injured and would, therefore, de facto nullify the sense of the social insurance benefit.208 Especially, married couples are included in the liability privilege.209
94
The OGH supports a lifting of the family liability privilege if the liability of the tortfeasor does not lead to him actually bearing the damage, thereby, as a result of the liability, no curtailment of the family maintenance arises. According to the OGH, this is the case when motor vehicle liability insurance is available to cover the claims of the social insurance carrier.210 The liability of the tortfeasor is accepted by the OGH to the extent that the damage is borne by the liability insurer. If, therefore, the claim is brought directly against the tortfeasor, it is to be exclusively satisfied by the enforcement in his claim against the liability insurer.211
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d. The Family Liability Privilege in Private Insurance Law (§ 67 sec. 2 VersVG) If an insurer, on the basis of an insurance contract, covers the damage of its insuree, its compensation claim against the tortfeasor is transferred ex lege to the insurer (§ 67 sec. 1 VersVG). However, if the tortfeasor is a relative of the injured party and they live in a common household212, the transfer of the claim to 207 208
209
210
211
212
See recently OGH in [2000] RdA, no. 32 (with cmt. by R. Reischauer). Cf. OGH in VersE, 465; [2000] RdA, no. 32 (with cmt. by R. Reischauer). The judicature is considerably influenced by the arguments of H. Krejci, Der Ausschluß des Übergangs von Schadenersatzforderungen gegen Familienangehörige auf die Sozialversicherungsträger (§332 ASVG, § 1542 RVO), [1967] VR, 224 et seq., and R. Reischauer, [1998] RdA, 1 et seq., 85 et seq. The subject matter of the publicised decisions (cf., for example, those in the two previous footnotes) was damage of spouses who were passengers in the motor vehicle. Regardless of this, it is argued that the circle of the privileged relatives is to be decided with the aid of social insurance law norms – in particular the rule concerning co-insurance; cf. M. Neumayr in: M. Schwimann (supra fn. 80), § 332 ASVG no. 111. Cf. OGH in VersE, 468 and [2000] RdA, no. 32 (with cmt. by R. Reischauer). In this decision the OGH also renounced its previous view, according to which, despite the existence of liability insurance, the family liability privilege then remained intact when the injured relative is coinsured with the tortfeasor in social insurance. Cf. OGH in VersE, 463; VersE, 468. This question today will only then be raised de facto in cases of car accidents when the injured party inadvertently does not make use of his action directe against the insurer. Other than under the ASVG, the co-habitating partners also fall under the term “relative” in § 67 Abs 2 VersVG; cf. OGH in VersE, 1449.
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the insurer is impossible unless the damage was caused with intent.213 It is interesting to note that § 67 sec. 2 VersVG – in contrast to §§ 332 sec. 5 and 333 sec. 3 ASVG – does not contain any exceptions to the liability privilege if the tortfeasor is relieved by liability insurance. The OGH, therefore, following the BGH, decided in an older decision that the existence of liability insurance of the tortfeasor does not signify a lifting of his liability privilege according to § 67 sec. 2 VersVG.214 There are no recent decisions. However, it does not seem compelling that the OGH would still maintain this position today.215 e. Reduction of Liability in the Framework of Forest Cultivation (§ 176 sec. 3 ForstG) If a third party is injured in connection with work in the course of forest cultivation, the forest owner or another person involved in forest cultivation is liable only for gross negligence and if the accident happens in enclosed areas, only for intent. However, possible liability according to the EKHG remains unaffected. In our opinion, this lifting of the liability reduction can likewise only be understood if one considers the existing mandatory liability insurance covering all claims based on the EKHG.
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2. Question: Unlike in other countries (e.g. Germany and Switzerland), there is no special liability privilege in Austria for a spouse harming his or her partner.
97
7. Insurance and Agreements to Limit or Exclude Tort Liability (22) Assuming that the particular legal system allows for the derogation of tort liability by contractual agreements: Do courts take the issue of liability insurance into account when examining whether there is an implicit agreement excluding or limiting tort liability? For instance, do courts hold owners of horses to be strictly liable even if the animal hurts someone who was allowed to take it for a ride gratuitously because horse owners are usually protected by liability insurance? 1. Question: The legal tortious rules are fundamentally of an optional nature so that compensation claims can be waived within the limits of contra bonos mores (§ 879 ABGB) by means of – also implied – agreement.216 The issue regarding an implied liability exclusion is only faced in the case of damage to property and economic loss: Doctrine namely deems the liability exclusion for personal injury caused by slight negligence as contra bonos mores.217 Recent213 214 215
216
217
On § 67 Sec. 2 VersVG cf. M. Schauer (supra fn. 12), 329–330. OGH in VersE, 465. On the one hand this concerns an obiter dictum, as the decision’s subject matter concerns the family liability privilege in social insurance law. The judicature, on the other hand, also assumes a removal of all liability privileges in social insurance law in as far as liability insurance exists. This was previously not the case; cf. above. Cf. on this OGH in SZ 48/22. Special rules concerning the permissibility of liability restrictions and exceptions are to be found, in particular, in §§ 6 Sec. 1 Z 9, 6 Sec. 2 Z 5 KSchG, 10 EKHG and 156 LuftfahrtG. Cf. H. Koziol (supra fn. 1), no. 18/14; F. Bydlinski, [1992] JBl, 341 (351).
98
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ly the OGH only had an opportunity to judge liability exclusions in the standard business conditions and argued also here for them being contra bonos mores.218 However, the Supreme Court does not seem to be against such a result on occasion also when individual agreements have been made.219
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2. Question: According to judicature and doctrine, with gifts and loans, compensation claims for non-performance damage which has been caused by slight negligence are excluded according to the parties’ intention.220 Exempt from this, however, is damage to the legal positions of the contractual partners, i.e. the cases of so-called positive breach of contract (positive Vertragsverletzung).221 The personal injury of the borrower here is such a case.222 As here a liability privilege of the lender is not to be assumed, its cessation due to the existence of liability insurance is ruled out. (23) Vice versa: What impact does first-party insurance have on the willingness of courts to find a tacit agreement excluding liability in tort? For example, as house owners in most countries are compelled to insure against fire, does this insurance policy also extend to tenants of the same dwelling such that the insurance company has no rights of recourse against a tenant setting the house on fire negligently?
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Both Questions: It is – also according to the OGH – at the conclusion of a first party insurance which insures the proprietary interest in an asset, possible that, in addition, also the liability interests of a third party, e.g. entitled users, are coinsured.223 The insurance contract here produces a contractual liability exclusion in favour of the co-insured tortfeasor as the compensation paid by the insurer definitively relieves the tortfeasor of his duty to compensate.224 The OGH, however, shows much reserve in the majority of its decisions in relation to the acceptance of an only implied, as opposed to an explicit, inclusion of the compensation interests of third parties in the insurance.225 The Supreme Court 218
219
220 221 222
223 224
225
Cf. OGH in SZ 71/58; [2000] ZVR, no. 94; [2001] JBl, 590; [2002] ZVR, 49. The contrary decision [1997] ZVR, no. 34 (with rejecting cmt. by G. Kathrein) is, therefore, obsolete. Cf. in particular OGH in [1986] Evidenzblatt der Rechtsmittelentscheidungen in ÖJZ (EvBl), no. 111 and obiter OGH in SZ 71/58. Regardless of this, according to the OGH, liability waivers for personal injury are to be interpreted restrictively (cf. SZ 52/57), so that the OGH would probably even reject an implied liability waiver on this ground Cf. G. Schubert in: P. Rummel (supra fn. 80), § 945 no. 1. H. Koziol (supra fn. 1), no. 4/4. Absent an agreement of liability reduction, the question of contra bonos mores is, therefore, also not raised. Cf, e.g. M. Schauer (supra fn. 12), 165, 329; OGH in VersE, 1562. In this case the compensation claim of the injured party is not, according to § 67 VersVG transferred to the regulating insurer but is lost. The inclusion of the interests of third parties for compensation in kind in the insurance contract can also be achieved by means other than coinsurance, namely, the insurer waiving his recourse right according to § 67 VersVG; cf. OGH in [1994] RdW, 43 (with agreeing cmt. by E. Grassl-Palten). Express recourse waivers are contained, for example, in Art. 10 AKKB 1995 in favour of the authorised driver (cf. supra fn. 171) and Art. 11 of the General Conditions for the Comprehensive Insurance of Aeroplanes (Allgemeine Bedingungen für die Kaskoversicherung von Luftfahrzeugen, ALKB) 1995 in favour of the authorised pilot.
Tort Liability and Insurance: Country Report Austria
45
has thus decided that, for fire and water damage insurance, this insurance should only serve the proprietary interest in the insured building. Therefore, when the owner of the building concludes such insurance, the compensation interests of the liable tenant, according to the OGH, are not implicitly included in the contract itself even if the tenant – as normally agreed – economically bears the insurance premiums through the settlement of the running costs.226 A Supreme Court decision from 1993, however, pronounced that the compensation interests of the members of an aviation association are tacitly included in the aircraft comprehensive insurance concluded by the association.227 The OGH essentially justifies this on the fact that a tacit inclusion can be assumed when, at the conclusion of the insurance contract, it is foreseen that the insured good will also be used by third parties without there being an increase of the risk (in respect of the occurrence of damage). The justification and result of this decision have, however, not been accepted in other proceedings. For example, the OGH has decided that, in the absence of explicit regulations, motor vehicle drivers are not co-insured in the comprehensive insurance of the owner of the vehicle.228
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8. Procedural Issues (24) What is the relationship between court proceedings and judgments on the issue of liability on the one hand and on the issue of insurance coverage on the other? May an insurer refuse coverage although the policy holder has been found liable in a final judgment on the torts claim? In practice, who defends a claim for damages brought against another: the potential tortfeasor himself or his insurer? 1. and 2. Question: The result of the liability trial is binding on the following compensation trial between the tortfeasor and the liability insurer. The binding nature, however, assumes that the insurer will be given the opportunity to intervene in the liability trial. Under this condition, in the compensation trial, the insurer cannot object to the non-existence of the insurant’s duty to compensate if the insurant was previously ordered to pay damages in the liability trial.229
102
3. Question: The party to the liability trial is the insurant. Due to the content of the currently used model conditions, the insurer is, however, the “Master”
103
226
227 228
229
On fire insurance cf. OGH in [1984] VersR, 1181; [1984] VersR, 1181. On tap water insurance see OGH in VersE, 1834. Comparable judicature can also be found for comprehensive motor vehicle insurance (cf. OGH in VersE, 936; Oberlandesgericht (OLG) Innsbruck in [1988] ZVR, no. 54). In the model conditions for this insurance can be found an express recourse waiver of the insurer; cf. supra fn. 225. Cf. OGH (supra fn. 224). OGH in [1988] RdW, 359. The OGH’s statement is now outdated as, in the current model conditions for comprehensive motor vehicle insurance, a waiver of recourse in favour of the authorised driver exists; to this and also to the decision mentioned cf. supra no. 77. Cf. M. Schauer (supra fn. 12), 402–403.
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of these proceedings.230 As such, the insurant has, for example, to provide the insurer’s lawyer with full powers of attorney required for litigation.231 IV. Further Topics (25) Any other topic relevant to the relationship between tort liability and insurance that has not been addressed in answering the questions posed above?
104
The above232 presented principle that the liability insurer and not the social insurance carrier has to bear the economic disadvantages of a motor vehicle accident, may also be the “Godfather” of two provisions, which depart from the tortious regulations on contributory negligence in an unusual manner: Art. III sec. 1 of the 3rd Amendment to KFG233 regulates the tortious consequences of a breach of the administrative duty to use a seat belt on a motor vehicle. It rules that, in the case of personal injury (or death) through a traffic accident, a breach of this duty by the injured party justifies contributory negligence only in relation to possible claims for compensation for non-pecuniary loss. A regulation with similar content can be found in Art. IV sec. 1 of the 4th Amendment to the KFG for the breach of the duty to wear a helmet on motorbikes.234 Because of this provision, the compensation claims for all other personal injuries or death remain unaffected by the contributory negligence of the injured party. No comprehensible reason for this departure from general principles of tort law235 is deducible from the historical documents. It can – at least partially – be explained by the fact that a not insignificant part of the remaining personal damage, in particular the treatment costs, are borne by the social insurance carrier.236 A reduction of these claims, therefore, would not be felt by the injured party himself but rather by the social insurance carrier to whom ex lege (§ 332 ASVG) the claims against the tortfeasors are transferred. Part of the doctrine, therefore, supposes “tangible interests of the social insurance carrier” as the legislator’s motive and is correspondingly critical of the mentioned regulation.237
230 231 232 233 234 235
236 237
Cf. Art. 8 lit 1.1.5. et seq. of the AHVB 1997. See Art. 8 lit 1.1.5.1 of the AHVB 1997. See supra no. 91. BGBl 1976/352. BGBl 1977/615. According to § 1304 ABGB, the claims of the injured party for compensation of all damages which have been also caused by contributory negligence would have to be reduced. Cf. to this supra fn. 188. F. Bydlinski, Der immaterielle Schaden in der österreichischen Rechtsentwicklung, in: Festschrift von Caemmerer (1978), 787; agreeing H. Koziol (supra fn. 1), no. 12/30. Of another opinion is R. Reischauer, who considers, among others, that a reduction of the compensation for pain and suffering is, as a rule, the most easy to bear for the injured party. Thus, according to R. Reischauer, the fact that tangible interests of the social insurance carriers have possibly influenced the content of these provisions does not on the other hand change the fact that the mentioned provisions do lead to appropriate legal consequences; cf. R. Reischauer in: P. Rummel (supra fn. 124), § 1304 no. 26.
THE RELATIONSHIP BETWEEN TORT LAW AND INSURANCE IN ENGLAND AND WALES Richard Lewis1 I.
The Influence of Insurance on the Tort System in General
There is no doubt that insurance profoundly influences the practical operation of the law of tort. Liability insurance is not merely an ancillary device to protect the insured, but is the “primary medium for the payment of compensation, and tort law [is] a subsidiary part of the process.”2 Although the majority of defendants in tort are individual people, they are almost all insured. In nine out of ten cases the real defendants are insurance companies, with the remainder comprising large self-insured organisations or public bodies. Only rarely are individuals the real defendants. Instead policyholders cede control over their case to their insurer and thereafter usually play little or no part in the litigation process.3 (Question 24) Insurers determine how the claim is to proceed and, for example, commonly make admissions without the consent of the insured,4 and settle cases in spite of the policyholder’s objection.5
1
Insurers pay out 94 per cent of tort compensation.6 Classic studies reveal that it is their bureaucracy that dictates much litigation procedure, and determines
2
1
2 3
4
5
6
Cardiff Law School, Cardiff University, PO Box 427, Cardiff CF10 3XJ, Wales, UK. E-Mail:
[email protected]. I am indebted to the members of the European Centre of Tort and Insurance Law (ECTIL) and to a number of insurance representatives for their contributions to a conference on this subject held in Munich in June 2004 at the offices of the reinsurers, Munich Re. I am also grateful for the comments of my colleagues Richard Moorhead and Antonia Layard, and to Harold Luntz, Malcom Clarke, and Chris Parsons. P. Cane, Atiyah’s Accidents, Compensation and the Law (6th edn. 1999), 191. Harry Street admitted that he was once a defendant in a case but only discovered that it had been determined on appeal when he read about it in a newspaper! D.W. Elliott/H. Street, Road Accidents (1968), 209. T. Goriely/R. Moorhead/P. Abrams, More Civil Justice? The Impact of the Woolf Reforms on Pre-Action Behaviour (2002), 90. However, this very wide discretion given to insurers to conduct the litigation behind the insured’s back is subject to some limit as recognised in Groom v Crocker [1939] 1 KB 194. Report of the Royal Commission on Civil Liability and Compensation for Personal Injury (The Pearson Commission) (1978), Cmnd 7054, vol. 2 para. 509.
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when, and for how much, claims are settled.7 It is their buildings, rather than courts of law, or even solicitors’ offices,8 that are the important centres of tort practice. The number of such centres has declined recently because of company mergers and greater specialisation which has concentrated the work in particular areas. Consolidation in the liability market9 has resulted in it being dominated by only eight major companies, although there are more than fifty other smaller firms issuing policies. All insurers have developed highly systematised approaches to claims handling, and make extensive use of information technology. They have increasingly structured their business, and closely monitor the performance of their claims handlers and lawyers. They have reduced the number of solicitors’ firms that act for them. Their standard procedures have been further refined, especially for smaller claims and “fast track” cases. Economic pressures mean that communication between the parties takes place on the telephone rather than via letters or face to face meetings, and the outcome of a claim is likely to be influenced as much by a computerised assessment as by the discretion of the claims handler involved.10 Although these generalisations do not apply to all insurers in every type of case,11 they have a great effect upon the way in which tort rules are viewed and used in practice.
3
Because insurers dominate the system, it is very difficult to view any tort case in isolation: each and every case is affected, no matter whether determined in court or out of it. Insurers’ control over the litigation process has not been emphasised sufficiently when the effect of insurance upon individual cases and on tort rules has been considered. However, it is dealt with immediately here in order to place in a wider institutional framework the cases used as examples later in this report.
4
Insurers are the paymasters of the tort system: they process the routine payments and they decide which elements of damage they will accept or contest. It is unusual for them to contest liability12 and, as a result, they make at least some pay7
8
9
10 11 12
See H. Genn, Hard Bargaining (1987), D. Harris et al., Compensation for Illness and Injury (1984) and, in the USA context, H. L. Ross, Settled out of Court (1980). The major findings are supported by the few, more recent, empirical studies and, in particular, by T. Goriely et al. (supra fn. 4). But see the critique of H. Genn, in: R. Dingwall et al., Firm Handling: The Litigation Strategies of Defence Lawyers in Personal Injury Cases, [2000] 20 Legal Studies, 1. Lord Phillips, the Master of the Rolls, has even suggested that solicitors might no longer be involved with small claims where defendants are insured, and that insurers be left to administer these claims alone: Insurers should run small claims, [2004] Law Society Gazette, 29 April. Office of Fair Trading, An Analysis of Current Problems in the UK Liability Insurance Market (OFT659a, 2003), para. 5.6. In 2002 although there were over 350 companies authorised to transact motor insurance, only 65 companies and 11 Lloyds syndicates actively did so. The ten largest motor insurers controlled two thirds of the market. ABI Response to the Greenaway Review of Compulsory Motor Insurance and Uninsured Driving (2004), annex B. T. Goriely et al. (supra fn. 4), 31 and 149. R. Dingwall et al. (supra fn. 7). T. Goriely et al. (supra fn. 4), 103 found that insurers’ files “contained remarkably little discussion of liability,” finding it initially denied in only 20 per cent of cases.
The Relationship Between Tort Law and Insurance in England and Wales
49
ment in 86 per cent of personal injury claims made against them.13 In the great majority of cases they pay not only compensation to claimants, but also the litigation costs of both sides. However, if an action fails the claimant may become liable for costs. To avoid this, loss insurers now offer claimants, after they have been injured, a policy which promises to pay their costs in the event of an unsuccessful claim. If the claim proves successful, the premium can even be added to the damages awarded in tort. Insurers may also offer legal expenses insurance in other contexts,14 and this can affect key aspects of the litigation.15 In particular, claimants cannot easily choose their own lawyer and may be required to use one from a panel approved by the insurer.16 The clients of these solicitors may receive a different service from those freely chosen by claimants, and conflicts of interest may arise.17 Insurers thus fund the tort system, control much of the representation, and can have an interest in whatever the outcome of a claim. Insurers determine the extent that lawyers become involved in disputes, and the tactics that are used in the proceedings. Increasingly cases are being settled at an early stage, and without resort to the issue of court documents.18 Insurers decide, in particular, whether a case merits the very exceptional treatment of being taken to a court hearing.19 In effect, they allow trial judges to 13
14
15
16
17 18
19
Report of the Pearson Commission (supra fn. 6), vol. 2 para. 511. The relative importance to the tort system of road and industrial injuries for which insurers are most likely to be responsible has hardly changed since the Commission reported. Based on more recent data, Marshall and Morris suggest that 89 per cent of motor cases and 77 per cent of employers’ liability cases were successful in 2002–03. Resolving a Burning Fees Issue (2003) 23 Litigation Funding 12. It is estimated that around 17 million motor policies and 15 million household policies offer “Before the Event” Legal Expenses Insurance. Such insurers already control the litigation in 80 per cent of motor accident claims, and their market penetration is expected to continue to increase. P. Smith, Panel Solicitors: the Legal Expense Insurer’s Perspective, [2004] 14 (3) PI Focus, 17. P. Fenn/A. Gray/N. Rickman, The Impact of Sources of Finance on Personal Injury Litigation (2002), Lord Chancellor’s Department No. 7/02. P. Abrams, In Safe Hands? Funding Litigation by Legal Expenses Insurance (2002). H. Blundell, Free to Choose? BTE Legal Expenses Insurance and Freedom of Choice, [2004] Journal of Personal Injury Law, 93. It is feared that all road accident litigation will be dealt with by no more than a hundred solicitors firms nationwide. S. Lawson, BTE Insurance – a Threat to the Profession or New Opportunities?, [2004] 14 (3) PI Focus, 17. P. Abrams (supra fn. 15), chap. 8 and 9. T. Goriely et al. (supra fn. 4), 159 found that almost all parties agreed that, after the Woolf reforms of civil procedure, cases were now more likely to be resolved without court involvement. Major insurers estimated that, because of earlier settlement, the number of cases disposed of only after the issue of formal proceedings had declined by a third. Even in the past, according to the Pearson Commission (supra fn. 6), vol. 2, table 12, 86 per cent of cases were settled without a writ being issued. Before being set down for trial 98 per cent of cases are settled, and many more are concluded before any hearing takes place. The Pearson Commission (supra fn. 6), vol. 2, table 12. Similarly P. Pleasence, Personal Injury Litigation in Practice (1998), 12 reveals that only 5 out of the 762 “ordinary” cases with costs of less than £5,000 that were studied went to trial. Earlier, D. Harris et al. (supra fn. 7) had suggested that the figure might be as high as 3 per cent. However, even in cases involving very substantial awards of damages – £150,000 or more paid by insurers in 1987 and 1988 – only ten per cent of payments were the result of formal court orders, and most of these related to children or patients for whom court approval of their settlements is required. P. Cornes, Coping with Catastrophic Injury (1993), 20.
5
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determine only one per cent of all the claims made. Only a few of these are appealed with the result that the senior judiciary are left to adjudicate upon a small fraction of what are, by then, very untypical cases. Whether an appeal court is to be given an opportunity to examine a point of tort law may depend upon the insurer for, if it serves the insurer’s purpose for doubt to remain, the claimant can be paid in full and threatened with a costs award if the action is continued.20 In this sense tort principles themselves have been shaped by and for insurers, even though there has been a significant growth in the power of claimant lawyers in the last twenty years.21
6
Insurers’ influence upon settlements is even more pronounced than it is upon decided cases. For the lawyer asked by his client to advise on the merits of a claim it is the realities of the litigation system that are of concern rather than the formal rules of law. Practitioners would agree with the key analysis of Ross22 that the textbook rules of tort are often transformed when they come to be used in the system in three ways: firstly, they are simplified; secondly, they are made more liberal; and thirdly, they are made more inequitable. Simplification occurs because the rules are too uncertain when applied to the individual facts of particular accidents. For reasons of cost and administrative efficiency, insurers have been forced to substitute other criteria for the strict tort rules. Mechanical rules of thumb – such as the car running into the back of another always being found the one at fault – replace any detailed investigation into blame. There is neither the time nor resources to instruct experts to analyse the scene of each road accident and precisely measure its effect upon the individual claimant. Cases are disposed of on the basis of paperwork alone, and this may bear only a limited relationship with what actually occurred. The result of the cost pressures upon insurers is that more claims succeed than the strict rules of tort would allow. Many insurers pay something for claims which, on full investigation, would be without foundation. As a result:
20
21
22
As recognised in Davis v Johnson [1979] Appeal Cases (AC) 264 at 278. But see the failed attempt to prevent the House of Lords considering important causation issues in relation to asbestos liability in Fairchild v Glenhaven Funeral Services Ltd [2002] 1 AC 32 discussed by K. Oliphant in: H. Koziol/B.C. Steininger (eds.), European Tort Law 2002 (2003), 148, and in [2002] 12 (3) Association of Personal Injury Lawyers Newsletter, 19. Claimant lawyers are now much more likely to be specialists and work in larger and much better organised firms than in the past. Relying upon Law Society figures, T. Goriely et al. (supra fn. 4), note 4 at 25 note that even before April 2000 (when almost all legal aid was abolished for personal injury claims) solicitors were becoming increasingly specialised, and fewer firms were “dabbling” in such work. The founding of the Association of Personal Injury Lawyers in 1990 and its subsequent activity reflects the increasing abilities and resources of claimant lawyers. Melville-Williams, A. P. I. L., [1991] 19 Civil Justice Quarterly, 103. The Association now has over 5,200 members, employs 28 people, and has a turnover of £1.95 million. It is extremely well organised, and has its own Press, Parliamentary and Research officers as well as other administrators. See APIL, Annual Report and Accounts 2004. H.L. Ross, Settled out of Court (1980).
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“… wherever there is insurance there is … a closer approximation to the objectives of social insurance in fact than the doctrines of tort law would lead one to suppose.”23 However, this liberality is but part of a system which overall is weighted in favour of insurers and results in much inequality. Indeed the case often used to illustrate the general inequalities in the legal system involves a “one-shotter” accident victim suing a “repeat player” insurer.24 Delay, uncertainty, financial need and other pressures cause claimants to accept sums much lower than a judge would award. The eagerness of claimants and their solicitors to get something from the system is reflected in the fact that they have been found to be very keen to accept any formal offer made to them by the “risk neutral” insurer.25 Those who can withstand the pressures of litigation do better than those who cannot, with the result that those from a particular class or background are more likely to succeed.26 Those who suffer most are the severely injured. Although in the greatest need, they will find their high value claim scrutinised in detail and processed very differently from the average case which typically involves but a minor upset and little, if any, financial loss. Those seriously injured are much less likely to receive “full” compensation than those suffering minor injuries who, for a variety of reasons, are likely to be over-compensated.27 The overall result of the settlement system is that rough and ready justice is dispensed, much influenced by insurance company personnel and procedures, and driven by the needs of the insurance industry. The system produces arbitrary results and bears only a limited relationship to the portrayal of justice contained in the traditional tort textbook.
7
The importance of insurers to the tort system is reflected in the fact that the claims which are brought closely match the areas where liability insurance is to be found. Thus road and work accidents predominate partly because they are the two major areas where tort insurance is compulsory. They constitute 86 per cent of all the claims brought for personal injury.28 They dominate the
8
23 24
25
26 27
28
F.V. Harper/Fleming James, The Law of Torts (1956), s 13.7. The seminal article is M. Galanter, Why the ‘Haves’ Come Out Ahead, [1974] 9 Law and Society Review, 95. However, R. Dingwall et al. (supra fn. 7) emphasise that not all defendants in personal injury cases are “repeat players” and they should not be treated as a homogenous group. Other limits of the article were examined in an anniversary special issue in [1999] 33 Law and Society Review, 795. According to D. Harris et al. (supra fn. 7), table 3.3 claimants’ solicitors used to accept the first formal offer made to them in two out of three cases. More recently T. Goriely et al. (supra fn. 4), 154 found more incidence of bargaining, although a third of cases still settled after only one offer, almost two thirds after two and ninety per cent after three. H.L. Ross (supra fn. 22). P.A. Bell/J. O’Connell, Accidental Justice: The Dilemmas of Tort Law (1997), 63–66. D. Dewees/D. Duff/M. Trebilcock, Exploring the Domain of Accident Law: Taking the Facts Seriously (1996), 19. Compensation Recovery Unit figures for 2003–04, with motor comprising 48 per cent of the total and employer liability 37 per cent. Similarly Datamonitor, UK Personal Injury Litigation 2003, fig 5. The nature of litigation in this respect has hardly changed for the Pearson Commission total figure of 88 per cent was only 2 per cent more than that reported twenty five years later. Op cit vol. 2 table 11. Atiyah suspected that the relative proportion of claims had not changed. P.S. Atiyah, The Damages Lottery (1997), 99.
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practice of tort even though they are relatively minor causes of disability and incapacity for work.29 Those suffering injury in areas not covered by insurance are extremely unlikely to obtain compensation. According to one study, whereas 1 in 4 road accident victims and 1 in 10 work accident victims gain compensation from tort, only 1 in 67 injured elsewhere do so.30
9
The scope of the tort system is affected not only by those areas where liability insurance has been made compulsory, but also by the existence of alternative sources of compensation. What opportunities are there for resort to either welfare payments from public insurance, or policy monies from first party private insurance? The interrelationship of compensation systems cannot be discussed in detail here,31 but a couple of examples will suffice to demonstrate the potential effects of other insurance systems upon tort. The first example is a historical one, and in practice resulted in the abandonment of tort law for the great majority of work injuries. It derives from the “election” rule whereby workers injured in the course of their employment had to choose either to sue in tort or to claim private insurance benefits on a no-fault basis from their employer. They could not obtain both damages in tort and these insurance benefits. For a variety of reasons employees overwhelmingly opted, or were pressed into receiving the no-fault benefits,32 leaving the tort system with a very limited role to play in the industrial field.33 Although this “employer privilege” continues in North America, a few European countries, and increasingly in Australia, it was abolished in the UK in 1948. Tort claims for work accidents have since flourished, and now constitute over a third of all the actions brought.34
10
A second example of the influence of insurance upon the extent to which resort is had to litigation involves private agreements between insurers to abandon the tort system in respect of certain losses. This may take various 29
30
31
32
33 34
D. Harris (supra fn. 7), table 2.1 found that the most common accidents were those in the home, or suffered in the course of leisure activities or in playing sport, and yet very few of these resulted in any damages award. Although work and transport injuries dominate the tort system they comprise only about half of all accidents according to Pearson (supra fn. 6), vol. 2, table 57. Datamonitor (supra fn. 28), 79 estimate that there were 7.8 million accidents in the home in 1999 of which only 0.5 per cent potentially could result in a successful tort claim. The Pearson Commission (supra fn. 6), vol. 1, table 5. The study reveals that only 6.5 per cent of all accident victims incapacitated for three days of more are compensated by the tort system. However, if only serious injuries are considered tort becomes much more important. Where an accident causes incapacity for work for six months or more, almost a third of claimants receive tort damages. D. Harris et al. (supra fn. 7) made similar findings concerning the limited importance of the tort system. Its significance is reduced tenfold if account is taken of those suffering disablement not from accidents alone but from all causes, including illness and disease. For a recent example see U. Magnus (ed.), The Impact of Social Security Law on Tort Law (2003). W.A. Dinsdale, History of Accident Insurance in Great Britain (1954), 161. For judicial criticism of the “deplorable” and “extremely shabby” tactics used by insurers see Deane v H. F. Edwards & Co (1941) 34 BWCC 183. P.W.J. Bartrip, Workmen’s Compensation in Twentieth Century Britain (1987), chap. 10. Compensation Recovery Unit figures for 2003–4. Contrast the somewhat lower proportion cited by Datamonitor, UK Personal Injury Litigation 2003, fig 5.
The Relationship Between Tort Law and Insurance in England and Wales
53
forms,35 but the agreement which has come to public attention is the so called “knock for knock” arrangement in relation to motor accidents. Although more reluctant to do so in recent years, motor insurers have set up a series of agreements with other insurers which have similar risk profiles concerning the extent to which they will litigate. In advance of any accident involving claimants covered by both first and third party insurance, they agree firstly, that each will indemnify the property damage suffered by its own policyholder; and secondly, that they will not use the tort system to reclaim any of this loss from the other party even if they were clearly responsible for the damage. Where an insurer suffers a loss as a result of this arrangement, it hopes to make up for it in a later case. Overall, insurers expect that matters will even themselves out. These agreements are made in order to avoid the excessive cost and uncertainty that would be involved if insurers were forced to use the tort system for all small claims. They result from the inter-relationship of first party insurance with the tort system. This influence of insurance upon the general pattern of tort liability is matched by its effect upon the level of compensation awarded. The principles upon which damages are assessed implicitly recognise that it is a company with a deep pocket that will pay and not an individual. Although most awards in tort are for very limited sums – little more than £2,500 36 – there are very few individuals who could afford to pay the amounts required in serious injury cases. The justice of the case never merits an investigation into the limited means of the average person found liable because that person will not have to pay. If it were not for insurance there would be little hope of restoring the claimant to the pre-accident position in a serious injury case. It is doubtful whether we would even wish to attempt to place full responsibility for the damage on most defendants. The very nature of the tort system would have to change. Without insurance, it is probable that tort liability itself could not survive.37
11
These facts about the tort system have been empirically established in a series of studies,38 but gain little prominence in tort textbooks.39 (Question 8) In spite of students being left in ignorance, it cannot be denied that insurance in this
12
35
36
37
38
R. Lewis, Insurers’ Agreements not to Enforce their Strict Legal Rights, [1985] 48 Modern Law Review (M.L.R.), 275. This is the median figure in the survey of 81,000 cases receiving legal aid and closed in 1996 – 97 in P. Pleasence, Personal Injury Litigation in Practice (1998), 40 fig 3.17. In 70 per cent of successful cases the damages were less than £5,000, although the overall average was £11,000. P. Fenn/N. Rickman, Costs of Low Value Liability Claims 1997–2002, report average damages of only £3,000 for employers liability accident claims, although this study of almost 100,000 cases related only to claims for less than £15,000. See http://www.dca.gov.uk/majrep/claims/ elclaims.htm. Datamonitor (supra fn. 28), 81 reports the average general liability personal injury claim in 2002 cost £4,407. In evidence to the Law Commission in 1993 the Trades Union Council noted that the average sum obtained in the 150,000 union-backed cases in 1991 was under £2,000. J.G. Fleming, The American Tort Process (1988), 21. Without insurance, the system “would long ago have collapsed under the weight of the demands put on it and been replaced by an alternative, and perhaps more efficient system of accident compensation.” J.G. Fleming, The Law of Torts (9th edn. 1998), 13. Extensively referenced in D. Dewees et al. (supra fn. 27). But see Saks, Do We Really Know Anything about the Behaviour of the Tort Litigation System – and Why Not?, [1992] 140 University of Pennsylvania Law Review and American Law Register, 1147.
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context is fundamental to the general operation of the tort system. Over fifty years ago one writer concluded that the doctrines of tort law “… are horse and buggy rules in an age of machinery; and they might well have gone to the scrap heap some time ago had not the tremendous growth of liability insurance and the progressive ingenuity of the companies made it possible to get some of the benefits of social insurance under – or perhaps in spite of – the legal rules.”40
13
Although insurance has had this profound effect upon the tort system, there remains much doubt about, firstly, whether the presence or absence of insurance in a particular claim has an effect upon liability in that case; and, secondly, the extent to which the rules of tort themselves have been revised to take account of the distributive effect of insurance. These are matters discussed in later sections of this report. II. The Areas of Compulsory Insurance (Questions 2–4)
14
In the UK the two most important areas where it is compulsory for there to be liability insurance are well known and not dealt with in detail here even though they provide the focus for much tort litigation.41 There must be insurance against liability incurred, firstly, by those using a motor vehicle in a public place; and secondly, by an employer for injury to his employees in the course of their employment.42 These two areas of liability are of vital importance to the tort system for, as stated above, they comprise almost 9 out of 10 claims made for personal injury. The incidence of tort liability thus closely mirrors the areas of compulsory insurance.
15
The other areas of compulsory insurance are relatively minor in respect of personal injury, but are significant with regard to protection against economic loss. (Question 2) However, these miscellaneous instances of compulsory insurance reveal a lack of coherent legislative policy with regard to the need for such protection, at least in relation to personal injury. It is difficult to discern 39
40
41
42
The major exception being P. Cane (supra fn. 2), especially chap. 9. There is little useful discussion in the many student and practitioner texts with the exception of M. Jones, Textbook on Torts (8th edn. 2002), s.1.3 and S. Deakin/A. Johnson/B. Markesinis, Tort Law (5th edn. 2003). J.G. Fleming, The Law of Torts (9th edn. 1998), 13 regards insurance as the cause of a vast expansion in liability and this “pervasive trend runs like a golden thread” throughout the book. There are few insurance textbooks compared to tort, but they similarly avoid examination of the effect of insurance on tort liability. A notable exception is the excellent section in M.A. Clarke, Policies and Perceptions of Insurance (1997), chap. 8. J. Fleming, Accident Liability Reconsidered: The Impact of Liability Insurance, [1948] 57 Yale Law Journal (Yale L J) 549, at 569. C. Parsons, Employers Liability Insurance – How Secure is the System?, [1999] 28 Industrial Law Journal, 109. Road Traffic Act 1988 ss 143 and 145, and the Employers Liability (Compulsory Insurance) Act 1969 and the relevant regulations (SI 1998 No 2573). Since 1999 employers have been required to secure cover for up to £5 million in respect of any one occurrence, but in practice most insurers buy cover in the £10 to £50 million range. For a motor vehicle, as an alternative to insurance, by s 144 of the 1988 Act it is possible to deposit £500,000 with the Supreme Court. Some public bodies are also exempt from the requirement to insure.
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why insurance should be required in respect of certain accidents but not others. The ad hoc introduction of compulsion into the occasional statute has taken place without discussion of the potential problems caused by the lack of cover in related areas. The anomalies that result can be illustrated by the fact that insurance is required for injury caused by horses and wild animals, but not for more common injuries caused by bicycles or dogs; it is required for cars and aircraft, but not for boats or trains; it is required of employers with regard to claims from their employees but not from members of the public; and it applies to nuclear reactors, but not to those using explosives or engaged in other activities which are exceptionally hazardous. Finally it is required for causing oil pollution at sea, but not for causing it on land. The full list is as follows: • • • • •
•
43 44 45 46 47
48 49 50
51
Owners of horse riding establishments are required to insure against liability for injuries resulting from the hire or use of their horses.43 A keeper of a dangerous wild animal can only do so under licence, a condition of which is that there is insurance against liability for any damage caused by the animal.44 Aircraft operators are required to hold liability insurance as a condition of obtaining their licence.45 A licensee of a nuclear reactor is strictly liable for all damage caused and must carry liability insurance or make otherwise suitable provision for compensation claims.46 Owners of ships carrying more than 2000 tons of oil and entering or leaving a UK port must be insured against liability.47 The relevant legislation also makes provision for the implementation of an international convention48 which will extend the duty to insure to owners of all ships carrying any of 6000 defined substances, including oil and gas. When the provisions come into force the liability will be strict.49 The possibility of compulsory insurance for a broad range of environmental damage is also envisaged in a draft European Directive.50 Insurance may also be required for a ship in UK waters in respect of a wider range of liabilities than those relating to the environment as discussed above.51 Riding Establishments Act 1970 s. 1 (4A) (d). Dangerous Wild Animals Act 1976 s 1(6) (iv). Civil Aviation (Licensing) Act 1960 and the relevant regulations SI 1964 No 1116. Nuclear Installations Act 1965 s 19. Merchant Shipping Act 1995 s 163, and the Oil Pollution (Compulsory Insurance) Regs 1997 No 1820. In 2002 the UK also signed the International Convention on Civil Liability for Pollution Damage Caused by Bunker Oil adopted by the International Maritime Organisation (IMO) in 2001. The UK acted in support of the Convention’s aims of ensuring all sources of marine pollution are covered by international strict liability and compulsory insurance regimes. The Hazardous and Noxious Substances Convention adopted by the IMO in May 1996. Little, [1998] Lloyds Maritime and Commercial Law Quaterly, 554. Art. 14 para. 2 of the draft European Directive on Environmental Liability states that, after a review of the financial security provisions, proposals may be submitted for mandatory financial security. Compulsory insurance may then be required. Merchant Shipping Act 1995 s 192A, as inserted by s 16 of the Merchant Shipping And Maritime Security Act 1997.
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• •
•
• •
Richard Lewis
Solicitors are required to insure against their professional liabilities.52 Although there is no legislation forcing accountants or barristers to insure, their professional associations require them to do so. Because the National Health Service indemnifies them for their work in the public service, neither doctors nor dentists are required to insure in such circumstances. However, when working as independent contractors they are not protected by the NHS and, although required by their professional associations to insure, there is no statutory requirement for them to do so. Even though the Secretary of State for Health can require doctors and dentists to insure,53 this power has not been exercised. A Bill requiring these professionals to arrange an indemnity against liability failed to pass its Parliamentary stages in 2003.54 In contrast, certain other medical professionals are required by statute to insure.55 Independent financial advisers have been required to carry liability insurance by the industry regulator.56 Insurance intermediaries were formerly required to insure against liability57 and will shortly have a similar obligation when the Insurance Mediation Directive is implemented.58 Although legislation has been passed requiring estate agents to insure against liability for failing to account for clients’ money, it has never been brought into force.59 Related measures have been taken to protect the public against the insolvency of others having control over clients’ money, but these have not always involved requiring insurance against tort liability as such. Bonds, insurance, or industry levies as security against insolvency, rather than liability, may be required, for example, of banks60 and travel agents.61
A. Voluntary Insurance
16
Although, as discussed below, some do not insure in spite of being required by law to do so, it is also the case that many take out liability insurance even though they do not have to do so. For example, businesses usually carry public liability insurance to complement and extend their compulsory employers’ coverage by including such risks as liability arising from their occupation of property. They may also voluntarily insure against specific risks that are usually excluded from general liability policies (such as those deriving from liability as manufacturers 52 53 54 55 56
57 58
59 60 61
Solicitors Act 1974 s 37, and the Solicitors Indemnity Insurance Rules 2002. The Health Act 1999 s 9. The Medical Practitioners and Dentists (Professional Negligence Insurance) Bill 2003. For example, the Osteopaths Act 1993 and the Chiropractors Act 1994. Financial Services and Markets Act 2000 s 138. Investment Firms: Proposed Policy and Rules (2003) at http://www.fsa.gov.uk/pubs/cp/cp193.pdf. Under the Insurance Brokers (Registration) Act 1977 s 12. For the proposed changes see FSA Consultation paper P193: Professional Indemnity Insurance for Personal Investment Firms: Proposed Policy and Rules (2003) at http://www.fsa.gov.uk/ pubs/cp/cp193.pdf. Estate Agents Act 1979 s 16. Banking Act 1979. The Package Travel, Package Holidays and Package Tours Regulations 1992 (SI No 3288).
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of products, or from liability arising from environmental and pollution control regulations). In addition, directors and officers’ liability insurance may be purchased as a protection against managerial incompetence. Ordinary individuals similarly will agree to take out liability insurance beyond the scope of the compulsory cover. Often they will be unaware of the extent to which they are protected because the purchase of liability insurance is not the main purpose of the transaction. For example, certain liabilities can be indemnified merely as a consequence of a policy taken out in order to obtain a mortgage on property or to protect payment for a holiday. Purchasers may be surprised to discover that they are protected against their liability for injuries on their property or resulting from their negligence on holiday. Again, those taking out loss insurance against the contents of their home being damaged may find, on reading their policy, that they are also covered for their liability to others in many circumstances. However, there are no statutes which force people to take out these different forms of liability insurance.
17
It is impossible to estimate the percentage of the population protected as potential claimants by liability insurance. (Question 4) It varies according to the cause of the injury and the type of loss suffered. In any event it must be remembered that strictly it is the defendant that is protected by such insurance; the claimant can only gain access to the compensation fund if liability can be established. Unlike in many other European countries at least with regard to motor vehicles,62 liability in the UK still requires proof of fault. As a result, as we have already seen, only a small minority of those injured by accident or disease obtain compensation even in areas where liability insurance is compulsory.
18
B. Failure to Arrange the Insurance Required by Statute Failure to comply with the obligation to insure is subject to sanctions in the criminal law, the normal penalty being a small fine.63 (Question 3) The extent to which there is compliance varies. Although proof of insurance may be a pre-requisite to obtaining the relevant licence, there may still be many who avoid payment. It has been estimated that about 1 in 20 motorists,64 and about 1 in 200 employers65 do not have the insurance required. 62
63
64
See B.A. Koch/H. Koziol (eds.), Compensation for Personal Injury in a Comparative Perspective (2003). New fixed penalties were announced in June 2003, but for a first offence the motoring fine still averages only £200. There were 267,000 convictions for such a failure to insure in 2001, and in over half of the cases the fine was less than £100 according to the Home Office, Offences Relating to Motor Vehicles in England and Wales 2001 (2003). Employers can be fined up to £2,500 a day, but in practice the fines are low and enforcement more limited. D. Greenaway, Uninsured Driving in the United Kingdom (2004), Department of Transport, London http://www.dft.gov.uk/stellent/groups/dft_rdsafety/documents/page/dft_rdsafety_030393. hcsp. Similar figures published by the Motor Insurers Information Centre show that there are over a million uninsured drivers on the UK roads every day. http://www.miic.org.uk. The 5% default rate in the UK is similar to that in Spain, and is better than those estimated for Italy and Greece, but it is much worse than that in Germany (0.1%) and the Netherlands (1%–2%) according to the Association of British Insurers, Uninsured Driving in Europe (2004).
19
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20
In the areas where insurance has been made compulsory further measures have been taken to ensure that compensation will be available despite the misdeeds or failings of a defendant. However, again here there are various anomalies in the protection given with the result that those injured on the road have more security than those injured at work or elsewhere.66 The state has intervened to regulate the tort system either directly by legislation, or indirectly by forcing insurers to ensure that the claims of certain accident victims will be met. Thus reserve funds levied from insurers will compensate, via the Motor Insurers’ Bureau, if a motorist fails to comply with the obligation to insure. If the motorist is in breach of the terms of the insurance because, for example, he drove when drunk, or on business instead of pleasure, insurers are prevented from avoiding the policy with regard to the liabilities for which the driver must insure. There is similar, although less extensive, protection for an employee in a claim against an employer found to be in breach of a condition in his insurance policy. However, if an employer fails to comply with the statutory duty to insure there are no reserve funds available. The injured employee’s claim may then be worthless. Finally, there is some protection for the claimant if the tortfeasor has gone bankrupt or into liquidation.67 A direct action against the insurer may then be allowed.
21
The effect of failure to comply with the obligation to insure in the civil law differs according to whether motor or employer’s liability is being considered. In motor insurance, the failure gives rise to an action for breach of statutory duty against the person who should have taken out a policy.68 However, the practical effect of this is limited because the reserve funds will compensate in any event for injuries caused by an uninsured driver. In contrast, where the failure to insure is that of an employer rather than a motorist there are no reserve funds. A civil action for breach of statutory duty then could have practical value. However, the Court of Appeal has held that no such action can succeed with the result that a claimant was left without compensation when he sought damages personally from the directors of the uninsured and insolvent firm that had employed him.69 (Question 16)
65
66 67
68 69
Department of Work and Pensions, Review of Employers’ Liability Compulsory Insurance: Second Stage Report (2003). Contrast the Small Business Service telephone survey of over 2000 businesses in 2002 which suggested that the figure was 1 in 14. C. Parsons (supra fn. 41). Third Party (Rights Against Insurers) Act 1930. The deficiencies of this Act were noted by the Law Commission, Third Parties – Rights against Insurers Report No 272 (2001). See also the European Communities (Rights against Insurers) Regulations 2002 (SI No 3061) made pursuant to the Fourth Motor Insurance Directive (No 2000/26/EC). Monk v Warbey [1935] 1 KB 75. Richardson v Pitt-Stanley [1995] 1 Queen’s Bench (QB) 123. However, this case was not followed in Scotland in Quinn v McGinty [1998] Rep LR 107.
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C. Failure to Arrange Insurance Other than that Required by Statute (Questions 14–17) In general, although it is compulsory to insure in the areas listed above, there is no liability in English law for otherwise failing to take out insurance. Liability is usually established by proving fault, and it is not negligent if the only failure is to put in place measures to pay for losses tortiously caused. This can be illustrated by the position of parents and liability for their children. In the UK, although generally not liable for their children’s torts, in theory parents could be liable for their own torts in failing to control their child.70 However, no parent has ever been found liable for failing to take out insurance either against their own liability, or against that of their child. (Question 15).
22
However, this principle that there is no general duty to insure has recently been qualified at least in relation to the liability of occupiers employing independent contractors on their property. Statute prescribes that, in order to avoid liability for the acts of a contractor, the occupier must take steps to ensure that the contractor is competent to do the work in question. At least where the contractor is doing hazardous work, a majority of the Court of Appeal has agreed that the occupier should inquire whether the contractor is covered by a liability insurance policy because this is one of the factors which is relevant in proving competence. However, this duty to make inquiries does not extend to checking the terms of the policy itself or to discovering whether the policy is still current. As a result, on the facts of the case, the occupier was held not liable for a negligent fairground contractor who had recently allowed his liability insurance policy to expire.71 Nor was a duty to check for insurance found where the contractor had already been approved by the local authority to carry out the task in question.72
23
If a defendant fails to take out not liability insurance, but first party insurance which would have indemnified the claimant against loss, again there is little authority in tort to support a claim. There can be contractual responsibilities which, for example, may require one party to insure for the benefit of others having an interest in the property in question.73 However, outside of contract or trust, there is no duty to insure. This general principle was affirmed in the case of a school that was held not liable for failing to take out insurance for the possibility of its children being injured in the course of playing sport.74 The
24
70
71
72 73
74
See K. Oliphant, Children and the Law of Tort in England and Wales, in: M. Martín Casals (ed.), Children in Tort Law: Children as Tortfeasors (forthcoming). Gwilliam v West Hertfordshire NHS Trust [2003] QB 443. Even in this case one judge, Sedley LJ, strongly dissented from the view that there should be a duty to check for insurance. In Bottomley v Todmorden Cricket Club [2003] PIQR P18 although Sedley’s dissent was supported by the first instance judge, on appeal, further support was given to the idea that insurance was relevant to establishing the competence of the contractor. T Naylor v Payling [2004] EWCA 560. As illustrated recently in Scottish & Newcastle Plc v GD Construction (St Albans) Ltd [2003] EWCA Civ 16 and Oxford Aviation Services Ltd v Godolphin Management Co Ltd [2004] EWHC 232. Van Oppen v Bedford Charity Trustees [1989] 3 All ER 389.
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court pointed out that there was no duty for the parent to insure the child and that it would therefore be inappropriate to place a more onerous duty upon the school. Again, in a related case, an employer was held not liable for failing to insure an employee against the risk of him being injured in the course of his employment by the fault of a third party who could not pay any damages himself.75 In this case the injury was suffered as a result of a road accident in Ethiopia. Although it is compulsory to insure against liability for injuries occurring in the UK, this does not extend to cover injury suffered abroad or where no liability can be established. There is therefore no duty to arrange first party insurance for another person.
25
Just as there is no common law principle requiring defendants to take out loss or liability insurance, there is no formal rule to support a claimant being found contributory negligent merely because he failed to take out first-party insurance. (Question 17) Thus a landlord who failed to insure his property was nevertheless able to succeed in his tort action against a tenant who negligently caused damage to that property.76 (Question 23) Similarly, the fact that a claimant has taken out first party insurance in a personal injury case is generally ignored, and damages must be paid even though the loss has been compensated from this other source.77 Formally, the claimant is thus neither penalised for his prudence in arranging insurance, nor for his thoughtlessness in failing to insure. III. The Influence of Insurance upon Particular Cases and Rules: General Views
26
In the opening section of this report we concluded that insurers have had a major effect upon the general operation of the tort system. However, there is much more doubt about the extent that insurance can be shown to be a factor taken into account to determine the outcome of individual cases. To what extent have facts been interpreted to fit the established basis for liability, and the result thus manufactured perhaps for the benefit of an uninsured claimant? More significant for the academic tort lawyer is the suggestion that, rather than the facts, it may be that the rules themselves that have been changed to accommodate the insurance position.
27
Why might this be done? We need not examine the economic, political and social arguments in detail here. However, in simple terms, some have argued that liability may more readily be imposed if the tort action is seen only as a means of compensating needy individuals, and the defendant is merely a conduit to an insurance fund and a means of distributing the cost of the injury to a wider pool. Conversely, if the claimant has his own insurance for the loss caused, his 75 76 77
Rush v Reid & Tompkins Group [1989] 3 All ER 228. Lambert v Keymood Ltd [1999] Lloyds Rep IR 80. R. Lewis, Deducting Benefits from Damages for Personal Injury (1999), chap. 6. However, in a property damage case insurance may have some effect. See, for example, Lamb v Camden LBC [1981] QB 625 discussed below.
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needs are less and liability may then be denied. “Who is insured?” and “who is in the better position to insure?” have thus been seen by some as key questions in determining liability issues. Whether it is economically more efficient for a loss to be met from first party insurance rather than from liability insurance via a tort claim raises wide issues. However, it is sufficient here to note that the relative insurability of the parties has been argued to be relevant when determining whether liability should be imposed. A. Judicial Views In the past it was almost unknown for judges to examine or even acknowledge the existence of insurance relating to a claim, and it remains extremely unusual for them to do so. They have occasionally asserted that insurance has had no direct effect upon them, stating that it “is not the function of a court of law to fasten on the fortuitous circumstance of insurance to impose a greater burden” on the defendant than would otherwise be the case.78 However, their general silence about such matters has not prevented speculation about whether the wider arguments relating to insurability are having an unacknowledged effect. It is difficult for judges to discuss insurance factors openly because they give rise to wide ranging policy considerations. In addition, if insurance were openly recognised as a determining factor, judges could be accused of deciding cases on the basis of the parties’ means alone, and the idea that a rich or protected litigant must always lose to a poor or needy one is too simplistic to contemplate.
28
As an exception to the general rule, one judge, Lord Denning, was more prepared to examine the insurance background to disputes but even he did so only occasionally. Most famously, in a case over thirty years ago involving a learner driver being sued by her instructor for negligent driving, he suggested that the presence of liability insurance could determine the standard of care to be applied. He thought that the skill of a fully qualified driver could be required from the learner driver partly because she carried liability insurance.
29
“Parliament requires every driver to be insured against third party risks. The reason is so that a person injured by a motor car should not be left to bear the loss on his own, but should be compensated out of the insurance fund. The fund is better able to bear it than he can. But the injured person is only able to recover if the driver is liable in law. So the judges see to it that he is liable, unless he can prove care and skill of a high standard …. Thus we are … moving away from the concept: ‘No liability without fault.’ We are beginning to apply the test: ‘On whom should the risk
78
Viscount Simonds in: Davie v New Merton Board Mills [1959] AC 604 at 627. Similar comments were made by the same judge in Lister v Romford Ice Storage Co Ltd [1957] AC 555 at 576, and by Lord Bridge in Hunt v Severs [1994] 2 AC 350 at 393. Lord Wilberforce in Morgans v Launchbury [1973] AC 127 at 137 thought it dangerous and irresponsible for a judge to alter the basis of liability without knowledge about the impact upon the insurance system.
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fall?’ Morally the learner driver is not at fault; but legally she is liable to be because she is insured and the risk should fall on her.”79
30
Two years later he returned to the theme, pointing out that it was damages as well as liability that had been influenced: “The damages are expected to be borne by the insurers. The courts themselves recognise this every day. They would not find negligence so readily – or award sums of such increasing magnitude – except on the footing that the damages are to be borne, not by the man himself, but by an insurance company.”80
31
Although the law reports contain no other statements as explicit as these, in the last fifteen years or so they have made increasing reference to insurance. Judges are more prepared than in the past to discuss wider policy issues, 81 and these have sometimes included insurance aspects.82 Within this broader framework judges have referred to distributive justice whereby account is taken of the effects of a decision beyond the immediate parties to the dispute. In a recent lecture Lord Steyn stated: “The primary aim of tort law is the pursuit of corrective justice. It requires somebody who has harmed another without justification to indemnify the other. There is, however, another perspective, namely considerations of distributive justice. It concentrates on the place of the plaintiff and the defendant in society…. Not surprisingly, our courts have not shut their eyes to such considerations: the insurance position of the parties has sometimes been treated as relevant.”83
32
Insurance, therefore, may be taken into account but only occasionally. It is difficult to forecast when and with what effect. There is considerable uncertainty. B. Commentators’ Views
33
A Realist perspective upon the judicial role emphasises the importance of underlying policy considerations as against the formalist reasoning contained in the judgements themselves. Traditional judicial silence on insurance has provided a vacuum which a few tort scholars have sought to fill. Some have 79 80 81
82
83
Nettleship v Weston [1971] 2 QB 691 at 699. Morris v Ford Motor Co Ltd [1973] QB 792 at 798 K. Malleson, The New Judiciary (1999); R. Stevens, The English Judges: Their Role in the Changing Constitution (2002); M. Kirby, Judicial Activism (2004). For an Australian context see M. Gill, The Expansion of Liability and the Role of Insurance – Who’s the Chicken?, [1999] International Journal of Insurance Law, 27. Lord Steyn, Perspectives of Corrective and Distributive Justice in Tort Law, [2002] 23 Irish Jurist, 1. Similarly, in McFarlane v Tayside Health Board [2000] 2 AC 59 at 83 he described the duty of care as “a mosaic in which the principles of corrective and distributive justice are interwoven.” Lord Hoffmann said that corrective justice “… has been abandoned in favour of a cautious pragmatism” in Frost v Chief Constable of South Yorkshire Police [1999] 2 AC 455 at 502.
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drawn inferences about the influence of insurance in spite the reasons expressly given in the judgements, whereas others have rejected such causal connections. There has been a sharp division in views. On the one hand, there are those who argue that the “hidden hand” of insurance has had a great effect;84 courts are said frequently “to treat tort as a compensation and loss-spreading scheme, via the pervasive phenomenon of liability insurance.”85 Judges may even be influenced without knowing it because insurance “acts as a stimulus to decision-making whether or not the decision-maker is consciously aware of it.”86 The result, according to Cane, is that “there can be little doubt that the development of the law has been influenced by the growing prevalence of liability insurance.”87 Another textbook agrees: “… [T]here is no denying the fact that, as a result of modern insurance practices, the notions of “duty” (and causation) are at times used to conceal insurance dictates and the term “negligence” is employed in contexts where the defendant could not humanly have avoided the accident in question.”88 Even if the rules themselves have not directly been affected, insurance may thus “invisibly” influence the result in a particular case.89 On the other hand, others have argued that the effect of insurance has been exaggerated and that in fact it has had little effect on tort rules themselves. Prosser’s view, over thirty years ago, was that: “While liability insurance undoubtedly has had an effect, it is difficult to escape the impression that all this has been very much overstated. A dispassionate observer, if such a one is to be found in this area, might … conclude that the ‘impact’ of insurance upon the law of torts has been amazingly slight; that most of the changes that have been pointed out are due to other causes….”90 Similarly, Clarke argues that influence – in the sense that the law has been tailored to fit the insurance position – is scarcely to be seen at all.91 84
85 86
87 88 89
90
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J.G. Fleming, The Law of Torts (9th edn. 1998), 13: “[W]hile in theory insurance follows liability, in experience insurance often paves the way to liability. In short it is the hidden persuader.” It plays its role “from a hidden position behind the scenery” according to H. Cousy, Tort Liability and Liability Insurance: A Difficult Relationship, in: H. Koziol/B.C. Steininger (eds.), European Tort Law 2001 (2002). J. Morgan, Tort, Insurance and Incoherence, [2004] 67 M.L.R., 384 at 392. M. Davies, The End of the Affair: Duty of Care and Liability Insurance, [1989] 9 Legal Studies, 67 cf. B. Cardozo, The Nature of the Judicial Process (1921), 12: “It is often through these subconscious forces that judges are kept consistent with themselves, and inconsistent with one another.” P. Cane (supra fn. 2), 203. S. Deakin/A. Johnson/B. Markesinis, Tort Law (5th edn. 2003), 3. J. Fleming, Accident Liability Reconsidered: The Impact of Liability Insurance, [1948] 57 Yale L J, 549 at 551. W.L. Prosser, Law of Torts (4th edn. 1971), 547. In his evaluation of Prosser, White argues that, although insurance was not the primary factor, it did stimulate the growth of strict liability. G.E. White, Tort Law in America (1980), 172. M.A. Clarke (supra fn. 39), 283.
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35
In examining these issues Stapleton has written a key article.92 She argues that any causal link between the development of insurance and the expansion of tort liability must be viewed with caution. Echoing the words of Prosser, she concludes that when courts refer to insurance they do so only as a “makeweight” factor after it has been decided to impose liability for other reasons. She points to tort rules which appear to be entirely unaffected by insurance factors, and argues that commentators have used the argument selectively to explain certain developments while ignoring other areas. There has been no fundamental shift in the formal basis of tort law such as might have been expected if insurance were to provide a new foundation for its development. The formal rules still usually require proof of fault, and the failure to move decisively towards a stricter liability is evidence of the limited effect of insurance. Finally, Stapleton is concerned that if attention is paid only to insurability, the potential deterrent or corrective role of tort will be suppressed. Even though many will not share the belief that, in practice, tort has much effect in controlling behaviour or achieving deterrence, and many may doubt that the tort system produces results which have such high claims to justice, nevertheless they will agree that it is a mistake to place too much emphasis upon tort law as a means of compensation. Tort is but one of a number of compensation options available, or which might be developed.93
36
In spite of these criticisms Stapleton acknowledges that insurance is clearly relevant to “the operation of tort law in daily life.” This includes its effect upon who sues, and the dynamics of the settlement process. In addition, she agrees that judges are fully aware that it is the insurer who pays, and, at a very general level, it is likely that courts have been influenced. However, she casts doubt upon more specific claims that link the expansion of tort liability with the availability of liability insurance.
37
Although there is much to agree with here,94 it is not always easy in practice to draw the distinctions upon which the analysis relies. In particular, it can be difficult to isolate individual decision making from the institutional framework of the tort system. Stapleton accepts, but does not expand upon, the influence of insurance on the “operation of tort law in daily life.” This was outlined at the beginning of this report where it was suggested that insurers’ control and administration of the tort system affects all claims. In particular, 92 93
94
J. Stapleton, Tort, Insurance and Ideology, [1995] 58 M.L.R., 820. S. Sugarman, Personal Injury and Social Policy – Institutional and Ideological Alternatives, in: N. Mullany/A.M. Linden (eds.), Torts Tomorrow (1998). One such alternative was given in S. Sugarman, Doing away with Personal Injury Law (1989), and another in T. Ison, Compensation Systems for Injury and Disease: The Policy Choices (1994). These solutions can be contrasted with, for example, the first party insurance proposals of P.S. Atiyah, The Damages Lottery (1997), and the reform suggestions noted by D. Dewees et al. (supra fn. 27). In criticising the article, Morgan, [2004] 67 M.L.R., 384 does not reflect upon the subtleties in Stapleton’s argument contained in the previous paragraph, and rather than engaging with the detailed analysis of the caselaw she presents, relies upon only two recent cases to substantiate his argument that courts “frequently” take insurance into account. Unfortunately, this is the very generalisation to which Stapleton objects.
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later in this report it is argued that the pervasive influence of insurance becomes clearer if the focus changes from liability to the assessment of damages. Restoring the victim to his pre-accident position becomes inconceivable in serious injury cases in the absence of a mechanism for distributing the cost of doing so. In this sense each award of substantial damages reflects the importance of insurance to the tort system. Finally, even if we accept that tort rules themselves have not been changed substantially by insurance we might still conclude that, in determining the facts of a particular case, judges have been “invisibly” affected by knowledge of the insurance position. The “sympathetic factor” at trial is known to litigators, and is what Clarke calls the “magnetic effect” of money whereby the result is influenced by any deep pocket in a case.95 Fitting the facts, rather than the law, to the insurance position limits the value of Stapleton’s analysis. C. Conclusion All commentators therefore agree that insurance undoubtedly has had some influence upon tort; it is only the extent of this influence that is open to question. Here it is argued that that influence has been substantial. Not only has insurance had a profound effect upon the operation of the claims system in general, but it has also influenced individual cases. Practitioners are aware that insurance is one of the factors that may determine the inferences to be drawn from the facts of the case. It competes with the moral basis of the fault principle in this regard. Sometimes the insurance factor and the need for compensation will triumph, and negligence will be found where none existed; but occasionally the absence of fault will prevent the claim from succeeding. The morality of the fault principle still has a great effect upon determining liability, but the general effect of insurance becomes more pronounced when damages for serious injury are being assessed.
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Whether the rules of tort themselves have been changed to reflect insurance is more difficult to establish. On the one hand, it is certainly true that the foundations of tort remain largely unchanged. Formally, liability still depends upon proof of fault and, even where rules have been revised more in favour of claimants, it is too easy to suggest that insurance is the cause. On the other hand, some judges have acknowledged that they have concerned themselves with who has the deeper pocket, or who was in the better position to distribute, or absorb, a loss. It is difficult to conclude that loss distribution arguments have influenced only the facts found and not, to some degree, the rules applied. However, substantial change in tort rules has not occurred. Instead it is the overall involvement of insurers with the system which leads us to conclude that insurance has had a major effect.
39
95
Supra fn. 39, 273.
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D. Ought Insurance to Have Influence?
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Discussion of whether liability rules and the tort system in general have been influenced by insurance must be distinguished from whether rules should be so influenced. As soon as we start discussing law reform, we cannot focus only upon the distributive effects between the class of victims and the class of wrongdoers. Instead we must also take account of the majority of injured people who are presently left completely outside of the tort system. Whether, for all these people, compensation is better paid via tort liability as opposed to first party loss insurance or state welfare payments depends upon the political, moral and economic prisms through which the question is viewed. “Should the state play a greater role in dealing with misfortune?” invites a wide range of responses. The extent that tort system should be seen as only providing corrective and not distributive justice reflects wider political and moral perspectives.96
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Even within a narrower focus, the argument that the reality of insurance and insurability should be taken into account is a very imprecise one. Whose insurability should we focus upon? By what criteria are we to determine who is the “better” or cheaper insurer when both sides will nearly always be able to purchase cover at some price? By concentrating on insurability we may divert attention from deterrence and whether market forces may have a role to play via tort in affecting risk taking behaviour, although the scope for such a possibility has been much exaggerated often because of its very failure to take into account how insurance actually operates. Description of the influence that insurance has had must therefore be distinguished from the prescriptive effect that others might wish it to have. In contrast to the conclusion we reached above that insurance has had a major influence upon the tort system, and has had at least some part to play upon individual decision making, the view here is that it will not be possible to reach any general agreement on the role that it ought to play. IV. The Influence of Insurance upon Particular Cases and Rules: Analysis of Specific Areas A. Procedure (Question 24)
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Insurers are closely consulted and involved in making rules of civil procedure. These rules permeate the tort system and bring it to life. The Civil Procedure Rules 1998, eight pre-action protocols,97 and fixed costs agreements98 were the result of lengthy negotiation between interested parties, and insurers played a major part. In particular, insurers’ attitudes towards conditional fee agree96
97 98
For a website debate revealing the divisions among tort scholars see the 2003 postings beginning with Harold Luntz at http://www.ucc.ie/law/odg/messages/030723b.htm. http://www.dca.gov.uk/civil/procrules_fin/menus/protocol.htm. These agreements were reached following mediation by the Civil Justice Council between what were described as the two sides of the personal injury litigation industry. The Civil Procedure Rules were subsequently amended to reflect the agreements.
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ments and their readiness to embark upon satellite litigation to contest the ability of claimants’ lawyers to bring claims has had major effects upon use of tort law. For example, because of the fee changes those suffering from industrial disease are now much less likely to obtain representation, and they will find it even more difficult to obtain compensation than they did previously.99 Although fee arrangements have been sanctioned which clearly take insurance into account, in a number of other respects the formal rules of procedure have ignored insurance. For example, until they were effectively abolished in 1934, juries were used to a greater or lesser extent to determine tort cases, and there was a rule of practice at the Bar that a jury was not to be told about the insurance position.100 This rule countered the fear that liability might be imposed too readily if laymen were aware that an individual defendant was insured. Previously it was said to be difficult to get a fair hearing from a jury especially in a motor accident case.101 The rule has no part to play today because the judge, sitting alone, will be aware from his own experience that insurers are likely to be party to the great majority of tort cases that come before him. Commenting upon the old rule one judge said:
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“…[T]hose days are long past. Everyone knows that all prudent professional men carry insurance, and the availability and cost of insurance must be a relevant factor ….”102 Another example of where the legal system refuses to acknowledge the presence of insurance is embedded in the doctrine of subrogation. Standing in its client’s shoes, an insurer has a right to defend the claim or bring an action to recoup monies it is liable to pay out under a policy. This involvement in litigation via subrogation is accomplished by using not the name of the insurer itself, but that of its policyholder alone. As a result the law reports are replete with what are fictitious actions, and students are often left with little indication of the importance of insurance to the civil system.103 The press and public 99
100
101 102 103
It is true that there has been a proliferation of disease claims recently, numbers rising almost threefold from 73,000 in 2002 to 213,000 in 2004 according to Compensation Recovery Unit figures. However, this is the result of the special compensation rules that have been devised for miners’ respiratory diseases and vibration white finger. Almost 740,000 of such claims have been registered since 1999, and are said to be “the biggest personal injury schemes in British legal history and possibly the world” according to http://www.dti.gov.uk/coalhealth/01.htm. However, the move to conditional fees for other disease claims has made solicitors much more reluctant to pursue them as acknowledged at recent Association of Personal Injuries Lawyers meetings. For the difficulties traditionally faced by those suffering from disease see J. Stapleton, Disease and the Compensation Debate (1986). Discussed by Lord Denning in Post Office v Norwich Union Fire Insurance Soc Ltd [1967] 2 QB 363 at 375. If the rule were breached, the jury could be discharged. Askew v Grimmer (1927) 43 TLR 354. Scrutton LJ in Gowar v Hales [1928] 1 KB 191 at 197. Lord Griffiths in Smith v Bush [1990] 1 AC 831 at 858. This includes the ignorant jury who refused to find the named defendant liable because “you sued the wrong people. You should have sued the insurance company.” R. Eggleston, Evidence, Proof and Probability (2nd edn. 1983), 73.
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are similarly left in ignorance of the insurance background. This cloak of anonymity has only rarely attracted the criticism it merits.104
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Procedural problems can be caused by failing to recognise the role of insurers. For example, it may be necessary to serve documents directly upon the defendant himself. The insurance company may not suffice.105 In particular, the Motor Insurers Bureau, which administers the reserve funds for motor vehicle accidents involving uninsured or unidentified drivers, has been able take considerable advantage of the technicalities resulting from the requirements of service. To avoid some of the procedural difficulties, sometimes it has been necessary to create special rules. For example, even though a defendant company is no longer in existence it is now possible for it to be restored to the register of companies solely in order for it to be sued.106 Its old insurer cannot then avoid liability for injuries only because it has been dissolved. However, there are difficulties even with this procedure,107 and further problems are still caused by the fact that an individual defendant and not an insurer is technically the party to the action. B. The Duty of Care
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The duty concept acts as the gatekeeper of the law of tort insofar as it determines whether novel claims are to proceed further. Taking into account wider policy factors, judges can rule out claims for which there may be no precedent. Policy concerns such as the danger of encouraging a flood of claims and placing an excessive burden upon defendants have been most discussed in relation to the duty concept. However, judges have examined less often the secondary consequence of such a danger – the difficulty of insuring against a very wide liability. Stapleton argues that such a factor is distinct from the morality of imposing an indeterminate liability, and that insurance difficulties alone have been of little importance in decision making. This is because, firstly, she believes that, where a duty has been found, insurance has only been used as a superfluous additional argument for doing so; and secondly, where a duty has been denied, insurance tends to be ignored even though it may be clear that the defendant could protect himself against the liability.
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By contrast, it has been argued that the scope of the duty of care expanded directly in relation to the increasing availability of liability insurance from 1880, and it contracted following insurance fears after 1984.108 In response Stapleton 104
105
106 107
108
R. Hasson, Subrogation in Insurance Law – A Critical Evaluation, [1985] 5 Oxford Journal of Legal Studies, 416. The position in relation to motor insurance has been improved by the European Communities (Rights Against Insurers) Regulations 2002 (SI No 3061) made pursuant to the Fourth Motor Insurance Directive 2000/26/EC. Companies Act 1989 s 141. The Law Commission, Third Parties – Rights against Insurers Report No 272 (2001), and Lord Chancellor’s Department Consultation Paper (2002) http://www.dca.gov.uk/consult/rro/ tparties.htm. Davies, [1989] 9 Legal Studies, 67.
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states that this causal connection can only be made in a very broad sense for, although there were several major fluctuations in liability over the century, there was no equivalent ebb and flow of insurance to account for them. As an illustration, the case that heralded the judicial retrenchment of the 1980s may actually have ignored the insurance position.109 This is because the decision severely curtailed liability for causing economic loss, even though it was probable that liability insurance was actually available to cover that loss, or would have been made available if required.110 Such insurance exists in other European countries.111 However, there are cases where insurance has been specifically taken into account. Distribution of loss arguments have been considered particularly relevant where economic loss has been claimed.112 In one such case, when considering the general principles to be applied to determine whether a duty of care existed, a judge discussed at length how his decision might be affected by broad views of the economic consequences.113 Two specific illustrations of the effect of insurance in a particular case can be given. In the first, a classification surveyor, employed by shipowners, was held to owe no duty of care to those having an interest in the cargo.114 In part this was because the court considered their irrecoverable loss was “readily insurable.” The second case concerned the liability of a surveyor of property engaged by a mortgagor. He was held liable for his survey to the purchaser of the property who, although not directly commissioning the report, had relied upon it. In preventing the surveyor from disclaiming a duty of care, one judge said that the risk of the surveyor’s negligence would be distributed among all house purchasers through an increase in his fees to cover insurance, rather than allowing the whole of the risk to fall upon the one unfortunate purchaser.115 These distributional consequences can be hard to assess, and reveal the wide scope for potential discussion. Fearful of this, and in order to limit speculation, other judges have asked for clear evidence to be presented on matters such as uninsurability.116
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Conflicting judicial views about the relevance of insurance can be illustrated by reference to two recent cases involving injuries suffered when taking part in sport. In the first, insurance was thought relevant to whether a rugby referee owed a duty of care to the players in the game over which he had control. The court accepted that its decision was affected not only by the availability of liability insurance, but also by the countervailing consideration of the ability of
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109 110 111
112 113 114 115 116
Murphy v Brentwood DC [1991] 1 AC 378. M.A. Clarke (supra fn. 39), at 277 and 286. Ibid. Contrast the generally limited provision in European countries described in W. Van Boom et al., Pure Economic Loss (2004), especially at 200. See cases cited in S. Deakin/A. Johnson/B. Markesinis, Tort Law (5th edn. 2003), 144 et seq. Hoffmann J in Morgan Crucible Co v Hill Samuel [1991] Ch 295 at 302. Marc Rich & Co v Bishop Rock Marine Co Ltd [1996] AC 211 at 241. Lord Griffiths in Smith v Bush [1990] 1 AC 831 at 859. Perrett v Collins [1998] 2 Ll Rep 255 at 277, and the dissent of Lord Lloyd in Marc Rich & Co v Bishop Rock Marine Co Ltd [1996] AC 211.
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the players to take out their own accident insurance.117 A duty of care was found. By contrast, in the second case, although again a duty was found, insurance was deemed irrelevant. A duty of care towards a boxer was imposed on the non-profit making Board that governed boxing, and its insurance and financial difficulties that might result were ignored.118
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Where, as in most cases, insurance is not discussed, a few tort commentators still speculate whether it might help to explain a court decision. For example, it has been held that an ambulance service owes a duty of care to those it has been called to attend.119 However, the fire service owes no such duty in responding to its emergency calls.120 One textbook comments: “If there is to be a difference between the cases, it seems better to realise that it lies in the fact that the fire service is primarily concerned with saving property and that imposing liability would tend to enure for the benefit of subrogated fire insurers who have taken a premium to cover the risk ….”121
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By contrast, the person who suffered brain damage as a result of the failure of the ambulance to arrive was unlikely to carry first party insurance against such an injury. It is impossible to disprove the view that insurance may have had an effect upon these decisions, but it can be hazardous to make other than a speculative connection as the above textbook writer did. Such connections are not far-fetched; but in the individual case they remain unproven. C. Fault, Strict Liability and the Standard of Care (Question 11)
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The standard of care has been said to be affected by insurance because judges have a wide discretion to interpret what may be expected of the reasonable man. They can demand a very high level of care and, in effect, impose strict liability through the fiction of fault. The standard of care can be made more objective by being divorced from the particular circumstances, and excuses, of the defendant. We have already cited the example of the learner driver held to the standard of care of a fully qualified driver, and the reasonable man at times has been said to require “agility of an acrobat and the foresight of a Hebrew prophet.”
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Although it is tempting to assert that it is insurance that accounts for these high standards, other explanations are possible. For example, one judge recently acknowledged that the great care required of motorists merely reflected the fact that the car is a very dangerous weapon and the pedestrian very vul117
118 119 120 121
Vowles v Evans [2003] 1 Weekly Law Reports (WLR) 1607; Van Oppen v Clerk to the Bedford Charity Trustees [1990] 1 WLR 235. Watson v British Boxing Board of Control [2001] QB 1134 at 1163. Kent v Griffiths [2001] QB 36. Capital and Counties plc v Hampshire County Council [1997] QB 1004. W.V.H. Rogers, Winfield & Jolowicz on Tort (16th edn. 2002), 143. This echoes the view of Lord Hoffmann in Stovin v Wise [1996] AC 923 at 954.
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nerable.122 Moreover, it is clear that the scope of liability does not correspond to the extent of potential protection provided by insurance. Firstly, as a modern example we might note that the standard of care required of doctors has not been stretched to exceptional levels in spite of the availability of insurance. Secondly, it must be remembered that in the nineteenth century defendants were held liable for extensive damage long before liability insurance became readily available from around 1880.123 The formal rules of tort then offered considerable scope for the imposition of strict liability long before there were ideas that this might be economically efficient or that losses might be channelled into deeper pockets. Although the liability insurance market became well established in the early part of the twentieth century, it was the fault principle, rather than strict liability, that came to dominate the formal law. The loss spreading and insurance rationales of strict liability were largely abandoned by the common law after a landmark case in 1946, which saw the triumph of fault. 124 Thereafter strict liability could usually only be found where courts labelled as fault those acts which were far from being so in reality. Although statute has imposed some strict liability, it is limited and, apart from in work accident cases, and for some aspects of economic loss,125 it has had little practical effect. Insurance therefore has had very limited effect in encouraging the development of rules of strict liability. The fault principle continues to thrive in spite of the growth of insurance. A claim will fail unless fault is proven no matter how much insurance the defendant carries. For example, no damages are payable as a result of an accident in which the driver dies of a heart attack before the collision occurs, or where the driver is suddenly affected by an illness of which he had no prior knowledge.126 Not only will there be no liability in tort, but there can be no claim on any reserve fund. Strict liability has been imposed for many work accidents where statute prescribes the standard of care required. However, it is still possible for a defendant to avoid liability by arguing that the statute requires proof of fault, or that its breach was not the cause of the injury to the claimant. A couple of very recent cases illustrate this. The failure to provide a safe working platform was held not to be the cause of injury when a claimant fell from an unsafe platform as a result of it being deliberately toppled in anger by a workmate.127 Similarly, even though an employer supplied safety boots that contained a hole and caused the claimant to suffer frostbite, there was no liability because this was not a risk against which the steel-capped boots were in122 123
124 125 126 127
Russell v Smith [2003] EWHC 2060 and Eagle v Chambers [2004] RTR 9. Its roots can be traced back to the early nineteenth century and marine insurance. However, the major stimulus was provided later in the century as a result of engineering risks and employers’ liability. Ch. Parsons, From Accident to Liability – A Brief History of Liability Insurance, [2002] 17 (2) Insurance Research & Practice, 23, W.A. Dinsdale, A History of Accident Insurance in Great Britain (1954). Read v Lyons & Co Ltd [1947] AC 146. K.M. Stanton, The Modern Law of Tort (1994), chap. 17. Mansfield v Weetabix [1998] 1 WLR 1263 Horton v Taplin Contracts [2003] PIQR P12.
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tended to guard.128 Although insurance undoubtedly influenced the imposition of strict liability upon employers in the first place, it is but part of a complex mixture of factors determining whether damages will be paid. In many cases the morality behind the fault principle, or the notion of responsibility, has sufficient strength to override the fact that the defendant is insured. Insurance has brought about no sea change in the formal basis of liability and its influence is partial at best. D. Causation
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Although drawing a line to liability based on causation is open to wide ranging influences, cases that specifically refer to insurance are few indeed. Even in a major recent case dealing with injury by asbestos where the amounts of compensation at stake were exceptional and policy issues to the fore, insurance was not mentioned.129 This has not prevented commentators from suggesting that the hidden hand of insurance might explain the very generous view of causation taken in a number of personal injury cases where liability has been imposed for freak accidents or bizarre results.130 However, again the influence of insurance is inconsistent for it is possible to point to cases that have adopted a less generous approach. Some claimants have been denied despite their need of compensation, and even though the defendant was not only at fault but also insured.
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Insurance has been said to be a factor in certain cases where the causation rules have been applied in a restricted way to provide for only a very limited liability in relation to property damage.131 Claimants are much more likely to carry first party insurance for such damage than they are to be insured against personal injury. Lord Hoffmann recently stated: “Property insurance is relatively cheap and accessible; in my opinion people should be encouraged to insure their own property rather than seek to transfer the risk to others by means of litigation, with the heavy transactional costs which that involves.”132
128 129
130 131
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Fytche v Wincanton Logistics [2004] UKHL 31. Fairchild v Glenhaven Funeral Services [2003] AC 32 noted by K. Oliphant in: H. Koziol/ B.C. Steininger (eds.), European Tort Law 2002 (2003), 144. J. Morgan, Lost Causes in the House of Lords, [2003] 66 M.L.R., 227 at 282 notes that the sums involved in this case were “staggeringly large” and cites a press release from the construction union UCATT headlined “insurance companies hit for £6 – £8 billion.” P. Cane (supra fn. 2), 106. For example, the limited liability imposed for damage caused by fire in the USA. J.G. Fleming, An Introduction to the Law of Torts (2nd edn. 1985), 15, W.L. Prosser, Law of Torts (4th edn. 1971), 553. Transco v Stockport Metropolitan Council [2003] 3 WLR 1467. Similarly Lord Diplock in Photo Productions v Securicor Ltd [1980] AC 827 at 85, and contrast Lord Denning in the lower court who considered that a plaintiff’s loss insurance could be cancelled out by a defendant’s liability insurance [1978] 1 WLR 856 at 866.
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However, in the same case Lord Hobhouse denied that insurance should affect principles of liability:
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“The argument that insurance makes the rule unnecessary is no more valid than saying that, because some people can afford to and sensibly do take out comprehensive car insurance, no driver should be civilly liable for his negligent driving.” In an earlier case, Lord Denning, following the Hoffmann reasoning, explicitly argued that no liability should be imposed, and there should be a break in the chain of causation, partly because the claimant could have relied on first party insurance against property damage.133 In fact, the judge may have been wrong in this for the property had been empty for some time and, as a result, no insurance may have been in force.134 The case may illustrate that when courts try to take wider factors into account they may find the position more complex than at first appears. They may lack the technical evidence required, and their speculation about the insurance position may prove quite wrong.135
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E. Defences It is possible to view certain cases in which courts have refused to apply defences which would deprive the claimant of all or part of the damages as being influenced by the insurance position. For example, the ability to pay is said to account for cases in which the tiredness of a worker which helps to cause his own injury is held not to constitute contributory negligence, and his damages are not then reduced. By contrast, the tiredness which results in injury to another worker, and for which the employer could be vicariously liable, is held to be negligence. (Question 11)
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However, courts never refer to insurance specifically in this context, and the argument again depends on cases being determined by hidden factors, and accepting that its effect on the law, at best, is partial. On the one hand, insurance may have influenced both judges and Parliament in that they have restricted the scope of the defence of consent in areas where insurance is compulsory. For example, in motor accidents a statute prevents a passenger’s claim from being defeated by any express or implied agreement he may have made with the driver.136 This means that his claim cannot be defeated by a notice in the vehicle disclaiming any liability. Similarly for work accidents, judges have determined that where an employer is in breach of his statutory duty the claim against him cannot be avoided by pleading that the worker consented to the state of affairs. On the other hand, however, it must be emphasised that contributory negligence continues to be applied frequently in personal injury
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133 134 135
136
Lamb v Camden LBC [1981] QB 625. B. Lee/R. Merkin, Human Action as Novus Actus Interveniens, [1981] New Law Journal, 965. M.A. Clarke (supra fn. 39), 292 notes that information on insurance may be hard to obtain, and argues that the reasons for putting a ceiling on the liability of carriers, for example, do not bear close scrutiny. Road Traffic Act 1988 s 149.
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claims, reducing damages in about a quarter of all cases that are settled.137 In a recent case damages were reduced by as much as 60 per cent in spite of the defendant being in breach of statutory duty.138 Furthermore, even the defence of consent survives in a handful of cases to defeat a claim from those who are extremely foolhardy, such as the passenger who chose to take a joyride in a plane, rather than a car, with a pilot with whom he had consumed a great deal of alcohol.139 The morality of the fault principle is hard to eradicate in such a case, no matter what the level of insurance.
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In one case, although consent failed as a defence involving a claim for occupier’s liability, warning notices displayed at the behest of the liability insurer were held to be effective to deny a duty of care to a spectator at a motor race.140 The case is especially notable for the dissent of Lord Denning who, because of the insurance factor, would have allowed damages. He thought that the insurer’s warning notices should have been ineffective because insurers should not be allowed to take the premiums and yet avoid the liability. However, the other judges did not share his analysis. A statute was later passed which today may enable such a claim to succeed. It prevents an occupier of business premises from excluding liability for death or personal injury to visitors. However, an exclusion relating to property damage is allowed if it is reasonable. One of the factors affecting this, and specified in the statute, is the availability of insurance.141 (Question 22) F. Vicarious Liability
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The principle of vicarious liability holds an employer strictly liable for the torts of an employee acting in the course of his employment. This has been justified on the basis that it enables losses to be borne by those with deeper pockets, and that employers are better placed to make insurance provision.142 Although these justifications may help account for some aspects of the liability, again they will not suffice to justify the full scope of the rule. For example, there is usually no vicarious liability for the acts of independent contractors even though the needs of the claimant and the ability of the employer to insure may be the same. Nor is there liability if the employee acts outside the course of his employment. Even where recent decisions appear to impose a stricter liability, judges do not refer to insurance as a factor.143 It cannot be asserted that there is a direct correlation between the availability of insurance and the impo137 138 139 140 141 142 143
D. Harris et al. (supra fn. 7), 91. Sherlock v Chester City Council [2004] EWCA Civ 201. Morris v Murray [1991] 2 QB 6. White v Blackmore [1972] 2 QB 651 at 667. Unfair Contract Terms Act 1977 s 11 (4). P.S. Atiyah, Vicarious Liability in the Law of Torts (1967), 22–28. For example, liability has recently been imposed for sexual assaults carried out by a warden on boys at a boarding school in Lister v Hesley Hall [2001] 2 WLR 1311, and for the deliberate stabbing of the claimant by a nightclub steward away from his place of employment in Mattis v Pollock [2003] 1 WLR 2158. Glofcheski, A Frolic in the Law of Tort: Expanding the Scope of Employers’ Liability, [2004] 12 Tort Law Review, 18.
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sition of vicarious liability when the basic rule is subject to such major exceptions for which insurance cannot account. Stapleton stresses this point, and argues that the wide approval of the vicarious liability limits undermines the relevance of insurability as a factor in tort law.144 However, although it cannot be viewed as a sole factor, insurance cannot be discounted as an influence upon the expansion in liability. In a vicarious liability case in 1957 a court notably refused to take insurance into account and this led to measures being taken to avoid its result.145 The insurer of the employer found vicariously liable successfully reclaimed the damages for which it was responsible from the negligent employee who had caused the accident. Although the action was brought via subrogation in the name of the employer, it was pursued against the employer’s wishes. Employers generally were opposed to such recovery by insurers. Together with trade unions, they considered that it would be bad for industrial relations if responsibility for shop-floor accidents were to be transferred to uninsured employees in this way. As a result, after the case they came to a private agreement with insurers’ representatives that subrogation would not be used in this way again. The full effects of the fault system were therefore abandoned in practice. Although this was achieved without judicial assistance, the result is that it is insurers, and never employees, who pay the tort bill.
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G. Assessment of Damages (Questions 18 to 20) Contrary to the impression that may be gained from a tort textbook, it is quantum rather than liability that is the more important issue for a practitioner. Insurers are far more likely to contest the amount of damages claimed rather than whether there has been a breach of duty. Arguments that the defendant did not cause the injury or owed no duty of care are rare indeed. Too little attention has been paid by academics to the damages award. It should be a focus of concern not only when the efficacy of the tort system as a whole is being discussed, but also when the justice of any tort rule is being scrutinised. The debate about the influence of insurance upon tort similarly reflects too little concern about the damages award.
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It is clear that, at least in cases of serious personal injury, “the size of damages awards … is explicable only on the basis that judges are influenced by the widespread presence of insurance.”146 This is a major point. The extraordinarily high level of damages all paid in one lump sum is the feature of the tort system that distinguishes it from welfare and other compensation systems. Liability insurance enables tort to espouse its distinctive rhetoric: it purports to make an assessment of loss that is not only tailored to the individual claimant, but sufficient to restore the position before injury took place. These claims are
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144 145 146
J. Stapleton (supra fn. 92), 828. Lister v Romford Ice Co [1957] AC 555. P. Cane (supra fn. 2), 204. Similarly Lord Denning in Morris v Ford Motor Co [1973] 1 QB 792, 798.
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greatly overstated,147 and yet form much of the reason for tort’s existence. Without a mechanism to distribute the cost of imposing liability, it would rarely be worth assessing damages in the way we do at present in serious injury claims. Without insurance it is doubtful whether the tort system would survive at all. Insurance in this sense provides the lifeblood of tort.
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In recent years major changes have been made to the assessment of damages, and many of these are predicated upon payment being made either by insurers, or other large self-insured bodies. The assessment of damages has become ever more precise. Actuarial and forensic accountancy evidence has become commonplace. Such matters as the discount rate for early receipt of damages, the interest rate on delayed payment, and the inflation factor enabling past awards to be compared with those of the present day have all been more closely linked to the wider financial world. In a few serious injury cases lump sum payment has been replaced in part by a periodic pension, and the courts now have the power to order that damages take this form even if the parties object.148 It is impossible to conceive of such developments – involving continuing lifetime obligations to make increasing payments – if it were not for the fact that individuals almost never pay tort damages themselves. The argument here is that it is not easy to divorce these changing rules on assessment and payment of damages from the fact that it is insurers who run the tort system.
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A previous ECTIL report examined in detail the extent that damages take account of the actual receipt of insurance monies, whether deriving from private or public sources.149 That report noted that there is a trend in the UK towards preventing claimants obtaining double compensation by reducing damages to take account of these collateral benefits. Thus a series of cases in recent years have deducted various types of social security benefit. In one of these cases a judge recognised the reality that damages are met from insurance premiums, and to allow a claimant to recover twice, at the expense of insurers, could not be justified.150 Following the institution of statutory scheme in 1990, social security benefits are now recovered by the state from damages awards. Insurers are required to deduct benefits from any tort compensation they pay, and reimburse the state. However, no account is taken of any private insurance from which the claimant benefits151 unless it relates to a policy paid for by his employer alone.152 It is therefore still common for over-compensation to take 147
148 149 150 151
152
The system fails to achieve its high ideals and, within its own terms, often under-compensates the more seriously injured claimants. R. Lewis et al., Court Awards of Damages for Loss of Future Earnings: An Empirical Study and an Alternative Method of Calculation, [2002] 29 Journal of Law & Society, 406 and [2002] J Personal Injury Law 151, and Loss of Earnings Following Personal Injury: Do the Courts Adequately Compensate Injured Parties?, [2003] 113 Economic J, 568. The Courts Act 2003 s 100. R. Lewis, Structured Settlements: The Law and Practice (1993). U. Magnus (ed.), The Impact of Social Security Law on Tort Law (2003). Lord Bridge in Hodgson v Trapp [1989] 1 AC 807. Bradburn v Great Western Railway Co (1874) LR 10 Exch 1, and R. Lewis, Deducting Benefits from Damages for Personal Injury (1999), chap. 8. Pirelli General Plc v Gaca [2004] EWCA Civ 373.
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place. For example, in two thirds of the cases where negligence causes death, the estate benefits from receipt of life insurance monies in addition to tort damages.153 Private insurance is therefore usually ignored by the tort system, whereas public insurance is now almost always deducted from damages, and this has reduced the incentive to sue in tort. Apart from this example, the extent that insurance influences damages in particular cases, as opposed to the system in general, is much less clear. In the USA individual damages awards have clearly been affected by insurance policy limits. There is evidence that lawyers do not pursue claims beyond these limits in order to obtain “blood money” from defendants personally.154 However, in the UK the policy limits for a claim are almost never relevant, and therefore it is less easy to see the precise effect of insurance cover. As in other areas, judges have expressed different views concerning the relevance of insurance and this results in much uncertainty. Their diversity of approach can be illustrated by three leading appellate cases. Although they all mention insurance, in only one of them was there any detailed discussion of the wider effects on society of substantially increasing damages, and in the first of them the relevance of insurance was emphatically denied.
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In this first case damages were sought for the care freely given by a spouse to his loved one following her serious injury.155 It was established law that such a claim could be made even though the husband did not charge his wife for the help he gave her. However, the complicating factor was that the wife’s injury had been caused by the husband’s own negligence. He was thus both tortfeasor and carer. The court held that his wife could not succeed in her claim for the cost of care that he had freely given. A tortfeasor could not be expected to pay twice for the injury by not only giving the care, but then also having to pay for it. The claimant had argued that this ignored the reality that it was the husband’s insurer that would pay, not the husband himself. However, the House of Lords strongly rejected the relevance of insurance, and this was later supported by the Law Commission for the “danger otherwise is that decisions as to where liabilities should be imposed will be made on the basis of who happens to be insured.”156
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In the second of the cases, the court again took a conservative line with regard to the relevance of insurance when it substantially increased compensation to allow more precisely for the return on investment of a lump sum award of damages. Actuarial evidence showed that previously claimants had been under-compensated because they had been expected to obtain an unrealistic rate
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153
154
155 156
The Law Commission, Personal Injury Compensation: How Much is Enough? (1994), Report no. 225 para. 13.8. T. Baker, Blood Money, New Money and the Moral Economy of Tort Law in Action, [2001] 35 Law & Social Review, 275. Hunt v Severs [1994] 2 AC 350. Law Commission, Damages for Personal Injury; Medical, Nursing and Other Expenses (1999), Report No 262 para. 3.74.
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of interest. To pay for the increase in damages the court recognised that insurance premiums would have to rise. “Whether this was something which the country can afford is not a subject on which your Lordships were addressed. So we are not in a position to form any view as to the wider consequences.”157 Any change to the rule that the defendant had to pay damages in full could only be made by Parliament “which, unlike the judges, is in a position to balance the many social, financial and economic factors which would have to be considered….”158
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By contrast, in the final case, evidence of the wider consequences of raising damages for non-pecuniary loss was presented to the court, and had considerable effect upon the outcome.159 (Question 20) Although involving questions of social policy, the level of damages was not thought a matter for Parliament alone. However, the court drew a distinction between its role in a claim for pecuniary as opposed to non-pecuniary loss: for pecuniary loss, the court was only required to make the correct calculation, and economic consequences were irrelevant; whereas for non-pecuniary loss, the court was concerned with what was fair, just and reasonable, and the impact upon society was then a relevant factor. The court was to avoid setting damages “at a level which would materially affect the cost of living or disturb the current social pattern….”160 As a result it was important to consider how the insurance industry might be affected by any change. In addition, the consequences for the National Health Service (NHS) in paying for the effects of clinical negligence had to be considered. Various parties submitted written evidence to the court giving details of the effect on insurance premiums of a change in the way damages are assessed. They also dealt with the consequences for the NHS if its resources were to be depleted by increasing awards of compensation. Although these matters were discussed in general terms in the judgement itself, there was no examination of the detailed calculations. Nevertheless a decision was reached which was broadly favourable to defendants: although damages for pain and suffering were increased by up to a third in the most serious injury cases, no increase was made for the mass of claims involving minor injury. Compared to the Law Commission’s proposal for a substantial increase in damages for a much broader range of cases, this change caused insurers little difficulty. The Commission had attached much less importance than the court to the wider consequences for society and had not considered cost to be relevant. Although the court tried to confine these wider ranging arguments to non-pecuniary loss 157 158
159
160
Lord Lloyd in Wells v Wells [1999] 1AC 345 at 373. Lord Hutton ibid at 405. Similarly Lord Scarman in Lim v Camden Area Health Authority [1980] AC 174 at 187 considered the effect of higher awards on insurance premiums and the NHS matters for Parliament. Heil v Rankin [2001] QB 272 discussed by R. Lewis, Increasing the Price of Pain, [2001] 64 M.L.R., 100. Diplock LJ in Wise v Kaye [1962] 1 QB 638 at 669. Lord Denning feared small insurance companies could be ruined if premiums were increased and he was concerned about their wider effect upon “the body politic” in Fletcher v Autocar and Transporters Ltd [1968] 2 QB 322 at 335, but see Salmon LJ at 363.
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cases, it was directly influenced by the impact of any change in assessment upon insurance. Wider ranging factors which might influence damages for personal injury were also discussed in a case which considered whether such awards must be considered as comparitors when damages for defamation are assessed.161 In deciding that comparison need not always be made, Lord Hoffmann noted that damages for personal injury, unlike those for defamation, are almost always paid either by insurers or out of public funds and, as he stated elsewhere, “spread across the whole community by an intricate series of economic links.”162 Their exemplary and deterrent effects are minimal or non-existent. The total sums paid out by the personal injury system are very large and have an effect upon the economy as a whole. As a result, he argued, the amounts awarded depend to some extent upon what society can afford to pay the victim. By contrast, these considerations have little part to play when damages for defamation are assessed.
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H. Punitive Damages Insurance has had little effect upon the award of punitive damages in the UK. (Question 19) The bases for such an award are extremely limited and in practice they affect areas where private insurance has little role to play, such as claims against government bodies. By far the most important area where insurance is taken out relates to the liability of police authorities. However, the amount of damages awarded against such body, given that it is publicly funded, is unlikely to be affected by whether or not there is insurance as well.
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In one case an insurer contested whether it had a duty to pay punitive damages under the terms of its standard liability policy.163 However, the court held that the wording did cover punitive damages, and that there was no rule of public policy to rule out such cover at least in respect of a police authority’s vicarious liability. The Law Commission has recommended that punitive damages be extended.164 It also considered whether defendants should be allowed to insure against the possibility of such damages being awarded, and concluded that there should be no restriction. However, police authorities have reported that it is now difficult to arrange such cover.165
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161 162 163 164
165
The Gleaner Co Ltd v Abrahams [2003] 3 WLR 1038 at 1053. Dimond v Lovell [2000] 2 WLR 1121 at 1133. Lancashire County Council v Municipal Mutual Insurance Ltd [1997] QB 897. Law Commission, Aggravated, Exemplary and Restitutionary Damage (1997), Report no. 227. However, insurance is always available via off-shore policies issued from places like Bermuda. T. Baker, Insurance Law and Policy (2003), 526.
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Richard Lewis
Insurance and Statute
A. Insurers’ Lobbying and Influence upon Legislation
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A wide range of legislation going far beyond liability concerns can affect insurers. They formed their own trade association in 1917 partly in order to respond to potential changes in the law. The Association of British Insurers (ABI) has since grown to such an extent that, with one exception, it is now more than twice the size of any other trade association.166 With an annual budget of over £20 million, it has been very effective in putting forward the industry’s point of view. The regulatory framework of insurance reflects the success of the ABI in arguing for forms of self-regulation in lieu of statutory controls, and for exemption from general legislation that might otherwise apply. Insurance remains the least regulated of contracts, and its exemption from domestic legislation dealing with unfair contract terms “amazing.”167
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One forthright example of the ABI pressing its case is where it issued a press release just before an appellate hearing was due to take place. In the release it threatened insurers’ withdrawal from a particular market in the event of the court finding liability.168 More effective has been its regular lobbying of government ministries. One insurance commentator has even suggested that internationally institutions such as the ABI “see themselves as governing governments.”169 In addition to lobbying ministries, the ABI has ensured that its case is heard in Parliament. Until 1997 one in ten Members of Parliament declared a financial link with the insurance industry,170 although this figure has been halved for the current Parliament.171
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The ABI is organised so as to respond to all government proposals to change the wide areas of law with which it is concerned. In 1998 the government announced that no proposal for regulation which has an impact upon businesses would be considered by ministers without a “regulatory impact assessment” being carried out. Rather than being just another bureaucratic requirement, the new procedures offer business and industry a major opportunity to influence the policy and legislative process.172 Parliamentary Bills are now accompanied by impact statements assessing the financial costs and benefits of the measures being proposed. In drawing up such statements civil servants are directed to 166 167
168 169
170 171
172
M. Boleat, Trade Association Strategy and Management (1997), 21. As described by the former Director-General of Fair Trading, G. Borrie, in: The Development of Consumer Law and Policy – Bold Spirits and Timorous Souls (1984), 110. A. Layard, Insuring Pollution in the UK, [1996] Environmental Liability, 17 at 18. R.V. Ericson et al., Insurance as Governance (2003), at 151. See also R.V. Ericson/A. Doyle, Uncertain Business: Risk, Insurance and the Limits of Knowledge (2004). M.A. Clarke (supra fn. 39), 281. The author’s examination of the Register of Members’ Interests in February 2004 revealed that only eight members of the House of Lords declared an insurance interest, one being membership of Lloyds. Only fifteen Members of Parliament declared any connection with insurance companies, although a further ten recorded that they were current members of Lloyds and nine others that they were former members. C. Miller, Political Lobbying (2000), 251.
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consult widely. Twenty or so bodies are specifically named, one of them being the ABI.173 As a result, it is automatic for the ABI to be asked to estimate the effect of proposed reforms on insurance premiums. Insurability is therefore now a relevant consideration whenever statutory changes affecting tort are being considered. (Question 5) Impact statements have given insurers a more formal and public opportunity to make representations to government, but it is doubtful whether this has given them much more influence than they had previously. This is because their most effective representations continue to be exercised in private, behind closed doors.174 One illustration of the effectiveness of such private lobbying is the overturning of a Law Commission recommendation that a particular financial formula be used to set the discount rate in assessing damages. (This rate makes allowance for the investment return upon lump sum damages). In the Damages Act 1996 the Commission’s recommendation was replaced by a power given to the Lord Chancellor to change the rate as he saw fit. However, this discretionary power was not exercised for some time, and when a rate was eventually set it was less favourable to claimants than if the Commission’s formula had been used. The Opposition spokesman in Parliament noted that the change in the Act was “mightily convenient to the insurance industry” and commented that it was the result of “whispering in appropriate ears.”175 The effectiveness of this private lobbying is difficult to monitor, and has received only limited attention from public lawyers. It reveals “a hidden dimension of the law which many lawyers may prefer to leave decently covered.”176
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B. The Influence of Insurance upon Particular Tort Statutes Statute has been affected not only by the lobbying of insurers on specific matters, but also, in a more general way, by developments in insurance provision. As with caselaw, it can be argued that new legislative rules reflect the tort system’s ability to distribute the cost of injury via insurance. The influence has been said to be clearer in relation to statute than caselaw.177 However, others might argue that among the relatively few statutes that deal directly with tort, there are examples of legislation, such as that dealing with occupiers’ liability, which take little notice of the incidence or potential scope of liability insurance.
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By contrast, certain legislative measures can only be explained by reference to the insurance background. For example, one statute exempts from liability any mother causing injury to her unborn child. However, it is subject to an excep-
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173
174 175
176 177
Cabinet Office, Better Policy Making: A Guide to Regulatory Impact Assessment (2003) http://www.cabinet-office.gov.uk/regulation/scrutiny/ria-guidance.pdf. See M. Boleat (supra fn. 166), chap. 7–8 and especially 61–64. R. Lewis, Lobbying and the Damages Act 1996: ‘Whispering in Appropriate Ears’, [1997] 60 M.L.R., 230. C. Harlow/R. Rawlings, Pressure through Law (1992), 60. M.A. Clarke (supra fn. 39), 283.
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tion where the injury results from the mother’s negligent driving of a motor vehicle, and the mother then can be sued.178 Although this Act generally reflects a desire to prevent disputes among family members, its effect is limited in that one area where insurance against liability is compulsory. Similarly the reform which abolished the rule which prevented actions between husbands and wives has been explained by the need to access insurance funds where a road accident had occurred.179 (Question 21) Under that legislation a stay of action may be ordered by a court where no substantial benefit would accrue to either husband or wife, the intention being that this power would be exercised in situations where no insurance existed. The spread of insurance provision is also said to account for a series of statutes which have expanded the scope of liability such as those enabling actions to be brought against the estates of deceased tortfeasors,180 dissolved companies,181 or by claimants who are partly at fault themselves.182 One statute familiar to all tort students explicitly takes insurance into account for it declares that, in determining whether a notice is sufficient to exclude liability, the court must have regard to the availability of insurance.183 VI. Liability Insurance Crises (Question 7)
81
On several occasions in the past liability insurance has been said to be in crisis. Symptoms have included the failure of liability companies, or their withdrawal from particular markets. More commonly it has been a very steep rise in the cost of insurance that has signified that all is not well. If insurers increase premiums to a very high level more motorists and employers will fail to comply with their duty to insure. A rise in premiums may also deter activities that the community at large needs, or result in costs which the community can ill afford. However, the extent to which these crises have been precipitated by changes in tort rules themselves is a matter of controversy. Here it will be argued that it has been other factors that have been much more important. Even though the crises have been used to justify sharp increases in premiums, the cost of liability insurance remains very small for the great majority of businesses. For example, the average cost of employers’ liability insurance is only 0.25 per cent of the payroll.184
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The most recent crisis illustrates that changes in tort law, although giving cause for concern, do not have as much effect upon insurance rates as insurers 178 179 180 181 182 183 184
Congenital Disabilities (Civil Liability) Act 1976. Law Reform (Husband and Wife) Act 1962. Law Reform (Miscellaneous Provisions) Act 1934. Companies Act 1989 s 141. Law Reform (Contributory Negligence) Act 1945 Unfair Contract Terms Act 1977 s 11 (4). Department of Work and Pensions, Review of Employers’ Liability Compulsory Insurance: First Stage Report (2003). However, a general building firm would pay one to two per cent, and a firm specialising in high risk construction activities, such as roofing or scaffolding, might be required to pay 15 per cent. Directors’ and Officers’ liability premiums have risen sixfold since 2001. For a company just within the top one hundred quoted on the stock exchange the increase is from £250,000 to £1.5 million, but even this sum is but a small fraction of the firm’s turnover. The Times 10 October 2003.
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and others would have us believe.185 In 2002, after premiums had fallen by 14 per cent in the previous five years, they rose dramatically. There were increases of 50 per cent for employers liability, 30 to 40 per cent for public liability and 30 to 60 per cent for professional indemnity insurance. The amount which policyholders had to bear themselves before insurance monies could be claimed also rose sharply. These changes resulted in some larger organisations deserting the market and setting up their own captive insurance companies.186 Other alleged effects of the rate increase were more controversial. Although there was anecdotal evidence that many firms had been forced to trade illegally, in fact compliance remained high with only 1 in 200 employers in default.187 Similarly, although there had been estimates that up to 200,000 small firms were unable to find insurance at all, a report into the crisis from the Office of Fair Trading (OFT) could find little evidence that in fact this was the case. Insurance continued to be available, although sometimes only at a high price.188 For example, for the high risks involved in roofing work it was estimated that premiums rose by an average of 161 per cent. Firms most affected were not only those taking high risks, but also smaller firms where the premium rise was likely to account for a higher percentage of their turnover. Independent financial advisers also found that their rates had soared following a wave of scandals that had engulfed the industry. The regulator closed down several operators not having insurance cover. The effect of the rate rise thus differed according to the size and character of the business. However, overall the crisis was not as serious as some had suggested, and the average firm was able to absorb the increased premiums without too much trouble. To what extent had changes in the law of tort contributed to the rise in rates? Previously Cane had attributed the steep increase in the rates set in the 1980s for many professional groups to the dynamics of the insurance industry rather than to changes in tort liability.189 A similar conclusion may be reached in relation to the increases made in 2002. According to the OFT report, although 185
186 187
188
189
See F. Furedi, Courting Mistrust: The Hidden Growth of a Culture of Litigation in Britain (1999), and contrast E. Lee et al., Compensation Crazy: Do We Blame and Claim Too Much? (2002) and the Better Regulation Task Force, Better Routes to Redress (2004). The latter, a Government report, concludes that the compensation culture may be a myth, but the perception of it results in real and costly burdens. For an account of exaggerated tort claims by the media in the USA see W. Haltom/M. McCann, Distorting the Law: Politics, Media, and the Litigation Crisis (2004). In the two years from 2001 the number increased from 245 to 492. The Times 27 May 2003. Department of Work and Pensions, Review of Employers’ Liability Compulsory Insurance: Second Stage Report (2003), 21. About 112,000 workers were employed where there was no liability insurance. Office of Fair Trading, An Analysis of Current Problems in the UK Liability Insurance Market (2003). However, there are fears that there will shortly be no cover for asbestos liability. From July 2003 the world’s largest reinsurers, Munich Re, Swiss Re and Cologne Re, announced that they would no longer underwrite this liability. If the reinsurance market disappears, companies with workplace asbestos exposure will not be able to obtain cover and many businesses would have to cease trading. The Times 3 June 2003. P. Cane, Liability Rules and the Cost of Professional Insurance, [1989] 14 Geneva Papers on Risk and Insurance, 347.
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changes in the tort system account for part of the increase in the premiums, the main causes lie outside of that system.
84
The most important tort factor is not an increase in the number of claims, but an increase in the level of damages and other costs per claim. For example, for employers’ liability, although the number of claims are falling, the cost of each one is rising sharply.190 Insurers have suggested that the most important factor causing this rise is not the changing law, but the specialisation of claimants’ lawyers and their access to better information on comparable awards.191 Claim cost per motor policy rose by an average of almost 10 per cent a year from 1991 to 2000 whereas average earnings rose by only 4.2 per cent.192 More tentatively, the OFT report suggests that reforms in civil procedure and the funding of claims may also have encouraged more actions. Finally, and with even more circumspection, increasing liability for “long tail” claims, including asbestos, is mentioned. However, the report notes that insurers have a tendency to exaggerate the effect of changes in tort law as the causes of rises in insurance costs.
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By contrast, non-tort factors appear to be far more important. These include the uncertainty prevalent in the general insurance climate after the shock of the loss of the World Trade Centre; lower investment returns resulting from the continued decline of the stock market; the cyclical nature of the insurance market; and the structure of the insurance industry which, in the previous five years, has resulted in competition at a level which was unsustainable and which ignored the commercial realities. Overall, therefore, although tort claims costs and liability premiums have increased in recent years, it is difficult to conclude that they have led to the system being stretched beyond its capacity or that they are the main cause of any “crisis”.193 (Question 7) VII.Conclusion
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This report has argued that insurance in England and Wales has had a profound effect upon tort and in particular upon the system of personal injury litigation. The influence of insurers upon the everyday practical operation of that system is readily apparent. In addition, they clearly have opportunity and reg190
191 192 193
Berman Greenstreet, Workplace Compensation: Costs, Trends and Options for Change (2002). According to the main insurers surveyed, from 1995–98 the rate of claims fell by 20 per cent. The rate of decline has continued. According to the Compensation Recovery Unit work accident claims declined from 97,000 in 2000–1 to 79,000 in 2003–4. Although there was a sharp increase in disease claims, this is explained by the special scheme set up to compensate miners for respiratory disease. Over the four year period claims for all accidents fell from 612,000 to 557,000 a year. This decline in claims has included those for road accidents. Claims frequency fell among motor insurers in both years 1999 and 2000 although it was still 29 per cent higher than in 1992. Association of British Insurers, Third UK Bodily Injury Awards Study (2003), at 24. Association of British Insurers, Second UK Bodily Injury Awards Study (1999), at 60. Association of British Insurers, Third UK Bodily Injury Awards Study (2003), at 22. For an excellent analysis of the instability of liability insurance markets see C. Parsons, Moral Hazard in Liability Insurance, [2003] 28 (3) Geneva Papers on Risk and Insurance.
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ularly seek to influence the development of legislation affecting liability. Much more difficult to assess is the potential for insurance to affect the outcome of individual claims. Proving that the facts of cases have been moulded to fit the deeper pocket of insurers cannot be done by resort to the law reports alone, but it remains the suspicion of many a practitioner. Although it is easier to assess the influence of insurance upon the rules of tort, rather than the facts found in individual cases, the picture is by no means clear. On the one hand certain rules, such as those discussed in the statute section above, clearly reflect the distributional consequences of insurance. In addition, if the focus changes from establishing liability to assessing damages the general influence may be more apparent. On the other hand, there remain large areas of tort law where the rules appear unaffected by insurance. The conclusion reached earlier in this report was that, at best, the influence of insurance upon the common law rules is only partial. Instead, it is with regard to the system as a whole – whether involving statutory or common law rules, fact finding, or everyday operation – that insurance can be seen as of vital importance. It is the lifeblood of the system.
TORT LIABILITY AND INSURANCE: GERMAN REPORT Gerhard Wagner I.
General
(1) Within the legal and economic literature of your country, is there a discussion about the relationship between tort liability and insurance? What are the major subjects and ideas of such discussion? 1. Tort Liability and Liability Insurance a) The Irrelevancy Principle At first blush, the relationship between tort law and liability insurance is simple to characterise, as it is governed by a straightforward principle: the principle of irrelevancy (Trennungsprinzip).1 According to this view, tort and insurance are separate legal spheres in the sense that the existence of insurance is irrelevant to the determination of liability – liability comes first and must be established without regard to the availability of an insurance cover. However, irrelevancy always works the other way as the mere fact that the insured has been found liable towards a third party does not necessarily entail that there actually is insurance coverage for this particular claim. Again, the insurance issue is separate from the liability issue. This principle is thought to be so selfevident that it is never mentioned in day-to-day decision-making. The context where the courts make explicit reference to the “Trennungsprinzip” exclusively concerns its procedural dimension, i.e. the co-ordination of the damage claim brought by the victim against the tortfeasor and the indemnity claim brought by the tortfeasor against the insurance company. Even in this context, the focus is not on the distinctiveness of the two claims and trials but on the exceptions to the rule, i.e. the interrelation of both claims.2
1
2
E.R. Prölss/A. Martin, Versicherungsvertragsgesetz (VVG) (27th edn. 2004), Sect. 149 no. 24; H.-L. Weyers/M. Wandt, Versicherungsvertragsrecht (3rd edn. 2003), no. 909. For details see infra nos. 90 et seq.
1
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b) The popular belief: Insurance does matter (Assurance Oblige)3
2
It is a popular belief among commentators that the courts pay only lip-service to the irrelevancy principle as they actually do take the insurance issue into account when establishing liability.4 In particular, any ruling of a court which is thought to have overstretched the duty to take reasonable care is taken as evidence for the supposition that the judges had been moved by the motive to compensate the victim by making insurance funds available to him.
3
In contrast to these assertions, the long-time chief justice of the 6th senate of the Federal Supreme Court (Bundesgerichtshof, BGH), competent for the law of extra-contractual liability, made it clear that his court has always put tort law first and has never allowed the insurance tail to wag the tort law dog.5 Whose perception is the right one?
4
It is somewhat surprising that the authors claiming a strong influence of liability insurance on court decisions even in the area of fault-based liability do not cite any specific examples but rather point to the general expansion of tort liability in recent decades.6 While it will not be disputed that such an expansion really took place, this development alone is no evidence for the fact that it was the availability of liability insurance which moved the courts. What may be said with some degree of certainty is that – outside some well-defined areas7 – published decisions where a German court explicitly based its decision on the fact that the defendant was insured or lacked such cover simply do not exist. Whether the judges really mean what they say or rather substitute conventional arguments for the motives that really moved them is impossible to tell. The supposition that the true reading of a particular decision is to be based on considerations of insurance could easily be refuted if the judges had no knowledge as to whether the defendant was covered by insurance or not. However, in the ordinary litigation setting, the judges do have this information. Where the alleged tortfeasor has insurance cover, it will usually be the insurance company who instructs counsel.8 Thus, the court will usually know about the existence or non-existence of insurance cover. 3
4
5
6 7
The term “assurance oblige” was introduced into the law by A. Ehrenzweig, Assurance Oblige – A Comparative Study, [1950] 15 Law & Contemporary Problems, 445. H. Stoll, Haftungsfolgen im Bürgerlichen Recht (1993), 103 et seq.; H.-L. Weyers, Unfallschäden (1971), 429 et seq.; C.v. Bar, Das „Trennungsprinzip“ und die Geschichte der Haftpflichtversicherung, [1981] Archiv für die civilistische Praxis (AcP) 181, 289, 293; M. Fuchs, Versicherungsschutz und Versicherbarkeit als Argumente bei der Schadensverteilung, [1991] AcP 191, 318, 326; D. Looschelders, Bewältigung des Zufalls durch Versicherung?, [1996] Versicherungsrecht (VersR), 529, 537; C. Katzenmeier, Überlagerungen des Schadensersatzrechts durch das Versicherungsrecht, [2002] VersR, 1449, 1451; from a comparative point of view H. Cousy, Tort Liability and Insurance: A Difficult Relationship, in: H. Koziol/B.C. Steininger (eds.), European Tort Law 2001 (2002), 18, 19: insurance as a “hidden motive” of judicial decisions in the area of tortuous liability. E. Steffen, Haftung im Wandel, [1993] Zeitschrift für die gesamte Versicherungswissenschaft (ZVersWiss), 13, 26. See supra fn. 4. See infra nos. 6 et seq.
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c) Reversal of the Academic Trend? Although the matter will always remain controversial, a revision of the trend of thought is in the academic air in Germany. An indication of this is the fact that influential scholars like Canaris but also scholars of the younger generation are sceptical about the insurance argument or even reject it outright.9 According to their view, it is wrong to fashion the rules of tort law with an eye towards insurance. Contrary to the credo fashionable in the 1960s and 1970s, assurance does not obligate the policy holder. Liability must be established in its own right and on its own terms. A person may be hold liable for the loss of another because he failed to take reasonable care or, where statute so allows, because he exercised control over a source of danger but never for the simple reason that he carried liability insurance. According to the view of these “modern” commentators, insurance and liability should be kept separate, and the fact of insurability or insurance as such should never be an argument in favour of or against attaching liability.
5
d) Exceptions There are a limited number of particular areas where courts have been prepared to explicitly take insurance coverage into account. Those areas will be explored in detail later and at this point will just be included in the following list:
6
(1) Liability in Equity
7
Where the tortfeasor lacks the relevant capacity to be held responsible under the law of delict, he may still be liable in equity. In this respect, the law requires that there is a difference in wealth between the parties, with the tortfeasor being better off than the victim. In making this determination, courts tend to take the insurance cover into account.10 (2) Damages for Pain and Suffering
8
As it is impossible to really “calculate” damages for pain and suffering as well as other non-pecuniary loss, the standards for measurement are flexible. Consequently, the courts have been willing to set the level of compensation with an eye towards the existence or absence of coverage.11 (3) Privileges and Immunities Privileges and immunities, shielding a party from liability, which exist in German family law have been handled restrictively by the courts to the extent of 8
See infra nos. 22 et seq. K. Larenz/C.-W. Canaris, Lehrbuch des Schuldrechts II/2 (13th edn. 1994), § 76 III 4 g, 416 et seq.; N. Jansen, Die Struktur des Haftungsrechts (2003), 386, 625; M. Fuchs, [1991] AcP 191, 318, 338; G. Wagner, in: Münchener Kommentar zum BGB (MünchKommBGB), Vor § 823 no. 49. 10 For details see infra nos. 53 et seq. 11 For details see infra nos. 75 et seq. 9
9
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their virtual abolition in certain areas.12 The decisive factor here is, again, insurance: judges are of the view that the purpose of these privileges is to benefit individuals, not their insurers, such that they must not be applied where the denial of liability would allow an insurer to pocket the premiums – without compensating victims in return.
10
(4) Exclusionary Agreements Courts have been prepared to imply a contractual agreement excluding liability in tort where they thought that justice so required, particularly in the context of gratuitous transactions between individuals. However, they have reversed this trend and carved out exceptions to the judicial rule of non-liability where the individual tortfeasor enjoyed the benefit of liability insurance. To hold otherwise, the argument goes, would only benefit the insurer, whereas the implied contractual term was designed to benefit individuals.13 e) A Realistic Outlook
11
It is impossible to know what is really going on in the minds of the judges that deliberate on the proper resolution of a damage claim. The fact that insurance plays an important role in some areas but is virtually never mentioned in the core areas of tort law is a result that may be puzzling in itself. How plausible is it to suppose that judges will usually ignore the insurance factor altogether but then use it as a decisive factor in particular settings?
12
Still, one should not too easily suppose that judges do not mean what they say. Given the formalities of civil procedure and the care devoted to the gathering of the relevant evidence, it would also be wrong to suggest that courts may easily hide their true evaluations behind a smokescreen of legal reasoning. But the crucial argument in favour of a “literal” reading of court decisions is the following: The assertion that insurance really is the decisive factor in the resolution of tort claims implies that a judge would decide one and the same case differently, on the basis of whether the defendant carried liability insurance or not. However, it would be outrageous if a court announced that it held a defendant liable for the sole reason of him carrying insurance, implying that it had acquitted another defendant without liability insurance on the very same facts. With regard to the higher courts whose decisions tend to be published to a wider audience, the insurance argument is particularly weak. Imagine a judgment holding the owner of a house liable for having failed to remove snow and ice from the sidewalk before 7 o’clock in the morning, and suppose that the really decisive factor had been the fact that the homeowner was covered by liability insurance. Once this decision has been published, how could the court refuse to allow another claim brought against a homeowner who failed to comply with the duty of care announced before but lacks the protection of an insurance policy? There simply is no feasible way for a court to distinguish 12 13
For details see infra nos. 78 et seq. For details see infra nos. 82 et seq.
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the two cases without disclosing its true motivation, i.e. the insurance factor. As such rulings which openly discuss the insurance issue do not exist, the best explanation may still be the very simple one, i.e. that judges generally do not care about insurance when determining whether to hold a defendant liable on the facts of the case. In many instances, however, the question is not whether a particular defendant is insured because all the defendants of a particular class are insured as a matter of course. The most important areas of tort law – motor accidents, medical malpractice, environmental damage – are subject to mandatory insurance schemes. Within these areas, the bareboned, uninsured defendant is a rare exception. In the area of motor accidents this exception is even taken care of by a collective insurance vehicle, compensating victims who have been injured by an uninsured defendant.14 Thus, a judge hearing a damage claim that grew out of a traffic accident acts within an environment of pervasive liability insurance. It would place superhuman demands on a court to ignore that liability for traffic accidents is embedded in a comprehensive insurance scheme meant to protect accident victims and negligent drivers alike. In fact, the Bundesgerichtshof has been acknowledging the weight of the insurance factor in traffic accident law and has emphasized its sensitivity towards the needs and limits of the system. However, the court did not use the fact of pervasive liability insurance as a justification for an expansion of delictual liability or for an inflation of damage awards but rather as an argument for a cautious approach.15 The idea behind this approach is the view that traffic accidents are a mass phenomenon, and that any legal rule in this area must stand the transaction costs test. Thus, the rules governing liability and calculation of damages must be easy to apply to particular cases which in turn requires that their informational demands are modest and that they are apt to be developed into rules of thumb without causing major distortions with respect to the outcomes.
13
Likewise, in the area of medical malpractice, the judges are certainly aware of the fact that the defendant doctor will not pay the damage award out of his own pocket and will not be forced to sell his house and his car in order to pay up on the judgment.
14
2. The Goals of Liability Insurance The popular belief that courts have inflated fault-based liability with an eye towards liability insurance is usually associated with the claim that liability insurance has experienced deep changes. Starting as a protective device in the interest of the insured tortfeasor in the late 19th century it turned into an instrument of social policy, aimed primarily at the protection of the victim in the 14 15
See infra nos. 22 et seq. Bundesgerichtshof (BGH) (15.10.1991) in Entscheidungen des deutschen Bundesgerichtshofs in Zivilsachen (BGHZ) 115, 364, 372 et seq.; BGH (15.10.1991) in BGHZ 115, 375, 379; BGH (17.3.1992) in [1992] VersR, 710 et seq.
15
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20th century.16 The most popular example to illustrate this development is of course the case of motor accident insurance where the action directe was introduced in the 1960s. Even beyond the realm of traffic accidents, some commentators have subscribed to the view that the combination of strict liability and liability insurance has compensation as its sole aim.17 The underlying belief is that strict liability does not create any incentives to take precautions against harm. From this position it is only a small step to the assertion that fault-based liability – at least where it is combined with liability insurance – has been developing towards strict liability and thus has been refocused on the compensation goal as well.
16
Outside the well-defined area of automobile accident insurance, the impact of the argument about the changing goals of liability insurance remains unclear. It is certainly true that the existence of insurance cover not only protects the policy holder against the risk of financial deprivation but also serves the interest of the victim in cases where the tortfeasor who is individually responsible lacks the funds to satisfy a judgment issued against him. However, as long as there is no evidence that the courts fashion the scope of liability with an eye towards the scope of insurance cover, i.e. allow claims for the simple reason that the tortfeasor enjoys the protection of insurance, the observation that liability insurance also serves the interests of the victim remains empty in normative respects. 3. No-fault Insurance Schemes as an Alternative?
17
Like in other western countries, the idea to abolish the combination of private tort law and liability insurance in favour of a no-fault first-party insurance scheme, either with respect to personal injury generally or at least with regard to motor accidents, has been taking root in German legal writing.18 It might well be said that the abolition of the tort law/liability insurance combination in favour of a collective indemnity system much like social insurance schemes would be in perfect harmony with German tradition. After all, it was Bismarck who, at the end of the 19th century, effected an end to the operation of tort law in the area of workplace accidents. He made this move with an intention to keep the insurance industry out of this line of business and to keep the compensation system under public control. Against this historical background, one should suppose that the substitution of a system of social insurance for tort law should have rallied much support in Germany.
16 17 18
C.v. Bar, [1981] AcP 181, 289, 303 et seq.; C. Katzenmeier, [2002] VersR, 1449 et seq. C.v. Bar, [1981] AcP 181, 289, 312 et seq.; cf. also M. Rohe, [2001] AcP 201, 117, 151. E.v. Hippel, Schadensausgleich bei Verkehrsunfällen (1968); H. Kötz, Sozialer Wandel im Unfallrecht (1976), 41 et seq.; E. Deutsch, Haftung und Versicherung, [1980] Juristische Blätter (JBl), 298, 303; cf. also H.-L. Weyers, Unfallschäden (1970), 648 et seq., counseling in favour of first-party insurance with regard to damages to property and for abrogation of subrogation of social insurance carriers in cases of personal injury.
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However, quite the reverse is true. These proposals have never gained enough steam as to even catch the attention of the political system. This is truer today than ever before. It is safe to say that, today, the introduction of a general nofault scheme, covering all sorts of personal injury is definitely off the political agenda. Germany suffers deeply from the consequences of an inflated welfare state overburdened with a broad variety of responsibilities. It is highly unlikely that proposals aiming at collective solutions for yet another social problem will gain much support in the near future. In short, the welfare state is on the path towards retrenchment, not enlargement.
18
The only area where no-fault schemes still attract some attention is medical malpractice.19 The current system follows the well-known model of a combination of fault-based liability and liability insurance on the part of doctors and hospitals, supplemented by a voluntary conciliation procedure offered by the local medical associations. This system produces a relatively high level of litigation which in turn occupy the strained resources of the judiciary. Although the idea to introduce a system of first-party patient insurance has been discussed since the late 1970s, support has remained modest, and for good reasons.20
19
The perceived benefits of a first-party patient insurance scheme in terms of reduced administrative costs are unlikely to mature as the insurance scheme would also have to distinguish between cases of malpractice and cases of “mere” mishap. Doctors intervene into processes of disease which are impossible to fully control such that the mere fact that the patient’s physical condition remains poor or even worsens cannot suffice to establish liability. Furthermore, it is a general feature of collective insurance schemes to be generous on the issue of liability but to compensate for this generosity by cutting back on the damages allowed. In particular, damages for non-pecuniary loss are unavailable under the German law of social security in general and workers’ compensation schemes in particular.21 A switch to such a model would do nothing to ameliorate the position of those victims who qualify for full compensation – including pain and suffering damages – under current law. On the contrary, they would be compelled to enforce two claims instead of one, i.e. one against the insurance scheme for monetary losses and one against the doctor personally for compensation of non-pecuniary losses.
20
However, the strongest point against collectivization of medical liability is the deterrence issue. In spite of the uncertainties associated with the deterrent ef-
21
19
20 21
H.-L. Weyers, Empfiehlt es sich, im Interesse der Patienten und Ärzte ergänzende Regelungen für das ärztliche Vertrags- (Standes-) und Haftungsrecht einzuführen?, Gutachten A zum 52. DJT, I (1978); Weyers’ suggestions were adopted by Dinslage, [1981] VersR, 310; Baumann, [1983] Juristenzeitung (JZ), 167, 170 et seq.; H.J. Radau, Ersetzung der Arzthaftung durch Versicherungsschutz (1993), 233 et seq.; U. Thumann, Die Reform der Arzthaftung in den Vereinigten Staaten von Amerika (2000), 244 et seq.; for a thorough discussion see C. Katzenmeier, Arzthaftung (2002), 214 et seq. C. Katzenmeier (supra fn. 19), 234 et seq. H. Kötz/G. Wagner, Deliktsrecht (9th edn. 2001), no. 587.
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fect of tort law it is safe to contend that the threat of liability does have some effect on the behaviour of doctors. Those who cherish the view that the financial aspects of such a threat do not affect behaviour at all should at least acknowledge that the prospect of a civil trial where the conduct of the physician is closely scrutinized and evaluated by colleagues serving as experts is one which a reasonable doctor would wish to avoid. The belief, sometimes entertained by adherents of collective insurance schemes, that the threat of criminal or administrative sanctions could restore the deterrence effect destroyed by the abolition of personal liability in tort is at best naïve. Public prosecutors or executives in the regulatory agencies observing the health-care industry will never show the same resolve as victims in pursuing claims against a negligent doctor. In addition, there is no need to abrogate tort liability if the same costly process of investigating the case would simply be shifted to another procedure run by a different agency. Thus, there is good reason to stick with the traditional combination of fault-based liability and liability insurance.22 II. Compulsory and Voluntary Insurance (2) Compulsory liability insurance: To what extent does it exist outside the automobile accident sector?
22
Compulsory liability insurance is wide-spread in the German legal system. The cases where the potential tortfeasor is under a duty to take out insurance against the risk of liability may be grouped into two different classes. The first of these classes concerns, by and large, the area of strict liability. Since the ascent of the automobile, lawmakers have reacted to new risks by a two layered approach, combining the imposition of strict liability with a legal duty to insure. Today this combination of strict liability and mandatory insurance covers all relevant areas of risks associated with technology and industry. Apart from automobile accident insurance, current examples concern the following areas:
23
The operator of an aircraft is subject to strict liability for damage caused by accidents and is under a duty to insure against this risk.23
24
The creator of genetically modified organisms is liable to victims regardless of fault and must carry liability insurance in order to conduct his business.24
25
The operator of a plant causing risks to the environment is strictly liable to victims who suffered injury through the pollution of air, water or soil by the relevant installation. Again, the operator is under an obligation to cover the risk of liability by taking out insurance.25
22 23 24 25
G. Wagner (supra fn. 10), Sect. 823 no. 646. Sect. 33, 43 Luftverkehrsgesetz (LuftVG). Sect. 33, 36 Gentechnikgesetz (GenTG). Sect. 1, 19 Umwelthaftgesetz (UmweltHG).
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The same principles apply to the particular case of operation of a nuclear power plant or other facility where nuclear processes are being carried out.26
26
The producer of a drug is liable for injury caused by defects of the product and must carry liability insurance covering the attendant risk.27
27
In the area of technical risks, strict as well as compulsory insurance are parts of a regulatory scheme affecting the operation of dangerous plants, appliances or vehicles. Thus, the duty to insure is subject to enforcement by the governmental agency competent to license the respective operation and to supervise it in due course.
28
However, there are rare cases where mandatory liability insurance is not contingent upon the operation of a technical apparatus but attaches to dangerous activities. The most important example is the activity of hunting. Hunters are strictly liable for any damage caused by animals to neighbouring farmers, and in addition they have to observe the ordinary standards of diligence vis-à-vis their fellow hunters and passengers, using the forest or the open field for recreation or any other purpose.28 Every individual engaging in the activity of hunting is under an obligation to insure against these risks of liability.29 The duty is enforced by the government agency that issues the requisite licence to hunt.
29
The second class of cases where an obligation to insure has been imposed on potential tortfeasors concerns the area of professional liability. Enforcement is guaranteed by the regulatory bodies in which the relevant profession is organized. As a practical matter, compulsory insurance covers the most important and accident-prone professional activities.
30
A statutory rule requiring doctors to insure against liability is missing in Germany. However, the ethical standards doctors must adhere to require the practitioner to take out insurance coverage.30
31
Attorneys and public notaries must insure against the risk of liability which in these cases ordinarily concerns pure economic loss.31
32
There are more instances of compulsory insurance to report but it does not seem very helpful to list the different kinds of activities which are of lesser importance only.
33
26 27 28 29 30
31
Sect. 25 seq., 13 seq. Atomgesetz (AtG). Sect. 84, 94 Arzneimittelgesetz (AMG). For details see G. Wagner (supra fn. 10), Sect. 835. Sect. 17 para 1 no. 4 Bundesjagdgesetz (BJagdG). Cf., for example, Sect. 21 Code of Conduct of the physicians in Northrhine-Westfalia (Berufsordnung für die nordrhein-westfälischen Ärztinnen und Ärzte). Sect. 51 Bundesrechtsanwaltsordnung (BRAO), Sect. 19a Bundesnotarordnung (BNotO).
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(3) Basic features of mandatory insurance schemes: Are bank guarantees accepted as substitutes for insurance policies? Is the action directe (direct claim by victim against insurer) available generally or in the motor insurance area only? Is a party who fails to comply with its obligation to insure subject to sanctions?
34
Bank Guarantees: Where the obligation to insure is linked to the regime of strict liability and is incumbent upon the operator of a plant or installation, the law sometimes allows for bank guarantees as a substitute for liability insurance,32 and sometimes even for guarantees supplied by the federal or state governments.33 The underlying policy rationale seems to be that high-tech industries sometimes pose risks which may be of considerable magnitude and are very hard to quantify. Where private insurers are not willing to accept the risk in return for an affordable premium, the public may do so either directly or under the guise of a state-controlled bank. This way, the government may promote a high-risk project against the limits of the insurance market.
35
In practice, the impact of this alternative to insurance has always remained slight. The dominant instrument of risk transfer is the one to a professional carrier of risk. Private banks have never entered the market as they lack professional expertise in the field of liability risks and usually are unable to pool the particular risk with other, independent ones.
36
Action directe: The victim has a direct claim against the insurer in the field of motor accidents only. In all cases other than motor accidents he has to sue the tortfeasor himself – not his insurer. However fundamental this divergence may seem, its consequences are of minor importance, at best. A combination of several provisions of the German Insurance Act (VVG) and of industry practice work to the effect that the “ordinary” variant of German compulsory liability insurance comes very close to a regime of action directe.
37
Sect. 3 para II of the Standard Business Terms of Liability Insurance (AHB) places the duty upon the insurer not only to satisfy meritorious claims brought against the insured but also to defend any unmeritorious claims.34 In any case, pursuant to Sect. 5 no. 4 AHB, it is up to the insurer to investigate the claim brought forward, to decide on whether the case should be settled or go to trial, and in the latter case to instruct counsel and to pay him if the dispute is lost. From the perspective of the insured there is thus hardly any difference between qualified insurance schemes providing for the action directe and ordinary liability insurance. The same consideration again applies to the victim as the tortfeasor merely serves as the nominal party to the case, the real party for purposes of decision making being the insurer. Today, it is well-settled law that the tortfeasor even lacks the authority to admit certain facts in court, as it 32 33 34
Sect. 19 para 2 no. 3 UmweltHG; Sect. 94 para 2 no. 2 AMG. Cf. Sect. 19 para 2 no. 2 UmweltHG, Sect. 36 para 2 no. 2 GenTG; Sect. 14 para 2 AtG. BGH (8.3.1992) in BGHZ 117, 345, 346; BGH (30.9.1992) in BGHZ 119, 276, 281.
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is within the power of the insurer to make the decisions with regard to trial tactics.35 On the part of the victim the concern will be not so much with the designation of the “right” party to the case but with his protection against the risks of insolvency and of a third-party creditor to levy upon the insurance claim. In both respects, the victim enjoys the protection of the law. As to the insolvency of the tortfeasor, Sect. 157 VVG provides that the trustee in bankruptcy must separate the claim for insurance cover for the benefit of the victim such that it is excluded from distribution between the other creditors. Outside bankruptcy, these third-party creditors are also barred from attaching the insurance claim in the course of execution of a judgment. As the law on the books is silent on the issue the courts have come to the help of the victim by earmarking the insurance claim not as a money claim but as a claim for indemnity against liability. A claim of such nature is thought to be exempt from execution by other creditors than the one whose liability claim has triggered the insurance policy.36 Again, the victim enjoys the same privileges as provided by an action directe.
38
The German Insurance Act (VVG) contains a number of provisions on compulsory insurance (Sect. 158b et seq. VVG) which serve the purpose of even further moving the insurance regime towards the action directe or even firstparty insurance. Pursuant to Sect. 158c VVG the insurer may be liable towards the victim even though he may escape liability vis-à-vis the insured, i.e. his contracting partner. However, that privilege does not extend to cases where the harmful event is beyond the scope of coverage as defined in the contract of insurance and by the applicable law. In the important case that the insured caused the damage intentionally, the insurer may deny coverage as well, Sect. 158c para 3 VVG. It must be borne in mind, though, that even under the act governing mandatory insurance for motor accidents which has introduced the action directe into German law, the insurer is not liable for intentional infliction of damage but a fund supported by the insurance industry as a whole picks up the loss.37
39
Sanctions: A party failing to procure the insurance cover mandated by the law may be subject to sanctions. It is a crime punishable with imprisonment for a term of up to one year to drive a motor car on a public road without the necessary insurance cover.38 The same threat applies to the operation of a plant pol-
40
35 36
37 38
BGH (14.3.1995) in BGHZ 129, 108. Reichsgericht (RG) (5.2.1909) in Entscheidungen des deutschen Reichsgerichts in Zivilsachen (RGZ) 70, 257, 259 et seq.; RG (28.1.1913) in RGZ 81, 250, 251 et seq.; RG (21.6.1918) in RGZ 93, 209, 211 et seq.; RG (13.5.1929) in RGZ 124, 235, 238; RG (27.5.1938) in RGZ 158, 6, 12 et seq.; BGH (22.1.1954) in BGHZ 12, 136, 141; BGH (30.10.1954) in BGHZ 15, 154, 157 et seq.; C.v. Bar, [1981] AcP 181, 289, 308 et seq.; F. Stein/M. Jonas/W. Brehm, Zivilprozeßordnung (22nd edn. 2004), Sect. 851 no. 38. Cf. Sect. 12 para 1 no. 3 Pflichtversicherungsgesetz (PflVG), see also Sect. 3 para 6 PflVG. Sect. 6 PflVG.
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luting the environment without the requisite insurance.39 In addition, the government agency competent to enforce environmental provisions may deny or retract the licence to operate the plant.40 Similar rules of criminal law apply to the creation of genetically modified organisms,41 to the dissemination of drugs42 etc.
41
Attorneys and doctors who fail to take out the insurance cover required by the professional rules applicable face sanctions by so-called “courts of honour” administered by the local bar associations or medical boards.43 (4) To what percentage is the population in fact protected by liability insurance contracts?
42
As has become clear from the analysis presented above, any business enterprise operating a major production facility must procure insurance coverage of a certain scope and magnitude. The same is true with respect to professional services, in particular with regard to attorneys and physicians. There is thus a considerable penetration of German business by the insurance industry and its products. It is no exaggeration to maintain that more than 90% of German businesses will carry liability insurance of some sort.
43
As to the private sector, a survey conducted by Allensbacher Werbeträger in 2002 revealed that 66% of all private households enjoyed the benefit of liability insurance coverage.44 III. The Influence of Liability Insurance on Court Decisions in Tort Cases – Focus on the Courts 1. Insurability (5) Legislation: Is the insurability of a particular risk, e.g. environmental liability, a relevant policy consideration when it comes to lawmaking in the area of tort law? Would lawmakers refrain from imposing strict liability for uninsurable risks? Vice verca: Is the rise of strict liability in modern times – to the extent that there was one in the particular jurisdiction – thought to have any connection with the establishment of a vibrant insurance industry able to pick up the attendant risks? In this sense, may it be said that the availability of liability insurance “drives” the demand for responsibility in tort generally and for strict liability in particular?
39 40 41 42 43 44
Sect. 21 para 1 no. 1 UmweltHG. Sect. 19 para 4 UmweltHG. Sect. 39 para 1, 36 GenTG. Sect. 96 no. 14 AMG. Cf., for example, Sect. 113 et seq. BRAO. Gesamtverband der deutschen Versicherungswirtschaft (ed.), Die deutsche Versicherungswirtschaft, Jahrbuch 2002 (2002), 51.
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The issue of insurability surfaces each time the government makes an attempt at law reform in the area of tort law. As the German civil code disposes of a broad concept of delictual liability as a matter of course the domain of law reform has always been the area of strict liability. One of the principles of this branch of the law is that the liability of the tortfeasor is limited by caps. Time and again it is said that these caps are necessary in the interest of insurability of the underlying risk45 but the true story is otherwise. As the former German Imperial Court said, the caps work like a subsidy in favour of the dangerous activity subjected to strict liability.46 The caps contained in the Traffic Act with respect to motor accidents are explained on the ground that they help to keep premiums low.47 Their explanation in terms of enabling insurability is unconvincing for the simple reason that motor liability insurance covers the liability ex delicto as well which is unlimited as a matter of course.48
44
One of the rare incidents of a discussion focussing on insurability was the introduction of a bill on environmental liability which led to the enactment of the Environmental Liability Act of 1990, in force since January 1st 1991.49 The Act exposes large parts of the manufacturing and chemical industries as well as agricultural businesses and those engaged in waste disposal to strict liability. Not surprisingly, these industries fought against the bill, trying to avoid it altogether or to at least make it more commendable to industry interests. A central element in their lobbying strategy was the claim that the businesses concerned were unable to buy insurance coverage for the new liabilities as these were not insurable. The denial of insurability in turn was split up into two different arguments. One started from the assumption that intentional torts were not insurable and inferred that damage caused by the unlawful operation of a plant was not insurable either. In this context, unlawful operation of the facility was understood to include any violation of the many regulations spelled out in administrative law and in the particular licence that was granted to the operator. Thus, the alleged insurability limitation gained a broad scope indeed. The second prong of the argument denying insurability referred to perfectly lawful operation of the facility. The idea here was that the harmful consequences of ordinary operation of the facility were perfectly foreseeable, i.e. an ordinary cost of doing business. As the harmful event was not uncertain in time or magnitude, insurance was inappropriate.
45
It is easy to see that both prongs taken together cancel each other out. It is hard to maintain that both the consequences of lawful operation of the facility and those of wrongful operation transgress the limits of insurability. The mistake in the argument is the equation of lawful or wrongful operation of the facility
46
45 46 47 48
49
J. Esser, Grundlagen und Entwicklung der Gefährdungshaftung (1941), 107. RG (11.4.1935) in RGZ 147, 353, 355. R. Greger, Haftungsrecht des Straßenverkehrs (3rd edn. 1997), § 12, Entstehungsgeschichte. H. Kötz, Haftung für besondere Gefahr, [1970] AcP 170, 1, 38 et seq.; H. Kötz, Gefährdungshaftung, in: Bundesministerium der Justiz, Gutachten und Vorschläge zur Überarbeitung des Schuldrechts II (1981), 1825 et seq. For details see G. Wagner, Umwelthaftung und Versicherung, [1991] VersR, 249, 254 et seq.
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with lawful or wanton causation of harm. In reality, the concepts are not aligned in this way. The mere fact that the operator contravened some regulatory standard does not allow the conclusion that he caused the harm intentionally. Likewise, the fact that the operator observed all the requirements and standards in the applicable regulations does not entail that the harm was foreseeable. Quite the contrary, if it had been foreseeable, then the licence would never have been granted in the first place. The experience made in the area of environmental law is that activities which were thought to be safe in the past turn out to have triggered long-term effects that are indeed harmful but were not foreseeable. Asbestos is an example in point as for quite some time it was believed that this material is particularly safe since it does not burn etc. After decades of use only it turned out that asbestos has “invisible” effects that caused cancer in many people exposed to it. A similar reasoning may be applied to the case of wrongful operation of the facility.
47
Whatever one may think of the preceding analysis, the lobbying efforts of German industry were not successful. Parliament passed the Environmental Liability Act into law regardless of the issue of insurability. The German insurers worked out a set of standard business terms particularly for the environmental liability cover which contained important restrictions along the lines expounded above.50 However, the insurance industry refrained from excluding the harmful effects of lawful operation of the facility altogether. As the fears about the opening of the floodgates of liability did not materialize, the current trend is to broaden the scope of the environmental liability cover rather than to restrict it even further.
48
On the other hand, up to this day, the federal government failed to pass regulations detailing the scope and conditions of the insurance cover which operators of dangerous facilities have to procure in order to receive and maintain their operating licence.51 It is not to be expected that these regulations will be passed into law any time soon. This failure may illuminate the fact that the subject matter is difficult enough for attempts to define the scope and conditions of the insurance cover to be procured. (6) Jurisprudence: Do courts either tacitly or openly take the issue of insurability into account when holding a defendant liable? In particular, are there decisions where a court has denied a damage claim for the reason that it thought the ensuing liability to be uninsurable? Are judges reluctant to impose a liability regime that was not anticipated by the parties, e.g. in cases of “new risks” like dangerous substances, electromagnetic fields and the like?
50
51
Cf. G. Wagner, Die Zukunft der Umwelthaftpflichtversicherung, [1992] VersR, 261; G. Wagner, Versicherungsfragen der Umwelthaftung, in: M. Ahrens/J. Simon (eds.), Umwelthaftung, Risikosteuerung und Versicherung (1996), 97, 118 et seq. J. Peter in: P. Salje/J. Peter (eds.), Umwelthaftungsgesetz (2nd edn. 2005), Sect. 20 nos. 1 et seq.
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Vice versa: Is the fact that a risk may be insured or was in fact insured against an argument counselling for strict liability? Are there decisions suggesting that liability may be strict rather than fault-based or that its scope may be broader or the damage award higher because insurance coverage was thought to be available? Do judges draw a distinction between compulsory insurance schemes and voluntary insurance, even if the latter seems widespread among the public? The issue of insurability does not play a role in court decisions. The major reason for the lack of decisions in this area may be that the German courts have denied themselves the competence to develop strict liability and to introduce new heads of strict liability on their own motion, these measures being reserved for the lawmakers.52 Thus, there is no need for courts to address the issue of insurability.
49
(7) Are there any examples where it is thought that the courts have overstretched tort liability such that the insurance industry was cast into crisis? No. Of course the Federal Supreme Court (BGH) has been criticised on occasion for having overstretched the concept of delictual liability, particularly by applying a standard of diligence no ordinary person is able to live up to.53 Such criticism has always been limited to particular cases, not to the operation of the liability system at large. Furthermore, the average amount of damages awarded by German courts is much smaller than for instance in the U.S. Punitive damages are not accepted in Germany, and the measure for pain and suffering damages is still moderate, although the magnitude of the average award is on the rise in this area.
50
A third factor to keep in mind is that victims of personal injury will primarily turn to their social or private health insurance carrier which will take care of the injury, initially without asking who might bear responsibility for it.54 Of course, insurance carriers subrogate to the rights of the victim, i.e. they may enforce any damage claims their insureds may have against tortfeasors. However, these subrogation rights are not always enforced, and the satisfaction of the imminent needs of the victim takes a lot of pressure out of the system of civil liability. For these reasons – and maybe for others too – there has never been a crisis of liability insurance in Germany.
51
52
53
54
RG (11.1.1912) in RGZ 78, 171, 172; RG (11.4.1935) in RGZ 147, 353, 355 et seq.; BGH (25.1.1971) in BGHZ 55, 229, 234; BGH (7.11.1974) in BGHZ 63, 234, 237; G. Wagner (supra fn. 10), Vor § 823 no. 23. J. Esser, Die Zweispurigkeit unseres Haftpflichtrechts, [1953] JZ, 129, 130 et seq.; E.v. Caemmerer, Wandlungen des Deliktsrechts, Festschrift 100 Jahre Deutscher Juristentag II (1960), 49, 63 et seq.; K. Zweigert/H. Kötz, Die Haftung für gefährliche Anlagen in den EWG-Ländern sowie in England und den Vereinigten Staaten von Amerika (1966), 50; see also G. Wagner (supra fn. 10), Vor § 823 no. 24. For details see G. Wagner, Die Aufgaben des Haftungsrechts – eine Untersuchung am Beispiel der Umwelthaftungsrechts-Reform, [1991] JZ, 175, 179 et seq.; G. Wagner, Haftung und Versicherung als Instrumente der Techniksteuerung, [1999] VersR, 1441, 1447 et seq.
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(8) Literature: What is the position of commentators on the issue of insurability: Should it be taken into account in the practice of tort law or is it beyond the legitimate pale of tort law? Do commentators voice concerns that expansion of liability may some day exceed the scope of insurable risks?
52
Over quite some time, German commentators have been emphasizing the changing role of liability insurance. Pursuant to this school of thought, liability insurance was only initially designed to protect potential tortfeasors against financial loss. In the course of the 20th century, however, it was converted into something to the benefit of potential victims.55 It is the area of traffic accidents which again furnishes the most striking illustration of the conversion thesis. However, although recognition of the “social function” of liability insurance became a matter of popular parlance among academics, it is difficult to identify any consequences that were drawn from this. For the most part, the social function of liability insurance was merely employed to explain the relevance of insurance within the four areas listed above, i.e. liability in equity, determination of non-pecuniary loss, privileges and exceptions. Furthermore, the new social function of liability insurance was employed in order to demonstrate that a switch to first-party no-fault insurance in the area of traffic accidents would be less dramatic than the critics thought.56 Maybe it is the focus of the literature on these topics that prevented it from developing a general account of whether and in what circumstances problems of insurability should be taken into consideration. The only instance in which the particular problem of insurability was discussed in the literature was the introduction of strict liability for environmental harm.57 Within the general literature, von Bar, in an influential article published in 1981 went furthest in suggesting that the behaviour of the tortfeasor may be labelled wrongful for the simple reason that he had or lacked insurance.58 However, as long as insurance figures are on both sides of the equation and may be used either to justify or to deny liability, the insurance argument is practically worthless. 2. Costs and Benefits of Insurance (9) To what extent do courts base their judgments on the objective of risk spreading, i.e. place the loss on the party better able to absorb it, either through self-insurance (which amounts to deep pocket liability) or through market insurance, i.e. by buying coverage from a professional risk carrier? Are there judgments which explicitly accept risk spreading as a relevant policy consideration to influence court decisions in individual cases? Do courts implicitly take risk spreading into account (without saying so)? Is it advisable 55
56 57 58
C.v. Bar, [1981] AcP 181, 289; E. Deutsch, Haftung und Versicherung, [1980] JBl, 298, 299; see also supra no. 15. Cf. E. Deutsch, [1980] JBl, 298, 299 et seq. See supra nos. 44 et seq. C.v. Bar, [1981] AcP 181, 289, 326: „Wir dürfen daher ein Verhalten ‚unerlaubt‘ nennen auch deswegen, weil das durch es verwirklichte Risiko versichert ist, und wir dürfen, so denke ich, im Jahre 1981 die Frage stellen, ob ein Nicht-Versichertsein der im haftungsrechtlichen Verkehr erforderlichen Sorgfalt noch entspricht.“
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for a party to argue that the other side was in a better position to insure against the risk and thus should bear the ensuing loss? Within the general context of German tort law, court decisions which explicitly mention the policy of risk spreading do not exist.
53
However, some prominent decisions may be analysed in terms of the objective of risk spreading. The pertinent example is a decision of the BGH in a case involving an exploding soda bottle which severely injured a three-year-old child when taking the bottle out of the crate.59 The legal problem in this case was that the victim was unable to prove that the bottle had been defective when it left the defendant’s facility. It would have been defective if the pressure inside the bottle had been too high or if the glass had shown a small crack that led to its explosion. The possibility that the bottle had been damaged subsequently during transport or storage could not be ruled out, though.60 As a matter of legal doctrine the BGH had to dismiss the claim on non-liquet grounds. However, the court allowed the claim, reversing the burden of proof against the defendant. He could only escape liability upon proof that all reasonable steps had been taken to assure that no damaged or otherwise accident-prone bottle would leave his premises.61
54
This decision has drawn a lot of criticism.62 What commentators bemoanded most was an explanation as to why the burden of proof with respect to the existence of the defect at the time when the product was put into the stream of commerce was reversed in this case – but not in all the other cases where it had been established that the producer failed to take all the precautions required in law. The true rationale of the decision may thus be an insurance argument. Given that only very few soda-bottles of the thousands of bottles sold every week tend to explode it may seem fair to “insure” the victim of such a rare event with the producer of such bottles.63 Of course, the BGH said nothing in this regard and never even mentioned the effects its decision may have in terms of risk spreading. However, the justices repeatedly stressed the low frequency of accidents and the beneficial properties of multi-use glass bottles. Thus, it does not seem an unfair guess to suppose that the court might have proceeded on the theory that it would be desirable to insure the victims of such rare events with the soda-drinking public. Whether fair or unfair, it remains a guess only.
55
The only exception to the rule that German courts decline to take the objective of risk spreading into account, is liability in equity under Sect. 829 BGB.
56
59 60 61 62
63
BGH (7.6.1988) in BGHZ 104, 323. BGH (7.6.1988) in BGHZ 104, 323, 330 et seq. BGH (7.6.1988) in BGHZ 104, 323, 333 et seq. G. Brüggemeier, [1988] Verbraucher und Recht (VuR), 345; U. Foerste, [1988] VersR, 958; P. Arens, [1991] Zeitschrift für Zivilprozeß (ZZP), 104, 123, 131 et seq.; T. Winkelmann, [1989] Monatsschrift für Deutsches Recht (MDR), 16. Cf. G. Wagner (supra fn. 10), Vor § 823 no. 24.
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Sect. 829 BGB stipulates that a tortfeasor lacking the capacity to act reasonably in the sense of Sect. 827 and 828 BGB but committing what would otherwise be a tort is nonetheless liable in damages if equity so requires, provided that the victim cannot recover from a third party for disregard of his duty to supervise the tortfeasor, and the latter is not deprived of the financial means necessary for his own maintenance, including his legal duties to support others.64 The most important case of Sect. 829 BGB concerns the liability of minors.
57
The courts have given Sect. 829 BGB a broad interpretation, applying the principles of liability in equity whenever the tortfeasor would otherwise escape responsibility for personal, subjective reasons. As a consequence, the minor might be held responsible in cases where he does not lack the relevant capacity but did not act negligently, i.e., did not fall short of the level of care to be expected of a child of his age.65 Likewise, to the extent that the minor is exonerated from the reproach of negligence for the sake of a prudent child being unable to control his own behaviour, liability might still be based on equitable grounds.66 The relevant test for defining the scope of equitable liability is to place an ordinary and reasonable adult into the shoes of the minor and ask whether he would have been liable had he behaved in the same way as the child did67. If this question is to be answered in the affirmative, the minor will be held liable provided that equity so requires.
58
Whether equity requires compensation does always depend on a consideration of all circumstances68 but particular regard is to be paid to the financial condition of the parties. The BGH requires a substantial difference between the financial state of the parties in the way that the tortfeasor’s economic circumstances must be substantially better than those of the victim.69 To establish the relevant discrepancy, the court must compare the wealth of both parties, add64
65
66 67 68
69
Sect. 829 Bürgerliches Gesetzbuch (BGB): „Wer in einem der in den §§ 823 bis 826 bezeichneten Fälle für einen von ihm verursachten Schaden auf Grund der §§ 827, 828 nicht verantwortlich ist, hat gleichwohl, sofern der Ersatz des Schadens nicht von einem aufsichtspflichtigen Dritten erlangt werden kann, den Schaden insoweit zu ersetzen, als die Billigkeit nach den Umständen, insbesondere nach den Verhältnissen der Beteiligten, eine Schadloshaltung erfordert und ihm nicht die Mittel entzogen werden, deren er zum angemessenen Unterhalt sowie zur Erfüllung seiner gesetzlichen Unterhaltspflichten bedarf.“ BGH (21.5.1963) in BGHZ 39, 281, 285 et seq.; BGH (8.1.1965) in [1965] VersR, 385, 386; Oberlandesgericht (OLG) Braunschweig (23.12.1953) in [1954] VersR, 460; G. Wagner (supra fn. 10), Sect. 829, no. 8 et seq.; E. Steffen in: Reichsgerichtsräte-Kommentar (RGRK), Sect. 829, no. 9; A. Zeuner in: Soergel, Bürgerliches Gesetzbuch (BGB), 5/2 (12th edn. 1998), Sect. 829, no. 11; E. Deutsch, [1964] JZ, 86, 90; E. Deutsch, Allgemeines Haftungsrecht (2nd edn.1996), no. 482. BGH (21.5.1963) in BGHZ 39, 281, 286. G. Wagner (supra fn. 10), Sect. 829, no. 7. BGH (5.1.1957) in BGHZ 23, 90, 99; BGH (11.11.1994) in BGHZ 127, 186, 192; G. Wagner (supra fn. 10), Sect. 829, no. 15. BGH (18.12.1976) in BGHZ 76, 279, 284; BGH (24.4.1979) in [1979] Neue Juristische Wochenschrift (NJW), 2096; BGH (13.6.1958) in [1958] NJW, 1630, 1631; G. Wagner (supra fn. 10), Sect. 829, no. 16.
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ing up the respective incomes and assets, such as real estate and savings, and deducting current debts and financial obligations towards third parties. Since children are mostly without income or assets, some courts have turned to the financial circumstances of the parents instead.70 The effects of third-party insurance on liability in equity is at once one of the most important and contested issues under Sect. 829 BGB71, as evidenced by the fact that even the BGH has changed its position several times in the past. Originally, the court held that the availability of third-party insurance was a relevant aspect of the tortfeasor’s financial circumstances, which had to be considered in determining liability in equity.72 Later on, this jurisprudence was abandoned in favour of a distinction between the liability and the quantum issues: according to this new approach, the availability of liability insurance was relevant to the quantum issue, the amount of damages, only. The court was not allowed to grant the damage claim in equity for the sole reason that the minor was covered by liability insurance. If there was no claim but for the insurance coverage, because the other financial circumstances of the parties did not require compensation in equity, then the mere fact of insurance coverage could not create a claim in the first place. To hold otherwise, it was thought, was to make liability contingent on insurance although the relationship is generally thought to run the other way around, liability insurance being contingent on the establishment of liability in tort.73
59
In 1994 the court came back to the issue and revised its position again.74 The underlying facts were those of a road traffic accident for which a person lacking the relevant capacity was responsible. The BGH reasoned that the principle purpose of mandatory insurance schemes was not only the indemnification of the policy holder but also the protection of the victim.75 As a consequence, the fact that the tortfeasor enjoyed the benefit of insurance coverage was thought to be relevant not only to quantum but to liability as well. The principle that insurance coverage follows liability – and not vice versa – was pushed
60
70
71 72
73
74 75
Cf. BGH (13.6.1958) in [1958] NJW, 1630, 1631; BGH (24.4.1979) in [1979] NJW, 2096; expressly Koebel, [1956] NJW, 969, 971; G. Wagner (supra fn. 10), Sect. 829, no. 14; E. Steffen, in: RGRK, Sect. 829, no. 13; J. Oechsler, in: J. Staudinger (ed.), Kommentar zum Bürgerlichen Gesetzbuch (BGB) II (2003), Sect. 829 no. 54; Cf. for critizism OLG Köln (22.10.1980) in [1981] VersR, 266, 267; R. Borgelt, Das Kind im Deliktsrecht (1995), 73. See in general G. Wagner (supra fn. 10), Sect. 829, no. 18 et seq. BGH (15.1.1957) in BGHZ 23, 90, 100, under reference to the en banc decision of the BGH (6.7.1955) in BGHZ 18, 149, 166. Hereafter, the liability insurance has to be considered as part of the equity-test for determining whether damages for pain and suffering are due under Sect. 847 BGB. BGH (13.6.1958) in [1958] VersR, 485, 487. The principle of disconnection prohibits construing a provision for damages in the light of the insurance covering these damages, cf. H.-D. Drewitz, Die Versicherung folgt der Haftung (1977), 2. BGH (11.11.1994) in BGHZ 127, 186. Sect. 158c para 1 Versicherungsvertragsgesetz (German Insurance Act, VVG): „Ist der Versicherer von der Verpflichtung zur Leistung dem Versicherungsnehmer gegenüber ganz oder teilweise frei, so bleibt gleichwohl seine Verpflichtung in Ansehung des Dritten bestehen.“
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aside with an eye to the purpose of mandatory insurance schemes to further the interests of the victim.76 As a result of this decision, the impact third-party insurance has on liability in equity depends on whether coverage is mandatory or voluntary. If it is mandatory the personal financial position of the tortfeasor is irrelevant to the extent that the insurance policy provides coverage; if it is voluntary liability in equity must be established with regard to the financial means of the tortfeasor only. Once such liability is established however, the availability of insurance coverage is taken into account such that the victim may recover to a greater extent than if the tortfeasor had been uninsured. 3. Standard of Care (10) What is thought to be the influence of liability insurance on actual care levels? Is moral hazard a well-received concept in legal circles?
61
Among scholars influenced by the economic analysis of law, the concept of moral hazard is well received. It is common knowledge that liability insurance has adverse effects for the level of safety observed by the insured. Less popular is the knowledge of the many ways in which insurance carriers might try to influence the behaviour of insureds in the interest of safety.
62
Scholars subscribing to traditional legal dogmas are less informed about the detrimental effects of liability insurance and of the instruments available to the industry to counteract these effects. It is a recurring motive in the literature disapproving of the expansion of strict liability to argue (1) that strict liability provides weaker incentives to take care than fault-based liability as potential tortfeasors lose the prospect to escape liability altogether, and (2) that the familiar combination of strict liability with insurance kills off whatever deterrence effect the former may still yield.77 (11) In setting the standard of care, do courts take into account if the defendant is insured, imposing a stricter standard in case he is? Similarly, is the standard of comparative negligence more lenient in areas where the defendant is protected by liability insurance? In both cases, do courts draw a distinction between voluntary and mandatory insurance schemes?
63
Among commentators, it is a popular activity to criticise the courts for expanding delictual liability beyond its reasonable confines by overstretching the standard of care.78 Equally popular is the belief that courts have become increasingly prepared to do so because they knew that whatever liability was imposed, it would be picked up by an insurance carrier.79 76 77
78
79
BGH (11.11.1994) in BGHZ 127, 186, 192. Recently M. Rohe, [2001] AcP 201, 117, 151; see also D. Medicus, in: R. Breuer/M. Kloepfer/ P. Marburger/M. Schröder (eds.), Umweltschutz und Privatrecht (1990), 5, 13. K. Larenz/C.-W. Canaris, Schuldrecht II/2, § 76 III 7 b, 427 et seq.; see also G. Wagner (supra fn. 10), Vor § 823 no. 24. H. Stoll, Haftungsfolgen im Bürgerlichen Recht (1993), 103 et seq.
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In contrast to these assertions, the long-term chief justice of the 6th senate of the BGH, competent for the law of extra-contractual liability, made it clear that his court has always put tort law first and has never allowed the insurance tail to wag the tort law dog.80 What he did acknowledge, however, was that the BGH took into account the effects of its decisions on premium levels. In fact, the court announced in several cases involving motor accidents that the amount of compensation should be set with an eye towards the compulsory motor accident insurance system.81 At first sight, this concern may seem unfounded as motor accident insurers earn billions a year which they then distribute among the victims of car accidents. A single decision seems to have very little impact on the operation of this system. However, it is not the particular case that matters but rather the effect the decision has on the reimbursement practice of insurers. If the BGH, for example, allows the victim to claim the costs of repair even if these costs exceed the fair value of the undamaged vehicle, insurers will have to allow such claims and premiums are likely to rise.
64
Astonishingly then, the BGH dares to touch upon the insurance issue only where the objective is not efficient risk spreading or expansion of liability but rather its limitation.82 A somewhat “Freudian” explanation for this behaviour would assume that the insurance question looms large in the mind of judges anyway but that it must not be addressed in the open. The reason for this kind of judicial self-restraint is of course the almost unanimous belief that the liability issue must be kept separate from the insurance issue, i.e. that liability must never be based on the objective of risk-spreading.83
65
It is equally hard to tell whether liability insurance plays a role in evaluating the behaviour of victims. The decisive question here is whether courts are reluctant to find negligence on the part of the victim where the liability of the tortfeasor is covered by insurance. As a matter of sense of justice one might suppose that the legal thrust of a finding of contributory negligence is seriously diminished where such a finding works to the benefit of an insurance company rather than relieving the individual tortfeasor from an otherwise heavy burden. Again, it is next to impossible to come up with hard facts on this issue as judges are avoiding the admission that they decide cases differently as to whether the loss falls upon an insurance company or not, however, in the area of hunting accidents. It is hard to escape the conclusion that courts have exhibited particular generosity towards victims because they could be certain that an insurance company would internalise the costs of their judgments. The grant of a hunting licence in Germany is contingent on the applicant carrying liability insurance.84 Maybe for this reason, the BGH has been ready to find
66
80 81
82 83 84
E. Steffen, [1993] ZVersWiss, 13, 26. BGH (15.10.1991) in BGHZ 115, 364, 372 et seq.; BGH (15.10.1991) in BGHZ 115, 375, 379; BGH (17.3.1992) in [1992] VersR, 710 et seq. BGH (29.10.1974) in BGHZ 63, 182, 187. Supra no. 1; infra no. 90. Cf. Sect. 17 para 1 No. 4 BJagdG.
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negligence on the part of the defendant even though the plaintiff was a fellow hunter who behaved at least as carelessly as the person he sued for compensation in that he moved himself into the shooting range of the plaintiff at dawn.85
67
Again, it is impossible to say whether insurance was the true motive behind such decisions. What can be said with reasonable certainty, however, is that it would be entirely wrong to think that judgments finding contributory negligence on the part of a plaintiff who suffered personal injury at the hands of an insured defendant were the rare exception. In the motor accident arena, such judgments reducing damages for personal injury are common although everybody knows that the reduction of damages only benefits the liability insurer of the defendant. The German courts were even prepared to cut down compensation claims brought by small children who inadvertently crossed the street behind a car parked at the curb and ran into the approaching vehicle of the defendant.86 Precisely with regard to these scenarios Parliament, in the year 2002, passed a law stipulating that children below the age of 10 years lacked capacity if involved in a motor accident.87 This step of the legislature was necessary only because the German courts were unwilling – or not willing enough – to take the liability insurance on the part of the defendant into account when determining the contributory negligence of minors as plaintiffs. (12) Do courts take first-party insurance into account in setting the standard of care? Is there a tendency to set the standard high in case plaintiff is compensated anyway under a first-party insurance policy and low if plaintiff does not enjoy such coverage? (13) Might a party be held to have acted negligently for the sole reason that he delegated the duty of care incumbent upon himself to an independent contractor who in turn was not protected either by an insurance policy or by sufficient equity against which potential victims could have executed their claims?
68
There are no court decisions explicitly basing liability for the tort committed by an independent contractor on the fact that the independent contractor lacked the financial means to satisfy damage claims. Commentators are divided.88 One point of view is to maintain that the loss suffered by the victim in case of insolvency of the independent contractor is pure economic loss which as such is not within the protective perimeter of tort law.89 Commentators 85 86
87
88 89
BGH (17.9.1968) in [1968] VersR, 1141. BGH (21.2.1985) in [1985] NJW, 1950, 1951 et seq.; BGH (13.2.1990) in [1990] VersR, 535, 536; see also G. Wagner, [2002] NJW, 2049, 2061. Cf. Sect 828 para 2 BGB; as to the legislative background G. Wagner, [2002] NJW, 2049, 2060 et seq.; the legislative materials are reprinted at G. Wagner, Das neue Schadensersatzrecht (2002), 152. For an overview cf. G. Wagner (supra fn. 10), Sect. 823 no. 293. P. Marburger, in: R. Breuer/M. Kloepfer/P. Marburger/M. Schröder (eds.), Kreislauf oder Kollaps im Abfallwirtschaftsrecht (1995), 129, 151; G. Spindler, Unternehmensorganisationspflichten (2001), 722, 768, 781 et seq.
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favouring responsibility of the party delegating his duty of care argue that the issue is not the protection of pure economic loss as the claim requires an actionable tort having been committed by the independent contractor, i.e. the infringement of a protected interest.90 It is further thought to be a general legal principle that someone who entrusts a legal duty to a separate entity must ensure that this entity has sufficient means to perform the task – and to satisfy claims in the event of malperformance. 4. General Duty to Insure (14) Does it constitute negligence if a party failed to transfer the risk of liability to an insurance carrier? If so, what is the sanction in case of such failure? No.
69
(15) May parents be held accountable for the torts of their children because they failed to buy liability insurance for the whole family, including the child? Parents are under no duty to take out liability insurance for their child. Some commentators tried to derive such an obligation from the parental duties to take care of the child’s property (Sect. 1626 para 1 cl 2 BGB) and to support the child (Sect. 1610 para 1 BGB).91 However, this proposal has not won much support.
70
(16) Are employers under a duty to take out liability insurance covering the torts of their employees? If so, what is the sanction in case of default, both visà-vis the employee and the third party victim? No such duty exists under German law. Nevertheless, liability of employees for damage suffered by their employers or by third-parties is a serious problem which gave rise to a whole system of interrelated legal rules whose common aim it is to shift the costs of accidents to the employer.92 To begin with, the employee is not liable for torts committed against his employer, provided that he did not cause the harm intentionally or recklessly. Where a third-party suffered harm, the employee is liable even for his negligence but enjoys a right of recourse against the employer under the same conditions, i.e. absent intention and recklessness. Thus, the employer will ordinarily have a strong interest in covering the risk of liability on the part of his employee. If he fails to do so, he will become personally liable for the loss caused by his agent. The responsibility of the employer to pick up the harm caused by the employee is even thought to persist in case the employee himself carried liability insurance cov90
91
92
G. Wagner (supra fn. 10), Sect. 823 no. 293; P.v. Wilmowsky, Die Haftung des Abfallerzeugers – Bestandsaufnahme und rechtspolitische Leitlinien, [1991] NuR, 253, 257. F. Peters, Schutz Minderjähriger vor deliktischen Verbindlichkeiten, [1997] Zeitschrift für das gesamte Familienrecht (FamRZ), 595, 598 et seq. For details cf. H. Kötz/G. Wagner (supra fn. 21), no. 299; and the book by H. Otto/R. Schwarze, Die Haftung des Arbeitnehmers (3rd edn. 1998).
71
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ering professional risks. If his insurer compensates the victim, the insurance company may seek recourse from the employer or his liability insurer, respectively.93
72
Against the legal background just explained it cannot come as a surprise that most firms in Germany have in fact taken out liability insurance even where it is not compulsory.94 Under the standard business terms of the ordinary liability insurance policies for commercial enterprises sold on the German market, the cover is not limited to tortuous acts of the employer in person but extends it to acts of employees which cause third-party loss.95 In addition, the importance of mandatory insurance schemes should not be underestimated even in the context of the employer/employee relationship.96 Mandatory insurance for motor cars works to the effect that employees who cause motor accidents enjoy the protection of liability insurance.97 The same is true for a pilot who causes an aeroplane to crash or an engineer who is responsible for the escape of a toxic agent from a chemical plant which is subject to mandatory insurance under the Environmental Liability Act.98 Finally, it bears mentioning that the German Workers Compensation Scheme covers personal injury inflicted by one employee upon another in the course of employment.99 In such a case, a public insurance carrier picks up the loss, wearing the two hats of a liability insurer for the employer and the employee who committed the tort, and as a first-party insurer for the employee who suffered harm.
73
Accidents suffered at work or on the road are still the most important risks of modern society in the sense that for any individual it is most likely to suffer such an accident – rather than being harmed in other social contexts. Regarding these other risks, most firms have contracted voluntarily for liability insurance also covering damage caused by their employees. All these circumstances together explain why the question whether the employer is under a legal duty to provide a liability insurance cover for his agents is anything but a hot issue in German law. Some commentators have tried to derive such a duty from the contract of employment but the dominant view in the literature is that no such duty exists.100 It is a matter of self-interest for the employer to cover his own risk of becoming liable for the losses caused by his agents in the course of employment.
93 94 95
96 97 98 99 100
H. Kötz/G. Wagner (supra fn. 21), no. 215, 481 et seq. H. Kötz/G. Wagner (supra fn. 21), no. 227: almost 100% of all firms carry liability insurance. H. Kötz/G. Wagner (supra fn. 21), no. 300; H. Kötz/G. Wagner (supra fn. 21), no. 227; No. 2 of the „Besondere Bedingungen und Risikobeschreibungen für Industrie, Handel und Gewerbe“; as an example cf. BGH (5.7.1995) in [1995] VersR, 951. Supra nos. 22 et seq. For details cf. H. Kötz/G. Wagner (supra fn. 21), nos. 221 et seq. Supra nos. 22 et seq. H. Kötz/G. Wagner (supra fn. 21), nos. 581 et seq., 595 et seq. H. Kötz/G. Wagner (supra fn. 21), no. 232.
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(17) Vice versa: May a plaintiff be thought to be guilty of contributory negligence for the sole reason that he failed to protect himself by means of firstparty insurance? For example, where a potential buyer of a car embarks on a test drive and causes damage to the demonstration car: Is the automobile dealer under a legal obligation to supply first-party insurance such that the client is protected against tort liability in case of an accident? No such duty, in a strict legal sense, exists. However, the courts imply a contractual agreement partially excluding the liability of the driver for the reason that the automobile dealer may easily insure against damage to the car. See infra question 22.
74
5. Insurance and Damages (18) Does the fact that the defendant is insured influence in any way the assessment of damages? There is no decision where a court openly admitted that it had set the level of compensation with an eye towards the insurance cover which the defendant had at his disposal. Thus, the issue is a matter of guesswork. However, it is hard to escape the conclusion that courts are influenced by the fact that the defendant will not have to bear the damages awarded in a judgment himself. Such a presumption seems particularly convincing in areas of compulsory liability insurance of which the automobile sector is the most prominent example. It seems highly unlikely that the BGH would have been as generous in awarding compensation for a damaged car if those awards were not covered by liability insurance.
75
(19) To the extent that the particular legal system provides for exemplary or punitive damages: Is the fact that the defendant has transferred the risk to an insurance carrier relevant to the decision on imposing punitive damages? If so, does it tend to aggravate or to mitigate the amount granted? Punitive damages are not available in German tort law.
76
(20) Insurance and non-pecuniary loss: To the extent that courts enjoy discretion to set the amount of damages for non-pecuniary loss: Is insurance a relevant factor worth considering when it comes to the assessment of such damages? If so, does it aggravate or mitigate the amount allowed? It is well accepted that the protection of the defendant by liability insurance is a relevant factor in the assessment of damages for non-pecuniary loss.101 The underlying principle is that in fixing the damages for pain and suffering the court must take the financial position of the tortfeasor into account. The existence of insurance cover is obviously relevant to the financial capacity of the 101
BGH (6.7.1955) in BGHZ 18, 149, 165 et seq.
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defendant. From an economic point of view, insurance is just a smart way of saving. 6. Privileges (21) To the extent that the law allows for privileges, dispensing certain classes of parties from the ordinary standard of care, do such privileges apply even where the privileged party is insured? In particular, in cases where one spouse harms another in a road accident, may the tortfeasor invoke any privilege he might enjoy generally also against his or her partner?
78
Pursuant to Sect. 1359 BGB spouses enjoy a privilege in dealings with one another. Each spouse owes the other one not observation of the general duty of care but only of the diligentia quam in suis in the sense of Sect. 277 BGB. Each spouse merely has to observe the same level of care and diligence he or she follows in his or her own affairs,102 as long as they do not act intentionally or recklessly.103 The same standard applies also between parents and children, Sect. 1664 BGB. The justification for these privileges is the protection of the family against internal lawsuits which aim at little more than a redistribution of wealth from one family member to another.
79
In modern times, the privileges of Sect. 1359 and 1664 BGB have increasingly come under pressure. Courts and commentators have asked the question whether marriage or family ties are apt to serve as a justification for the reduction of care levels rather than for their strengthening, in particular with regard to personal injury cases. It might be supposed that this shift in attitudes which occurred between the late 19th century, when said paragraphs were drafted, and the late 20th century may have been influenced by the rise of liability insurance.
80
With regard to motor accidents, one does not have to rely on guesswork. In a famous decision, the BGH has held that the privilege of Sect. 1359 BGB does not apply here. The court squarely based this result on the argument that it would only benefit the liability insurance carrier if the defence of Sect. 1359 BGB were allowed in this context.104 In an obiter dictum, the court indicated that such privileges may never apply to accidents outside the home provided that these accidents were not excluded from the scope of protection of the insurance policy.105
102
103
104 105
L. Michalski, in: Erman (ed.), Bürgerliches Gesetzbuch (BGB) II (11th edn.2004), Sect. 1664, no. 3. Sect. 277 BGB: „Wer nur für diejenige Sorgfalt einzustehen hat, welche er in eigenen Angelegenheiten anzuwenden pflegt, ist von der Haftung wegen grober Fahrlässigkeit nicht befreit.“ BGH (11.3.1970) in BGHZ 53, 352, 354; BGH (12.6.1973) in BGHZ 61, 51, 59 et seq. BGH (11.3.1970) in BGHZ 53, 352, 354.
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The limitation of privileges in the area of torts within the family ties in with statutory limitations expressly stipulated in the context of workers’ compensation. Pursuant to Sect. 104 para 1, 105 para 1 SGB VII (Social Security Act, Vol. VII), the injured worker has no cause of action either against his employer or his fellow worker who caused the damage unless the injury was caused intentionally or suffered in the course of a road accident sustained while on the way to work or back home. As a consequence, a worker who is injured in a traffic accident while at work, e.g. the plumber’s assistant driving the principal’s van to a customer, has no private cause of action against the employer who failed to repair the break system of the car, or against a fellow worker who was sitting at the wheel and caused the accident carelessly.106 Thus, the idea behind the exception regarding accidents sustained on the way to work and back home is not – or not primarily – that mandatory liability insurance exists as this is true for all kinds of road accidents. The true justification of the exception in cases of road accidents suffered on the way to work and back home appears to be that the worker suffering such accident should be treated equally as any other traffic victim. The main practical consequence is that the injured worker may assert a claim for compensation of non-pecuniary loss – pain and suffering – against the employer or the fellow worker.
81
7. Insurance and Agreements to Limit or Exclude Tort Liability (22) Assuming that the particular legal system allows for the derogation of tort liability by contractual agreements: Do courts take the issue of liability insurance into account when examining whether there is an implicit agreement excluding or limiting tort liability? For instance, do courts hold owners of horses to be strictly liable even if the animal hurts someone who was allowed to take it for a ride gratuitously because horse owners are usually protected by liability insurance? Under German law, the parties are free to exclude extracontracutal liability by agreement. What sounds like a clear and easy-to-apply principle bears many problems for legal practice. In many cases where there was an exclusionary agreement the courts declined to enforce it, and in other cases where an exclusionary agreement was prima facie lacking the courts were prepared to imply it.
82
As to the first category, courts have always been reluctant to enforce provisions excluding liability in tort which were hidden in the boiler plate language of contracts of adhesion. When the judge-made rules on judicial control of standard business terms were cast into written law, it was made explicit that contractual provisions in standard business terms excluding tortious liability for personal injury were invalid.107
83
106 107
BGH (12.10.2000) in BGHZ 145, 311, 313 et seq. Cf. Sect. 309 no. 7a BGB.
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84
The other case of judicial intervention of particular interest in the present context concerns the construction of implied terms into contracts which are silent on the issue of liability in tort. In the familiar case that a customer interested in buying a car embarks on a test drive and causes an accident, the courts have assumed an implied contract between the customer and the automobile dealer excluding the liability of the former for damage to the car. The justification for this result does not even pretend to be based on the declarations of the parties. The crucial argument here is that the dealer may easily protect himself against accidents during test drives by taking out first-party insurance for the car whereas the customer is unable to transfer the risk to a professional carrier because damage caused to a car while driving it is excluded both from automobile liability insurance and from the general liability insurance cover.108 Given that the decision to protect the potential buyer is based on the “ability to insure”, i.e. the quality as a “superior insurer”, it follows quite naturally that the customer is protected even where the dealer acts as a mere representative of a non-commercial seller but that the shield breaks down once the seller is not a professional but a private owner offering his car himself, without making use of a professional business.109
85
A similar train of argument is used in cases where a horse owner lent the animal to a third-party who then hurt himself while riding it. The usual dispute of this type involves two private parties, with the party who lent her horse gratuitously facing a large claim for damages brought by the borrower. Why would a court allow such a claim, thereby punishing the lender? – The answer, of course, is: insurance. Although there is no legal duty to do so, horses are usually covered by liability insurance. Thus, the true defendant in these cases is not the private lender but the insurance company standing behind him or her, liable to pick up any award of damage the court may issue. This is the motive that actually moved the BGH when the court stretched strict liability for animals so far that it even covered horse riders and then refused to exclude the responsibility of the keeper of the animal, either by applying contractual limitations in favour of gratuitous lenders or by implying an agreement excluding liability. In fact, the court explicitly limited the rule that the keeper of the animal is liable towards the rider to the case that the loss eventually falls upon an insurance agency.110
86
Similarly, in the area of hunting accidents, the court has followed the same credo in holding that it was not in the interests of the parties to a hunting party to exclude liability between themselves.111 The same rationale applies to injuries suffered during the exercise of a sport, provided that the tortfeasor is covered by liability insurance.112 108
109 110 111 112
BGH (7.6.1972) in [1972] NJW, 1363; BGH (10.1.1979) in [1979] NJW, 643, 644; BGH (18.12.1979) in [1980] NJW, 1681, 1682. OLG Köln (20.11.1995) in [1996] NJW, 1288, 1289. BGH (9.6.1992) in [1992] NJW, 2474, 2475. BGH (21.10.1958) in [1958] VersR, 851 et seq. BGH (5.3.1963) in BGHZ 39, 156, 158.
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The reasoning of the courts in the cases reported may be succinctly summarised in the rule that the court will decline to imply an agreement excluding delictual liability where the only effect of such an agreement would be to benefit the liability insurer.113 Consequently, if the sport that brought the parties together is a car race and accidents suffered in such a competitive activity are not included into the coverage of motor accident insurance, then an exclusionary agreement will readily be implied.114
87
(23) Vice versa: What impact does first-party insurance have on the willingness of courts to find a tacit agreement excluding liability in tort? For example, as house owners in most countries are compelled to insure against fire, does this insurance policy also extend to tenants of the same dwelling such that the insurance company has no rights of recourse against a tenant setting the house on fire negligently? Within the German legal system, this question arose in the context of leases of dwellings and apartments where the tenants usually bear the costs of fire insurance as these are passed on in the rent charged. In the familiar case of the tenant who falls asleep on his sofa at night with a cigarette burning in his hand which then sets the house on fire, the question arises whether the fire insurer may have recourse against the tenant. If one simply puts tort law and insurance law together like two pieces of a puzzle, the answer must be in the affirmative. The tenant is certainly liable towards his landlord for having caused the fire negligently, and the insurer who indemnified the landlord succeeds to the latter’s rights against the tenant.115 If this were the end of the story, the tenant would have to pay for the fire insurance but would receive no benefit whatsoever as he would continue to be responsible for the damage caused by him. The risk transferred to the fire insurer would be narrowly defined indeed as only the loss of the house through acts of God or the behaviour of parties other than landlord and tenants would result in it having to bear the loss.
88
For quite some time, the BGH has explored ways to avoid these results. One way leading towards this end was – again – to imply a term within the contract of lease between landlord and tenant pursuant to which the liability of the tenant was excluded, provided that he did not cause the fire intentionally or with gross negligence.116 Recently, the court has stuck to this goal but switched to another legal institution for achieving it. According to the new reasoning the solution to the problem is to be found not in the contract for lease but in the contract for insurance which is thought to imply a term to the effect that the insurer waives any rights of recourse he may have against the tenant.117 That such a “waiver” is a matter of pure fiction is too obvious to be denied. Again,
89
113
114 115 116 117
BGH (5.3.1963) in BGHZ 39, 156, 158; BGH (21.10.1958) in [1958] VersR, 851 et seq.; BGH (9.6.1992) in [1992] VersR, 2474, 2475. BGH (1.4.2003) in [2003] NJW, 2018, 2019 et seq. Sect. 67 VVG. BGH (29.10.1956) in BGHZ 22, 109, 115 et seq.; BGH (7.3.1990) in [1990] VersR, 625, 626. BGH (8.11.2000) in BGHZ 145, 393, 397 et seq.
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the construction of a party agreement is merely camouflage set up to allow the court to arrive at the result it deems fair and reasonable. Consequently, it does not protect the tenant against recourse by the insurer where the fire was caused intentionally or recklessly.118 8. Procedural Issues (24) What is the relationship between court proceedings and judgments on the issue of liability on the one hand and on the issue of insurance coverage on the other? May an insurer refuse coverage although the policy holder has been found liable in a final judgment on the torts claim? In practice, who defends a claim for damages brought against another: the potential tortfeasor himself or his insurer?
90
As has been explained already, the relationship between the liability issue and the insurance issue is governed by the “principle of separation” (Trennungsprinzip).119 At its root, this principle means that the two issues are to be treated separately, according to the ordinary principles of each field. The mere fact that the defendant is insured does not mean that he is also liable, and the fact that liability has been established does not necessarily entail that there is also insurance cover. Transposed into the area of procedural law, the principle of separation implies that the damage claim and the indemnity claim are to be processed separately as well. The victim and the tortfeasor will be parties to the dispute concerning liability, and the tortfeasor and the insurance company will then have to come to terms with respect to coverage.
91
If matters were left standing like this, one could imagine a scenario like the following: A damage claim is brought against the alleged tortfeasor who turns to his insurer for advice. The insurer regards the damage claim to be unfounded and refuses to compensate the victim. The latter sues the tortfeasor in court and wins a judgment. The insured now comes back to the insurer seeking indemnification which the insurer denies on the ground that the court was wrong to allow the damage claim which in truth was unfounded. To prevent the insurer from playing cat and mouse with the insured, the unanimous view in German law is that the insurer is bound by a final judgment on the damage claim even though he is no party to such proceedings.120 The doctrinal justification for turning the principle of res judicata against the insurer as third-party is thought to be the contract of insurance itself.121 An agreement to insure against
118 119 120
121
BGH (8.11.2000) in BGHZ 145, 393, 398. See supra nos. 1 et seq. RG (22.7.1941) in RGZ 167, 243, 245 et seq.; BGH (22.9.1958) in BGHZ 28, 137, 139; 37, 71, 82 et seq.; BGH (18.3.1992) in BGHZ 117, 345, 350 et seq.; BGH (30.9.1992) in BGHZ 119, 276, 278; BGH (27.5.1998) in BGHZ 139, 52, 54; see also also P. Reiff, Zivilprozessuale Probleme der Haftpflichtversicherung insbesondere bei gestellten Verkehrsunfällen, [1990] VersR, 113 et seq; H. Hagen, [2001] Neue Zeitschrift für Versicherung und Recht (NVersZ), 341 et seq. BGH (13.12.1977) in [1978] VersR, 862, 864; BGH (30.9.1992) in BGHZ 119, 276, 280.
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the risk of liability is interpreted broadly so as to cover indemnification of the insured wherever he has been found liable by a final judgment of a court. These arguments appear even more compelling once account is taken of the standard business terms of the German insurance industry which themselves reflect the practice in the field. As has been mentioned already, it is for the insurer to defend unmeritorious claims brought against the insured122 and to manage legal proceedings initiated by the victim.123 Against this background, it is no exaggeration to say that the insurer is the “real” party to the dispute over the damage claim, both in a procedural and in a substantive sense. As far as substance is concerned, any damage award will be paid out of the insurance fund, and consequently the insurer is in charge of the procedural process. If the insurer then ends up on the losing end, it seems only fair and reasonable that he is barred from walking away scot-free, starting the dispute over the liability issue all over again when the insured seeks indemnification.
92
Of course, the insurer may waive his procedural rights, refuse indemnification and leave the instruction of counsel to the insured. But even where he has done so, it is appropriate to bind the insurer to the judgment against the insured.124 After all, the insurer had a fair chance to take the process of dispute resolution into his own hands. Where he failed to exercise this right but the victim still won, the only explanation is a miscalculation on the part of the insurer. For obvious reasons, it would be unfair to allow the insurer to unload the risk of miscalculation upon the insured.
93
These principles apply even in cases involving a conflict of interest between the insured and his insurer. Take the case where the insurer denies coverage not because he holds the damage claim to be unfounded but because the insured caused the damage intentionally such that there is no cover and thus refuses to defend the claim. The BGH has nonetheless held the insurer to be bound by the judgment against the insured entered into by the court hearing the damage claim.125 As this court assumed that the insured did not act intentionally but only negligently he was ordered to indemnify the tortfeasor.
94
122 123 124 125
Sect. 3 para II AHB; see supra nos. 22 et seq. Sect. 5 no. 4 AHB. BGH (30.9.1992) in BGHZ 119, 276, 281 et seq. BGH (30.9.1992) in BGHZ 119, 276, 281 et seq.
TORT LIABILITY AND INSURANCE: ITALY Giovanni Iudica and Alessandro P. Scarso I.
General
(1) In the legal and economic literature of your country, is there a discussion about the relationship between tort liability and insurance? What are the major subjects and ideas of such discussion? Legal scholars in Italy focus mainly on two aspects of the relationship between liability insurance and torts: firstly, from a Comparative Law and Economics perspective, the biases due to the availability of insurance coverage for prospective tortfeasors have been studied1. In particular, legal scholars tried to consider whether insurance coverage represents an element in favour of a liability regime based on fault or in favour of a strict liability regime2. The main issues of this debate have been the damage compensation systems, in terms of the desirability of the substitution of tortious liability with a no-fault based insurance system or with a social security system for accidents3. In this context 1
2
3
See, in this perspective, among others: F. Cosentino, La responsabilità civile e le ragioni dell’analisi economica, [1996] Danno e responsabilità (DR), 403–405. With reference to textbooks: see R. Cooter/U. Mattei/P.G. Monateri/R. Pardolesi/T. Ulen, Il mercato delle regole – Analisi economica del diritto civile (1999), 367 et seq., particularly 421–422; G. Alpa/P. Chiassoni/A. Pericu/F. Pulitini/S. Rodotà/F. Romani, Analisi economica del diritto privato (1998); P. Gallo, Analisi economica del diritto (1998); D. Chiancone/A. Porrini, Lezioni di analisi economica del diritto (1996). For the relationship between economic aspects and tort law rules, a forerunner role was that of P. Trimarchi, Rischio e responsabilità oggettiva (1961). The debate is particularly interesting in Italy, due to numerous Civil Code rules which contain “undetermined concepts” and “normative concepts” (see K. Engisch, Einführung in das juristische Denken (1997)): for instance Artt. 2050, Liability for dangerous activities, 2051, Liability par le fait de la chose, 2052, Liability for animals, 2053, Liability for the collapse of buildings, 2054, Liability for motor vehicles. For the vast jurisprudential application especially of Artt. 2050 and 2051: P.G. Monateri, Illecito e responsabilità civile, in: M. Bessone (ed.), Trattato di diritto privato X, II (2002), respectively, 99 et seq. (Liability for dangerous activities) and 117 et seq. (Liability par le fait de la chose); G. Alpa, La responsabilità civile, in: G. Alpa, Trattato di diritto civile IV (1999), respectively, 683 et seq. and 691 et seq. C. Salvi, Responsabilità extracontrattuale (dir. vigente), in: Enciclopedia del diritto XXXIX (1988), 1262–1263; G. Ponzanelli, La responsabilità civile. Profili di diritto comparato (1992), 105 et seq.; F.D. Busnelli, Modelli e tecniche di indennizzo del danno alla persona. L’esperienza italiana a confronto con “L’alternativa svedese”, [1986] Jus, 219 et seq.; F. Galgano, La commedia della responsabilità civile, [1987] Rivista critica del diritto privato (RCDP), 191 et seq.; A. Procida Mirabelli di Lauro, Dalla responsabilità civile alla sicurezza sociale. A proposito dei diversi sistemi di imputazione dei danni da circolazione di veicoli (1992), 64 et seq.
1
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the efficiency of insurance as a means for socialising mass torts, in particular damage to the environment (see supra nos. 48 et seq.) had a pre-eminent role4. The majority believes that it is advisable to resort to alternative means in order to administer the social cost of mass torts, in order to avoid insurance replacing social security systems, but with higher costs5.
2
A different approach has studied purely theoretical aspects related to the relationship between the insurance contract and tort rules. In these texts the accent is on the conceptual differences of the notion of “liability” and “risk” in tort and insurance law, and on the legal issues strictly related to the insurance contract (action directe, subrogation of the insurer and its limits, etc.)6. II. Compulsory and Voluntary Insurance (2) Compulsory liability insurance: To what extent does it exist outside the automobile accident sector?
3
Legal provisions of compulsory liability insurance have to be distinguished according to their national or regional source. Within state regulations, despite the unavoidable approximations that a rough classification entails, compulsory liability insurances are related:
4
5
6
For the vast legal literature on this issue, see, among others: B. Pozzo, Il danno ambientale (1998); W. Pfennigstorf, L’assicurazione r.c. danni da inquinamento, [1991] Assicurazioni (AS) I, 48; F. Giampietro, Responsabilità e assicurazione per i danni all’ambiente, [1989] Giustizia civile (GC) II, 379; M. Mandò, L’assicurazione per i danni da inquinamento ambientale dopo l’Art 18, l. no. 349/86, [1988] RCDP, 799; A.D. Candian, La responsabilità civile per danno ambientale e assicurazione, in: La parabola del danno ambientale, in: Quadrimestre di diritto ed economia dell’assicurazione, 1, 45; S. Patti, La tutela civile dell’ambiente (1979). See P.G. Monateri (supra fn. 2), 198, stresses that in Italy contract, through the recourse to dispute resolution agreements, and not tort liability, rules such cases; P. Gallo, Pene private e responsabilità civile (1996), 157, who refers to the prevailing opinion in the United States, see S.D. Sugarman, Doing Away with Tort Law, [1985] Cal. Law Review, 555; S.D. Sugarman, Doing Away with Personal Injury Law (1989). See in this perspective: A.D. Candian, Responsabilità civile e assicurazione (1993), 66 et seq., where the different significance of “damage” in tort law and insurance law is examined. Among other texts, see: G. Ponzanelli, Nuove figure di danno alla persona e tecniche assicurative, [1989] Responsabilità civile e previdenza (RCP), 409; M. Comporti/G. Scalfi (eds.), Responsabilità civile e assicurazione obbligatoria (1988); G. Alpa, L’assicurazione di fronte all’evolversi del concetto di responsabilità, [1988] AS I, 540; ibid, Sistemi di compensazione e tendenze attuali della responsabilità civile, [1975] Rivista trimestrale di diritto processuale e diritto civile, 1583; A. La Torre, Colpa, rischio e danno fra responsabilità civile e assicurazione, [1979] AS I, 320; U. Natoli/F.D. Busnelli/A. Galoppini, Responsabilità civile, assicurazione, e costo sociale dell’illecito, in: Annuario di diritto comparato (1970), 56 et seq. Italian legal scholars drew attention particularly to the relationship of liability insurance and tort law in the motor vehicle area. See, among others: G. Scalfi, Considerazione sulla Convenzione di Strasburgo del 14 maggio 1973. Responsabilità civile per i danni causati dagli autoveicoli, [1975] RCP, 18 et seq.; A. Gambino, Tramonto dell’assicurazione della responsabilità civile automobilistica, [1973] AS I, 415; M. Franzoni, Il terzo danneggiato nell’assicurazione obbligatoria della responsabilità civile (1986).
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a) to “dangerous activities”; besides the automobile insurance sector, other forms include:
4
the movement of boats and crafts with a registered tonnage exceeding 25 tons and with an engine performance exceeding a determined minimum7, exclusively for tortious liability for injuries to persons8 (Art. 2, Statute 24 December 1969, no. 990, changed by Art. 48, Statute 11 February 1971, no. 50)9;
5
any type of race or sporting competition of motor vehicles and related trials, for injuries to persons and animals and damage to property, with the exclusion of injuries and damage suffered by participants and their vehicles (Art. 3, Statute 24 December 1969, no. 990);
6
the use of aircraft, for damage suffered by third parties on the ground (Art. 798, Codice della navigazione – Navigation Code – [CN])10 and for injuries suffered by passengers transported by the aircraft (Art. 996 CN and Statute 7 July 1988, no. 274)11;
7
leisure and sporting flights of two-seater flying devices (in effect, hang gliders and ultra-light aircraft) – Art. 21, Decree of the President of the Republic (Decreto del Presidente della Repubblica – d.p.r.) 5 August 1988, no. 404, implementing Statute 25 march 1985, no. 106, for damage suffered by third parties on the ground, damage due to collisions in the air and for injuries suffered by passengers;
8
operators of nuclear plants (Art. 21, Statute 31 December 1962, no. 1860);
9
hunters (Art. 12, Statute 11 February 1992, no. 157);
10
7
8
9
10
11
Precisely, three “cavalli fiscali”, fiscal unit measuring the HP of engines (approx. 30 HP) – Art. 2, Statute 24 December 1969, no. 990, modified by Art. 48, Statute 11 February 1971, no. 50. Therefore damage to property is excluded (see Corte di Cassazione – Italian Supreme Court – Cass., 28 November 1994, no. 10156, [1995] in Archivio della circolazione, 722). It has to be noted that, according to Statute 24 December 1969, no. 990, boats and crafts with a registered tonnage exceeding 50 tons are excluded from compulsory liability insurance. A duty to sign an insurance contract is provided for removable marine motors whose power exceeds 3 “cavalli fiscali” (approx. 30 HP), regardless of the boat or craft to which they are applied. In general, compulsory liability insurance of boats and crafts only exists for injury to persons (and not for damage to property – Art. 2, Statute 24 December 1969, no. 990). Art. 798 Codice della navigazione (Navigation Code – CN) imposes on whoever operates the aircraft the duty to enter into an insurance contract for liability for damage caused to third parties on the ground. The CN also rules the features of the insurance police, the amount of the damage covered, and the rights and duties of the parties arising from the insurance contract in Artt. 1010–1016 CN. Lastly confirmed by Art. 50, Statute 10 January 2004, no. 12, that ratified the Montreal Convention of 28 May 1999 on the unification of some rules concerning international air transport. For differences between the two insurance forms, see G. Silingardi, Reg. CE 2027/97 e nuovo regime di responsabilità del vettore aereo di persone, [1998] Diritto dei trasporti, 831 et seq.; A. Antonini, La tutela assicurativa del passeggero nel trasporto aereo di persone, [1990] RCP, 937 et seq.
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11
distributors of liquid gas cylinders with a capacity exceeding 16 litres, for damage to persons, animals and property, including damage caused by users and the persons living with them deriving from the use of cylinders (Art. 5, sub a and b, Statute 2 February 1973, no. 7);
12
the National Hydrocarbon Agency (Ente Nazionale Idrocarburi [ENI]) for risks related to methane cylinders (Art. 19, d.p.r. 9 November 1991, no. 404);
13
operators of “equipped skiing areas” (aree sciabili attrezzate). This compulsory liability insurance is ruled in Art. 4, Statute 24 December 2003, no. 363, which establishes that operators of “equipped skiing areas” are “responsible for the regularity and safety of the use of ski slopes and that they may not be open to the public unless the operator is insured against tortious liability for damage to users and third parties resulting from the use of those areas for which the operator is responsible”.
14
b) in the practice of a profession in the broad sense. In these cases, besides full compensation of the victim, the protection of the tortfeasors plays a major role12. This is the case, among other instances:
15
for “middle managers”, who, according to the duties carried out, are particularly exposed to tortious liability in relation to third parties. In these cases the employer has a duty to provide liability insurance (Artt. 1 and 2, Statute 13 May 1985, no. 190)13;
16
for trainees of public employers or employers where the state has a share or of private non-profit employers operating in the social or cultural sector (Art. 18, sub e, Statute 24 June 1997, no. 196);
17
for students of the three-year degree course in dentistry and dental prothesis for tortious liability arising from clinical practice and apprenticeship – under the supervision of teaching staff – required for admission to the bachelor’s degree (sole article, Statute 20 March 1984, no. 47);
18
of non-profit organizations for tortious liability of its members in relation to third parties (Art. 4, Statute 11 August 1991, no. 266 and Art. 2, ministerial decree [decreto ministeriale – d.m.] 14 February 1992);
19
for educational institutions of municipalities and sporting organizations whenever they seek permission for the use of gymnastic or sporting facilities belonging to military units, for the coverage of tortious liability of users (Art. 5, Statute 24 December 1986, no. 958); 12
13
This is pointed out, with reference to compulsory liability insurance for employers of nonprofit organizations and “middle management”, by A.D. Candian (supra fn. 6), 268. For a case where the notion of “middle management” had to be determined with reference to the director of a pharmacy, see Pretura (Italian basic court – Pret.) of Milan 10 December 1986, [1987] GC I, 434.
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for insurance brokers, for tortious liability due to negligence or errors in the exercise of their profession (Art. 4, point g, Statute 28 November 1984, no. 792);
20
for road transport for third party carriage of freight, for tortious liability for damage caused by their vehicles or for damage occurring to the freight transported (Art. 13, no. 4, Statute 6 June 1974, no. 298);
21
for the sale of “all inclusive” tours, excursions and holidays for tortious liability for personal injury suffered by the consumer (Art. 15) or arising from the nonfulfilment or inexact fulfilment of the holiday package (Art. 20, by-law [decreto legislativo – d.l.] 17 March 1995, no. 111, implementing directive 90/314/CEE).
22
Many provisions of compulsory liability insurance have been introduced by regional or provincial laws14; for example, laws ruling the compulsory liability insurance of:
23
ski instructors or ski schools15 and alpine guides16;
24
operators of cableways used for the transport of persons or things for damage caused by the plant to persons, animals and property17;
25
operators of camping sites “for the risks of tortious liability in relation to users”18;
26
minors temporarily without a family environment, in the case of family custody, for tortious liability of guardians in relation to third parties for the period of the stay of minors within their family19.
27
Finally, draft legislation was proposed to introduce compulsory liability insurance for health service doctors and those that have an arrangement with the public health insurance scheme20. It is currently before the Parliament.
28
14
15
16
17
18
19 20
In Italy, besides the State, the Regioni (regions) and the two Autonomous Provinces of Trento and Bolzano have legislative power (Art. 119 Constitution [Cost.] and Art. 2, Annex no. IV of the Peace Treaty between Italy and the Allied Powers, signed in Paris on 10 February 1947, respectively). See, for example, as far as the Lombardy Region is concerned, Regional Regulation 7 October 2003, no. 22, Art. 15 (ski instructors) and Art. 16 (ski schools). For the Autonomous Province of Bolzano, Provincial Statute 19 February 2001, no. 5, Art. 22, no. 1. For the Autonomous Province of Trento, Provincial Statute 23 August 1993, no. 20, Art. 21, 4 sub F, (ski instructors) and Art. 40, 1 sub H (ski schools). For example, in the case of the Lombardy Region, Regional Regulation 7 October 2003, no. 22, Art. 31. Autonomous Province of Bolzano, Provincial Statute 17 February 2000, no. 5, Art. 9, no. 3; Autonomous Province of Trento, Provincial Statute 17 February 2000, no. 5, Art. 9, no. 3. See, for example, Autonomous Province of Trento, Provincial Statute 13 December 1990, no. 33, Art. 8, no. 4. See, for example, Lombardy Region, Regional Statute 7 January 1986, no.1, Art. 82, sub E. See Art. 8 of the draft presented on 10 December 2003, assigned to the 12th Commission on “Social Affairs” on 28 January 2004 (Italian House of Representatives C. 4550).
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(3) Basic features of mandatory insurance schemes: Are bank guarantees accepted as substitutes for insurance policies? Is the action directe (direct claim by victim against insurer) available generally or in the motor vehicle insurance area only? Is a party who fails to comply with the obligation to insure subject to sanctions?
29
Generally, the requirement of compulsory liability insurance cannot be met by making use of alternative means. Still, some alternative guarantees of damage compensation are expressly ruled by law. Among the most important provisions, the commencement of the Testo unico della intermediazione finanziaria (Consolidated law on financial brokerage – TUF)21 replaced the former compulsory liability insurance of auditors of listed companies22 with a “suitable guarantee” to cover risks arising from the auditing, which, according to Art. 107, TUBC23, has to be granted by a bank, an insurance company or a financial brokerage company (Art. 161 no. 4 TUF) subject to the supervision of the Banca d’Italia.
30
A financial guarantee can also be provided for the operation of nuclear plants. Specifically, the operator of a nuclear plant is liable for any damage suffered by persons or objects within the nuclear plant or related to it, together with the insurer “or any other person who provided a financial guarantee” (Art. 18, Statute 31 December 1962, no. 1860).
31
Generally, there is no relationship between compulsory liability insurance and the action directe in favour of the victim. Rules not providing for any action directe of the plaintiff in relation to the insurer clearly prevail. For instance, Art. 4, point g, Statute 28 November 1984, no. 792 (on the liability of insurance brokers), rules that insurance coverage is a requirement for the registration in the professional association, but does not provide for an action directe. Similarly, in the case of road transport of freight for third parties Art. 13, no. 4, Statute 6 June 1974, no. 298, mentions liability insurance as a requirement for membership of the professional association without stating anything as to an action directe of the plaintiff in relation to the insurer. The absence of a specific provision of an action directe is also a feature of the compulsory liability insurance of employers of non-profit organizations (Art. 4, Statute 11 21
22
23
See Decree of the President of the Republic (Decreto del Presidente della Repubblica – d.p.r.) 24 February 1998, no. 58. A company listed on the Stock Exchange is permitted to entrust its auditing only to auditors enrolled in a specific register administered by the CONSOB (the Italian Stock Exchange Authority) (Artt. 155 and 161 Testo unico della intermediazione finanziaria – Consolidated Statute on Financial Brokerage [TUF]). The requirement in order to be registered is the existence of a “suitable guarantee”. Legal scholars agree as to the fact that the change introduced does not reflect the intention of reducing guarantees, but to allow recourse to other forms of sureties (caution money, guarantees, etc. – see P. Balzarini, Art. 164, in: P. Marchetti/L.A. Bianchi (eds.) La disciplina delle società quotate nel testo unico della finanza – Commentario (1999), 1908). Testo unico in materia bancaria e credititizia (Consolidated law on banking – TUBC) 1 September 1993, no. 385.
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August 1991, no. 226 – the so-called “Consolidated law on non-profit organizations”). There are only very few regulations within the Italian legal system that explicitly provide for an action directe of the plaintiff and for the non-effectiveness, in relation to the plaintiff, of pleas arising from the insurance contract between insurer and insured. Besides the action directe in the motor vehicle insurance area (Art. 18, 1st paragraph, Statute 24 December 1969, no. 990), a specific action directe provision refers to damage caused on the ground by the operator of an aircraft (Art. 1015 CN).
32
The compulsory liability insurance of aircraft operators and the motor vehicle liability insurance both stand out inasmuch as they not only provide for an action directe, but also because they state the non-effectiveness, in relation to the plaintiff, of pleas the insurer could raise in relation to the insured party. Art. 18, 2nd paragraph, Statute 24 December 1969, no. 990, rules that “for the whole maximum amount of the insurance policy, the insurer may not bring in any plea against the plaintiff arising from the insurance contract or any terms ruling that a contribution to the damage has to be paid by the insured”.
33
Similarly, Art. 1015, 2nd paragraph, CN states that the insurer is not permitted to point out any cause that could give rise to the discharge or nullity of the contract with retrospective effect24.
34
Clearly, the effectiveness of pleas arising from the relationship between insurer and insured party prospectively undermines – despite the provision of an action directe – the purpose of a quick and certain compensation of the plaintiff inherent in compulsory liability insurance.
35
This apparent paradox of action directe provisions without a specific rule excluding the effectiveness in relation to the plaintiff of pleas arising from the insurance contract explain their specific theoretical and practical interest. Jurisprudence dealt with such cases with reference to hunter’s liability. The current regulation (Statute 11 February 1992, no. 157) does not provide for the non-effectiveness of pleas the insurer could raise in relation to the insured party, whereas the previous statute (Statute 27 November 1977, no. 968) explicitly considered those pleas as being ineffective in relation to the plaintiff.
36
Majority jurisprudence first pointed out that the choice made by the legal system seemed illogical, given that the very purpose of compulsory liability insurance is to implement the social security purpose of protecting victims of hunting accidents25. On the operational level, then, faced with an insurance
37
24
25
The same legislative rule applies (see also Art. 1012 CN) in the case of deliberate acts of the insured party. Nevertheless the insurer is entitled to bring in all other pleas deriving from the insurance contract (Art. 1015, 3rd paragraph, CN). See Corte costituzionale (Constitutional Court – Corte cost.) 11 July 1967, no. 124, [1969] Giustizia civile (GC) III, 249 et seq.
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policy that excluded certain risks from coverage, judges repeatedly stressed that terms restricting risk coverage in relation to the victim “beyond the limits of reasonableness” (oltre i limiti del ragionevole) have to be considered as null and void26. This has been argued on the grounds that such terms go against binding rules, i.e. compulsory liability insurance27.
38
As a general rule the legal system provides for an administrative sanction, in the form of a fine28, or of revocation of the licence whenever the insurance coverage is a requirement for its issue29.
39
Similar measures have been adopted at the regional or provincial level. For example, the operation of a cableway without the prescribed liability insurance results in an administrative penalty from IT£ 1.5 million to IT£ 3 million (approx. € 775 to € 1,550)30.
40
A conceptually identical measure applies in the case where ski instructors or alpine guides operate without the prescribed liability insurance31 or where the management of a camping site does not have compulsory liability insurance (from IT£ 2 million to IT£ 6 million, approx. € 1,032 to € 3,096) in the latter case with the doubling of the penalty in the case of repeated offences 32. 26
27
28
29
30
31
32
Cass. 28 March 1990, no. 2544, [1991] AS II, 113; Cass. 5 September 1980, no. 5136, [1980] GC, 1 = [1981] AS II, 181, regarding a term excluding compensation for damage by the insurer in the case where the insured party negligently breaches provisions on hunting. See Cass. 5 September 1980, no. 5136 (supra fn. 26): a term excluding compensation for damage in the case of non-observance of provisions on hunting was declared void. The Supreme Court held that a different result would undermine the legislative rule introducing compulsory liability insurance for hunters. Similarly Cass. 28 March 1990, no. 2544 (supra fn. 26) Contra: Cass. 4 April 1991, no. 3503, [1992] RCP, 394, stated that the insurance for tortious liability deriving from hunting, whilst being compulsory for the hunter, does not give rise to a direct obligation of the insurer in relation to the victim, but only provides for the reimbursement – according to the scheme ruled by Art. 1917 CC – of the sum the insured party has to pay to the plaintiff. In the case of compulsory liability insurance deriving from the circulation of motor vehicles an administrative sanction from € 675.75 to € 2,754.15 € (Art. 193, 1st paragraph, Statute 24 December 2003, no. 326 – so-called “Road Code” [Codice della strada]). Or in the case of tortious liability of operators of “equipped skiing areas” from € 20,000 to € 200,000 (Art 4, sub 2, Statute 24 December 2003, no. 363) in addition to the revocation of the licence (Art. 4, sub 3, Statute 24 December 2003, no. 363). In the case of tortious liability arising from the circulation of motor vehicles the law provides for the immediate stop of the circulation of the vehicle, its transport to and deposit in an area not open to the public and possible expropriation should the owner fail to meet legal requirements within the prescribed time (Art. 193, 1st and 2nd paragraph, Statute 24 December 2003, no. 326 – so called Codice della strada). In the case of “equipped skiing areas” Art. 4, 3rd paragraph, Statute 24 December 2003, no. 363 provides for the denial of the licence to carry out the skiing activity where there is no compulsory liability insurance. Autonomous Province of Bolzano, Art. 12, Provincial Statute 17 February 2000, no. 5 (substituted by Art. 49, Provincial Statute 19 February 2001, no. 4). An analogous provision applies to the Autonomous Province of Trento (Art. 12, Provincial Statute 17 February 2000, no. 5). In the case of the Lombardy Region, an administrative sanction from € 2500 to € 5000 (Regional Regulation 7 October 2003, no. 22, Art. 17, sub D) or a sum from IT£ 200,000 to IT£ 1 million (approx. € 206 to € 1,030) for the Autonomous Provinces of Bolzano (Provincial Statute 19 February 2001, no. 5, Art. 20, sub. 2). Autonomous Province of Trento, Provincial Statute 3 December 1990, no. 33, Art. 3.
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Only in marginal cases does the absence of the compulsory insurance coverage entail a criminal sanction. This happens, for instance, with compulsory liability insurance of an aircraft operator for damage suffered by third parties on the ground according to Art. 798 CN33, where the prohibition from using the aircraft is supported by a criminal penalty (Art. 1234, Codice penale – Criminal Code – CP).
41
(4) To what percentage is the population in fact protected by liability insurance contracts? The only data available relating to liability insurance refers to insurance premium revenues in the various branches of insurance and, more specifically, to the individual types of insurances. Unfortunately, since there is no available information on the number of insurance contracts entered into, it is not possible to determine the percentage of the population protected by liability insurance contracts.
42
According to ANIA (Associazione italiana delle imprese di assicurazione – the Italian insurers’ association), the compulsory automobile liability insurance amounts to 85% of overall compulsory liability insurance premium revenues34.
43
Nevertheless, useful comparative data can be drawn from the so-called insurance penetration index (IPI) in the liability insurance sector35. According to ANIA in 2001, the IPI in Italy was 2.436, among the lowest in Europe, which means that liability insurance37 is relatively less popular in Italy than in other western European countries. Nevertheless in some branches of insurance in Italy the practice of entering into voluntary insurance contracts is quite widespread (for instance, tortious liability insurance of employees among larger companies).
44
33 34
35
36
37
See S. Ferrarini, Le assicurazioni marittime (1991). Total revenues in the automobile branch amounted to an overall € 16,652 million in 2003, whilst overall revenues in all other compulsory insurance branches amounted to € 2,734 million in 2003. It is interesting to note that revenues from voluntary liability insurances are increasing faster than compulsory liability insurances, thus indicating that the Italian insurance market is filling the gap it presents compared to other more developed European markets. The increase of insurance premiums in the former amounted to 10.6% in 2003, with total revenues of € 2,472 million (ANIA – Associazione italiana delle imprese di assicurazione [the Italian Insurers’ Association], L’assicurazione italiana 2002/2003, 162). The insurance penetration index is defined as the ratio between the total amount of insurance premiums collected and the GDP. In 2001 the insurance penetration index was 4.1 in the Netherlands, 3.8 in the UK, 3.4 in Germany, 2.9 in France, 2.8 in Spain, 2.7 in Belgium (ANIA, L’assicurazione italiana 2002/2003, 22). See supra nos. 3 et seq.
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III. The Influence of Liability Insurance on Court Decisions in Tort Cases – Focus on the Courts 1. Insurability (5) Legislation: Is the insurability of a particular risk, e.g. environmental liability, a relevant policy consideration when it comes to lawmaking in the area of tort law? Would lawmakers refrain from imposing strict liability for uninsurable risks? Alternatively: Is the rise of strict liability in modern times – to the extent that there was one in the particular jurisdiction – thought to have any connection with the establishment of a vibrant insurance industry able to pick up the attendant risks? In this sense, could it be said that the availability of liability insurance “drives” the demand for responsibility in tort generally and for strict liability in particular?
45
The insurability of a particular risk does not play a major role in lawmaking.
46
In particular, in environmental liability a fault-based liability was introduced even though legal opinion predominantly favoured a strict liability regime.
47
It is interesting to note that predominant legal opinion explicitly argued a strict liability regime on the grounds of preserving consistency38 of the legal system and pointed out that it would favour insurability of environmental liability39.
48
Art. 18, 1st paragraph, Statute 8 July 1986, no. 349, provides that there must be “fraudulent or faulty acts in violation of statutory provisions or of measures adopted according to the law”. Thus, as is apparent from the statute, the Italian legislator wanted neither to follow the approaches adopted in other legal systems, nor the suggestions derived from economic analysis, nor from the Italian scholars who favoured the introduction of a strict liability rule40.
49
The minor role of insurability considerations in lawmaking can also be inferred from the regulation of auditors’ liability. The TUF41, despite providing for the duty to supply “suitable securities”42, did not provide, as most interest38
39
40
41 42
See, among others: B. Pozzo (supra fn. 4), 190 et seq.; A. Somma, La valutazione del danno ambientale: rilevanza pubblica della lesione e delle categorie civilistiche, in: Contratto e impresa (1995), 524; F. Giampietro, Il risarcimento del danno ambientale davanti alle sezioni unite civili, [1989] Corriere giuridico (CG), 505. For the easier insurability of the damage, see: W. Pfennigstorf (supra fn. 4), 48; F. Giampietro (supra fn. 4), 379; M. Mandò (supra fn. 4), 799; A.D. Candian (supra fn. 6), 45. P. Trimarchi, Responsabilità civile per danno all’ambiente: prime riflessioni, in: Amministrare (1987), 189; E. Briganti, Considerazioni in tema di danno ambientale e responsabilità oggettiva, [1987] Rassegna di diritto civile (RDciv), 289; A. Gambaro, Il danno ecologico nella recente elaborazione legislativa letto alla luce del diritto comparato, [1986] Studi parlamentari di politica costituzionale, 73. See d.p.r. 24 February 1998, no. 58. See Artt. 155 and 161 TUF.
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ed parties had hoped43, for a limitation of auditors’ liability, which therefore is unlimited. This is of significance if one considers that a limitation of auditors’ liability would have permitted them to insure tortious liability arising from the carrying out of their duties. Some general preliminary remarks seem appropriate.
50
The variety of causes of action, together with the articulated moulding of them through case law, make it unproductive to approach Italian tort law in terms of the conflict between the principles of fault and strict liability44. Indeed, the most advanced line of scholarship acknowledges that the various situations in which liability is possible, as defined in written law and understood by case law, end up as arrayed along a single broad, graduated scale, rather than clustered around two opposing poles45. Along this graduated scale, the role of the defendant’s conduct is assessed as a factor affecting the imposition of liability, moving from cases in which the proof of actual intent is required to those cases involving so-called “absolute liability”46.
51
That being said, it becomes clear that jurisprudence has a determining role, especially in “concretizing” the Codice civile provisions introducing liability regimes that come close to a strict liability rule. This is for example the case for Art. 2050 CC, which introduces liability for “dangerous activities”47. For these purposes, the production of drugs and medicines48, the operating of lifts and chair-lifts49, blood transfusions50, sports activities like operating a riding school51 or a go-kart track have been identified as being “dangerous activities”52.
52
As far as lawmaking is concerned, the Italian solution, like that of other legal systems, notably the German, seems to consist of the introduction of strict lia-
53
43
44 45 46 47
48
49
50 51
52
See the speech given by the President of the Order of Italian Chartered Accountants (Ordine dei dottori commercialisti) to the 6th Financial Commission and 10th Productive Activities Commission of the House of Representatives, in: Giornale dei Dottori commercialisti, 2004, 6 et seq., particularly 11. It is interesting to note that proposals to introduce a limit to the liability of auditors have been repeatedly submitted during the drafts of the TUF, for example by the ASSIREVI (Associazione italiana dei Revisori contabili – The Italian Auditors’ Association), which in Art. 12.9 of its proposal suggested a liability limit of 10 times the fee due to the auditor. See J.S. Lena/U. Mattei, Introduction to Italian Law (2002), 220. Ibid. Ibid. Art. 2050 CC states: “Whoever causes injury to another person in the performance of an activity dangerous by its nature or by reason of the instrumentalities employed, is liable for damages, unless he proves that he has taken all suitable measures to avoid the injury”. Cass. 20 July 1993, no. 8069, [1994] Foro italiano (FI) I, 455 = [1994] Rivista di diritto civile (RDC), 61; Tribunale (Italian Basic Court – Trib.) of Milan 19 November 1987, [1988] FI I, 144. Trib. of Savona 20 December 1965, [1966] GI I, 2, 557; Trib. of Como, 31 May 1972, [1972] Diritto e pratica dell’assicurazione (DPA), 776. See Trib. of Ravenna, ord. 28 October 1999, [2000] DR, 1012. Cass. 24 May 1988, no. 3616, [1989] GI I, 1, 99; Cass. 22 February 1979, no. 1155. [1979] Massimario della giurisprudenza italiana (MGI). Given the problem of demonstrating “that all suitable measures were taken”, Italian courts responded to the demands for a principle of strict liability by drawing on their broad procedural arsenal: by applying the doctrine of res ipsa loquitur, by shifting the burden of proof, and by developing various legal fictions which integrated the element of negligence.
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bility rules for non-insurable risks, coupled with the fixing of a maximum level of compensation for damage. This is the case for liability deriving from the operation of nuclear plants (Art. 18, Statute 31 December 1962, no. 1860)53. On the one hand – in order to favour an easier insurability of these risks54 – a strict liability regime was introduced; on the other hand, a limit to compensation due by tortfeasors has been set, beyond which the state will have to provide compensation (Art. 19, Statute 31 December 1962, no. 1860, confirmed by Statute 5 March 1985, no. 131)55.
54
Parliament does not seem to refrain from imposing strict liability for uninsurable risks. The main concern of Parliament and the almost exclusive purpose of jurisprudence seems to be the full compensation for damage suffered by the plaintiff. (6) Jurisprudence: Do courts either tacitly or openly take the issue of insurability into account when holding a defendant liable? In particular, are there decisions where a court has denied a damages’ claim because it thought the ensuing liability to be uninsurable? Are judges reluctant to impose a liability regime that was not anticipated by the parties, e.g. in cases of “new risks” like dangerous substances, electromagnetic fields and the like? Alternatively: Is the fact that a risk may be insured or was in fact insured against an argument for strict liability? Are there decisions suggesting that liability may be strict rather than fault-based or that its scope may be broader or the damages award higher because insurance coverage was thought to be unavailable? Do judges draw a distinction between compulsory insurance schemes and voluntary insurance, even if the latter seems widespread among the public?
55
As can be inferred from the answer to the previous question, in assessing tortious liability, jurisprudence does not seem to consider the insurability of the corresponding risks.
56
On the contrary, court decisions sometimes contain statements amounting to obiter dicta, clearly indicating that attention is not drawn to the amount of damages awarded and therefore – it might be added – to insurability56. 53
54
55
56
Tortious liability for the operating of nuclear plants is the “first explicit legal rule providing for strict liability” (G. Alpa (supra fn. 2), 803). See C. Angelici, Aspetti specifici dell’assicurazione dei rischi nucleari, [1980] Rivista del diritto commerciale (RDco) I, 59. With it Italy confirmed the Protocols modifying the Convention of Paris of 29 July 1960 and the Convention of Bruxelles of 31 January 1963, and their additional Protocols of 26 January 1968 and of 16 November 1982. See a recent decision of the Corte d’Appello (Italian court of 2nd instance – App.) of Milan 11 November 2003, [2003] RCP, 1317 et seq.), where the judge explicitly states that “in the case of an infringement of rights protected by the Constitution [the plaintiff] has the right to full compensation of damage suffered, without any reduction (which would be illegitimate and unconstitutional) suggested by economic analysis of law, which is notable for its scarcity of resources of institutions responsible for compensation” (1322).
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Therefore, even if statements about the influence of liability insurance on the recognition of liability and on the damages awarded are widespread, they are considered as being – as has been pointed out – a matter of fact57.
57
Just because the main concern of lawmaking and the almost exclusive concern of jurisprudence is guaranteeing fair compensation for damage suffered58, jurisprudence does not hesitate to apply a liability regime not anticipated by the parties.
58
The formula of Artt. 2050 (dangerous activities) and 2051 (liability par le fait de la chose) CC contain many normative Begriffe59, making this task easier for jurisprudence60.
59
As has been stated above61 the fact that a certain risk was or was not in fact insured against and, generally, that it could have been insured against does not play a significant role in the decision of the liability regime to be applied by jurisprudence.
60
Therefore no distinction is drawn between compulsory liability insurance and – in the relatively few cases in which it can be considered as being widespread62 – voluntary liability insurance.
61
(7) Are there any examples where it is thought that the courts have overstretched tort liability so as to cause a crisis in the insurance industry? According to Italian tort law in the case of injury to a person, three different types of damage have to be compensated: pecuniary loss (which amounts to income lost and medical expenses arising from the injury), the so-called danno biologico63, and finally other non-pecuniary losses, in particular pain and
57 58 59 60
61 62 63
See, also for bibliographic information, A.D. Candian (supra fn. 6), 7–8. See supra no. 54. See K. Engisch (supra fn. 2). As far as the liability for electromagnetic fields is concerned, jurisprudence tends to identify it as a “dangerous activity” according to Art. 2050 CC (see supra fn. 47). See Cass. 27 July 2000, no. 9893, [2001] CG, 204, with a commentary by L. Matarese, Il danno da onde elettromagnetiche: la svolta della Cassazione. The Supreme Court decided that whoever produces and supplies electricity – regardless of its source of production – has to comply with the rule stated by Art. 2050 CC. On damage caused by electromagnetic fields see F. Plebani, Il danno da onde elettromagnetiche, in: G. Ponzanelli (ed.), La responsabilità civile (2002), 119 et seq. The issue has been addressed by Statute 22 February 2001, no. 36. See mainly supra nos. 54 and 58. See supra nos. 43 and 44. The commonly accepted doctrine of danno biologico believes that damages have to be awarded in the case of physical or psychological injury regardless of the victim’s ability to earn. A definition of danno biologico reflecting the same concept can be found in Art. 3, 3rd paragraph, Statute 5 March 2001, no. 57, according to which danno biologico is “the injury to the physical or psychological integrity, susceptible of medico-legal assessment”. On danno biologico, see E. Navarretta, Diritti inviolabili e risarcimento del danno (1996).
62
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suffering, which, according to Art. 2059 CC, can be compensated only in cases provided for by law64.
63
A recent doctrine shared by the Corte di Cassazione65 (Italian Supreme Court – Cass.) ruled that compensation of non-pecuniary losses does not encounter the limits set by the Criminal Code (see Art. 185 CP) whenever interests protected by the Constitution are infringed. It further argues that the renvoi to cases provided for by law contained in Art. 2059 CC has to be read as also comprising the infringing of inalienable rights provided by the Constitution66.
64
Therefore the most recent doctrine that jurisprudence shares has in effect cancelled the limitation of the compensation of non-pecuniary losses set down in Art. 2059 CC, which actually ceases to have any prescriptive content67. (8) Literature: What is the position of commentators on the issue of insurability: should it be taken into account in the practice of tort law or is it beyond the legitimate pale of tort law? Do commentators voice concerns that expansion of liability may some day exceed the scope of insurable risks?
65
The problem of insurability has been dealt with indirectly and, up to now, only in theoretical terms, from the perspective of a comparative economic analysis of law. Legal scholars tackled the issue of whether aspects related to the insurability of certain risks should be considered in finding the most economically efficient solution in terms of the liability regime to be adopted. 64
65
66 67
Italian legal scholars discussed intensively whether legislative rules applicable to pecuniary losses or provisions applicable to non-pecuniary losses should be applied to danno biologico. The opinion in favour of the application of the general rule (applicable to pecuniary losses) of Art. 2043 CC (“A deliberate or negligent act causing unfair damage to others obliges the person who committed the act to compensate for the damage”) holds that danno biologico is a damage that can be estimated by objective criteria. See E. Bargelli, Danno non patrimoniale e interpretazione costituzionalmente orientata dell’Art. 2059 c.c., [2003] RCP, 702 et seq.; F.D. Busnelli, Il danno biologico – Dal “diritto vivente” al “diritto vigente” (2001); E. Navaretta, (supra fn. 63).The other opinion believes, on the one hand, that Art. 2059 CC, according to which non-pecuniary losses can be compensated for only in the cases provided for by law, should be applied (the most frequent and general legislative rule providing for compensation of non-pecuniary losses is Art. 185 Codice penale (Criminal Code, CP) which rules that “The person responsible for a crime has to pay pecuniary and non-pecuniary damages”). On the other hand, it holds that danno biologico can be compensated for even if the offence causing injury is not a crime (see Art. 185 CP), since a personal injury represents an infringement of interests protected by the Constitution and thus a “case provided for by law”. See: C. Castronovo, Danno biologico – un itinerario di diritto giurisprudenziale (1998); ibid, La nuova responsabilità civile (1997). Cass. 19 August 2003, no. 12124, [2003] RCP, 1317; Cass. 31 May 2003, no. 8828, [2003] RCP, 675. As far as jurisprudence of lower courts is concerned, see App. of Milan, 11 November 2003 (supra fn. 56), 1317 et seq. This doctrine had previously been (indirectly) approved by the Corte costituzionale (Constitutional Court, Corte cost.) 11 July 2001, no. 233, [2003] RCP, 1036 et seq. See supra fn. 65. P. Cendon, Anche se gli amanti si perdono l’amore non si perderà. Impressioni di lettura su Cass. 8828/2003, [2003] RCP, 685 et seq.; P. Ziviz, E poi non rimase nessuno, [2003] RCP, 710.
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Therefore, legal scholars did not address the problem of insurability referring to actual cases in order to affirm or deny the liability of the prospective tortfeasor. They rather focused on the “macroeconomic” aspect of the liability regime to be preferred. The texts on the issues of environmental liability and on mass torts68 clearly confirm it. As far as the former is concerned, legal scholars suggested – contrary to the solution adopted by Parliament – a strict liability regime69. In mass torts, on the other hand, legal scholars believe that tort law does not necessarily provide the optimum solution for settling such disputes70.
66
In Italy majority jurisprudence and legal scholars do not really focus their attention – directly – on insurability issues. Great store is set by damage compensation, by its assessment, with an eye to the stability and maintenance of the tort law system. In other words the expansion of liability is viewed from the perspective of the overall compensation awarded, without directly considering insurability issues.
67
In this context the above-mentioned judicature of the Italian Supreme Court allowing for compensation in case of infringing of any interest protected by the Constitution acquires the utmost importance. Faced with the – probable – increase in the amount of damage compensation awarded, legal scholars react either by suggesting the exclusion of minimal damage from compensation (the so-called Bagatellschäden)71; or by expressing their satisfaction that the infringing of values protected by the Constitution entails “full compensation for any non- pecuniary loss, including pain and suffering”72.
68
However, given that a great part of the above-mentioned damage arises from road accidents, where a compulsory liability insurance applies, it is remarkable that the prevailing legal opinion did not focus its attention on the insurance implications of the interpretation adopted by jurisprudence.
69
2. Costs and Benefits of Insurance (9) To what extent do courts base their judgments on the objective of risk spreading, i.e. to place the loss on the party better able to absorb it, either through self-insurance (which amounts to deep pocket liability) or through market insurance, i.e. by buying coverage from a professional risk carrier? Are there judgments which explicitly accept risk spreading as a relevant policy 68 69
70 71
72
See, on this issue, P.G. Monateri (supra fn. 2), 196 et seq. See supra nos. 46 et seq. In particular, see P. Trimarchi, Introduzione, in: Per una riforma della responsabilità civile per danno ambientale (1994); B. Pozzo (supra fn. 4); A. Somma, Il risarcimento del danno ambientale nelle esperienze tedesca e nordamericana: Geschäftsführung ohne Auftrag e public trust doctrine, [1999] Riv. giur. umb. See supra nos. 46 et seq. E. Bargelli (supra fn. 64), 702; F.D. Busnelli (supra fn. 64), 248 et seq.; E. Navaretta (supra fn. 63), 350 et seq.; A. D’Adda, I nuovi assetti del danno alla persona: dal danno biologico al “danno esistenziale”?, [2002] RCP, 341 et seq. In jurisprudence, lastly, App. Milan, 11 November 2003 (supra fn. 56), 1317 et seq. P. Cendon (supra fn. 67), 685 et seq.; P. Ziviz (supra fn. 67), 710.
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consideration to influence court decisions in individual cases? Do courts implicitly take risk spreading into account (without saying so)? Is it advisable for a party to argue that the other side was in a better position to insure against the risk and thus should bear the ensuing loss?
70
Within private law, Art. 2047 CC rules that if damage is caused by a person lacking full possession of his/her faculties, compensation is due by whoever had supervision, unless they prove that the event could not have been avoided. Paragraph 2 of Art. 2047 CC states that if the plaintiff did not succeed in receiving compensation from the person in charge, the tortfeasor may be sentenced – according to the economic status of the parties – to “equitable indemnity”. Italian legal scholars believe the provision to be outside tort law principles73. They point out that it represents a social security principle in favour of third parties, to the detriment of the tortfeasor’s assets, which lacks any justification apart from the specific rule providing for it. Therefore it should be considered as being exceptional74.
71
The application of Art. 2047 CC thus requires the plaintiff to unsuccessfully sue the supervisor, either because nobody was in charge or because the supervisor manages to satisfy the burden of proof75 or, finally, because the supervisor lacks sufficient assets76.
72
As far as the amount of damage compensation awarded is concerned, the only criterion indicated by Art. 2047 CC refers to the economic status of the parties77. For this reason an “equity” judgment may only occur in cases of a clear disproportion between the economic situation of the victim and that of the tortfeasor78. However, the maximum amount of compensation awarded is in any case limited to the damage suffered.
73
Although cases in which the liability of the supervisor had no effect and the person in charge was insured have not yet come before an Italian court, it appears likely that jurisprudence would not hesitate to affirm – regardless of the economic status of the person in charge – the applicability of the insurance policy, therefore the full compensation of the damage suffered by the plaintiff.
74
Courts are – understandably – not prepared to acknowledge the extent to which risk spreading influences their decisions.
75
An interesting case of an explicit admission of the consideration of the economic status of parties can be found in defamation: courts believe that damage 73 74 75 76 77 78
See on this issue, among others, P.G. Monateri (supra fn. 2), 196 et seq. P.G. Monateri (supra fn. 2), 14. See Trib. of Macerata 20 May 1986, [1989] Rivista italiana medico legale, 249. P.G. Monateri (supra fn. 2), 14. P. Trimarchi (supra fn. 1), 30. P.G. Monateri (supra fn. 2), 15, who points out that just for this reason the situation envisaged has to be considered as being exceptional and thus merely equitative.
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assessment should consider the number of copies (of a book, a newspaper, etc.) sold, considered as an indicator of the profit made by the defendant in libeling the plaintiff79. Courts explicitly argued that in such cases “damage assessment has a satisfactory, punitive and deterrent function”80, with the consequence that, among the useful parameters for assessing damages, the economic status of the tortfeasor should be considered (see infra nos. 98 et seq.)81. Generally speaking, the problem is circumscribed in Italy, since the Civil Code contains a set of provisions providing for vicarious liability, placing liability on subjects more likely to be able to pay damages.
76
This is especially the case of the liability of the employer (responsabilità dei padroni e committenti – Art. 2049 CC)82 and of the liability of parents, tutors and instructors (Art. 2048 CC – see infra no. 92): Art. 2049 CC places liability – in most cases – on a business person or organization83, whilst Art. 2048 CC compels the parents or the educational institutions to pay damages.
77
The trend to consider risk spreading in the application of the above-mentioned provisions becomes clear if one considers their practical application by jurisprudence.
78
In particular, according to prevailing jurisprudence, two requirements have to be met in order to apply Art. 2049 CC. Firstly, there has to be a so-called occasionalità necessaria, to be understood in the sense that the wrongful act occurs as a consequence of a situation created by the employer. Second, the tortious act should not have been committed within the “private activity” of the employee. Both criteria aim at affirming the liability of the employer whenever the wrongful act has to be considered as being sufficiently closely connected with the employee’s employment84.
79
79
80 81 82
83
84
Court decisions applying this principle are numerous: App. Milan 23 December 1986, [1987] Diritto dell’informazione e dell’informatica (DI), 585; Trib. of Neaples 18 September 1989, ibid, 1990, 144; Trib. of Rome 24 January 1989, [1989] DI, 930; Trib. of Rome 6 April 1988, [1988] DI, 837. A real estimate of copies sold was made by the Trib. of Milan (27 June 1991, [1992] DI, 78) in a case of embezzlement and involvement with criminals published in a periodical. Considering that the periodical had a circulation of 250,000 copies, the damages awarded were IT£ 200 million (approx. € 103,000). Trib. of Rome 24 November 1992, [1993] DI, 403. See supra fn. 80. Art. 2049 CC, Liability of employers: “Masters and employers are liable for damage deriving from a wrongful act of their employees in the practice of tasks to which they are assigned”. This is pointed out, with reference to Art. 2049 CC, by P.G. Monateri (supra fn. 2), 56. The author states that even though Art. 2049 CC is applied to any employer, the socially most common case refers to the liability of businesses. The doctrine followed by the Court dates back to Tondini v. Mor, where the Court stated that the employer is not liable in the case where the employee falls from a balcony as a consequence of the fact that he/she leaned out in order to communicate with a friend (and not in order to clean windows – Cass. 10 October 1957, no. 3726, [1957] MGI).
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80
Surprisingly, the interpretation given by jurisprudence of occasionalità necessaria in effect coincides with a but for test (i.e. conditio sine qua non)85. Jurisprudence regarding the unlawful behaviour of bank employees appears highly instructive. The standard situation considered refers to the handing over of a sum of money by the client of the bank to the bank employee, who uses it for private purposes. In these cases there seems to be a general trend to affirm the bank’s liability. Jurisprudence argues this result on the basis of very dissimilar and conflicting arguments: sometimes the delivery of the money to the disloyal bank employee within the bank’s boundaries is considered as proof of the close connection between the wrongful act and the employment86. In another case the judge holds that – regardless of the place where the handing over of the money occurred – previous deliveries of money to the bank employee outside the bank’s boundaries meet the requirement of the occasionalità necessaria87. Different decisions suggested that the mere fact that stricter internal controls could have prevented the wrongful act88 or that the client was given a receipt, even though the deposit was not listed in the statement of account approved by the client, plays a determining role89.
81
The impression of a jurisprudential trend to affirm liability of the employer according to Art. 2049 CC is even clearer in a recent decision in which the existence of “any relation” between employee and employer was regarded as being sufficient. The relevant dispute involved personal injury in a road accident that occurred during a lift in a car offered to the parents of a clergyman by the treasurer of a religious institute, and approved by the director of the institute. Legal scholars explicitly pointed out that the finding of liability on the part of the religious institute has to be argued on the grounds that “the institute normally is the subject who can effectively pay damages”90.
82
Pointing out that the other side was in a better position to insure against the risk and thus should bear the ensuing loss does not seem to entail any advantage to the party raising such a question. It thus does not play a major role (if any) in the decision as to whether the defendant is liable. 3. Standard of Care (10) What is thought to be the influence of liability insurance on actual care levels? Is moral hazard a well-received concept in legal circles?
85 86
87 88
89
90
P.G. Monateri (supra fn. 2), 72. Cass. 17 May 2001, no. 6756, [2001] Archivio civile (AC), 969 = [2001] Diritto e pratica delle società, nos. 21, 71. Trib. of Lucca 15 January 1992, [1994] RDciv., 1994, 895. Cass. 9 August 1994, no. 7348, [1996] FI I, 685 = [1995] CG, 79 = [1995] AC, 508 = [1995] Nuova giurisprudenza civile commentata I, 773 In this sense, explicitly, Cass. 8. November 1984, no. 5649, [1984] Repertorio del Foro italiano (RepFI), voce Responsabilità civile, no. 96. P.G. Monateri (supra fn. 2), 67.
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Legal scholars are well aware of the problem of moral hazard. Nevertheless they point out that there are numerous arguments to allay such fears. Firstly, Art. 1916 CC91 recognizes the subrogation of the insurer, who thus is permitted to sue the tortfeasor in place of the victim, providing him with incentives to adopt preventive measures.
83
Furthermore, insurance contracts usually provide for a contribution by the insured92 and tend to make it bureaucratically difficult for the victim to be awarded full compensation of damage suffered93. Despite giving rise to many protests, these factors obviously reduce the risk of moral hazard94.
84
Conversely moral hazard issues could arise inasmuch as the economic burden of the payment of the insurance premium is not on the insured party. This happens in case of the liability of officers and directors of businesses, where the policy premium is paid by the business, or of the liability of judges (Statute 13 April 1988, no. 117), where the damage is placed on the whole community.
85
(11) In setting the standard of care, do courts take into account if the defendant is insured, imposing a stricter standard in case he is? Similarly, is the standard of comparative negligence more lenient in areas where the defendant is protected by liability insurance? In both cases, do courts draw a distinction between voluntary and mandatory insurance schemes? As a general rule jurisprudence does not consider whether the defendant is insured when setting the standard of care. Similarly, in determining the standard of comparative negligence, courts do not seem to apply different parameters depending upon whether the defendant is insured.
86
Finally, no distinction seems to be drawn between voluntary and mandatory insurance schemes.
87
(12) Do courts take first-party insurance into account in setting the standard of care? Is there a tendency to set the standard high in case plaintiff is compensated anyway under a first-party insurance policy and low if plaintiff does not enjoy such coverage?
91
92
93 94
According to Art. 1916 CC “The insurer who paid the indemnity has a right of subrogation, for its total amount, in the rights of the insured in relation to liable third parties”. For interesting comparative remarks from the Law and Economics perspective, see P.G. Monateri, La surroga dell’assicuratore in diritto inglese a confronto con la soluzione prevalsa in Svezia, [1984] RCP, 309. So called bonus-malus insurance policies, which imply that the insurance premium paid increases (and, finally, the renewal of the insurance policy can be refused) whenever the accident appears to have been caused by a negligent behaviour of the insured party. See R. Cotter/U. Mattei/P.G. Monateri/R. Pardolesi/T. Ulen (supra fn. 1), 421. See the previous footnote.
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In Italian jurisprudence no precedents can be found explicitly strengthening the assumption that first-party insurance entails a different evaluation of the standard of care. (13) Might a party be held to have acted negligently for the sole reason that it delegated the duty of care incumbent upon itself to an independent contractor who in turn was not protected either by an insurance policy or by sufficient equity against which potential victims could have executed their claims?
89
No. In setting the standard of care, aspects related to the ability of the (delegated) tortfeasor to pay damages are not taken into account in any way. For wrongful acts deemed to be particularly important the legal system provides for compulsory liability insurance.
90
A liability of the party delegating duties incumbent upon itself could arise whenever the delegated party manifestly lacks the skills and equipment to carry out performance without endangering third parties (though this will not be on the basis of insufficient assets of the delegated party, but would arise from liability in eligiendo)95. 4. General Duty to Insure (14) Does it constitute negligence if a party failed to transfer the risk of liability to an insurance carrier? If so, what is the sanction in case of such failure?
91
In Italy not having transferred the risk of liability to an insurance carrier does not constitute a negligent act, unless a specific provision identifies that insurance as compulsory (see supra nos. 3 et seq.). A different solution would in effect undermine the distinction between voluntary insurance liability and compulsory insurance liability. Obviously, the failure to enter into an insurance contract entails the personal liability of the tortfeasor. (15) May parents be held accountable for the torts of their children because they failed to buy liability insurance for the whole family, including the child?
92
No. Parents are liable for damage caused by their children according to Art. 2048 CC. The predominant legal opinion believes that this provision actually introduces a regime of strict parental liability. Jurisprudence does affirm the liability of parents regardless of any specific negligent behaviour on their part, since it considers the wrongful act as being in itself proof of the poor care given to their children96. In substance, legal scholars believe that Art. 2048 CC 95
96
Jurisprudence applies Art. 2049 CC (see Cass. 10 January 1977, no. 80, [1977] MGI; Cass. 9 November 1978, no. 5153, [1978] MGI), whereas legal scholars believe that such cases fall under the general provision of Art. 2043 CC (P.G. Monateri (supra fn. 2), 70). P.G. Monateri (supra fn. 2), 17; G. Alpa (supra fn. 2), 667. In jurisprudence see Cass. 10 June 1985, no. 3664, [1986] Giurisprudenza italiana I, 1, 1525; Cass. 16 May 1984, no. 2995, [1985] DPA, 311; Cass. 14 December 1968, no. 3977, [1968] MGI.
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introduces a form of guarantee of the parents’ equity for torts committed by their children97. (16) Are employers under a duty to take out liability insurance covering the torts of their employees? If so, what is the sanction in case of default, both visà-vis the employee and the third party victim? No, unless the law explicitly provides for a compulsory liability insurance covering torts of the employees (see supra nos. 14 et seq.). Nevertheless, on a practical level, there is a clear trend towards entering into insurance contracts for tortious liability of employees, especially in cases where the amount of damages potentially due is considerable98. Art. 2049 CC concerning the liability of employers and its interpretation by jurisprudence (see supra nos. 79 et seq.) represent a strong incentive for employers to take out insurance.
93
(17) Vice versa: May a plaintiff be thought to be guilty of contributory negligence for the sole reason that he failed to protect himself by means of firstparty insurance? For example, where a potential buyer of a car embarks on a test drive and causes damage to the demonstration car: Is the automobile dealer under a legal obligation to supply first-party insurance such that the client is protected against tort liability in case of an accident? The general rule reads that unless the law introduces a compulsory (first-party) liability insurance, the failure to buy insurance coverage or, in the case considered, to protect oneself with first-party insurance, may not be considered as giving rise to contributory negligence.
94
Therefore, the absence of first-party insurance does not constitute contributory negligence by the owner of a motor vehicle, in case of damage caused to it by the driver99. Thus the driver is solely liable for the damage arising.
95
5. Insurance and Damages (18) Does the fact that the defendant is insured influence in any way the assessment of damages? As a general rule insurance coverage of the tortfeasor does not explicitly influence the assessment of damages100. Courts are – understandably – not pre97
98
99
100
S. Rodotà, Il problema della responsabilità civile (1967), 156 et seq.; F.D. Busnelli, Nuove frontiere della responsabilità civile, [1976] Jus, 162 et seq.; F. Giardina, La condizione giuridica del minore (1984), 132; M. Bessone, La ratio legis dell’Art 2053 cod. civ. e i principi di responsabilità oggettiva per i danni causati da rovina di edificio, [1982] RDco II, 1011. See, for instance, liability of physicians, where a debate as to the desirability of the introduction of a compulsory liability insurance is currently taking place (see supra no. 28). Although Art. 2054 CC, which provides for joint and several liability of the owner of the motor vehicle with the driver for damage caused to third parties, remains applicable. A significant exception is provided for the case of liability of the supervisor according to Art. 2047 CC (see supra nos. 70 et seq.).
96
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pared to openly acknowledge the extent to which the insurance coverage influences their assessment of damages.
97
Nevertheless legal scholars pointed out that, as a matter of fact, a trend towards a more generous assessment of damages can be registered in case the tortfeasor has insurance coverage. If this is the case, there is a factual coincidence with the risk spreading trends in Italian jurisprudence (see supra nos. 70 et seq.). (19) To the extent that the particular legal system provides for exemplary or punitive damages: Is the fact that the defendant has transferred the risk to an insurance carrier relevant to the decision on imposing punitive damages? If so, does it tend to aggravate or to mitigate the amount granted?
98
As a general rule punitive damages do not exist in Italian tort law. Nevertheless in the assessment of damages, Italian courts have developed approaches that come close to the granting of punitive damages101. This occurs especially within the scope of defamation. Courts believe that the overall amount of damages to be awarded should consider the number of copies (of a book, a newspaper, etc.) sold, as an indicator of the profit made by the defendant in libeling the plaintiff102. Courts explicitly argued that in such cases “damage compensation has a satisfactory, punitive and deterrent function”103, with the consequence that useful parameters have to be considered: a) the economic status of the tortfeasor; b) the degree of guilt; c) the profit drawn from the wrongful act; d) the circulation of the publication104.
99
Another area where jurisprudence comes close to the assessment of punitive damages is non-pecuniary losses in the form of pain and suffering of close relatives of the victim. In this case the blameworthiness of the wrongful act causing the injury is considered as being an indicator of the grief suffered by close relatives, thus allowing for a relatively higher assessment of damages (see infra nos. 108 et seq.).
100
Furthermore in environmental liability the Constitutional Court explicitly stated that tort law can have punitive purposes105. 101 102
103 104 105
This applies also in the absence of a jury, which the Italian legal system does not provide for. The decisions applying this principle are numerous: App. Milan 23 December 1986, [1987] DI, 585; Trib. of Neaples 18 September 1989, [1990] DI, 144; Trib. of Rome, 24 January 1989, [1989] DI, 930; Trib. of Rome, 6 April 1988, [1988] DI, 837. A real estimate of copies sold has been made by the Trib. of Milan (27 June 1991, [1992] DI, 78) in a case of embezzlement and involvement with criminals published in a periodical. Considering that the periodical had a circulation of 250,000 copies, the damage was assessed as IT£ 200 million (approx. € 103,000). See supra fn. 79. Trib. of Rome 24 November 1992, [1993] DI, 403. Ibid. Corte cost. 30 December 1987, no. 641, [1988] FI I, 694 = [1988] FI 1, 1057. See Art. 6, Statute 8 July 1986, no. 349, which states that in order to award compensation for damage “in the case where the assessment of damage is not possible, the judge shall determine an equitable amount by considering the seriousness of individual behaviour, the costs of the re-establishment [of the previous situation] and the profit achieved by the wrongdoers as a consequence of their behaviour causing harm to the environment”.
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Insurance coverage does not seem to determine a different assessment of damages in the cases where assessment of damages comes close to punitive damages.
101
(20) Insurance and non-pecuniary loss: To the extent that courts enjoy discretion to set the amount of damages for non-pecuniary loss; is insurance a relevant factor worth considering when it comes to the assessment of such damages? If so, does it aggravate or mitigate the amount allowed? Judges enjoy discretion especially in determining the amount of non-pecuniary damages.
102
In order to limit discretion a statute regulate the compensation of the so-called danno biologico in case of slight injuries to persons, i.e. injuries not exceeding 9% came into effect106. For such harm Statute 5 March 2001, no. 57, introduces standardised economic reference values to calculate danno biologico for the whole national territory. By doing so Art. 5, Statute 5 March 2001, no.57, confirms as legislative rule the method for evaluating danno biologico developed by precedent107.
103
The regulation is based on the so-called calcolo a punti (calcul au point)108. Nevertheless Statute 5 March 2001, no. 57, does not completely cancel judiciary discretion, since it leaves a margin of fair assessment in the settlement, which is entrusted to the judge’s evaluation of the concrete case109.
104
In 2002 another important provision assessing non-pecuniary losses came into effect. Statute 12 December 2002, no. 273, rules damage compensation for every danno biologico, even for those gravely affecting health (i.e., up to 100% of permanent disability). The determination of the amount of damages to be awarded is based on a system similar to that envisaged in Statute 5 March 2001, no. 57. The main difference refers to the margins of the discretion of the judge in “adjusting” the overall amount of damages due according to the concrete case submitted. This rule restricts the “equitable power” of the judge by
105
106 107
108
109
See Art. 5, sub a), Statute 5 March 2001, no. 57. See, also for more bibliography, E. Navaretta/E. Bargelli, Italy, in: H. Koziol/B.C. Steininger (eds.), European Tort Law 2001 (2002), 335 et seq. A forensic doctor evaluates danno biologico by determining the percentage of the disability. In the next step the judge gives a conventional value to each point of disability. The value changes according to the age of the victim and the gravity of his/her injury. According to Art. 5, Statute 5 March 2001, no. 57, the “disability coefficient” is subject to yearly modifications. The amount of the first point is currently € 634.62 for permanent disability (permanent danno biologico) and € 37.02 for every day of absolute disability in case of temporary danno biologico; see Art. 1, decreto ministeriale (ministerial decree – d.m.) 30 July 2002. It provides a more than proportionate increase of the “disability coefficient” according to the age of the victim and the seriousness of the injury. Furthermore, in view of the subjective condition of the victim, the injured party is permitted to ask the judge for additional compensation to the amount assessed by applying the parameters established by law.
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stating that the increase cannot exceed 20% of the basic value. Another important difference is related to the scope of Statute no. 273/2002, provided that is only applicable to personal injuries arising from road accidents.
106
An even greater problem in this regard is the assessment of non-pecuniary losses different from danno biologico, i.e. mainly of pain and suffering110. Recent decisions attest to the difficulties in the assessment of non-pecuniary losses in general, and of the different types of pain and suffering in particular.
107
Specifically, in the case of personal injury leading to the death of the injured person within a short time111 jurisprudence holds that, as far as the assessment of so-called “terminal damages” are concerned, the amount awarded should contemplate to a great degree the subjective situation of the victim. A mere mathematical assessment of damages should therefore not be permitted112. The justification of the different treatment of “terminal damages” lies in the fact that, contrary to ordinary temporary or permanent danno biologico (except in case of injuries gravely affecting health), health conditions of the victim progressively worsen113. In order to assess damages it thus becomes essential “to evaluate pain and suffering actually suffered by the victim, the seriousness of the offence and all other elements of the case submitted, in order to quantify precisely the compensation awarded in the concrete case”114.
108
Recent decisions of the Corte di Cassazione seem to confirm the extension of the discretion of the court when setting the amount of damages for non-pecuniary loss. On one hand, in order to prevent diverging assessments of damages, pain and suffering is determined as a fraction of the compensation awarded as danno biologico115. On the other hand, judges state that the assessment of pain and suffering cannot be reduced “automatically to a mere fraction [of the danno biologico]”. Compensation for “pain and suffering and for the danno biologico aims at different purposes, inasmuch as it refers to different aspects of personal life, with the result that damages set for pain and suffering could well be higher than for a disability or an illness”116.
109
It is interesting to note that the problem of assessing non-pecuniary losses is bound to acquire greater importance due to the affirmation of the compensation of any infringing of values protected by the Constitution (see supra nos. 62 et seq.).
110 111 112 113 114
115
116
See supra fn. 64. See Cass. 14 July 2003, no. 11003, [2003] RCP, 1049. Ibid. Ibid. See the recent contribution of B. Facci, La Cassazione ed il risarcimento del c.d. danno terminale, [2003] RCP, 1060. See Cass. 14 July 2003, no. 11003 (supra fn. 112); Cass. 16 May 2003, no. 7632, [2003] RCP, 1049, Cass. 9 January 1998, no. 1030, [1998] DR, 351. Cass. 23 May 2003, no. 8169, [2003] RCP, 1342.
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Especially with regard to pain and suffering, the guaranteeing of full compensation of damage suffered by the victim acquires the utmost importance. Therefore the fact that the tortfeasor actually has or does not have insurance coverage is of almost no importance.
110
The appraisal – on a practical level – of differences in setting the amount of compensation for non-pecuniary losses is made more difficult by the fact that the vast majority of these damages derive from road accidents, where there is compulsory liability insurance.
111
6. Privileges (21) To the extent that the law allows for privileges, dispensing certain classes of parties from the ordinary standard of care, do such privileges apply even where the privileged party is insured? In particular, in cases where one spouse harms another in a road accident, may the tortfeasor invoke any privilege he might enjoy generally also against his or her partner? Within private law Art. 4, Statute 24 December 1969, no. 990, introducing compulsory liability insurance in the motor vehicle area rules that, for the purposes of its application, in the case of damage to property, certain subjects are not considered as being third parties. For instance, among others: a) the owner, the usufructuary and the buyer of the vehicle who becomes the owner once the last instalment has been paid; b) the spouse not legally separated, natural, legal or adoptive ascendents and descendents and in-laws up to the third degree; c) in case the insured party is a company, its fully liable directors and persons related to them as at b) above.
112
It should be stressed that the exemption only applies in case of damage to property. Injury to any person transported is entirely compensated, even if they are co-owners of the vehicle117.
113
7. Insurance and Agreements to Limit or Exclude Tort Liability (22) Assuming that the particular legal system allows for the derogation of tort liability by contractual agreements: Do courts take the issue of liability insurance into account when examining whether there is an implicit agreement excluding or limiting tort liability? For instance, do courts hold owners of horses to be strictly liable even if the animal hurts someone who was allowed to take it for a ride gratuitously because horse owners are usually protected by liability insurance? A problem related to exemption clauses in tort law could arise in the following cases118: a) a third party suffers damage as a consequence of the non-fulfil117 118
Trib. of Monza 10 March 1995, [1996] GC, 1158. P.G. Monateri, Le fonti delle obbligazioni 3 – La responsabilità civile, in: Trattato Sacco (1998), 678.
114
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ment of a contract between other parties, explicitly containing a non-exemption clause; b) where the victim sues the employee or the assistant of its contractual partner (suing contractor’s assistant); c) situations arising from contracts in which the behaviour of one of the parties not only constitutes a non-fulfilment, but also a wrongful act in relation to the contractual partner; d) non-contractual situations ruled in advance in a contract.
115
Exemption clauses are ruled in Art. 1229 CC and usually refer to obligations arising from contracts119. Art. 1229 CC states that “any agreement excluding or limiting the liability of the debtor in advance for deliberate (dolo) or seriously culpable (colpa grave) non-fulfilment, is void. Furthermore “any prior agreement that exempts or limits liability in case the act of the debtor [= the tortfeasor] or their auxiliaries constitutes a breach of obligations deriving from the rules of ordre public, is also void”.
116
Legal scholars believe that such terms are also applicable to tort law, unless: a) they do not aim at introducing a liability exemption for a deliberate or grossly negligent behaviour; b) they do not infringe the limit of ordre public, to be understood as inclusive of all measures aimed at protecting the person and aimed at protecting the public interest120. Therefore a term excluding liability for injuries to the person has always to be considered as being void121.
117
It does seem that courts consider liability insurance in order to decide whether an implicit agreement excluding tort liability has been reached.
118
In the case of damage caused by animals, Art. 2052 CC applies. It introduces a strict liability of the owner of the animal or of whoever has charge of it, regardless of the fact that they had custody of the animal or that the animal fled or was lost, unless they prove a random act of fortune (caso fortuito). Since the notion of “custody” includes having charge of the animal122, and considering that the custodian of the animal is whoever has use of the animal123, it follows that, in principle124, damage suffered by users of the animal rests on them.
119
120 121
122
123 124
Art. 1229 CC is contained in the fourth Book, Chapter I, of the Civil Code, on Obligations in general. It thus applies to any obligation, irrespective of its source (whether contractual, tortious or deriving “from any other fact or act appropriate to produce it in conformity with the legal system” [Art. 1173 CC]). See supra fn. 118. Ibid.; U. Breccia, Le obbligazioni, in: Trattato Iudica-Zatti (1991), 620 et seq.; F. Galgano, Diritto civile e commerciale II (1999), 65 et seq. See supra nos. 60–61. P.G. Monateri (supra fn. 2), 141; A. De Martini, I fatti produttivi del danno risarcibile (1983), 219; V. Geri, La responsabilità civile da cose in custodia, animali e rovina di edifici (1974), 232 et seq. See Cass. 15 April 1959, no. 1115, [1960] MGI. A different solution applies in the case where the user-custodian receives a horse whose health conditions make the occurrence of damage independent from having charge of the animal (for instance where drugs have been given to the horse).
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(23) Vice versa: What impact does first-party insurance have on the willingness of courts to find a tacit agreement excluding liability in tort? For example, as house owners in most countries are compelled to insure against fire, does this insurance policy also extend to tenants of the same dwelling such that the insurance company has no rights of recourse against a tenant setting the house on fire negligently? Considerations similar to those made under supra nos. 114 et seq. apply to first-party insurance. Thus, there is no apparent relationship between first-party insurance and the finding of a tacit agreement excluding liability in tort, i.e. aimed at excluding the subrogation of the insurer in relation to the negligent tortfeasor.
119
Generally speaking, jurisprudence seems to be particularly cautious in extending insurance coverage in favour of third parties.
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8. Procedural Issues (24) What is the relationship between court proceedings and judgments on the issue of liability on the one hand and on the issue of insurance coverage on the other? May an insurer refuse coverage although the policy holder has been found liable in a final judgment on the torts claim? In practice, who defends a claim for damages brought against another: the potential tortfeasor himself or his insurer? As far as liability insurance is concerned, Art. 1917, 2nd paragraph, CC provides that, if the insured party asks for it, the insurer is obliged to pay the indemnity due. Furthermore, paragraph 4 of the same legal rule states that the insured party, sued by the plaintiff, may join the insurer in the action.
121
Therefore, in case the final judgment should hold the insured party liable, the insurer is obliged to pay damages, unless he was not aware of the court proceeding and thus did not have a concrete possibility of participating in the proceeding.
122
If an accident occurs, the insured party has a duty to inform the insurer within three days (Art. 1913 CC). If he fails to do so, the insurer has the right to ask for a reduction of the compensation due, in accordance with the damage suffered; whereas if the insured party deliberately did not fulfil the obligation to inform the insurer, they lose the right of having the insurer pay damages or may have them reduced (Art. 1915 CC).
123
On a practical level, a claim for damages brought against the potential tortfeasor is defended by the insurer.
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IV. Further Topics (25) Any other topic relevant to the relationship between tort liability and insurance that has not been addressed in answering the questions posed above?
125
It is interesting to note that sometimes a limitation of compensation for personal injury provided for by law has been considered as an infringement of the Constitution and thus as being inapplicable125. Specifically, in a dispute following a plane crash in which a passenger lost his/her life, the Constitutional Court held that Art. 1, Statute 19 May 1932, no. 481 and Art. 2, Statute 3 December 1962, no. 1382, providing for a limitation of liability of the air carrier according to Art. 22-1 of the Convention of Warsaw of 12 October 1929, replaced by the XI Hague Protocol of 28 September 1955, lacks a justification in cases of loss of human life. Therefore, full compensation of damage has to be awarded.
126
The problem has been overcome by the introduction of the Kuala Lumpur IATA agreement of 31 October 1995, which became effective with the IATA Agreement on Measures to implement the IATA Intercarrier Agreement (MIA) of 1 September 1996 and the IATA Provisions Implementing the IATA Intercarrier Agreement to be Included in Conditions of Carriage and Tariffs (IPA) of 16 May 1996. The full compensation of injury to a person has been confirmed by the EEC regulation no. 2027/1997 and by the Convention of Montreal of 28 May 1999.
125
Corte cost. 6 May 1985, no. 132, [1985] RCP, 537.
LIABILITY IN TORT AND LIABILITY INSURANCE: SWEDEN Bill W. Dufwa I.
General
(1) Within the legal and economic literature of your country, is there a discussion about the relationship between tort liability and insurance? What are the major subjects and ideas of such discussion? For many years, there has been a vivid discussion in Sweden concerning the relationship between tort liability and insurance. Three persons, in particular, have been the protagonists of the debate: Ivar Strahl (see 1. below), Jan Hellner (see 2. below) and Bertil Bengtsson (see 3. below). They have all argued in the same vein: insurance ought to play a more decisive role than it has done in traditional tort law. Strahl and Hellner have died. Bengtsson is today the Swedish authority not only in tort law but also in insurance law.
1
1. Ivar Strahl The real debate began with a report written by professor Ivar Strahl at the request of the Government. Strahl’s report, published in 1950,1 resulted from the traditional Nordic legal co-operation. A planner for every Nordic country – Henry Ussing in Denmark – was supposed to report for his government on how tort law should be reformed in his country. It has been said that the report on Sweden by Strahl had the strongest impression on the ensuing discussion.2 Strahl focused the spotlight on the environment in which tort law operated: social and private insurance as well as other compensation systems. He was a visionary who brought a new dimension to the debate. According to him it was not enough to develop tort law in the direction of strict liability. Instead, the need for protection of the victim ought to be put to the fore. While the debate prior to Strahl had been more orientated towards the preventive function of damages, the victim in Strahl’s world became the primary figure. To satisfy his or her needs damages to a large extent should be replaced by insurance. The main premise of the report was that tort liability concerning personal inju1
2
I. Strahl, Förberedande utredning angående lagstiftning på skadeståndsrättens område in: Statens Offentliga Utredningar (SOU) 1950:16. So J. Hellner/S. Johansson, Skadeståndsrätt (6th edn. 2000), 47.
2
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ry should be replaced by an insurance system geared by the State. It was not possible to immediately introduce such a system regarding property damage but the legislature should strive towards that same goal.
3
In the governmental bill3 delivered to the Parliament in 1972 with the aim of creating the first Swedish Damages Act, the ideas of Strahl were taken into consideration. In this respect the bill might seem contradictory. A new Act on tort law was proposed whilst at the same time the government recommended a winding-up of tort law. On the other hand, this way of working was necessary to preserve continuity; after all, the legislation work was from the beginning supposed to be carried out with the ideas of Strahl in mind.
4
More importantly, if Strahl’s ideas influenced the legislation, they were far from being realised in the Damages Act (skadeståndslagen (1972:201)) in the way Strahl wanted. Nor have they been carried out since. 2. Hellner
5
While Strahl was a professor of penal law, Hellner, professor of insurance law, was from the outset a real specialist of, as well as tort law, insurance law when he entered the debate in the middle of the 1950s.4 Hellner had an enormous influence on the development of tort and insurance law in Sweden right up to his death in 2002. Like Strahl he did not believe in the idea of prevention.5 Instead he strongly advocated the functions of reparation and distribution. He took part in the legislation work in tort and insurance law but never left his position as a legal scholar; he was the retiring and intelligent analyser of the whole system.6 3 4
5
6
Kunglig (Kungl). Majestäts (Maj:ts) proposition 1972:5. Skadeståndslag m.m. Stockholm 1972. Behind he at that time had his thesis on the law of restitution (J. Hellner, Obehörig vinst (1950)) and a book on the insurer’s right of subrogation (J. Hellner, Försäkringsgivarens regressrätt (1953)). The most prominent streaks of the writings of Hellner, the ability to write concentrated and a great knowledge of comparative law, soon became clear in the Swedish and international debate. Cf. J. Hellner, Compensation for Personal Injuries in Sweden – A Reconsidered View, in: Scandinavian Studies in Law Vol. 41 (2001), 249–277, 272–275. His perhaps most important contribution to the relationship between insurance and tort law at an international level was J. Hellner, Haftungsersetzung durch Versicherungsschutz in Schweden, in: J.G. Fleming/J. Hellner/E.v. Hippel (eds.), Haftungsersetzung durch Versicherungsschutz. Länderberichte zum anglo-amerikanischen Recht und zum schwedischen Recht zusammen mit einem rechtsvergleichenden Generalbericht und einem Bericht über die Diskussion (1980), 24– 39. See also J. Hellner, Tort liability and social insurance in Sweden. Aktuele problemen van verzekeringsrecht. Colloquium Gent 24–28 July 1972 (1974), 210–224; „Geborgenheitsversicherung“ – eine neue Stufe in der Entwicklung des Arbeitsunfallschutzes in Schweden in: Festschrift für Ernst Klingmüller (1974), 159–171; Entwicklungslinien im schwedischen Haftpflichtrecht, in: Festschrift für Karl Sieg (1976), 155–169; La nouvelle loi suédoise sur l’assurance automobile obligatoire, Revue générale des assurances terrestres (1977), 153–170; Rechtsreform durch Gesetzgebung des Verbraucherschutzes, in: Festschrift für Konrad Zweigert zum 70. Geburtstag (1981), 827–849; Sweden. Medical responsibility in Western Europe. Research study of the European science foundation (1984), 687–728; Compensation for Personal Injuries: The Swedish Alternative, [1986] The American Journal of Compartive Law, 613–633; Consumer Protection: Law and the Technique of Insurance. Hommage à André Besson (1987); Haftpflicht und Versicherung auf dem Gebiet der Produktehaftung im schwedischen Recht. Studiea cywilistyczne Tom XXXIII. Krakow (1987), 247–255; supra fn. 5 op. cit.
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3. Bengtsson Bengtsson has been active in all the important fields of law: legal science (professor of private law), legislation (chairman of many commissions working with tort and insurance law), and jurisprudence (member of the Supreme Court). He wrote the perhaps most important part of the governmental bill of the Damages Act.7 On the whole he seems to agree with the ideas of Hellner regarding how tort law should be developed. The influence of Bengtsson on Swedish tort and insurance law cannot be exaggerated. It has been and is still immense.8
6
4. The Development in Short Having been developed under the influence of Strahl’s ideas, Swedish tort law at the end of the last century seems to have run onto new tracks. In the last edition (2002) of a commentary on the Damage Act, written by Bengtsson and Erland Strömbäck,9 it is stated that the references to the future visions behind the Act has disappeared in the recent legislation work.10 An individualistic approach, characterised by repeated references to human rights and to the need for individual integrity, has become more prominent in Swedish society. Slowly, tort law, after many years of attack, seems to have experienced a renaissance.11 However, it is a cautious rebirth. A parliamentary government committee (Personskadekommittén) proposed in a report in 2002 that the Swedish legal prohibition on the State to bring recourse actions against tortfeasors, liable according to tort law, and for which the State has borne expenses through the social insurance system, should remain, without any exceptions, even in the case of those who have caused the injury intentionally.12
7
II. Compulsory and Voluntary Insurance (2) Compulsory liability insurance: To what extent does it exist outside the automobile accident sector? 1. Legislation A. Acts based on conventions or EC-rules: 1. Section 22 of the Nuclear Liability Act (atomansvarighetslagen (1968: 45)). 7 8
9
10 11 12
See supra fn. 3. The overwhelming contributions to tort and insurance law of this lawyer are characterized by acuity combined with a humble variety. Strömbäck is a lawyer who also took active part in the work with the Damages Act; after his important participation in the legislation work, he became the main insurance lawyer of Sweden. B. Bengtsson/E. Strömbäck, Skadeståndslagen. En kommentar (2002), 21. See also statements of B. Bengtsson (infra fn. 23). Samordning och regress. Ersättning vid personskada. SOU 2002:1. Betänkande av personskadekommittén. Stockholm 2002.
8
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2. Section 12 of the Oil Spill Liability Act (oljeansvarighetslagen (1995: 1081)), based on the Brussels Liability Convention of 29 November 1969 concerning damage caused by oil spill, as amended by the London Liability Convention of 19 November 1992. 3. Sections 6–7 of the Air Transport Act (lufttransportlagen (2002:1130)) based on the Montreal Convention.
9
B. Regulated professions: 1. Section 6, par. 1, 2 of the Real Estate Brokers Act (fastighetsmäklarlagen (1995:400)): in order to be registered as a broker, a requirement to practise the profession, the broker must prove that he carries liability insurance. 2. Section 4, par. 2 and Section 5, par 1,3 of the Brokers Act (lag (1989:508) om försäkringsmäklare): in order to be registered as a broker, a requirement to practise the profession, the broker must prove that he carries liability insurance.
10
C. The financial field: 1. Banks must have liability insurance in place which covers pledges that have been presented to them (Section 14 (pantbankslag (1995:1000)). 2. An enterprise working in the stock exchange and which administers the financial instrument of someone else is obliged to take out liability insurance to cover losses it might cause (part II, Chapter 10, Section 3–6 Rules given by the Swedish Financial Supervisory Authority concerning investments funds (FFFS 2004:2)).
11
D. The medical field:
12
Patient insurance is considered to be a liability insurance. It is mandatory for care givers (Section 12 Patientskadelag (1996:799)). 2. No Legislation
13
There are activities where no law prescribes a mandatory insurance, but where the situation nevertheless is such that the activity is not possible without a liability insurance. An example of this is the drug insurance scheme which is built on voluntarily performed rules. All drug producers, Swedish and foreign, are connected to this insurance scheme. (3) Basic features of mandatory insurance schemes: Are bank guarantees accepted as substitutes for insurance policies?
14
No, bank guarantees are not accepted as substitutes where legislation is in place (supra nos. 1 et seq.). Nor are they accepted for the purposes of the drug insurance scheme (supra nos. 8 et seq.). Is the action directe (direct claim by victim against insurer) available generally or in the motor insurance area only?
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Direct action is accepted where liability insurance is mandatory; for when this is the case, see above. See, for instance, Section 24 of the Nuclear Liability Act and Section 14 of the Oil Spill Liability Act.
15
Is a party who fails to comply with its obligation to insure subject to sanctions? Patient insurance. If there is no patient insurance in a particular case, the association of the care-giver has to pay the compensation (14 § 1 st.). What is paid out can be recouped by way of a recourse action against the person who has neglected to take out the insurance (21 §).
16
(4) To what percentage is the population in fact protected by liability insurance contracts? For a long time, it has been estimated that 85–90 percent of all Swedish households are covered by comprehensive household insurance. The percentage is considered the same regarding liability insurance for a business.
17
III. The Influence of Liability Insurance on Court Decisions in Tort Cases – Focus on the Courts 1. Insurability (5) Legislation: Is the insurability of a particular risk, e.g. environmental liability, a relevant policy consideration when it comes to lawmaking in the area of tort law? Would lawmakers refrain from imposing strict liability for uninsurable risks? Yes, insurability of a risk is a relevant policy consideration.
18
A. Strong regard is had to insurability within the framework of reduction of damages (see the questions under 5 below).
19
B. Concerning the conditions of liability the following should be noted. One might – regarding the importance of the role played by insurance and the interests of the victim in Swedish law – expect that the Swedish legislature should never introduce a strict liability, if there was no prospect of getting some kind of certainty that the victim should be fully compensated by insurance or in some other way. He who has such an expectation will be disappointed. Swedish environmental law gives occasion to this fear.
20
When strict liability was adopted in the environmental field by the legislature in 1983, the insurance issue had been thoroughly discussed. It was clear that the general environmental liability insurance normally does not cover damage that is foreseeable as a necessary or nearly necessary consequence of the activity.13 A
21
13
See Ersättning för miljöskador. Betänkande av miljöskadeutredningen. SOU 1983:7, 217–240.
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governmental committee that prepared the legislation therefore analysed and discussed a lot of other arrangements: no-fault insurances (liability insurances paid for by the dangerous activity but giving the victim “direct protection”) with a lot of variations as well as several kinds of funds or environmental fees, paid by the State.14 None was adopted. Essentially, the polluter pays principle forced the legislature to stick to tort law. Certainly, the legislature adopted a special environmental damage insurance paid by those enterprises who are exercising an activity dangerous to the environment. But the aim was not to cover all kinds of environmental risks. Only in three cases can insurance be used: 1) where it is impossible to identify the real polluter among many possible ones; 2) where the victim has no economic means to pay the injury or the damage; 3) where the victim cannot identify the polluter among many of them.15 Thus some risks are covered by strict liability but not by insurance or other compensation systems. Uninsurability of many environmental risks thus never stopped the legislature from embracing strict liability. Vice versa: a) Is the rise of strict liability in modern times – to the extent that there was one in the particular jurisdiction – thought to have any connection with the establishment of a vibrant insurance industry able to pick up the attendant risks?
22
a) If no liability insurance is in place which covers the risk from the outset, the Swedish legislature will carefully investigate if there is a possibility for the insurance industry to provide an insurance covering the strict liability. When the Swedish legislature adopted a general liability of the employer for injury and damage caused by the negligence of his employee in the course of his duty (taken here only as an illustrating example since the liability is not completely strict), the main reason for doing this was that the employer’s liability could be covered by his liability insurance in constrast to the employee who was not able to get liability insurance in respect of his profession. In cases where there was no liability of the employer before the legislation, the step taken by the legislature presupposed that the liability insurance would cover the new more extensive liability. During the legislation work some kind of guarantee must have been given by the insurers that such coverage was possible. b) In this sense, may it be said that the availability of liability insurance “drives” the demand for responsibility in tort generally and for strict liability in particular?
23
b) With regard to what has been said, the question raised can thus be answered in the affirmative, but only to the extent that other compensation systems are not considered to be better, as for instance insurance taken by the victim might be. During the second half of the last century, liability insurance was not the instinctive response for the legislature since it also suffered weaknesses as did 14 15
See supra fn. 12, 217. Chapter 33, Section 2 miljöbalken (1998: 808).
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the tort law system. If there is no liability insurance on the market covering the risk, but there is a possibility that there could be, the legislature would discuss and eventually encourage the insurance industry to create such a liability insurance. But once again, only if other compensation systems are not considered more appropriate (6) Jurisprudence: a) Do courts either tacitly or openly take the issue of insurability into account when holding a defendant liable? Yes, to a high degree. When strict liability was adopted by the Supreme Court in 199116 (it was imposed on a district heating power plant), one of the reasons for this step explicitly mentioned by the court was that the plant could protect itself by taking out liability insurance.
24
Another case, decided by the Supreme Court in 1979, concerned the question of who should be regarded as an employer and thus responsible for the negligence of an employee:
25
A plumber (B) without employees had promised a villa owner that he would install piping in his garden. To be able to do this, B hired from an enterprise (A) an excavator with a drill (C). A question arose as to who was the employer of C?17
26
The Supreme Court interpreted the motives of the Damages Act in such a way that the liability of an employer ought not to be shifted from the original employer where the contracting out was of a fairly insignificant duration and was done in favour of an enterprise that, in its activity, did not employ its own employees.18 The court referred to clear statements made by the legislature when employer’s liability was adopted. According to these, an unbiased balancing of the employer’s and the victim’s respective positions and interests normally rendered the result that the employer was closer to carrying the economic consequences than the victim. What is more, the employer had, in any event, a possibility to protect himself by taking out liability insurance. He could also let his cost calculations cover the premiums and thereby wholly or partially transfer these costs to a greater collective. According to the court, the possibility of insurance and of calculating the premiums in the costs of the whole activity was a point of view that in a natural way could be applied to the lender in this case. In relation to B, this point of view was, according to the court,
27
16 17 18
Swedish Supreme Court in [1991] Nytt Juridiskt Arkiv (NJA), 720. [1979] NJA, 773. According to the motives of the Damages Act, the question should firstly be decided with the point of departure in a judgment concerning which of A or B most closely exercised the control of the employee and who led the work. However, this guideline was not valid in all cases of lending labour, but only in such cases where the employee factually had been incorporated into the activity of the other enterprise in a way that he or she outwardly was considered to be wholly on an equal footing with the actual employees of this enterprise. See proposition 1972:5 (supra fn. 3), 478–479.
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“reasonably far-fetched and unpractical”. The employer’s liability was considered to have remained with A.
28
So, even the possibility of taking out insurance has influenced the courts. There are also cases where individual members of the Supreme Court have emphasised in their judgments that it would have been possible for the defendant to obtain liability insurance without greater costs and inconveniences;19 the argument having a strengthening effect.20
29
There is a clear connection between, on one hand, the existence of insurance or the possibility to take out insurance and, on the other, the reduction of damages. See the answer to question (18 b) below. b) In particular, are there decisions where a court has denied a damage claim for the reason that it thought the ensuing liability to be uninsurable?
30
Not to my knowledge. c) Are judges reluctant to impose a liability regime that was not anticipated by the parties, e.g. in cases of “new risks” like dangerous substances, electromagnetic fields and the like?
31
To some extent the answer is yes. Swedish courts are reluctant to impose a new kind of liability for “new risks”, since they have difficulties in foreseeing the consequences of such a liability concerning insurance and reinsurance. According to Bengtsson the insufficient analysis of the insurance issues, in combination with a tendency to look more into the particular circumstances of the case rather than regarding the more principle questions, has reduced the value of many court decisions.21
32
Supposing that there is no liability insurance on the market covering the new risk, the court would probably before introducing a strict liability consider the possibility of the insurance industry introducing such an insurance, to cover such a liability in the future. If they are insufficiently informed for such a difficult judgment or if they find that they cannot do it for other reasons, they will probably anyhow proceed and leave it to the market to determine what to do with the new type of liability regarding insurance and reinsurance. They might argue that if the legislature, with all the resources at its disposal, was unable to find an appropriate insurance compensation system covering all kinds of environmental damage (see the answer to question (5) above), why should the 19 20 21
So in [1959] NJA, 280 and in [1966] NJA, 70. Cf. J. Hellner/S. Johansson (supra fn. 2), 185. B. Bengtsson, Försäkringsteknik och civilrätt (1998), 13. A summary of this book is given by Bengtsson in: Tort Liability and Insurance Practice, Scandinavian Studies in Law vol. 38 (1999), 281–294. This summary is reproduced (same language) in B. Bengtsson, 21 Uppsatser. Skadestånd och försäkring, grundlag, fastighetsrätt och miljö. Ur domarens synvinkel (2003), 73–89.
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court have such an obligation? On the other hand, there are some examples that show the contrary reaction and where the court expressly found it more appropriate for the legislature to intervene; one example is the area of product liability where Swedish courts were very reluctant to adopt a general strict liability. d) Vice versa: Is the fact that a risk may be insured or was in fact insured against, an argument counselling for strict liability? Yes.
33
e) Are there decisions suggesting that liability may be strict rather than faultbased or that its scope may be broader or the damage award higher because its insurance coverage was thought to be unavailable? No.
34
f) Do judges draw a distinction between compulsory insurance schemes and voluntary insurance, even if the latter seems widespread among the public? If the voluntary insurance is widespread, e.g. home insurance or enterprise insurance, it is met with nearly the same consideration as mandatory insurance. One reason might be that investigations about insurances are easier to do in smaller countries (such as Sweden) than in bigger ones (such as Germany). The tradition in Sweden is also very much in favour of voluntary insurance.22
35
(7) Are there any examples where it is thought that the courts have overstretched tort liability such that the insurance industry was cast into crisis? No.
36
(8) Literature: What is the position of commentators on the issue of insurability: Should it be taken into account in the practice of tort law or is it beyond the legitimate pale of tort law? Do commentators voice concerns that expansion of liability may some day exceed the scope of insurable risks? There is at least one Swedish author to whom insurance is of no interest on grounds of principle when he writes about tort law.23 But the contrary is valid 22
23
Cf. for instance the importance of the trygghetsförsäkring vid arbetsskada (Security insurance, TFA) concerning work injuries or the drug insurance scheme; both of them are voluntary, not legislative. This is Håkan Andersson, see his thesis Skyddsändamål och adekvans. Om skadeståndsansvarets gränser (1993), where insurance here and there is mentioned but never is used as a more important way of arguing in connection with the diversification of risk, see the analysis of the thesis by B. Bengtsson, Review (of the book), [1994] Svensk Juristtidning (SvJT), 197. It is not clear but possible that Anders Agell shares this opinion of Andersson, cf. A. Agell, Adekvans eller skyddsändamål. Om rättsvetenskaplig metod och skadeståndsrättslig regelbildning, [1994–95] Juridisk Tidskrift (JT), 803. Cf. B. Bengtsson, 21 Uppsatser (supra fn. 21), 74 fn. 6.
37
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concerning all the other tort law commentators. Not all, but many, tort law problems are normally connected with insurance.24 If the risk is not insurable, of course, this is a matter that must be dealt with in some other way. The problem is touched upon by many Swedish authors, but normally not in the framework of tort law. Instead, one finds the views in writings on insurance law, most of course concerning business law, but also in those regarding insurance contract law.25 Here attention is traditionally called for the issue but no more. The only writer who has gone into the topic by deeply analysing the problems is Bengtsson. He did so in a book published in 199826 and in a most original and acute way. The point of departure for Bengtsson is that many reforms in the field of insurance contract law have been and still are opposed by insurers with reference to what Bengtsson calls “technique of insurance”, meaning all the considerations and measures of insurers concerning the relationship between risk and premium of a certain insurance product.27 The insurers’ arguments concerning the technique of insurance, which purport that a liability that is tightened up in favour of the victim is difficult to handle, have traditionally been accepted to a large extent by the Swedish insurance contract law legislator. Bengtsson finds that it is generally supposed, without any closer considerations, that such a liability involves an increased charge on a collective (which includes the defendant), at least by a rise of the premium. He also states that it is assumed that the tightening up of liability will have favourable preventive effects independent of the liability insurance. Bengtsson is sceptical of both these presumptions. Insurance lives its own life to a great part independent of the tort law rules. Not seldomly, it can essentially influence the size of the risk that is placed on the collective of the defendant or of the victim.28 Among his many conclusions one is that the burden of proof ought to lie on the person who refers to the insurance technique when opposing a liability that is tightened up. If the defendant assumes that a liability is not possible to insure and therefore would be too onerous to bear, he should have the duty to prove the reality of the situation in the insurance market, something that is difficult for the victim and for a third-party. And if the defendant claims that a liability insurance will be too expensive to carry, he ought to have the burden to prove this.29 2. Costs and Benefits of Insurance (9) a) To what extent do courts base their judgments on the objective of risk spreading, i.e. to place the loss on the party better able to absorb it, either through self-insurance (which amounts to deep pocket liability) or through market insurance, i.e. by buying coverage from a professional risk carrier?
24 25 26 27 28 29
See op. cit., 197–198. See B. Bengtsson, Försäkringsteknik och civilrätt (supra fn. 21), 27–33. Op. cit. Op. cit., 9. Op. cit., 166. Op. cit., 167–168.
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a) These ways of reasoning are well known to Swedish courts. However they are seldom explicitly expressed.
38
b) Are there judgments which explicitly accept risk spreading as a relevant policy consideration to influence court decisions in individual cases? b) Maybe.
39
c) Do courts implicitly take risk spreading into account (without saying so)? c) Yes, cf. no. 39 above;
40
d) Is it advisable for a party to argue that the other side was in a better position to insure against the risk and thus should bear the ensuing loss? d) Yes, definitely.
41
3. Standard of Care (10) a) What is thought to be the influence of liability insurance on actual care levels? The general rule is that in principle a connection between the existence of liability insurance in a certain case and the level of care is not permitted; the defendant is not considered to have been in fault simply because liability insurance exists.30 However, there are cases where it is clear that there has been some kind of influence, although the judges have been silent in this regard. Bengtsson in a well known article from 196131 makes a difference between cases regarding private life (see a below) and others concerning commercial life (see b below).
42
a) Private life In the case NJA 1945 s. 471 a farmer together with some other adults and his 9-year-old boy had been playing football in a courtyard, separated from a road by a garden wall. The boy kicked the ball up into a tree from where the ball fell down onto the wall and from this down onto the road. A cyclist ran over the ball and fell from the bicycle hurting himself. He sued only the farmer claiming damages for his injuries. The majority of the Supreme Court (3 votes to 2) found the farmer liable. He was considered to have neglected his obligations to ensure that the play was performed in such a way that the traffic was not in danger. In the small abstract that always precedes the cases in the law reports Nytt Juridiskt Arkiv (NJA) – and which is completed with great care by the judges – it was noted that the farmer had liability insurance. Bengtsson 30 31
Cf. Proposition 1972:5 (supra fn. 3), 621–622. B. Bengtsson, Om ansvarsförsäkringens betydelse i skadeståndsmål, Svensk Juristtidning (1961), 627–645.
43
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found that it was not possible that the notation was there as a result of a coincidence or with the aim of calling attention to the fact that there was a possibility for the farmer to take out insurance; this was self-evident. He has also emphasised that that the level of care imposed was “very high”; it has even been questioned if the level was not fictitious. The conclusion of Bengtsson was that there is valid reason for suspecting that the existence of insurance played a certain role in the Supreme Court’s decision.32
44
In another case five years later33 an employee, A, wrestled with a fellow-worker B, who was thirty years older. This was done in play but resulted in injury to the other. The Court of Appeal dismissed a claim for compensation by the injured party. One judge, however, wanted to approve the claim, stating:
45
“It is for sure that A has a liability insurance, at which state of things an injury negligently caused by him in its economic consequences finally falls upon an insurer. When estimating the fault of A this circumstance has no other importance than not to speak against putting on A a considerable duty to pay compensation because of fairness.”
46
This judge did something rare: he said what he was thinking. What he meant was that the existence of liability insurance could contribute to the acceptance of imposing a high level of care. Bengtsson comments that it is quite possible that the utterance corresponds to the attitude of many judges.34
47
The conclusion would be that it is possible that liability insurance has a special function in private life. When the tortfeasor has caused injury or damage without being too negligent, it might seem reasonable to liberate him or her from a heavy liability. Liability insurance might curtail this and render the tortfeasor liable nevertheless. Judges may argue in this way.35 b) Commercial life
48
Bengtsson found that to some extent the way of reasoning that characterises private life cases might be valid also in respect of cases from commercial life. Suppose that the tortfeasor is a small businessman or an association not working for profit and suppose also that it is not considered to be reasonable to charge this subject with an obligation to pay severe compensation awards. The existence of liability insurance might here change the picture. It might to the contrary be considered reasonable to impose such a liability because of the existence of insurance and therefore have increased the level of care owed. Several Swedish cases, decided by the Supreme Court, give the impression that the judges have reasoned in this direction. In many of these cases the abstract preceding the case mentions the existence of liability insurance in the same 32 33 34 35
Op. cit., 637–638. [1950] NJA, 440. B. Bengtsson (supra fn. 31), 638. Op. cit., 638.
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way as has happened in cases regarding private life (see above).36 According to Bengtsson, it seems as if liability insurance in these cases has caused an increase in the level of care owed. On the other hand, he argues, nothing supports the assumption that the liability insurance could create a presumption of liability or a strict liability independent of fault.37 b) Is moral hazard a well-received concept in legal circles? In 1959 Jan Hellner raised the question if liability insurance ought not to be developed towards a more from a social point of view effective institute. This could be achieved by to a certain extent respecting the moral obligations to compensate some injuries or damages that the policyholders could “feel”.38 The idea can be applied to the feelings of parents whose children have caused damage or to the owners of animals regarding the damage the animals have caused. Bengtsson seems to be favourable to this way of thinking. To manage the idea of a moral hazard, a distinction is made between what is a general rule (not permitted) and what is appropriate in the special case (permitted).
49
The concept of moral hazard has been well-received in other Scandinavian countries also. As early as 192939 the Norwegian law professor Astrup Hoel discussed a change of the liability insurance in the direction that Hellner preferred thirty years later.
50
(11) a) In setting the standard of care, do courts take into account if the defendant is insured, imposing a stricter standard in cases where he is? a) This is possible in a particular case. But it is not a general principle.
51
b) Similarly, is the standard of comparative negligence more lenient in areas where the defendant is protected by liability insurance? b) Comparative negligence.
52
A. According to Swedish tort law, mitigation, where required, is performed within the same parameters in personal injury (see 1. below) and property damage (see 2. below) cases. According to Chapter 6, Section 1, par. 2 of the Damages Act a reduction of compensation shall be determined according to what is reasonable having regard to the degree of misconduct shown on both sides and other relevant circumstances. The main question when applying this rule is if the reduction that results can be considered to be unreasonably onerous on the victim. According to the motives of the rules this “obviously” is not
53
36
37 38 39
See [1942] NJA, 434; [1947] NJA, 432 and [1960] NJA, 388. Cf also B. Bengtsson (supra fn. 31), 639 with further references in the article’s note 24. B. Bengtsson (supra fn. 31), 639 note 25. J. Hellner, Försäkringsrätt (1959), 365. See A. Hoel, Risiko og ansvar. Utviklingslinjer i forsikrings- og erstatningsret (1929).
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the case to the extent that the victim is protected by injury or property insurance or considered to be a self-insurer.40
54
At the same time it is stressed in the travaux préparatoires that regard to the victim must not be driven so far that the result becomes unjust to the defendant. Such a result was however never supposed to happen when liability insurance or the mandatory traffic insurance covers the damages or when the defendant was a self-insurer.41
55
B. If the mitigation in itself is performed in the same way in personal injury as in property damage cases, there is on the other hand a dramatic difference between the two cases concerning the conditions of mitigation (since mitigation in personal injury cases is only permitted exceptionally). 1. Personal Injury
56
Chapter 6, Section 1 Damages Act prescribes: “Compensation for damage or loss resulting from personal injury or death can be reduced, if the person suffering the damage or loss has himself willfully or by gross negligence contributed to the damage or loss. Compensation due to the driver of a motor vehicle who has rendered himself guilty of such offence as referred to in Section 4 of the Act (1951:649) penalties for Certain Traffic Offences, can be reduced also if the driver has in that connection contributed to the damage or loss by negligence. Where personal injury has resulted in the death of the injured person, compensation due to the survivors can be reduced also if the deceased has intentionally contributed to his own death.”
57
On the whole, this rule means that a reduction in damages concerning personal injury occurs only in rare cases. In the motives of this rule it was said that accessible economic resources were best utilized if the risks of injuries in society were spread as widely as possible. If full damages are paid this often leads to an acceptable spreading of risk since the damages in most cases42 are covered by liability insurance.43 “Reasonably” one could not expect the victim to have correspondingly protected himself through voluntary personal insurances.44
58
The question raised under b) above can, due to the special Swedish rules, be amended as follows: would a court consider the victim as “normally” (thus not grossly) negligent only – and thus without suffering from a reduction in the damages – if the defendant is protected by liability insurance? 40 41 42 43 44
Proposition 1975:12, 174, cf. [1975] NJA II, 558. Proposition 1975:12, 174, cf. [1975] NJA II, 558. Cf. the answer to question 4 above. [1975] NJA II, 554. [1975] NJA II, 554–555.
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Yes, this is completely possible. But more probable would be that the court would let the issue of liability insurance influence the test of what is reasonable (see A above).
59
2. Property Damage Chapter 6, Section 2 of the Damages Act prescribes:
60
“Compensation for loss of or damage to property or for financial loss can be reduced if fault or negligence on the part of the person suffering the damage or loss has contributed thereto.” Besides the lack of humanitarian and social reasons for a rule like the one concerning personal injury, the motives call attention to the fact that there are good possibilities for the victim to take out property insurance at a reasonable cost. Such compensation systems have for quite some time been accessible on the market.
61
However, it was admitted that sometimes the rules that were adopted regarding property damage might lead to unsatisfactory results. For such, more rare, cases it was considered to be reasonable to allow the courts the possibility to avoid clearly unjust results. This might be done within the framework of the test of reasonableness (see above).
62
c) In both cases, do courts draw a distinction between voluntary and mandatory insurance schemes? Cases where the issue has been brought to the fore are unknown to me.
63
Conditions of voluntary property insurance may be more widespread than others. They are often called “mandatory” terms of the insurance. These conditions are more highly regarded by the legislature than the others.45
64
(12) Do courts take first-party insurance into account in setting the standard of care? Is there a tendency to set the standard high where the plaintiff is compensated anyway under a first-party insurance policy and low if the plaintiff does not enjoy such coverage? Yes, but only concerning property damage, see above under question (11 b). (13) Might a party be held to have acted negligently for the sole reason that it delegated the duty of care incumbent upon itself to an independent contractor who in turn was not protected either by an insurance policy or by sufficient equity against which potential victims could have executed their claims?
45
Cf. [1975] NJA II, 555.
65
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Probably not. The answer might be otherwise if the party in question was duly informed about the weak protection available to the victim and if the risk of damage (particularly personal) was considerable. 3. General Duty to Insure (14) Does it constitute negligence if a party failed to transfer the risk of liability to an insurance carrier? If so, what is the sanction in case of such failure? A. Reduction in damages due to contributory negligence
67
a. In 1975 the Special Committee on Damages in its last bill Skadestånd VI46 proposed that damages for property damage could be reduced if the victim had neglected to take out such an insurance that is normal and apt for the activity carried out, and other conditions, or if there were other special reasons for this step regarding existing insurance coverage or possibilities to obtain such coverage. However, this bill never led to legislation.
68
b. The issue of if reduction in damages is possible just because the victim of property damage had not taken out insurance was discussed by Bengtsson in his book Om jämkning av skadestånd, published in 1982.47 He here connected the “new” rule on contributory negligence (Chapter 6, Section 1, see question 11 b) above) with the “old” rule of the Damages Act, namely Chapter 3, Section 6: “Compensation due under Sections 1 or 2 for loss of or damage to property may be reduced if this is deemed reasonable on account of existing insurance coverage or possibilities to obtain such coverage.”
69
Chapter 3 concerns employer’s liability for damage caused intentionally or negligently by his employee (Section 1). The rule also applies to the liability of the State or the municipality regarding property damage caused by fault in exercising public authority (Section 2).
70
Chapter 3, Section 6 was to cater for the idea that property damage to the largest possible extent should be covered by, and confined to, the voluntary insurance taken out by the victim. This boldness of conception could have been realised by a general limitation on the insurer’s right of subrogation. But such a rule had proved difficult to include at a time when the Damages Act was in the process of being created. Chapter 3, Section 6 was adopted instead. According to the guidelines developed in the travaux préparatoires of the Act, it is true that the insurers have a full right of subrogation concerning liability; so far there is no change. But to the extent that tort liability goes further than what is 46
47
Skadestånd VI. Försäkringsgivares regressrätt m.m. Betänkande av skadeståndskommittén. SOU 1975:103. See the proposed new rule in Chapter 5, Section 10 of the Damages Act and the comments in pages 175–178. B. Bengtsson, Om jämkning av skadestånd (1982), 102–103.
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covered by the liability insurance (because of restrictions in the conditions of insurance), the insurers do not have a right of recourse. According to the guidelines, one should treat victims that had omitted to take out standard property insurance in the same way as insurers exercising their right of recourse.48 Bengtsson noted in his book that the legislature when adopting the new Damages Act in 1975 “evidently” had taken as the point of departure that while the “old” rule in Chapter 3, Section 6 concerned the conditions of liability, the “new” rule on contributory negligence in Chapter 6, Section 1 (see question 11 b) above) was supposed to be separated from Chapter 3, Section 6. The basis of liability was not the same in the two sections mentioned. Bengtsson now paid attention to the important change that had taken place since 1972 regarding Chapter 6, Section 1 (see question 11 b above). He asked if this change ought not to mean that Chapter 3, Section 6 and Chapter 6, Section 1 should be brought together: existing insurance coverage or possibilities to obtain such coverage ought to play a role also when applying Chapter 6, Section 1. Such an approach, he said, was “undeniably” in line with the general attitude of the motives given regarding the change of 1975.
71
c. He also discussed the possibility for the judge when applying Chapter 6, Section 1 to be influenced by the more far-reaching ideas expressed in the bill Skadestånd VI (see a above). After having expressed a rather pessimistic view about the future of Skadestånd VI he highlighted that one had to be careful in letting the possibilities to obtain insurance play any essential role in this context.
72
d. This last expression was cited by the Supreme Court in NJA 1991 s. 567 where the facts were the following. During an elk-hunting, a hunter (A) negligently killed the dog of another hunter (B). A asserted that the damages ought to be reduced because B had not taken out first-party insurance for the dog. The Supreme Court drew attention to the fact that it had not been possible to insure the dog because of the age of the animal. The Court also pointed out that this insurance practice ought not to prevent the use of old dogs in hunting. There could therefore not be a reduction in damages awarded solely as a result of the dog not being insured.
73
The Supreme Court found that the value of the dog was not so high (being about € 1,400) that B could be considered negligent for using the dog in that
74
48
An example is provided in the following: Suppose that a privately-owned boat worth € 500,000 is damaged. Since this owner is not regarded as a normal consumer (the boat is worth too much), he ought to have taken out insurance to cover any potential damage to the boat. If an employee negligently burns the boat down whilst repairing the damage and the employer had no liability insurance, the owner might suffer a reduction in the damages that the employer has to pay. In fact, the possibility that he may receive no damages whatsoever is not excluded. The result will depend on the circumstances of the case, including, not least, the wealth of the employer; a big business, e.g. a municipality, might in general be subject to higher awards than small enterprises. Cf. B. Bengtsson/E. Strömbäck (supra fn. 10), 109.
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manner. If the dog had been only two years old and very valuable, it seems possible that the Court may have accepted the idea that B had been negligent in not insuring the dog and that a reduction in damages should therefore occur.
75
e. It seems surprising that Bengtsson in a comment in 1991 to this case did not want to interpret the judgment in this way. On the contrary, such an e contrario interpretation would, according to him, not be correct. The reason for his view of the matter was that he found that the development had gone onto new tracks. The right to own a thing had been changed; in 1991 it ought not to be violated by a request for insurance. And, according to his opinion, if anything, there was a tendency to completely disregard the insurance coverage of the victim when the question of tort liability was decided. At least concerning the legislature the tendency was to adhere to the more conventional view that was common before the reform period of the sixties and seventies.49 B. The four cornerstones
76
The increased possibility for the court to reduce damages – as opposed to the principle of restitution in integrum – became the most important characteristic of the development of Swedish tort law during the last quarter of the last century. However, a reduction was not supposed to take place when the defendant had liability insurance. From the insurers’ point of view this meant that the liability insurer in principle became liberated from the work with mitigation.
77
The cornerstone of this development are four Sections of SkL (see a–d below):
78
a. Chapter 2 Section 4 (children and youth): “Any person who, before being eighteen years, causes injury, damage or loss in cases aimed at in sections 1–3 above, shall compensate the injury, damage or loss to the extent this is reasonable, having regard to his age and degree of maturity, the nature of the act or omission by which the damage was caused, the existence of any third-party liability insurance and other economic conditions, as well as other circumstances.” A. Conditions for liability
79
For this provision to apply, the child must have caused the damage by fault. This is deemed so if an adult would be considered to have caused the damage by fault. In the travaux préparatoires of the SkL it is even said that the judgment of fault of the child shall take place with regard to more objective criteria than for adults,50 meaning that what the child understood or ought to have understood has less importance than it has for adults.51 49 50 51
See B. Bengtsson, [1993] SvJT, 783. See proposition 1972:5 (supra fn. 3), 164. Cf. J. Heller/S. Johansson (supra fn. 2), 265.
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How can one explain that the level of care of the child in principle is found not in comparison with other children but in relation to an adult? It is because “the legislature has taken into consideration the possibilities to impose liability that the existence of liability insurance creates”.52 The regard to the behaviour of adults of course has more importance for children who are less than 15 years of age than those who are older.53 And the reference to adults has a limitation; it cannot be applied to activities that only children exercise, above all when they are playing games.54
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B. Extent of liability As can be seen, the extent of the child’s liability to pay damages depends on a judgment of what is considered to be “reasonable”. Among the circumstances that have to be considered the legislature has mentioned “the existence of any third-party liability insurance”. This reference has been interpreted to mean that whenever there is liability insurance in place, any reduction of the compensation awarded because of the action of the child as a tortfeasor is excluded. That the victim is wealthy or is covered by insurance has no importance.
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C. Historical explanation The importance of liability insurance not only regarding the extent of liability but also in relation to the condition of liability was not something that fell from the sky, when SkL was adopted in 1972. It was an idea that had been developed in older jurisprudence and insurance practice.55 Also, at that time, the legal rules concerning the liability of children were based on a judgment of reasonableness, but here the words of the provision explicitly covered the condition of liability. However, the idea that liability insurance ought to influence the liability of the child was not generally accepted in doctrine.
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b. Chapter 2 Section 5 (mental deficiency):
83
“Any person who causes injury, damage or loss in cases aimed at in sections 1–3 above under the influence of a serious mental deficiency or of some other deficiency that is not self-inflicted or temporary, shall compensate the injury, damage or loss to the extent that this is deemed reasonable having regard to this person’s mental condition, the nature of the act or omission by which the damage was caused, the existence of any third-party liability insurance and other economic conditions, as well as other circumstances”.
52 53 54
55
J. Hellner/S. Johansson (supra fn. 2), 265–266. Cf. B. Bengtsson/E. Strömbäck (supra fn. 10), 64. See [1976] NJA, 458 (the play with a popgun did not create a liability for a 9 year old boy). Cf. [1980] NJA, 670 and B. Bengtsson/E. Strömbäck (supra fn. 10), 64. See particularly [1946] NJA, 545 and cf. B. Bengtsson, Tort Liability and Insurance Practice (supra fn. 21), 290–295.
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84
This article is interpreted in the same way as the previous one. The tortfeasor has to be compared with an adult. Thus, often found to have been at fault, the first question becomes: is there any liability insurance covering the damage? If there is, no reduction in the compensation to be paid is allowed.
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c. Chapter 3 Section 6 (employer’s liability for property damage): This regulation has been cited and explained above. d. Chapter 6 Section 2 (mitigation when reasonable): “Where liability to pay damages would be unduly burdensome for the person liable with regard to his financial situation, the amount of the compensation may be reduced according to what is reasonable, having regard also to the victim’s need of compensation and other relevant circumstances.”
86
This provision was adopted by the legislature at the same time as the “new” Chapter 6, Section 1 (contributory negligence) in 1975 (see the answers under question (11 b) above). It does not create a general possibility for the judge to reduce an award of damages.56 Only when the tortfeasor has economic difficulties to pay damages will the rule apply. According to the travaux préparatoires this means that a reduction can never take place, when the damage is covered by liability insurance or by self-insurance.
87
A reduction in compliance with Chapter 6, Section 2 is also refused when the defendant had a reasonable cause to take out liability insurance but neglected this chance. This is normally not the case when the defendant is a private person; one cannot expect a defendant to have acted in such a manner, even if e.g. householder’s comprehensive insurance is widespread (see the answer to question (4) above). The situation is different concerning enterprises. As defendants they will not be able to have a reduction in damages in accordance with Chapter 6, Section 2.57 However this is nowadays considered to be a little too harsh for small enterprises. In any event, an enterprise, including a large enterprise, might be excused if something exceptional and unexpected has happened.
88
If the victim is covered by personal or property insurance, he will not be able to refer to his need for compensation. (15) May parents be held accountable for the torts of their children because they failed to buy liability insurance for the whole family, including the child?
56 57
See to the following in particular B. Bengtsson/E. Strömbäck (supra fn. 10), 319–328. Proposition 1972:5 (supra fn. 3.), 138 and 176.
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No, parents can only be liable if they themselves have been negligent. The fault rule applies and parents are not at fault where they have not taken out home insurance.
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(16) Are employers under a duty to take out liability insurance covering the torts of their employees? If so, what is the sanction in case of default, both visà-vis the employee and the third party victim? No, there is no such duty on the employer.
90
(17) Vice versa: May a plaintiff be thought to be guilty of contributory negligence for the sole reason that he failed to protect himself by means of first party insurance? For example, where a potential buyer of a car embarks on a test drive and causes damage to the demonstration car, is the automobile dealer under a legal obligation to supply first-party insurance such that the client is protected against tort liability in case of an accident? See the answer to question (14) above.
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4. Insurance and Damages (18) Does the fact that the defendant is insured influence in any way the assessment of damages? In principal the answer is no. However the possibility that a judge in a particular case might be influenced by the existence of insurance when deciding the assessment of damages does not seem to be excluded.
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(19) To the extent that the particular legal system provides for exemplary or punitive damages, is the fact that the defendant has transferred the risk to an insurance carrier relevant to the decision on imposing punitive damages? If so, does it tend to aggravate or to mitigate the amount granted? Exemplary or punitive damages are not awarded in Swedish law.
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(20) Insurance and non-pecuniary loss: To the extent that courts enjoy discretion to set the amount of damages for non-pecuniary loss; is insurance a relevant factor worth considering when it comes to the assessment of such damages? If so, does it aggravate or mitigate the amount allowed? The freedom of Swedish courts to set the amount of damages is in reality very limited. Insurance boards together with the insurers to a large extent work with tables when they state the level of the damages. From time to time the Supreme Court confirms this development; only rarely the Supreme Court changes it.
94
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In principle, courts are not influenced by insurance in deciding the assessment of non-pecuniary damages, although they know all too well that this kind of damages is normally covered by liability insurance. No judgment where this principle has been deviated from is known to me. However I can see one point, where there could be an impact. It concerns the costs of non-pecuniary damages. The legislature has discussed this issue in connection with adopting new rules for non-pecuniary damages in 2001. It was considered important that the costs of the changes, which were in favour of the victim, did not become too high, since this would have a direct effect on the premiums for the two most important liability insurances: in traffic (the mandatory traffic accident insurance) and at work (Trygghetsförsäkringen (TFA), based on collective agreements). The recommendation was that the increase of non-pecuniary damages would be spread across different periods of time, for instance for three years.58 The Swedish Courts are extremely sensitive to what is said in the travaux préparatoires. Therefore a court might well refuse to accept too high an increase of the damages referring to the consequences for the policyholders of the liability insurance. 5. Privileges (21) To the extent that the law allows for privileges, dispensing certain classes of parties from the ordinary standard of care, do such privileges apply even where the privileged party is insured? In particular, in cases where one spouse harms another in a road accident, may the tortfeasor invoke any privilege he might enjoy generally also against his or her partner? A. Employees
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The liability of the employee (in Swedish legal literature often called his or her “personal” liability) for injury or damage caused in the course of employment is according to Chapter 4, Section 1 SkL dramatically reduced: “An employee shall be liable for harm, caused by a wrongful act or omission done in the course of his employment, only if and to the extent that there are extraordinary reasons for such liability having regard to the nature of his act or omission, his position, the interests of the victim or other relevant circumstances.”
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This rule covers four situations: recourse actions from the employer (1), the direct liability of the employee towards the employer (2) or a third party as victim (meaning all victims other than the employer) (3) and the employer’s liability towards the employee when the latter has paid compensation to the victim (4).
98
“Other relevant circumstances” include, firstly, economic considerations. These are most important concerning the employee’s personal liability against 58
See Regeringens proposition 2000/01:68, Ersättning för ideell skada (2001), 92.
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the victim (3 above). Whether there are “extraordinary reasons” is, according to the governmental bill, particularly influenced by insurance matters. If the victim (in case 3 above, the third-party) has not taken out property insurance that he ought to have, no damages will normally be paid. Special regard is had for the fact that an employee normally is not able to get liability insurance covering risks at the workplace, but if he has such a coverage this might be an extraordinary reason to make him personally liable.59 B. Children and mentally disturbed persons As victims, these categories can be considered to belong to a privileged class. For social reasons, contributory negligence on their part is treated more leniently by the judge.60
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6. Insurance and Agreements to Limit or Exclude Tort Liability (22) Assuming that the particular legal system allows for the derogation of tort liability by contractual agreements, do courts take the issue of liability insurance into account when examining whether there is an implicit agreement excluding or limiting tort liability? For instance, do courts hold owners of horses to be strictly liable even if the animal hurts someone who was allowed to take it for a ride gratuitously because horse owners are usually protected by liability insurance? I understand the question in the following way. The court has to interpret the agreement between the horse owner and the user of the horse. The point of departure is that a discharge from the strict liability of the owner is permitted.61 When the court examines the scope of the agreement (if it goes so far that the horse owner is released from the strict liability) – may it be influenced by the fact that the owner has liability insurance?
100
The reply is yes. On the whole, interpretation of contracts in Swedish law is influenced by insurance matters. Another example: a disclaimer, that normally is not respected, for instance to the extent that it covers personal injury, would be accepted if the party who refers to it has liability insurance that does not permit an exception for disclaimers, nor for personal injury; therefore the insurer cannot escape all liability by saying that the disclaimer is invalid because it concerns personal injury.62 And, an opposite example: a victim that dislikes a disclaimer is in a bad situation, if it is clear that there was a good possibility
101
59
60 61
62
Regeringens proposition 1972:5 (supra fn. 3), 410–412 and 561–562. Cf. B. Bengtsson/E. Strömbäck (supra fn. 10), 128. See B. Bengtsson/E. Strömbäck (supra fn. 10), 316. This it is only to a limited extent, see B. Bengtsson (supra fn. 47), 208–210. Cf. also, with further references, B.W. Dufwa, Droit suédois comparé au droit français, in: Les clauses limitatives ou exonératoires de responsabilité en Europe. Actes du Colloque des 13 et 14 décembre 1990 (1990), 179–210. Cf. B.W. Dufwa (supra fn. 61), 190–192.
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for him or her to take out insurance to cover the risk but this possibility was neglected.
102
This result of Swedish law is facilitated by the Contract Act where Section 36, par. 1 prescribes: “Contractual conditions might be mitigated or left without consideration, if the condition is unreasonable regarding the content of the agreement, the circumstances at the creation of the contract, later occurring state of things and circumstances as to the rest.”
103
In the motives of Section 36, essentially written by Jan Hellner, insurance is taken into consideration.63 (23) Vice versa: What impact does first-party insurance have on the willingness of courts to find a tacit agreement excluding liability in tort. For example, as house owners in most countries are compelled to insure against fire, does this insurance policy also extend to tenants of the same dwelling such that the insurance company has no rights of recourse against a tenant setting the house on fire negligently?
104
The Swedish courts do not seem to let insurance have an effect on the issue if there is “a tacit agreement excluding liability in tort”. The problem is concerned moreso with “open” insurance arguments, that do not directly touch the agreement between the parties. The case NJA 1998 s 390 illustrates this:
105
An employee of the Swedish Post stole an insured item of mail under transport. The item contained diamonds. The insurer who had paid compensation to the owner of the diamonds claimed damages from the Post in the region of one million euros. The Post referred to an ordinance, given by the Post, according to which the liability of the Post for mails was limited to one thousand euros. This ordinance was considered to have been a part of the contract between the Post and the victim. According to the Supreme Court a limitation of the liability in relation to a contractual party was without doubt valid in general, also regarding losses caused negligently by employees. But the main principle was that a disclaimer was not valid if the loss was caused by a crime, committed by an employee, and if the crime concerned property that was entrusted to the other party to the contract. Views of insurance and channelling could result in “considerable displacements” in favour of the party who referred to the disclaimer, here the Post. If the victim had the possibility of protecting himself through insurance and this was customary or his or her attention had been drawn to this possibility, an otherwise not permitted disclaimer could be accepted, particularly when insurance also had been taken out.
63
See Generalklausul i förmögenhetsrätten. Betänkande av Generalklausulutredningen (SOU 1974:83), 179–184.
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7. Procedural Issues (24) a) What is the relationship between court proceedings and judgments on the issue of liability on the one hand and on the issue of insurance coverage on the other? If the judge knows nothing about the content of the policy, it might well be that the coverage is more restricted or more favourable than the judgment on tort law.
106
The policy of liability insurance is to a certain extent interpreted with regard to tort law, but essentially the issue becomes one of contract law. The meaning of the term “property damage” in the conditions of product liability insurance was in a Swedish case64 interpreted in an extended way. One may suppose that this meaning of property damage also is valid for tort law in general, but this cannot be taken for granted, since the Supreme Court did not say this explicitly.
107
The same is valid concerning the interpretation of policies of insurances taken by the victim. To be sure that the interpretation of a special term is exactly the same that is understood with this term in insurance contract law, the court has to say it in one way or another. Otherwise the term might be interpreted in the same way as it would be in general contract law.
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b) May an insurer refuse coverage although the policy holder has been found liable in a final judgment in the torts claim? The insurer can of course refuse coverage in such a case, if the policy of the insurance has some kind of restrictions that has not been dealt with in the judgment (not least because often the judge does not know anything about the content of the insurance policy). See a) above. There might also be agreements aside from the policy between the insurer and the policy holder that change the force of the judgment.
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c) In practice, who defends a claim for damages brought against another: the potential tortfeasor himself or his insurer? Normal policies request the policy holder to ask the insurer about this. Some insurers in Sweden completely take care of the defence themselves, others ask an outside lawyer to do it. It also happens that it is left to the policy holder to find an appropriate lawyer. It all depends on various circumstances such as the value of the matter in dispute and the organisation of the insurer.
64
[1996] NJA, 68.
110
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IV. Further Topics (25) Any other topic relevant to the relationship between tort liability and insurance that has not been addressed in answering the questions posed above?
111
1. De lege ferenda insurance comes into the picture when discussing joint and several liability. If each of two tortfeasors have taken out liability insurance, one may ask if it would not be better to apportion the liability directly, thus escaping the costs of recourse actions between them. A European Tort Law ought to prescribe that the joint and several liability might give rise for an apportioned liability if this is reasonable.
112
2. One might also ask if the causation issue might be influenced by insurance matters.
SWITZERLAND Vincent Brulhart, Guy Chappuis, Urs de Maddalena, Jürg Waldmeier and Stephan Weber Preliminary advice: The majority of the following questions focus primarily on “the law in action”, i.e. on court decisions. If courts are reluctant to make public their views on the relationship between insurance and liability, the reporter should then shift his attention to legal doctrine, exploring the “culture” in which domestic courts thrive in order to identify the “hidden” considerations on which court decisions might be based. In both cases, scholarly discussions on the subject should be presented in addition, but not without indicating that their influence on legal practice is uncertain. I.
1
General
(1) Within the legal and economic literature of your country, is there a discussion about the relationship between tort liability and insurance? What are the major subjects and ideas of such discussion? The relationship between liability and insurance is mentioned only marginally in the literature on tort law; and many of these references deal with the controversial question of whether broad insurance cover undermines tort law’s preventive principle. In the opinion of some, liability insurance has a tendency to neutralise the ordered allocation of responsibility at which tort law aims. Others counter that the major thrust of tort law is the principle of compensation, and that this would be largely illusory without liability insurance: the size of today’s losses has grown beyond the means of individual parties to cover them, and the remedy is to transfer the risk to insurers. We must not forget, they maintain, that judges hold themselves strictly to legal principles in judging liability. In no case do they let themselves be influenced by the amount of insurance cover that may or may not have been purchased to alleviate a given risk. In this context, some would argue that tort law and insurance are similar instruments, with tort law being placed upstream of the insurer. Through the rules of recourse – statutory regulations which give tort law its form, and which answer the question as to which party, at the end of the day, will be obliged to compensate a loss – the operational, functioning aspects of tort law have been shifted to the recovery side. This
2
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view is rebutted by noting that there still remain broad areas where it is completely impossible to “pass along” losses by means of recovery actions. The monetary limits applying to personal injury claims paid by social insurers also come to mind here, despite the fact that Swiss tort law stipulates no such limits.1 One also sees the statement that liability insurance has evolved from an instrument for the protection of the insured party, to one for the protection of the injured party. This systemic change has been brought about by instituting obligatory insurance cover and the right of direct claim, and by excluding certain defences. Thus the basic idea of individual liability has given way to the idea of collective liability, which also means that the border between solutions under tort law and a no-fault system is quite flexible.2
3
In Switzerland, several economic analyses of tort law have appeared.3 These studies use an economic perspective to investigate, on the one hand, the creation of incentives to prevent losses; and on the other hand, the demand for insurance cover. According to the approach they recommend, the rules of tort law should provide incentives encouraging the intensification of preventive measures to the point where their cost equals the amount saved through reduced losses.4 In this context, one increasingly finds5 a concept of tort law that is familiar mainly from the older literature;6 one which is characterised by the predominance of the preventive principle. The contention is that, applied to all losses collectively, the obligation to pay compensation would contribute to reducing future harm, and indeed to reducing the overall amount of harm. These works also discuss the extent to which liability insurance collides with the preventive principle. They remind those who find this problematic that the systems for compensating losses under insurance law, too, include provisions intended to influence behaviour: for example by way of bonuses or penalties, deductibles, premium adjustments and means of recourse.7 For the proponents of the economic analysis, it is unimportant whether the expenses connected with a loss are carried by a single party or by a community of premium-payers. For them, the essential thing is for the costs to be internalised, kept as low as possible, and assigned to the person able to prevent further such losses at the lowest cost. This approach has been rejected on the whole8 because it em1
2
3
4 5 6 7 8
K. Oftinger/E. Stark, Schweizerisches Haftpflichtrecht, Erster Band: Allgemeiner Teil (5th edn. 1995), § 11 nos. 307 et seq.; V. Roberto, Schweizerisches Haftpflichtrecht (2002), nos. 30 et seq.; H. Rey, Ausservertragliches Haftpflichtrecht (3rd edn. 2003); H. Honsell, Schweizerisches Haftpflichtrecht (3rd edn. 2000), § 1 nos. 95 et seq., § 23 nos. 1 et seq. Cf. R. Schaer, Grundzüge des Zusammenwirkens von Schadenausgleichsystemen (1984), nos. 544 et seq. J. Finsinger, Der heutige Stand des Haftpflichtrechts aus der Law and Economic Perspektive, in: O. Guillod (ed.), Kolloquium Neuere Entwicklungen im Haftpflichtrecht (1991), 41 et seq.; M. Adams, Ökonomische Analyse der Gefährdungs- und Verschuldungshaftung, Habilitation, Heidelberg (1985); G. Artho, Ökonomische Analyse des Haftpflichtrechts (1991). Cf. M. Adams (supra fn. 3), 21 and 33. M. Adams (supra fn. 3), passim; J. Finsinger (supra fn. 3), 52. K. Oftinger in the Foreword to Schweizerisches Haftpflichtrecht I (1940), XXIII. Cf. K. Oftinger/E. Stark (supra fn. 1), § 11 no. 312 fn. 372; V. Roberto (supra fn. 1), no. 32. But particularly by K. Oftinger/E. Stark (supra fn. 1), § 1 51 et seq.
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phasises the economic aspects too strongly in considering the interests involved, and moreover because it is not feasible: it is not possible to put a definite monetary value on the cost of loss prevention; or on the losses prevented; or even on the benefit provided by a hazardous activity. The relationship between tort law and insurance was also examined as part of a planned revision of tort law. The relevant commission, formed in 1988, investigated as a preliminary question whether it would still be at all reasonable to attempt tort law reform on the basis of our traditional notion of it as an instrument for allocating and transferring individual losses. Would it not be preferable, they asked themselves, to compensate losses – at least in the personal injury area – using an insurance solution, as has been suggested many times in the literature? They confirmed that such a solution would be simpler in certain respects, and would potentially make it possible to improve the legal position of the injured parties. Speaking against this view is the concept of the law as having a pedagogical function: such a system would lead to the decay of individual responsibility. On the other hand, any attempt to counter this through a differentiated financial system or by suitably configuring the means of recourse would be tantamount to pursuing the same objective as tort law, only with different means. This would not offer any increase in efficiency, which would be the only justification for the exercise in the first place. In fact, this last question was subjected to detailed analysis. It showed that an insurance solution would produce only modest savings; this prompted the commission to come out firmly in support of basing any further development of compensation law on its present foundations. The commission was also aware that no such system would be viable if it was isolated internationally with respect to other legal systems; and in Europe, at least, this would be the case.
4
The commission stated unequivocally that it was no longer possible to carry on a reasonable, expert discussion on tort law and ways of changing it, keeping the practical effects of such changes in mind, without taking into account the increasingly involved relationship between regulations governing the allocation of losses, and regulations governing private and social insurance. In the law existing at the time, the various compensatory mechanisms stood “in splendid isolation”.9 It was for this reason that the rules to be found today in the Swiss Insurance Contract Law (Schweizerisches Versicherungsvertragsgesetz, VVG) or special decrees touching the relationship between tort law and private insurance were integrated into the proposed revision of the Code of Obligations (Art. 54 et seq. Vorentwurf Obligationenrecht, VE OR). This was necessitated by the increasing interconnection between the systems for loss compensation.
5
Particularly in the personal injury area, tort law and social insurance law are inseparably connected. A large majority of such damages are covered by social insurance benefits. When an accident occurs, the social insurer subrogates
6
9
Commented upon in detail by R. Schaer (supra fn. 2).
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the rights of the injured person, and recovers the loss from the liable party or his insurer. This interconnection has contributed in great measure to refining the doctrine and the methods of calculation: this is because the answer to “congruency questions” (e.g. to what degree compensation is identical with social insurance benefits) is material to decisions as to whether the injured party can still have a direct claim for compensation, or whether this claim belongs to the social insurer seeking recourse.10
7
Due to the energetic expansion of insurance cover, tort law has become more and more a secondary system whose relevance is limited to instances of recourse.11 However, the legal situation in Switzerland is not uniform regarding the extent of an insurer’s rights of recourse against the liable party or parties; nor is it clearly regulated in all cases. Social insurers – with the exception of pension funds – have a standard right of subrogation at their disposal. This permits comprehensive recourse against any and all liable parties. In contrast, private insurers are limited in their rights of recourse. Their right of recourse is non-existent with regard to liable parties under strict liability, and restricted in the case of liability through contractual obligation.12 Within the context of the planned tort law revision, it is planned to write private insurers as well into a comprehensive right to recourse in Art. 54a subs. 1 VE OR. Soon, pension funds, too, will have a comprehensive right of recourse for obligatory benefits, based on the subrogation clause (new Art. 34b Bundesgesetz über die berufliche Vorsorge, entered into force on 1 January 2005). II. Compulsory and Voluntary Insurance (2) Compulsory liability insurance: To what extent does it exist outside the automobile accident sector?
8
In addition to compulsory automobile liability coverage, Federal Swiss law requires the following types of compulsory liability insurance: •
•
•
10
11 12
A company applying for access to the rail system must demonstrate insurance cover (sum insured: CHF 100 million) for the consequences of its liability, or offer equivalent guarantees (Art. 9 subs. 2 lit. d Eisenbahngesetz in conjunction with Art. 5 subs. 3 Eisenbahn-Netzzugangsverordnung). Operators of pipelines for the transport of liquid or gaseous fuels must insure themselves against liability risk (sums insured: CHF 10 million in the case of liquid fuels; CHF 5 million in the case of gaseous fuels – Art. 35 Rohrleitungsgesetz). Insurable nuclear damage shall be covered by a private insurer to the amount of CHF 300 million plus CHF 30 million for interest and court costs. The Federal Government shall cover liable parties to the amount of Cf. A. Rumo-Jungo, Haftpflicht und Sozialversicherung, Begriffe, Wertungen und Schadenausgleich (1998). Cf K. Oftinger/E. Stark (supra fn. 1), § 11 no. 317; V. Roberto (supra fn. 1), no. 25. R. Brehm, Berner Kommentar (1998), nos. 61 et seq. and 108 et seq. on OR 51.
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CHF 1 billion plus CHF 100 million for interest and court costs. (Art. 11 et seq. Kernenergiehaftpflichtgesetz). Bicycle owners must carry CHF 500,000 in liability insurance; this sum was raised to CHF 2 million as of 1 January 2005 (Art. 35 subs. 1 Verkehrsversicherungsverordnung). A ship may only enter service after conclusion of liability cover (Art. 31 Binnenschifffahrtsgesetz). Hunters must carry liability cover of at least CHF 2 million (Art. 14 Jagdverordnung).
To date, Swiss Federal lawmakers have also standardised obligations with regard to various parties’ ability to satisfy liability claims (through liability insurance or other instrument): • • •
Operators of hazardous operations (Art. 59 lit. b Umweltschutzgesetz). Operations involving genetically modified organisms or pathogenic materials must guarantee performance of their legal liability (sum insured: CHF 20 million – Art. 10 Freisetzungsverordnung). Operators of aircraft must guarantee their ability to fulfil their obligations under statutory liability regulations (Art. 70 Luftfahrtgesetz).
The cantons have compulsory insurance in the following areas: • • •
9
10
for dams and reservoirs (Grisons and Valais): CHF 200 million for large installations, CHF 50 million for small ones for various professions such as attorneys, fiduciaries and notaries (Aargau, Solothurn, Vaud, etc.) for dog owners in several cantons
We are not aware of any cantonal laws requiring guarantees to cover liability claims.
11
De lege ferenda, there are discussions as to whether it might be advisable to give the Swiss Federal Council authority to introduce new compulsory insurance measures by decree (Art. 54 lit. g VE OR and Art. 54 lit. h VE OR). Certain associations have rejected these new regulations during the approval procedure, with the justification that they bypass the democratic process.
12
(3) Basic features of mandatory insurance schemes: Are bank guarantees accepted as substitutes for insurance policies? Is the action directe (direct claim by victim against insurer) available generally or in the motor insurance area only? Is a party who fails to comply with its obligation to insure subject to sanctions? Where there is a statutory obligation to provide a guarantee, bank guarantees or the deposit of securities are admissible.
13
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14
Action directe, the right of the victim to claim directly against the insurer, is only admissible where explicitly written into law. This is the case in the event of damage caused by one of the following agencies: nuclear energy, bicycles, dams and reservoirs, and aircraft. The draft revision of the tort law proposes expanding action directe to voluntary insurance covers, but confirms the right of the insurer to use all objections and defences against the damaged party that would be available against the insured party (Art. 54 lit. c and Art. 54 lit. a VE OR e contrario). These regulations are garnering some criticism in the approval process, due primarily to a comparison with the international situation and to large risks with individually configured contracts. However, such provisions are completely foreign to the system of voluntary insurance covers. Particularly insurance covers for the business sector are increasingly being adjusted and individually configured to meet the client’s highly individual needs. Thus there is no predefined scope of cover, as is the case with obligatory insurance, but this falls completely within the parties’ freedom of contract. Action directe would require the policy cover to be defined in conjunction with the damaged party – someone who is not party to the contract. This, by its very nature, would lead to expansions bringing no recognisable advantage. Art. 60 VVG gives the damaged party comprehensive cover in the event of insolvency of the liable party. Any reasonable sort of action directe is predicated upon uniform insurance products (e.g. motor liability) with standardised defences.
15
The law does provide some sanctions against neglect of the duty to insure – e.g. bicycle liability. In other cases, such sanctions are not necessary – for example where insurance cover must be demonstrated in order to maintain the certification of a commercial operation. (4) To what percentage is the population in fact protected by liability insurance contracts?
16
Probably around 85% of the operators of commercial enterprises of all types, about 65% of professionals and roughly 80% of all private individuals have insured themselves as a result of statutory liability (author’s estimate). III. The Influence of Liability Insurance on Court Decisions in Tort Cases – Focus on the Courts 1. Insurability (5) Legislation: Is the insurability of a particular risk, e.g. environmental liability, a relevant policy consideration when it comes to lawmaking in the area of tort law? Would lawmakers refrain from imposing strict liability for uninsurable risks? Vice versa: Is the rise of strict liability in modern times – to the extent that there was one in the particular jurisdiction – thought to have any connection
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with the establishment of a vibrant insurance industry able to pick up the attendant risks? In this sense, may it be said that the availability of liability insurance “drives” the demand for responsibility in tort generally and for strict liability in particular? Lawmakers do generally take insurability into account, but in connection with defining obligatory insurance covers or guarantees – not when the question is to choose the type of liability (e.g. to prescribe strict liability where insurable). In other words: in Switzerland, insurability is not the driver behind the general tendency towards introducing strict liability, though it is not possible to exclude any connection between the availability of insurance cover and strict liability being introduced.
17
(6) Jurisprudence: Do courts either tacitly or openly take the issue of insurability into account when holding a defendant liable? In particular, are there decisions where a court has denied a damage claim for the reason that it thought the ensuing liability to be uninsurable? Are judges reluctant to impose a liability regime that was not anticipated by the parties, e.g. in cases of “new risks” like dangerous substances, electromagnetic fields and the like? Vice versa: Is the fact that a risk may be insured or was in fact insured against an argument counselling for strict liability? Are there decisions suggesting that liability may be strict rather than fault-based or that its scope may be broader or the damages award higher because it insurance coverage was thought to be unavailable? Do judges draw a distinction between compulsory insurance schemes and voluntary insurance, even if the latter seems widespread among the public? In principle, and according to the adage “liability insurance does not create liability”, the question of liability must be judged independently of whether there happens to be liability insurance cover. This applies in like measure to the conditions of liability (legal cause, damage, unlawfulness, adequate causality) and to the determination of damages through the application of Art. 43 and 44 OR. (For a more complete treatment of the distinction between the conditions of liability and the determination of damages, see the answer to Question 9, with the examples given.)
18
In reality, the judge has broad discretionary powers – for example to decide whether the behaviour of a defendant charged with criminal liability is negligent; or if there is adequate cause to connect the circumstance from which the liability proceeded, to the occurrence of the loss. With the latitude accorded him, one could think that a judge might be influenced in his decision by the fact that the defendant is the beneficiary of a liability insurance policy – or that he has none. In reality, however, it is impossible to prove any such relationship.
19
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20
It is the same with regard to the determination of damages pursuant to Art. 43 and 44 OR: the judge’s broad discretionary powers allow him to take into account all the circumstances of the case he is deciding. One might imagine that the existence of an insurance policy covering the defendant’s liability in a particular action might influence the judge’s determination of damages; but there, too, it is impossible to prove any such relationship.
21
Liability in equity, however, is an exception to the adage mentioned above; and the question of whether the existence of liability insurance cover might be considered as a criterion justifying liability in equity has been the subject of rather abundant doctrinal discussion.
22
Ultimately, both the prevalent doctrine and Swiss case law have supported the thesis that the existence of liability insurance is to be considered in judging liability in equity.13 In this area, the material circumstances of the parties do indeed play a decisive role, and an existing liability cover is regarded as part of the assets of any third-party defendant in a liability action. In this regard, case law as well states that the financial situation of the parties should be assessed as of the day of the judgment, not as of the occurrence of the event occasioning liability.14
23
Here are two examples of liability in equity: • •
The liability of persons incapable of making a rational judgement pursuant to Art. 54 OR (for more detail, see the responses to Questions 9 and 18 below). The liability of a person conducting a business transaction pursuant to Art. 422 OR: It should be noted that case law has considered this provision as applying to unpaid agents as well as to acts performed as favours (BGE 61 II 95; BGE 129 III 181).
24
Art. 422 subs. 1 OR, relating to the conduct of a business transaction undertaken in the interest of a principal, states the following: “If the principal’s interest required a business transaction to be conducted, he is obligated to reimburse the person conducting such business transactions for all expenses, including interest, which were necessary, or useful and reasonable under the circumstances, and to the same extent to release him from the obligations he assumed, and to compensate him in the judge’s discretion, for other damage.”
25
This paragraph makes the principal subject to strict liability, which the judge then assesses according to the rules of equity. According to the case law quoted above, Art. 420 subs. 1 OR applies by analogy to unpaid agents as well as to acts performed as favours. 13
14
Bundesgerichtsentscheid (BGE) 103 II 330/338; R. Brehm (supra fn. 12), ad Art. 54 OR, 546– 547, as well as the doctrine mentioned. BGE 71 II 225/231; BGE 102 II 226/231.
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This solution derives from the principle that no one should be damaged by the execution of an obligation accepted for altruistic motives and without regard for his own interests. For reasons of equal treatment, it is evident that this principle should also be applied to the judgement of acts performed as favours, done without any desire to enter into a legally binding relationship.
26
Both legal doctrine and case law emphasise that liability proceeds not only from the fact that an action was performed in another party’s interest; but equally, in some cases, from the fact that the person performing such an act finds himself in a dangerous situation. In this sense, Art. 422 subs. 1 OR presents a perspective according to which the principal who derives profit from a dangerous activity that he has delegated must carry the liability for the risk. On the other hand, this type of liability is not considered if the delegated activity does not embody a particular risk, but only involves the general risks of living.15
27
Thus, the Federal Court judged that a person gravely injured in assisting a third party in moving a tree trunk with a backhoe, with no intention of binding himself contractually, and acting in the exclusive interest of the third party, was to be compensated by said third party for the harm suffered (BGE 129 III 181).
28
(7) Are there any examples where it is thought that the courts have overstretched tort liability such that the insurance industry was cast into crisis? Case law holds no precedent that pushes liability so far as to mean a crisis for the insurance industry.
29
(8) Literature: What is the position of commentators on the issue of insurability: Should it be taken into account in the practice of tort law or is it beyond the legitimate pale of tort law? Do commentators voice concerns that expansion of liability may some day exceed the scope of insurable risks? One can say that in general, the question of a particular liability risk’s insurability is a preoccupation not only of insurers, but likewise of the directly impacted economic sectors, the media and politics.
30
Thus, the project, currently underway, of totally revising tort law, has given rise to explicit reservations as to the insurability of ecological risk (position paper issued in May 2001 by the Swiss Insurance Association as part of the consultation procedure in connection with the preliminary draft legislation on the total revision of tort law, Chapter I 1). Indeed, according to the project, reparable damages include the cost of measures taken to restore destroyed or
31
15
H. Honsell, Die Risikohaftung des Geschäftsherrn, in: Festgabe für Ulrich von Lübtov (1980), 485 et seq., 496 et seq.; C. Canaris, Risikohaftung bei schadensgeneigter Tätigkeit im fremden Interesse, [1966] Recht der Arbeit (RdA), 41 et seq., 43.
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degraded environmental components or to produce an equivalent (Art. 45d subs. 1 c Vorentwurf zur Vereinheitlichung des Haftpflichtrechts). This arrangement would palpably extend the classic notion of tort; and though it is not possible to assess this at the current stage of the project, it could well raise questions of insurability.
32
It should be noted that the recently passed law of 21 March 2003 on non-human applications of genetic engineering took an identical position16 respecting reparable damages resulting from environmental impairment. Nonetheless, the insurability of this tort extension has not been the object of any in-depth, advance assessment. It seems that the insurance industry is now examining ways of offering cover to the experts concerned by this expansion of their liability.
33
Nanotechnology as well poses an insurability problem where liability is concerned, for our current knowledge of this science does not permit us to measure its risks. Echoes of these concerns have surfaced in the media.17 2. Costs and Benefits of Insurance (9) To what extent do courts base their judgments on the objective of risk spreading, i.e. to place the loss on the party better able to absorb it, either through self-insurance (which amounts to deep pocket liability) or through market insurance, i.e. by buying coverage from a professional risk carrier? Are there judgments which explicitly accept risk spreading as a relevant policy consideration to influence court decisions in individual cases? Do courts implicitly take risk spreading into account (without saying so)? Is it advisable for a party to argue that the other side was in a better position to insure against the risk and thus should bear the ensuing loss?
34
Switzerland has a reputation of being “overbanked” and “overinsured”. There is some truth to this saying insofar as banks and insurers play a prominent role in the Swiss financial community. On the average, a Swiss person spends USD 4922 for insurance coverage. This is the highest amount spent worldwide. Swiss citizens are quite careful about buying enough insurance coverage. This factual background is the reason why it is generally taken as a given that an insurer carries the burden of a loss.
35
However, it would go too far to say that courts explicitly base their judgments on this factual background; at least there are no written court opinions that refer to this. Yet behind a court’s official reasoning, it is possible to read between the lines that the fact that there is insurance cover for the risk has been taken into account. To this extent, it is fair to say that the fact that there is an insurer that “pays the bill” makes it easier for the judge to render a judgment.
16 17
See Art. 31 Bundesgesetz über die Gentechnik (GTG). Neue Zürcher Zeitung (NZZ), 30.9.2003, no. 226, 15.
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a) What about taking insurance into account while determining liability? The ideas of economic analysis have not gained acceptance in the practice of law, even though Swiss tort law is extremely flexible. For the same reason, insurance cover does not play a part in judging liability. The separation principle applies. The influence of liability insurance is a matter of discussion, particularly with regard to the liability of persons incapable of judging rationally. Art. 54 OR provides for determining the liability of such persons in equity.
36
Art. 54 1
A judge may determine in equity that a person who has caused damage shall be liable for partial or full damages even if such person is incapable of making a rational judgement.
2
If a person has caused damage while temporarily incapable of making a rational judgement, he shall be liable therefor unless he proves that his condition occurred through no fault of his own.
This equitable decision is guided by the financial situation of the parties involved.18 In this case, too, however, there are different opinions as to the extent to which the possession of liability insurance by the incompetent person can be considered in the legal decision. According to the doctrine, the first question to be decided is that of liability. Thus, theoretically, the existence of liability cover should not matter at all.19 Seen from the equity perspective, however, one must take exception to an injured party having to carry a loss himself even though the incompetent injuring party is insured. This consideration has led the Federal Court, as well as predominant legal opinion, to consider any liability cover as an asset of the injuring party, and thus as a circumstance that justifies liability.20 This means that minors are normally declared liable for damage they cause where there is private liability insurance. In some cases, the need to assign liability is so acute that so-called “wishful liability” comes into play (cf. nos. 56 et seq.); however, the insurance situation of the injured party is a factor in the determination of liability, and this tends to limit such claims.
37
b) What about taking insurance into account in determining compensation? Tort law in Switzerland differentiates between the damage determination phase, in which the amount of a loss is fixed, and the determination of compensation phase, which defines the share of the determined damage which the liable party must indemnify. This last step, handled in a very flexible manner that allows consideration of the circumstances of the individual case, is laid down in Articles 43 and 44 OR:
18 19 20
BGE 71 II 230; BGE 102 II 231; BGE 103 II 336; BGE 122 III 266, 267. See also [1977] Blätter für Zürcherische Rechtsprechung (ZR), no. 94. K. Oftinger/E. Stark (supra fn. 1), § 18 no. 63; V. Roberto (supra fn. 1), no. 245; for more depth, see R. Brehm (supra fn. 12), nos. 28 et seq. on Art. 54 OR.
38
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Art. 43 1
The judge shall determine the nature and amount of compensation for the damage sustained, taking into account the circumstances as well as the degree of fault. Art. 44
1
The judge may reduce or completely deny any liability for any damage if the damaged party consented to the act causing the damage, or if circumstances for which he is responsible have caused or aggravated the damage, or have otherwise adversely affected the position of the person liable.
2
If a liable person has caused the damage neither wilfully nor by gross negligence, and would be subject to distress as result of his payment of damages, the judge may also, for this reason, reduce the obligation to compensate.
39
The initial result, reached through consideration of concepts peculiar to tort law such as damage, causality, wrongfulness, or fault – can be reviewed and corrected in equity. Thus, the objective of the determination of compensation is to “do justice” to the individual case. Under this system, it would be possible to incorporate economic aspects to a certain degree. In addition, individual special decrees explicitly allow the judge to reduce compensation if the damaged party enjoys an unusually high income (Art. 4 Eisenbahnhaftpflichtgesetz, Art. 62 subs. 2 Strassenverkehrsgesetz (SVG) and Art. 7 subs. 2 Kernenergiehaftpflichtgesetz). In this connection, the Federal Court stated in BGE 104 II 188: “The judge shall determine the nature and amount of compensation for the damage sustained, taking into account the circumstances as well as the degree of fault” (Art. 43 subs. 1 OR). On this basis, the Federal Court generally reduces damages where the responsible party is a minor (BGE 100 II 337 consid. 3a and the laws quoted; cf. also BGE 102 II 368). But the judge may also consider, within the scope of his discretionary powers, the economic and social situation of each party.21 In the case in point, the judgment being appealed had noted that the plaintiff is not wealthy and that his professional expectations are relatively restricted, while the defendant is the beneficiary of a liability insurance cover. The judge then finds for the plaintiff, leaving to him only one quarter of the damage he has suffered, given that the action for which he is liable is an instance of contributory negligence, with the other three quarters to be carried by the defendant and his assignee. And in BGE 111 II 303, the highest judges explain: “In contrast, a reduction pursuant to Art. 62 subs. 2 SVG would be conceivable, according to which the judges may, under consideration of all circumstances, make appropriate reduction in cases where the damaged party has an unusually high income. According to the general rule given in Art. 44 subs. 2 OR, this should only be applied to protect the damaging party personally, and not to benefit his insurer.”22 21 22
H. Dexchenaux/P. Tercier, La responsabilité civile (2nd edn. 1982), 242 ch. 5. BGE 111 II 103; K. Oftinger, Schweizerisches Haftpflichtrecht I (4th edn. 1975) II, 273.
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Doctrine, however, notes that no importance should be attributed to such circumstances, as a matter of principle, the purpose of tort law being to compensate damage and not to redress social inequalities23. For this reason, any consideration of the damaged party’s modest financial circumstances should be refused. The same line of thought applies to the financial situation of the damaging party. Here, however, Art. 44 subs. 2 OR makes an exception for hardship cases. Where a damaging party caused damage neither intentionally nor through negligence, and where making compensation would bring him into a condition of hardship, the judge may moderate the compensation amount. However, BGE 111 II 303 adds that Art. 44 subs. 2 OR is intended to protect the damaging party and not the insurer (cf. BGE 104 II 188).
40
No consideration is given to the fact that the damaging party has liability insurance. Indeed, insurance is so widespread in Switzerland that this is the normal case. Consideration of this fact would reverse cause and effect: the liability insurer, after all, obligates himself to take on the losses for which the insured becomes liable. Thus, the obligation to pay compensation must be separated from insurance protection.24 The Federal Court, in BGE 113 II 328, made a statement on the consideration of insurance protection: “Counter to Plaintiff’s argument, this quota is not to be lowered – let alone rescinded due to contributory negligence – on the grounds that Defendant is a liability insurer”. Certainly, BGE 104 II 188 E. 3a takes into account that the damaged party lived in modest circumstances, and the liability of the damaging party was insured. Insurance cover, however, does not imply liability beyond the usual extent. Even the fact that, in the event of an insured loss, the damaging party – and more so his insurer – are both disallowed from claiming hardship pursuant to Art. 44 subs. 2 OR, has no bearing on the case.25
41
This is also the standpoint of practice. Except as an argument, pecuniary circumstances are hardly ever considered in determining compensation, and even cover by a liability insurer does not suffice as justification for a higher compensation (BGE 95 II 626, BGE 113 II 328, BGE 115 II 157). It is just as clear that tort law, in its current form, would not be conceivable without liability insurance. Yet it is difficult to prove in individual cases that the prescribed separation principle is being broken with. In critical cases, and where there is liability cover, the courts will in most cases answer the question as to whether there is cause for liability on the part of the damaging party with a Yes rather than with a No. Particularly in the lower levels of the appeal process, there is a tendency to demand compensation of a damaging party with liability insurance rather than to leave the damaged party out in the cold: “Notably, consideration is to be made of the financial situation of the two parties at the moment of the judgment” (BGE 102 II 231 E. 3b and citations), and “the fact that the damage suffered by the damaged party is covered in whole or in part by pay-
42
23 24 25
R. Brehm (supra fn. 12), N 64 on Art. 43 OR. R. Schaer (supra fn. 2), no. 544; R. Brehm (supra fn. 12), no. 67 on Art. 43 OR. BGE 111 II 303 E. 3a with notes.
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ments from third parties” (BGE 71 II 231 s. consid. 6). Often, courts do not speak explicitly of the fact that there is insurance cover, but use circumlocutions such as “…one would take vehement exception to a case in which…”. At the same time, one may say that it is hardly recommendable, for purposes of determining the compensation, to mention the insurance situation, with the exception of cases – very frequent, actually – where there is both liability insurance and first-party insurance.
43
In the draft revision, the paragraphs on determining compensation are formulated more generally: Art. 52 VE OR 1
The court shall determine compensation after considering all circumstances. It shall in particular consider the degree of negligence and the intensity of the characteristic risk applying respectively to the damaging party and to the damaged party, as well as measures taken by the damaged party to mitigate or reduce damages.
2
Exceptionally, the court may in addition consider the economic circumstances of the involved parties, particularly the circumstance that they are covered by insurance, or that there is no insurance cover.
44
Thus, insurance is explicitly mentioned as a factor in the assessment. A passage in the Explanatory Report states that both liability insurance as well as any fixed-sum insurance are meant. Benefits provided by other types of insurance (social insurance, property-casualty insurance) are already included in the calculation, and are thus not considered here.
45
At the same time, the report emphasises the exceptional character of the standard: tort law, it is said, is not a suitable instrument for redressing social inequalities, and the purpose here is not to fulfil the commandments of distributive justice.26 The insurance industry criticised the draft during the approval procedure: insurance, they said, was there to pay losses; while here, they maintained, losses were being determined on the basis of the available insurance. 3. Standard of Care (10) What is thought to be the influence of liability insurance on actual care levels? Is moral hazard a well-received concept in legal circles?
46
The predominant understanding is based on an objective concept of fault. The hypothetical behaviour of a normally prudent individual in the situation of the damaging party is generally accepted as the required standard of care. In contrast, the preliminary draft revision of tort law attempts to resubjectivise the fault concept (Art. 48a VE OR). This, it maintains, is justifiable – provided 26
Erläuternder Bericht, 157.
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that, on the other side, a general clause would mandate strict liability to fill the vacuum currently inhabited by the concept of causal liability. The degree of care required, in practice, is determined by the situation. Answering the question as to whether a party has exercised due care always contains a discretionary element27, and it is thus impossible to exclude that the existence of insurance cover may influence such decisions. On the other hand, it is also impossible to prove this. Mainly, it is the – in some cases, very strong – objectification of responsibility that is traced back to the broad existence of insurance cover. There is a palpable trend to conclude that, if a loss has occurred, then someone must be responsible; and this, it is said, can be explained that the loss can be transferred to a liability insurer.28 A shift of the due care concept to secondary, or previous, or subsequent instances can also be demonstrated. Worthy of particular mention is the physician’s obligation to clarify a case. It can extend just as well to attorneys, fiduciaries, or architects and engineers, and it also involves a duty to document events and procedures. Long acknowledged is the idea of a transfer of responsibilities coming up in connection with professionals in the exercise of their activities. But one notes, beyond the general tendency to improve the legal situation of the weaker party, or of the consumer, or of the victim, an aggravation of the situation typified by the increasing regimentation of the standards applied to conduct, as well as exaggerated standards applied to the degree of hazard (such as the duty to ensure traffic safety, for example).
47
As mentioned above, there are differing opinions as to the direct influence of tort law on the behaviour of potentially liable parties. On the one hand, strict liability may motivate potentially liable parties to take greater care in their activities; but on the other hand, the expansion of insurance cover removes some of the incentive to conduct oneself in a way so as to prevent losses.29 As everyone in Switzerland, with very few exceptions, is covered by liability insurance, there is very little discussion of subjective risk conduct. There is evidence that premium rates, particularly the bonus and penalty system, does have an influence on risk behaviour.
48
(11) In setting the standard of care, do courts take into account if the defendant is insured, imposing a stricter standard in case he is? Similarly, is the standard of comparative negligence more lenient in areas where the defendant is protected by liability insurance? In both cases, do courts draw a distinction between voluntary and mandatory insurance schemes? Here, too, it may be said that insurance cover is so widespread in Switzerland that it is almost impossible to prove any connection between insurance and the 27 28 29
V. Roberto (supra fn. 1), 19. K. Oftinger/E. Stark (supra fn. 1), § 16 no. 34. M. Müller-Chen, Haftpflichtrecht in der Krise?, [2002] Basler Juristische Mitteilungen (BJM), 292.
49
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standard of care. At the same time, an interdependency can be assumed. Without insurance, the standard of care, which is quite high in some cases, would not be conceivable. Yet though there is hardly any objective difference in the standards applied between areas with compulsory insurance and those without, it should be noted that areas with compulsory insurance are frequently more strongly regulated, and that this results in a care standard that is de facto higher. This applies very strongly to road traffic, where it would hardly be possible for damage to occur without an infringement of the rules of the road. (12) Do courts take first-party insurance into account in setting the standard of care? Is there a tendency to set the standard high in case plaintiff is compensated anyway under a first-party insurance policy and low if plaintiff does not enjoy such coverage?
50
There are scarcely any indications that courts set the standard of care any differently in cases where there is first-party insurance cover. Proceedings are also the same when the first-party insurance is for a definite sum insured, which might open possibilities for the damaged party to cumulate his claims and receive more compensation than his due. Even then, there is no perceptible difference in the required standard of care, though de facto the existence of insurance cover presumably does play a part in evaluating the liability situation. (13) Might a party be held to have acted negligently for the sole reason that it delegated the duty of care incumbent upon itself to an independent contractor who in turn was not protected either by an insurance policy or by sufficient equity against which potential victims could have executed their claims?
51
The standard of care required when selecting agents is largely dependent on the activity which they are to carry out. If these agents are to perform demanding tasks carrying the risk of injury to third parties, then more care should be devoted to their selection than for someone intended for a simple job that represents no danger. Selection criteria include knowledge, capability, reliability and experience of the agent, who must personally be capable of performing the task required.30
52
The Swiss literature does not go into the question of whether issuing an order to a person who is insufficiently secured financially might of itself constitute an infringement of the standard of care. This is definitely not the case in noncontractual, criminal law; however, where there is a contractual relationship between the damaging party and the damaged party, it depends on the area covered by the contract. After all, parties to a contract are selected with a view to their financial situation, and this can trigger a corresponding protection 30
R. Brehm (supra fn. 12), Art. 55 OR, no. 55; K. Oftinger/E. Stark (supra fn. 1), § 20 no. 132; H. Rey, Skript Ausservertragliches Haftpflichtrecht (3rd edn. 2003), nos. 929 et seq.; V. Roberto (supra fn. 1), no. 310.
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function. The law governing agency agreements allow delegation to third parties only after approval by the buyer (but see the exceptions in Art. 398 subs. 3 OR). Recently, we have seen people operate with the concept of “trust liability”. In BGE 120 II 331 et seq., Swissair was called to account for an insolvent subsidiary because it had neglected to correct the impression, created by letterheads and advertising materials, that it would stand security for its subsidiary.31 Here we see a new potential for liability opening up outside any contractual relationship, though it is a very controversial one.
53
4. General Duty to Insure (14) Does it constitute negligence if a party failed to transfer the risk of liability to an insurance carrier? If so, what is the sanction in case of such failure? In the voluntary insurance area, failure to transfer liability risk to an insurer is not considered negligent. Sanctions for not concluding an obligatory insurance cover vary, but they normally exist. According to the law of the road, knowingly operating an uninsured motor vehicle is punishable with imprisonment or fine (Art. 96 subs. 2 SVG). For attorneys, the failure to carry professional liability insurance has been an infringement of professional regulations since 1 June 2002 (Art. 12 lit. f Bundesgesetz über die Freizügigkeit der Anwälte, BGFA), and occasions disciplinary measures (Art. 17 BGFA). There are penal sanctions as well for non-compliance with compulsory insurance regulations in connection with nuclear energy (Art. 31 Kernenergiehaftpflichtgesetz).
54
Failing to take out adequate insurance cannot be construed as infringing the duty to mitigate damage, and as such cannot be used as grounds for reducing the claim. From the point of view of legal doctrine, too, the issue is not really damage mitigation, but rather preventive measures, and these can only be required in limited measure. In BGE 103 II 330, 338, the Federal Court did not regard underinsurance (of a non-obligatory cover) as negligence on the part of a damaged party: “It would indeed not be equitable to leave the entire uninsured portion of the loss to the damaged party, even if it might – and should – have been insured; while the damaging party (or his assignees) runs no risk of seeing his economic future compromised because he insured himself against the consequences of such an act by concluding insurance cover and paying premiums”.32 However, the lack of insurance cover can play a role where it was contractually stipulated. If it was required, its lack is an “inadmissible” handicap to the liable party as described in Art. 44 subs. 1 OR.
55
31
32
For the basics, see H.-P. Walter, Die Vertrauenshaftung, Unkraut oder Blume im Garten des Rechts?, [2001] Zeitschrift für Schweizerisches Recht (ZSR), 79 et seq. See also R. Brehm (supra fn. 12), Art. 44 OR, nos. 52–53.
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(15) May parents be held accountable for the torts of their children because they failed to buy liability insurance for the whole family, including the child?
56
Parents do not become liable merely by not taking out liability insurance for their offspring. According to Art. 333 para 1 ZGB, parents are liable for damage caused by children unless they can demonstrate that they have exercised due care in supervising them to the usual extent and in keeping with the circumstances.
57
Private liability insurance covers are available in Switzerland for individuals, families and unions for life. Thus, in Switzerland, it is almost unimaginable that a parent would have private liability insurance that does not cover the child. Indeed, as a precaution, most private liability insurance policies for individuals, upon the birth of a child, offer cover for the entire family for a year. Thus, in this event, private liability covers become group policies. In almost every case, dependants are automatically included in the parents’ insurance cover even after reaching their majority (as insured persons under the general insurance conditions of the private liability insurance). And cover goes even further: some policies include so-called “wishful liability” in their general insurance conditions, paying losses where no liability for the children exists. This special cover addresses the sort of situation, frequently conflict-laden, where children cause damage in the neighbourhood for which the parents would normally not be liable, as they have not been negligent in their supervision. (16) Are employers under a duty to take out liability insurance covering the torts of their employees? If so, what is the sanction in case of default, both visà-vis the employee and the third-party victim?
58
If an employee causes damage in the exercise of his duties, the employer is liable unless he successfully exculpates himself (Art. 55 subs. 1 OR). The damaged party may simultaneously sue the employer, pursuant to Art. 55 OR, and the employee for his personal negligence, pursuant to Art. 41 OR, the claims to concur.
59
In Switzerland, employers are not under any comprehensive obligation to take out employer’s liability insurance. In any event, however, the liability question is clarified before it is asked whether the damage is covered by insurance. It is not possible to determine whether the courts disallow demonstrations of due care when the employer – but not the employee – is covered by liability insurance. There is also no indication that taking out employer’s liability to protect employees from third-party claims is part of an employer’s duty of care.
60
Where there is employer’s liability insurance, cover, pursuant to Art. 59 VVG, must extend to the liability of the insured’s agents and to the liability of persons entrusted with the management or supervision of the operation. This regulation has a dual objective: on the one hand, it aims at protecting the dam-
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aged party; on the other hand, it counters the risk that the insurance company which paid the damages might seek recourse in an action against an agent or employee. The Allgemeiner Teil zum Sozialversicherungsgesetz (ATSG) voided the privileged liability provision contained earlier in Art. 44 subs. 2 Unfallversicherungsgesetz, which allowed claims against employers or colleagues only in instances of intent or gross negligence. This restriction now applies only to recovery claims (Art. 75 subs. 2 ATSG). Employer’s liability insurance covers, however, usually exclude recovery claims and rights of contribution.
61
(17) Vice versa: May a plaintiff be thought to be guilty of contributory negligence for the sole reason that he failed to protect himself by means of firstparty insurance? For example, where a potential buyer of a car embarks on a test drive and causes damage to the demonstration car: Is the automobile dealer under a legal obligation to supply first-party insurance such that the client is protected against tort liability in case of an accident? As mentioned before, there is no obligation for a damaged party to insure himself against property damage. Persons who do not insure themselves against a risk cannot for that reason be charged with negligence. The obligation to do compensation still exists, no matter whether the damaged party is insured or not. The damaged party is under no obligation to take preventive measures; nor can the failure to conclude insurance be considered as a cause to the occurrence of the damage.33
62
In BGE 103 II 33, the Federal Court gave an opinion in a case in which a woman turned on gas in a stove with the intent of committing suicide. The result was an explosion that destroyed the entire building. The owner’s fire insurance covered more than two-thirds of the loss. The Federal Court decided that, even considering any negligence on the part of the owner who had neglected to adjust her policy to reflect the value of the insured building, it was still appropriate to declare the damaging party liable for the uninsured portion of the loss – or her liability insurer, who is obligated to pay compensation in like measure as the woman (BGE 103 II 330 and 338). The fact that the house was underinsured, and that the damaged party was responsible for this, was insufficient justification to free the inheritors or their liability insurers from their obligation to compensate the damage. Thus, the damaged party would not be guilty of negligence even if there were no insurance at all.
63
5. Insurance and Damages (18) Does the fact that the defendant is insured influence in any way the assessment of damages?
33
K. Oftinger/E. Stark (supra fn. 1), § 5 no. 145.
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V. Brulhart, G. Chappuis, U. d. Maddalena, J. Waldmeier, S. Weber
64
In principle, under the Swiss system, the existence of liability insurance cover has no effect on the extent of damages. In practice, judges have broad discretionary powers. It is thus possible at times that they let themselves be influenced by the existence of insurance cover when determining damages.
65
Jurisprudence has admitted only one exception to this principle: the notion of liability based on Art. 54 OR.
66
This article governs the liability of persons incapable of judgement (Art. 16 et seq. Zivilgesetzbuch) and provides for an equity-based obligation to compensate damage: “A judge may determine in equity that a person who has caused damage shall be liable for partial or full damages even if such person is incapable of making a rational judgement.”
67
Among the criteria that the Federal Court considers for finding in equity is notably the parties’ economic circumstances: “The judge shall decide in equity if and to what measure this person should be required to indemnify damages resulting from his acts, whether the case be contractual or criminal. Notably, consideration must be given to the financial situation of the two parties at the moment of judgment, and whether the damage suffered by the damaged party may be covered in whole or in part by payments of third parties (BGE 103 II 330).
68
In this judgment, the judges noted that the damaging party incapable of rational judgement was the beneficiary of a liability insurance policy. They established the following principle: “This is a factor that must be considered in equity pursuant to Art. 54 subs. 1 OR. It would indeed not be equitable to leave the entire uninsured portion of the loss to the damaged party, even if it might – and should – have been insured; while the damaging party (or his assignees) runs no risk of seeing his economic future compromised because he insured himself against the consequences of such an act by concluding insurance cover and paying premiums” (BGE 103 II 330).
69
Thus where there is liability insurance cover, according to Swiss judges, the equity principle may demand full compensation of losses suffered by the damaged party, not a judgment of “equitable compensation”. (19) To the extent that the legal system provides for exemplary or punitive damages: Is the fact that the defendant has transferred the risk to an insurance carrier relevant to the decision on imposing punitive damages? If so, does it tend to aggravate or to mitigate the amount granted?
70
The notion of punitive damages is unknown to Swiss tort law.
71
In contrast, certain labour law provisions make it possible to find against an employer to the amount of several months’ salary where he has failed to comply with certain obligations with regard to his employees (i.e. Art. 5 III Bundesgesetz über die Gleichstellung von Mann und Frau).
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However, this risk does not come under any employer’s liability policy as it is purely a financial loss, which liability insurance never covers.
72
(20) Insurance and non-pecuniary loss: To the extent that courts enjoy discretion to set the amount for non-pecuniary loss; is insurance a relevant factor worth considering when it comes to the assessment of such damages? If so, does it aggravate or mitigate the amount allowed? Swiss jurisprudence is reticent in recognising a right to compensation for “normative” damage: i.e. damage that does not effectively diminish the property of the damaged party. Current Swiss legal doctrine, however, is becoming more and more critical of this restrictive approach to defining damage, and aims rather at substituting the theory of normative damage for the differential theory.
73
At present, two types of damages may be compensated according to normative principles:
74
• •
household loss (loss occasioned by the inability of the damaged party to do household work) costs for care and assistance (BGE dated 26 March 2002)
Judges enjoy wide discretionary powers in determining damages in connection with these two items (supra nos. 64 et seq.).
75
In contrast, the current legal regime denies any right to compensation for “frustration” damage: expenses incurred voluntarily by a damaged party, but which, due to the accident, do not need to be made. While these expenses are certainly needless, they do not entail an involuntary diminution of property. In this connection, one thinks of lost vacation privileges (BGE 115 II 474), of loss of use of an asset34, or of parking space rental for a vehicle lost in an accident.
76
6. Privileges (21) To the extent that the law allows for privileges, dispensing certain classes of parties from the ordinary standard of care, do such privileges apply even where the privileged party is insured? In particular, in cases where one spouse harms another in a road accident, may the tortfeasor invoke any privilege he might enjoy generally also against his or her partner? On 6 October 2000, Switzerland adopted the ATSG, that entered into force on 1 January 2003.
34
Semaine Judiciaire 2001 I 156.
77
194
78
V. Brulhart, G. Chappuis, U. d. Maddalena, J. Waldmeier, S. Weber
Art. 75 ATSG enshrines certain groups’ immunity to recourse – namely, that of the employer and persons close to the damaged party: “Insurers have no right of recourse against the spouse of the insured, his relatives in ascending or descending line, or persons belonging to his household, unless these have provoked the insured event intentionally or through gross negligence.” “Where the grounds for recourse derive from an occupational accident, the same limitation applies to the employer of the insured, to the members of his family and to the employees of his enterprise.”
79
This ruling means that the social insurer cannot take recourse in the named instances, either against the responsible party or against his liability insurer.
80
This limitation only applies, however, to damages giving rise to benefit payments by social insurers, and which demonstrate a degree of material congruence with losses that are indemnifiable under liability.
81
It should be noted that before ATSG, the legal regime included immunity to liability and to recourse – which implied that the damaged party, in the hypothetical situations to which it applies, was not authorised to sue for those damages not covered by social insurance.
82
The current regime only excludes recourse.
83
One should again note that some general insurance conditions exclude recourse claims from cover: for example, in the context of liability deriving from Art. 54 OR (supra nos. 64 et seq.). 7. Insurance and Agreements to Limit or Exclude Tort Liability (22) Assuming that the particular legal system allows for the derogation of tort liability by contractual agreements: Do courts take the issue of liability insurance into account when examining whether there is an implicit agreement excluding or limiting tort liability? For instance, do courts hold owners of horses to be strictly liable even if the animal hurts someone who was allowed to take it for a ride gratuitously because owners are usually protected by liability insurance?
84
In theory, the existence of a liability cover should not influence the way a limitation clause is applied or liability is excluded. But again, Swiss judges have broad discretionary powers. (23) Vice versa: What impact does first-party insurance have on the willingness of courts to find a tacit agreement excluding liability in tort? For example, as house owners in most countries are compelled to insure against fire, does this insurance policy also extend to tenants of the same dwelling such
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that the insurance company has no rights of recourse against a tenant setting the house on fire negligently? Swiss laws on civil liability limit the property insurer’s right of recourse to cases of gross negligence by a responsible party held accountable on the basis of a contractual agreement (Art. 97 and 101 OR).
85
In a judgment that is already old (BGE 80 II 247, handed down in 1954), the Federal Court established the principle that as regards contractual liability, a direct insurer – a fire insurer, for example – has a right of direct recourse against a contractually responsible party only where said party was guilty of gross negligence. Indeed, it is considered that one would do well to “maintain a certain moderation in granting this type of recourse”. In any case, it is imperative to refuse it when the third party is only being held accountable for simple contractual negligence, whether he committed it himself or it was committed by one of his employees.
86
The considerations underlying this principle are the following: if a property insurer may not reduce compensation by reason of simple negligence committed by its insured (Art. 14 II VVG), there can be no reason for doing otherwise if the same insured had charged a third party to act in his stead, and that third party committed simple contractual negligence. There is no reason for the direct insurer to ultimately not pay a loss that he would indeed have had to cover, had the insured himself committed the act of negligence that his agent became guilty of in the performance of his contractual obligations.
87
8. Procedural Issues (24) What is the relationship between court proceedings and judgments on the issue of liability on the one hand and on the issue of insurance coverage on the other? May an insurer refuse coverage although the policyholder has been found liable in a final judgment on the torts claim? In practice, who defends a claim for damages brought against another: the potential tortfeasor himself or his insurer? We should make a clear distinction here between the obligatory liability insurance regime and that of facultative liability insurance.
88
With obligatory liability insurance – motor liability, for example – Art. 65 SVG provides the damaged party with a right to open an action directe against the insurer of the damaging party.
89
This right follows – first – from the fact that it allows a lawsuit to be directed directly against the insurer; and – second – that the insurer may not use against the damaged party the exceptions which he may assert against his insured, such as suspending cover due to the non-payment of premiums, or reducing compensation due to the insured’s gross negligence.
90
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V. Brulhart, G. Chappuis, U. d. Maddalena, J. Waldmeier, S. Weber
91
In the context of facultative liability insurance – business liability, for example – the damaged party does not enjoy any right of action directe against the insurer. He is obliged to sue the responsible party.
92
At the cover level, the insurer can then assert against the damaged party any exceptions proceeding from the insurance agreement, thus reducing the amount he pays in compensation, or excluding insurance cover entirely. In practice, and regarding the conduct of the lawsuit, the general insurance conditions generally stipulate that the insurer will handle the negotiations and choose the lawyer charged with assisting the insured in any litigation.
93
In the facultative liability insurance context, the insurer is actually no longer party to the proceedings from that point on. He may, however, be called upon to participate as a party in the litigation. IV. Further Topics (25) Any other topic relevant to the relationship between tort liability and insurance that has not been addressed in answering the questions posed above? 1. Guaranteed Sums Insured
94
Swiss law mandates minimum guarantees that insurers are obliged to respect: with auto liability, for example, the guaranteed minimum is CHF 3 million. However, no upper limits are stipulated. Thus, again in motor liability, there have long been unlimited guarantees in practice. For reinsurance purposes, a limit of CHF 100 million was placed on guarantees in July 2003. 2. The Share of Social Insurance in the Indemnification of Damages and “Normative” Damages
95
Social insurance covers include obligatory Sickness and Accident Insurance, Old-Age and Survivors’ Insurance/Disability Insurance, military insurance, and old-age insurance for professionals. Together, they comprise a large palette of benefits that include medical expenses; temporary loss of income (totalling up to 80% of a maximum CHF 106,800 annual salary, provided by the obligatory accident cover); survivors’ pensions in case of death; disability pensions in the event of permanent occupational disability; or immaterial loss covers under obligatory accident insurance, to an annual total of as much as CHF 106,800. Pursuant to Artt. 72 to 75 ATSG, all benefits paid under the above covers come collectively under the right of subrogation enjoyed by the social insurance plans with respect to responsible third parties.35 35
The old-age insurance for professionals, which until now only enjoyed a simple right of recourse directed against a party that was liable by reason of negligence, will, from 1 January 2005, benefit from a comprehensive right of subrogation like that of the other social insurance covers, applying to all responsible third parties, whatever the liability situation.
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Social insurance benefits coming under the right of subrogation by virtue of the principle of material and temporal concordance are applied to compensation due under liability – which reduces commensurately the damaged party’s direct claim against the responsible party.
96
The benefits paid by the various social insurance plans are, moreover, co-ordinated with each other: if, for example, obligatory accident insurance and disability insurance overlap, the total benefits paid by both for temporary employment disability will represent 90% of the salary to a maximum of CHF 106,800.
97
The high benefit amounts paid by way of social insurance thus reduce in like amount the victim’s possibility of pressing direct claims not covered by social insurance against responsible third parties. This situation arises all the more frequently, as the benefits paid by the obligatory accident insurance are the same, both in type and amount, for occupational and non-occupational accidents.
98
This situation leads to two consequences: on the one hand, a socialisation of tort law to the extent that, at its crux, the debate now pits the social insurer – instead of, as earlier, the victim – against the responsible third party (or his liability insurer) and, on the other hand, a search, on behalf of the victim, for categories of damage not covered by social insurance, thus bypassing the associated right of subrogation (such as “normative” damage, which includes household loss and the costs of care and assistance rendered by persons close to the victim – see supra nos. 73 et seq.).
99
3. Compensation Fund in the Medical Area Beginning in the 1980s, voices have been heard maintaining that the law governing medical malpractice was ill-equipped to deal with the evolution of medical technology, which is now capable of producing accidents during therapeutic treatment that cannot be held the fault either of the physician or the care provider. (Positive law essentially bases a medical care provider’s liability on the commission of a tort: violating the duties of diligence or of information.) Thus from 1983, there have been several projects, some more extensive than others, that have sketched out or worked out models aimed at compensating damage arising from therapeutic accidents. These models represent an alternative mechanism for the compensation of damage that has little to do with classic tort liability.36
100
To date, none of these models has been launched; yet the debate is not over. On 5 October 2000, a parliamentary bill entitled “Patients’ fund” (Bill no. 00.3536) was submitted to the National Council, the lower chamber of the
101
36
G. Chappuis, Les mécanismes alternatifs de compensation pour les dommages autres que ceux causés par les accidents de voiture, in: Report of the Swiss Federation on Insurance Law, dated 21. December 2000, XI. Congress of AIDA 2002.
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Swiss Federal Parliament. We quote from the text: “The Federal Council shall be charged with the creation of a legal basis for the compensation of damage suffered by patients – notably, impairments to health due to a “charitable” (nosocomial) infection – incapable of being imputed to the liability of the physician or the health establishment, nor covered by the obligatory benefits of the social insurance schemes. The Federal Council shall examine the following possibilities:
102
inclusion within the scope of liability (by instituting strict liability, reversing the burden of proof in favour of the patients, etc.);
103
modification of the law governing social insurance (accident or sickness insurance);
104
creation of a fund for patients financed by benefit providers and insurers.”
105
This bill was not accepted by the Federal Council, but transformed on 30 September 2002 into a less restrictive form. The idea kept was to pursue the search for a solution that did not postulate the creation of a legal basis, but resorts to promoting a type of collaboration on the model of a public/private partnership between interested professional associations and the health insurers. At present, the project has not yet arrived at a definitive conclusion. V.
106
Conclusion
Today’s liability regime would be inconceivable without insurance: and this statement applies both to the reasons for liability as well as to the amounts calculated as compensation. It would be difficult to demonstrate this influence point by point. Most often, when such matters are decided, whether in a court of law or outside, it is the liability insurer who deals with the damaged party – not the tortfeasor – even though action directe has to date been realised only with respect to compulsory liability insurance.
General Approaches
THE NEED FOR MORE AND DETAILED INFORMATION Jaap Spier1 L’alouette déjà nous annonce le jour. Non! Non, ce n’est pas le jour, ce n’est pas l’alouette.2 To talk of the relationship between tort law and insurance is to balance on the borderline between fact and fairy tale. I will tell a Dutch tale.
1
There obviously are many links between tort law and insurance. Many are mentioned and often discussed at length in the ECTIL contributions. I confine myself to a very few points based on my own experience in the Dutch judiciary. They solely reflect my personal view, for what it is worth.
2
It is often assumed that it is easier to establish liability or to be (more) generous in awarding damages if a tortfeasor’s liability is covered by insurance. This may be true for a very few borderline cases, in particular if a judgement can be tailored to the facts of the very case at hand. But if true at all, it is probably confined to those cases.3
3
It is not impossible that it happened more often in the past, also in relation to cases that occurred more frequently. If this assumption is correct, it was probably due to the fact that courts were often unaware of the impact of their judgements dependant as it is on a series of factors of which courts do not have any knowledge. I will come back to that.
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1
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Advocate-General in the Supreme Court of the Netherlands; Professor of comparative Insurance Law at the University of Maastricht. This contribution has been written at the request of Christian Lahnstein. Final act of Gounod’s Roméo et Juliette. Insurance coverage of the defendant may, however, play a role in answering the question whether or not an exoneration clause can be invoked. In a very recent judgement, the Supreme Court seems to suggest in this context that insurance coverage by the defendant is one factor in determining whether or not he acted grossly negligently (sic!): see Hoge Raad (HR) June 18, 2004 Nederlandse Jurisprudentie (NJ) 2004, 585 (Kuunders v. Swinkels); see for more information the opinion of Advocate-General Verkade supra 4.8.
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5
In the aftermath of September 11, Dutch courts – from the county courts to the Supreme Court – have seemingly become rather reluctant to expand liability and the scope and amount of damages any further. About a year ago or so, the Dutch Supreme Court even took several steps back, I think. That holds true, for example, for the burden of proof in causation,4 liability for labour accidents5, accidents related to sports or games6 and state liability.7 8 It is not easy to say why this happened. I am inclined to think that it was due to one or more of the following reasons:
6
a. alleged increasing claim consciousness, which triggers the floodgate argument. Insurers often harp on this tune;
7
b. fear of uninsurability, fed by the assumed increasing claim consciousness and doom scenarios put forward by insurers and pessimists like myself.9 I just mention employer’s liability, professional liability, d&o (although many do not believe that yet), product liability and related areas; major acts of terrorism might well again cause a significant drop in the stock exchanges, thus affecting the assets of (inter alios) insurers. It is still in the laps of the Gods how, for example, terrorism exclusions and claims made policies are going to be interpreted; yet experiences in the past (e.g. in France and the U.S.) are not particularly promising in this respect;10
8
c. the idea that the limits of liability law have been reached, i.e. a revival of the old concept that, as a starting point, each victim has to bear his own loss unless there are compelling arguments to shift it to someone else.
9
I tend to believe that the threat of opening the floodgates, caused by ever more claims, together with the doom of uninsurability have played a role anyway.
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6 7
8
9
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E.g. HR November 29, 2002, NJ 2004, 304 and 305; HR April 18, 2003, NJ 2004, 306; HR March 19, 2004, NJ 2004, 307 and HR April 9, 2004, NJ 2004, 308. HR October 4, 2002, NJ 2004, 175; HR May 16, 2003, NJ 2004, 176; HR September 12, 2003, NJ 2004, 177. E.g. HR March 28, 2003, NJ 2003, 718 and HR February 20, 2004, NJ 2004, 38. E.g. HR May 7, 2004 Rechtspraak van de Week (RvdW) 2004, 67 and HR May 28, 2004, RvdW 2004, 78. It should be borne in mind that not all judgements fit in this trend; that is in particularly true for the case law in relation to time limitation; see HR October 31, 2003, RvdW 2003, 169 and February 20, 2004, RvdW 2004, 37. See e.g. J. Spier, Rampscenario’s; De prijs van de onzekerheid na de aanslagen in de Verenigde Staten op 11 september 2001 (2002), and my contribution in: T. Hartlief/S. Klosse (eds.), Einde van het aansprakelijkheidsrecht, 345–379; it has been mentioned in a series of opinions before the Supreme Court judgements too; see e.g. the opinions before HR June 6, 2003 NJ 2003, 504 supra 3.31–3.34 and 4.1–4.2; HR May 7, 2004 RvdW 2004, 67 supra 4.42 ff, and HR June 4, 2004, Broug and Van Oostrum v. Gemex, Jurisprudentie Arbeidsrecht 2004, 287 supra 3.1–3.10. See for many details, also from comparative angle, J. Spier/O.A. Haazen, Aansprakelijkheidsverzekeringen op claims made-grondslag (1996) and J. Spier, Schade en loss occurrenceverzekeringen (1998).
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Yet, it cannot be denied that the factual basis for this doom and perceived threat is weak. It follows from the rare statistics provided by Dutch insurers that the number of claims is decreasing instead of increasing; already for quite some time.11 Insurers also argue that the amounts claimed are becoming ever higher. Our ministry of Justice has done research on this point. It follows from this research that the latter is indeed true. But according to its findings, the amounts awarded by the courts did not change.12 So the argument – though true – seems of limited importance.13
10
This is not merely a Dutch experience. Others have difficulties too with statistics provided by the insurance industry. The ABA put it this way:
11
“reliable generalised data are not available even for the most basic questions, such as trends in frequency of tort litigation or severity of tort judgements.”14 Turning to the doom of uninsurability, the question arises whether at least this fear is sufficiently justified. The answer depends, inter alia, on factors such as the basis of coverage (claims made, loss occurrence), exclusions, insured limits, losses on specific markets (e.g. the USA and France) and competition in the market which makes it possible or not to charge adequate premiums.
12
Outsiders cannot have a well-founded view on these issues. They can only yield the wheel which insurers firmly keep in their hands. But that might be a risky exercise, if one bears in mind that – I quote the US Conference of State Legislatures –
13
“Terminology and accounting methods used by the industry are often different from the general understanding of such concepts. For example, reports of industry losses for 1985 have been calculated at anywhere from a $ 5.5 billion loss to a 1.7 billion profit.”15 Based on my own experience of the last seven years, in specific cases insurers do not provide statistics. Nor do they express fears of opening the floodgates or uninsurability. They stick to very general litanies, unrelated to specific cases and litigation. Does this mean that they do a bad job? Have they lost their minds? I do not think so. There are probably good reasons why they refrain from substantiating their arguments. One can only speculate what those argu11
12
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See already J. Spier/O.A. Haazen, Preadvies Nederlandse Juristenvereniging (1996), 11 et seq. and recently Verzekerd!, 2004, 08 p 13. R.J.J. Eshuis, Claims bij de rechtbank (Wetenschappelijk Onderzoek en Documentatiecentrum, 2003), 10 et seq. It is not irrelevant, as the claims obviously involve transaction costs; but that argument is not put forward! ABA-Report of the Commission to Improve the Liability Insurance System 1989, 76 et seq. Resolving the Insurance Crisis: State Legislative Activities in 1986 (July 1986), part II nr 6.
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ments are. Do they have something to hide or do they have other reasons? Whatever the reasons may be, there are good reasons to reconsider this attitude, as will be demonstrated further on.
15
Insurers will probably argue: we cannot tell the fortunes. But that would be too easy, I think. They must have information about the past, and they should have at least an expectation about the future, on which they base their premiums. Besides, they or their reinsurers certainly have information about other countries which could prove useful.
16
Admittedly, Dutch insurers and seemingly insurers in general have had quite some success with their abstract messages; this is at least true for the Netherlands. But their success greatly depends on the question whether courts can be persuaded that there is enough reason to be careful. They lay their fortune – or fate – in the hands of a very few people. That is tricky, all the more so, as there is quite some criticism on the reluctant course of our Supreme Court: “Wer baut auf Wind, baut auf Satans Erbarmen”.16
17
Frankly speaking, it is at least open to debate whether it is sufficiently justified to sacrifice the destiny of many victims on the altar of fear for the uncertain, and worrying, future. It is quite a step to send them away empty-handed if insurers could not charge adequate premiums due to competition. It would be difficult to explain why – say – Dutch victims would have to pay the price of uninsurability, if it would structurally be caused by heavy losses in other markets.
18
These kinds of questions may haunt in the heads of those who are responsible for the further development of the law. They cause nightmares. That is not your concern. But it is questionable how long courts can and will be prepared to resist the growing criticism and to keep on the very safe side without concrete and detailed evidence that such an approach is inevitable.
19
I strongly believe that reinsurers and insurers have an important task in this field. Perhaps reinsurers should take the lead in litigation which might open the floodgates. A delicate issue, I know.
20
I belong to the believers of what (re)insurers are telling us. But not many belong to that category. So insurers should explain that the limits of insurability have been reached, and why if that is the case. That might also help to overcome the concern recently expressed by Walter Stahel that “nobody seems to love insurers”.17 After all, it is easier to love someone if one understands what he is saying.
16 17
Wagner’s Fliegender Holländer. Geneva Association Information Newsletter 35, May 2004, 1.
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A lot of work still has to be done. A couple of years ago, the former c.e.o. of Munich Re, Mr. Schinzler, quoted Brecht:
21
“… wir sehen betroffen den Vorhang zu und alle Fragen offen” or, as he put it in English: “it is a curious way of coping to close the play and leave the questions open.”18 The many fascinating presentations have shed light on a great many important issues. But more work still has to be done, for which the cooperation of (re)insurers is of crucial importance. Perhaps – that is my personal view – we should also contemplate a reform of tort law. That would require a reconsideration of the foundations of tort law and probably even of private law in general. That obviously goes far beyond the important topic addressed in this most inspiring conference.
18
3rd International Liability Forum 1999, 34.
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THE VIEW FROM ABROAD: TORT LAW AND LIABILITY INSURANCE IN THE UNITED STATES Thomas S. Ulen1 I.
Introduction
The tort liability system and the first-party and liability insurance systems in the United States have long since settled into a comfortable and serviceable pattern and relationship. Courts and commentators agreed upon the principles for assigning tort liability, for computing damages, and for mediating the conflicts, both potential and real, between insurance and tort liability about 50 years ago. There has been almost no change over the last half century in any of these matters. The crucial word here is “almost.” Such changes as there have been were either brief aberrations that have been corrected or minor adjustments, largely political responses to felt problems in the tort liability system.
1
This is not to say that the fields of torts and insurance have been quiet or uneventful in the past half century. Let me distinguish two very different arenas in which there have been noticeable changes in tort law. First, there has been a great deal of intellectual ferment in the field of torts. This ferment has altered (or, more cautiously, begun to alter) the intellectual foundations of tort law. The prevailing view of, say, thirty years ago saw tort law as being directed at achieving corrective justice. The injurer had unfairly and without excuse harmed the victim, and law’s task was to set that injustice to rights. Academic commentary on tort issues began from this premise and evaluated the working of the tort liability system with respect to how skilfully it achieved the goal of doing corrective justice.
2
Beginning in the mid-1970s an intellectual revolution began in legal scholarship generally – that of the economic analysis of law. That revolution consist-
3
1
Swanlund Chair, University of Illinois at Urbana-Champaign; Professor of Law, University of Illinois College of Law, and Director, Illinois Program in Law and Economics. I would like to thank Prof. Dr. Gerhard Wagner for his invitation to participate in this project, Munich Re for their warm hospitality at the conference in Munich in June, 2004, and the European Centre of Tort and Insurance Law, and particularly Stefan Strahwald of ECTIL, for their and his generous help. I also owe a great debt of gratitude to my research assistant, Svet Minkov, J.D. and S.J.D., University of Illinois College of Law (2004), for his generous help with this essay.
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ed of using the tools of microeconomic theory to examine legal rules and institutions. In its positivist aspect, law and economics sought to explore how the law really worked at achieving its stated aims. Was, for example, the criminal justice system effective and efficient at deterring crime? This positivist phase of the general law-and-economics project was principally an empirical inquiry, and its findings were far-reaching and influential.2 In its normative phase, the law-and-economics literature focused on an alternative or, possibly, complementary goal for much of the legal system – the efficient use of resources. So, as an illustration, a normative economic analysis of property law sought to show how law ought to be organized and interpreted so as to lead to the efficient use of society’s scarce resources, trying, at the same time, to show the relationship between this alternative basis for property and the prevailing and traditional moral and legal bases.
4
The economic analysis of tort liability and of liability insurance had both positivist and normative phases, which I shall explain in Part II below. Here I want to draw attention to the fact that although there has been this profound change in the intellectual foundation of tort liability through the economic analysis, it is not possible to identify a clear influence of this intellectual change on the practical matters of tort law and liability insurance. I think that there is a straightforward explanation for this. The intellectual change that law and economics has wrought on the foundations of tort law has not served to overturn the doctrinal bases of tort liability. Rather, it has served to clarify those bases and to modify some doctrines at the margin. To take but one example, under the traditional, prevailing doctrines of thirty years ago the differences between strict and negligence liability were not clear. Courts and other lawmakers had only a rough sense of when to use one standard and when to use the other. The intellectual grounding in corrective justice theory for choosing between those liability standards was not clear. So, the great contribution of law and economics was, I believe, to provide a solid and practicable grounding for choosing between these (and other) tort liability standards.3
5
Second, at the practical level, while there has no been noticeable permanent shift in doctrine,4 there has certainly been much public feeling that the tort lia2
3
4
In criminal law and procedure, for instance, the work of Gary Becker and his students virtually dictated the research agenda of the criminology community throughout the 1970s and early 1980s. It also had a profound effect on practical matters, having been cited by the U.S. Supreme Court in its 1976 decision, Gregg v. Florida, that restored the death penalty and having also served as the intellectual basis for the creation of the U.S. Sentencing Commission in the early 1980s, a commission whose task was to rationalize individual and organizational criminal sentencing practices in the federal courts. I shall also argue, at infra nos. 31–36 and 46–58, that the economic analysis of tort liability also allowed for a clearer view of other puzzles in tort law, such as the appropriate basis for the collateral source rule and the appropriate relationship between tort liability and ex ante safety regulation. Let me stress again that the significance of law and economics for tort law is not to be found, as has been the case in criminal law, in its influence on how judges decide cases or how other lawmakers set safety standards but rather in its profound impact on the intellectual basis of that area of the law.
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bility system is fundamentally flawed. The popular press and some political debate are rife with examples of tort liability run amok. The most famous recent example of this is the McDonald’s coffee spill case.5 An elderly woman in New Mexico ordered coffee at a drive-thru window at McDonald’s. After receiving the coffee, she placed the cup between her thighs and began to drive. While driving, the woman struggled to pull the triangular sipping slit from the lid of the coffee cup. The slit proved resistant. In her efforts to get it off (but also to continue driving), she pulled too hard, causing the coffee to spill onto her thighs and the seat of the car. The temperature of the coffee was so high that the woman received serious burns to her thighs, requiring brief hospitalization and significant continuing care at her home. The woman’s daughter, a registered nurse, took time off from her work to care for her mother. Through an attorney the injured woman approached McDonald’s and asked for compensation for her out-of-pocket medical expenses and her daughter’s lost income, a total amount of roughly $10,000. McDonald’s refused, and the woman brought an action against the corporation for compensation for her injuries, arguing that the coffee was served negligently hot and without an adequate warning. The matter was tried to a jury with McDonald’s making a claim that the woman had been contributorily negligent (so that, even if McDonald’s were negligent, her losses should be reduced or eliminated). The jury found in favor of the plaintiff and awarded her almost $2 million in damages, of which approximately $400,000 was compensatory and the remainder was punitive. On appeal, the total amount was reduced to about $600,000.
6
The press and the commentators have had a field day with this case as a showcase of what is wrong with our legal system. The widespread sentiment is that any legal system that would allow a woman to recover $600,000 (never mind the original $2 million) for an injury that was apparently worth $10,000 and for which she was, arguably, partially at fault is a legal system that has jumped the rails.
7
Now, whether these criticisms of the legal system generally or of the tort liability system specifically are justified, they are commonly held.6 And, importantly for my task here, they have had an impact on legislative actions taken to reform the tort liability system. In the mid-1970s, the mid-1980s, and again in the mid-1990s (for reasons that I elaborate below), this general dissatisfaction with the legal system led more than half of the state governments in the United States to impose significant procedural and substantive constraints on statecourt actions for recovery in tort.7 For example, many states have flirted with
8
5
6
7
See the discussion of the facts in J.M. Feinman, Law 101 (2000) and at http://www.cooterulen.com. Indeed, the ills of the tort liability system have been an issue in the 2004 U.S. presidential election. President Bush has argued that the system needs serious reform and has criticized Democratic Vice-Presidential candidate John Edwards for being a successful plaintiff’s attorney in products liability and medical malpractice cases. On 2 November 2004 voters in six of the United States voted on significant tort reform. None of those reforms passed. See www.atra.org for a summary of all state and federal efforts at tort reform.
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(and some have implemented) no-fault schemes to replace liability for automobile-accident injuries or injuries in other specific areas. And many states have imposed dollar-amount ceilings on damages for pain-and-suffering or on punitive damages or special procedures (such as higher evidentiary standard) for the imposition of those damages than for other elements of damages. And then in Spring, 2003, as I shall discuss, the United States Supreme Court addressed the matter of punitive damages, holding that certain amounts would be thereafter deemed to be unconstitutional.8
9
The paper proceeds as follows. In the next section of this essay I shall very briefly outline the general dimensions of the U.S. tort liability system and its relationship to insurance markets. Then I turn to a summary of the economic analysis of tort liability and of insurance, including a summary of important empirical findings about the tort liability system. The next section discusses some current political and legal controversies in the tort liability system, principally its treatment of damages. There is a brief concluding section. II. The General Principles of the United States Tort Liability System
10
The standard course in torts in a U.S. law school9 is a one-semester (about 15weeks) course, and every law student must successfully complete that course in order to graduate from law school. There are additional courses or specialized seminars in such topics as products liability and professional malpractice, but those have relatively limited enrolments. The principles that the typical U.S. student learns in her general survey course in tort law have been the same for decades. Indeed, many of the cases, by means of reading which U.S. law students learn the principles of torts, are ancient English cases and older American cases that the books cite not for the purpose of showing the slow development of U.S. tort law but rather to show the relative stability and timelessness of the fundamental tort principles.
11
In this section I briefly survey the sources of U.S. tort law and give a broadbrush overview of the system. A. The Courts, the Legislatures, and Administrative Agencies
12
Most of U.S. tort law has developed through common law adjudication. Private parties injured accidentally have, when negotiation with the injurer or the 8 9
See infra nos. 100–105. This does not, perhaps, bear reiterating, but the study of law in the U.S. is a post-graduate education for three years. Every student at a U.S. law school has already completed a four-year undergraduate course of study in some other discipline. An increasing number of law students have also had some other, usually non-educational, experience between their graduation from their undergraduate studies and the commencement of their legal studies. Yet another development worth noting is that a rising (but still small) number of law students, mostly at the elite law schools, are simultaneously doing other graduate studies (in a professional field, such as medicine, business, education, public administration, or social work, or in an academic field, such as economics, history, political science, or philosophy).
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injurer’s insurer have failed, repaired to courts to determine liability and, where liability attaches, the appropriate compensation that the injurer owes the victim. The common law, as is well known, develops such general principles as it has through appellate litigation, being careful to confine itself to the facts before it, to be sensitive to how prior courts in the jurisdiction have resolved disputes with similar fact patterns, and altering its received principles only where significant new facts or controversies necessitate change.10 This system of adjudication, like almost any other, leaves gaps in the law – that is, it allows for fact patterns to be presented that do not fall squarely within the bounds established by precedent. Common law courts must either fill these gaps with plausible principles drawn from other legal sources (such as the decisions in similar cases handed down by courts in other jurisdictions, the writings of legal commentators, or the enactments of legislatures) or decline to fill the gap, leaving the task to other competent lawmakers.11
13
In tort law there are relatively few gaps; as a result, much of U.S. tort law has been developed by common law courts without much in the way of gap-filling being exercised by the state and national legislatures or administrative agencies. And most of the tort law so developed has been articulated through state court rulings. Tort law is almost exclusively state law.
14
Because there is no or very little federal and legislative oversight in this matter (with the recent exception of punitive damages, as we shall see), there is the strong possibility of 50 different tort systems, corresponding to the holdings of the ultimate courts in each of the 50 United States. This has not, happily, been the case. There is a near uniformity among the states with respect to tort law doctrine. But I do not want to overstate that uniformity. There are, in fact, differences, both procedurally and substantively. For example, there are important differences among the states in the form of comparative negligence
15
10
11
See generally M.A. Eisenberg, The Nature of the Common Law (1988). For a modern account of why common law does and should avoid general theories, see Cass R. Sunstein, Incompletely Theorized Arguments, [1995] 108 Harvard Law Review (Harv. L. Rev.), 1733. A classic case illustrating and explicitly considering these alternatives is Riggs v. Palmer, 22 N.E. 188 (1889). A young man, Elmer Palmer, killed his grandfather, Francis B. Palmer, was convicted of first-degree homicide, and sentenced to spend his life in prison. The decedent’s daughters, Mrs. Riggs and Mrs. Preston, brought an action to prevent the murderer from inheriting his victim’s estate. They argued that Elmer had killed his grandfather precisely because his grandfather, who was apparently extremely upset at his grandson, had announced his intention to change his will so as to leave almost nothing to Elmer and almost everything to his daughters. In that circumstance, the daughters argued, to allow the murderer to profit from his murder would be contrary to law’s implicit understandings. Perhaps so, but it was not apparently contrary to the prior holdings of the New York courts, nor to any enactment of the New York State legislature. The New York Court of Appeals decision, which ultimately found in favor of the daughters, ranged far and wide in an effort to decide what to do in this case, including doing nothing so as to spur the legislature to fill this gap in a more comprehensive fashion than could the Court of Appeals.
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that they use.12 And, as I have already mentioned, there are different evidentiary standards and different caps imposed on the imposition of some elements of damages.
16
The U.S. Supreme Court has resisted almost all attempts to constitutionalize U.S. tort law until very recently, when it held that punitive damages imposed even in a state court proceeding might be violative of the U.S. Constitution’s proscription against excessive fines and punishments. I devote a section to that holding below.
17
There is another important source of law on liability-related issues – legislatively created administrative agencies. Let me distinguish two general senses in which these agencies create tort rules and then focus on the latter of those senses. Legislatures in the U.S. (and elsewhere) frequently delegate to administrative agencies the task of elaborating the specific rules to be enforced in an area for which the legislature has defined general principles.13 Consider environmental law. In the late 1960s and early 1970s the U.S. Congress grew concerned about the degradation of the air and water in the U.S. and created the U.S. Environmental Protection Agency to provide the appropriate regulations. The Congress established some broad guidelines for the agency – for instance, that they were not to use cost-benefit analysis in devising ambient air standards but rather to seek to achieve clean air as the agency thought fit to define it and in a practicable manner – but left the details to the Agency.
18
Similarly, in an area closer to the core goals of tort law, Congress created the National Highway Transportation Safety Administration (NHTSA) in the mid-1960s to make automobile transportation less dangerous. NHTSA promotes safety through what the literature now calls ex ante regulation – that is, through the defining and enforcement of equipment mandates and other rules with which automobile manufacturers must comply or face sanctions.14 For 12
13
14
Comparative negligence allows for the damages recoverable by the victim to be reduced (but not necessarily eliminated) if both the victim and the injurer were at fault. (By contrast, under negligence with a defense of contributory negligence, which was, till the mid-1970s or so, the default liability standard in the 50 state courts, “contributory negligence was a complete bar to recovery,” to quote a famous English formulation from the early 19th century.) Comparative negligence can take one of three general forms. Under the pure form, the fact finder makes a determination of the percentage of the fault for the accidental losses attributable to the plaintiffvictim and to the defendant-injurer and computes the net amount to be given to the victim. The percentages can range from 0 to 100 for either party. Under the modified form of comparative negligence, the fact finder makes the same determination. If, however, the percentage of fault attributable to the plaintiff-victim is 50 or greater, then the plaintiff recovers nothing. Most of the U.S. states that use comparative negligence use this form. Under the “slight-gross” form of comparative negligence the fact finder allows the plaintiff-victim to recover only if his contributory negligence was “slight” and the injurer’s was “gross”. There is an interesting parallel between the relationship between legislatures and administrative agencies in the U.S. common law system and civil codes and courts in the civilian legal systems that I leave for others to elaborate. The locution “ex ante regulation” stands in contrast to “ex post liability determination.” The former seeks to avoid accident losses directly through prevention. The latter seeks to achieve the same end by holding out the possibility of imposing financial liability in the event that an accident occurs and the injurer is held liable.
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example, all new automobiles marketed in the United States must have padded dashboards, collapsible steering wheels, shatterproof windshield glass, seat belts and passive restraint safety devices, bumpers capable of protecting cars in crashes up to a designated speed, and more.15 For our purposes in this essay, the important point to note – a point to which I shall return below – is that administrative agency regulations cover some of the same ground as that covered by exposure to private actions in tort. This suggests the need to establish more precisely the appropriate relationship between administrative agency regulation and tort liability.
19
In summary, tort law in the United States is largely the product of common law adjudication by state courts and has established principles for assigning liability and determining damages that have been more or less in place for at least 50 years. The only important alternative source of law that either competes with or complements private-party tort law is that emerging in the past thirty or forty years from state (principally) and federal safety regulatory agencies.
20
B. An Overview of the Tort Liability System The default standard for finding a defendant-injurer liable for a tortious wrong in the United States is fault.16 In order to establish negligence the plaintiff must demonstrate, by a preponderance of the evidence, that he or she was harmed in a compensable manner, that the defendant’s action or failure to act was a proximate cause of that harm, and that in acting or failing to act as he did, the defendant-injurer breached a duty of care that he owed to the plaintiffvictim.
21
Although there is some controversy about this point, the standard method of establishing that the defendant violated a duty of care owed to the plaintiff is the so-called Hand test.17 The test is frequently written as a mathematical formula in which the defendant-injurer is required to compare the cost of the precaution he might have taken to avoid the accident with the accident losses discounted by the probability of the accident’s occurring. (Let us call the product of the probability of the accident’s occurring and the accident losses suffered “expected accident costs.”) According to the Hand test, if the cost of the precaution that would have prevented the accident is less than the expected acci-
22
15
16 17
Although I have focused on federal administrative agencies, I must note that the states have their own administrative agencies. These state administrative agencies relate both to the torts adjudicated in state courts and to the jurisdiction of similar federal agencies. There is, for instance, an Illinois Environmental Protection Agency that regulates purely intrastate environmental matters, the theory being that the USEPA regulates interstate environmental matters. As can be imagined, there is frequently a very fuzzy line between these jurisdictional claims and, as a result, conflict among state and federal administrative agencies. In this section I am going to paint with a very wide brush and without nuanced brushstrokes. The test takes its name from Judge Learned Hand, who articulated the test in U.S. v. Carroll Towing Co., 159 F.2d 169 (2d Cir. 1947).
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dent costs and the defendant did not take that precaution, then the test deems him to be “at fault” and liable for the victim’s losses. If the precaution costs exceed the expected accident costs and the injurer did not take the precaution, then the test exonerates him for the victim’s losses.18
23
Negligence can take several forms – contributory negligence and the various forms of comparative negligence. The default standard in the majority of state court actions in the U.S. today is modified comparative fault.19
24
The great alternative to fault liability is strict liability. According to that standard, the plaintiff, in order to recover, must only show harm and that the actions or failure to act of the defendants were a proximate cause of his harm. Traditional analysis holds that strict liability is appropriate for “abnormally dangerous activities,” such as blasting with dynamite or keeping a pet tiger.20 There used to be several affirmative defenses in a strict liability action, such as the plaintiff’s having voluntarily assumed a risk or having used a product in an unconventional manner, but the current trend is toward absolute liability for the injurer under this tort liability standard.
25
Whatever the tort liability standard, the successful plaintiff-victim may recover compensatory damages for his routine losses (as of income and property, consortium, and medical expenses) and in some cases his non-economic losses (most commonly, “pain and suffering” damages, which is such a vague and imprecise term that no one can credibly know what that means or estimate its amount in any given case). The victim may also recover punitive damages if he can show (sometimes by a higher standard than preponderance of the evidence, such as “clear and convincing” evidence) that the defendant acted willfully, wantonly, or in gross disregard for the safety of others. Regardless of what one might infer from the McDonald’s coffee case, punitive damages are extremely rare in the U.S.21
18
19 20
21
There are many nuances to the test, and not all jurisdictions in the US follow it, but most do. Other tests, which can be shown to be closely related to the Hand test, are the “risk-utility” test (frequently invoked in products liability cases, in which the court compares the risk of harm that the defendant’s product created with the utility that the product could generate to the defendant and to consumers) and the “consumer expectations” test (which seeks to determine what reasonable consumers expected of a product and what it actually delivered). Of course, there are, in some instances, easier tests for negligence, such as negligence per se (in which the defendant clearly violated some obvious rule) or res ipsa loquitur (in which there is no need to make calculations of what the defendant might have done because what he did is so obviously at fault that the “thing speaks for itself”) or a violation of the prevailing customs of the trade (as in medical malpractice or other professional liability settings). See supra fn. 12 for a description of this and the other forms of comparative fault. By implication, traditional doctrine holds that negligence liability is appropriate in circumstances of normally risky activities. For a more thorough account, see supra nos. 5–7.
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C. No Fault as an Alternative to Tort Litigation Finally, I should mention an alternative to the tort liability system that has commanded a fluctuating amount of enthusiasm – no-fault insurance. At its heart is the belief that the insurance system is a more efficient, rapid, and less contentious means of compensating the victims of wrongful injury than is the litigation system. Beginning in the early part of the 20th century many states began to replace private litigation as the default means of dealing with injuries to workers with a system known as “workers’ compensation.” The system involved small contributions by employees and employers to a state-administered agency. When an employee was injured on the job, he applied to the state agency for compensation, with the amounts that he would receive being determined by a schedule of benefits drawn up by the agency.
26
In the 1930s a study group at Columbia University made a similar proposal for automobile accident losses.22 But the concept did not command attention in the United States (although the Canadian Province of Saskatchewan introduced automobile no-fault insurance in 1947) until the late 1960s. The precipitating event was a comprehensive proposal by Robert Keeton and Jeffrey O’Connell.23 They proposed a limited no-fault system to be applied only to the victims of minor traffic accidents, with compensation to be paid according to a schedule and without regard to the recipient’s fault. Only medical expenditures, lost property, and income loss were compensable under the no-fault scheme, although victims retained the power to pursue litigation for damages in excess of the scheduled amounts and for non-economic damages.
27
In 1971 Massachusetts became the first state to enact a no-fault plan. Within three years eighteen additional states had enacted no-fault, usually with the complete support of the insurance industry and the opposition of the bar. At the height of the enthusiasm for no-fault, nearly half of the states (twentyfour) had passed some form of no-fault.24
28
The experiment with no-fault automobile insurance came to a halt in 1976, with only the District of Columbia having adopted the system since that date. Six of the twenty-four states that adopted the system in the early 1970s have since repealed their mandatory no-fault systems, and another nine have significantly revised their systems to rely more heavily on traditional tort litigation for the compensation of automobile accident losses. Today there are only nine
29
22
23 24
Columbia University Research Council in the Social Sciences, Report by the Committee to Study Compensation for Automobile Accidents (1932). R. Keeton/J. O’Connell, Basic Protection for the Traffic Victim (1965). As is frequently the case in what Justice Brandeis called the laboratories for legal experimentation, the states did not adopt identical no-fault laws. Sixteen states adopted a mandatory system; and eight states (in a system called the “add on” system) retained third-party insurance coverage for the bulk of automobile injuries and enlisted no-fault as a supplement to the required liability coverage. In all the states that adopted no-fault parties retain the right to litigate. None of the states adopted a pure form of the proposal, in which no-fault would have completely replaced the tort liability system.
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states and the District of Columbia that maintain a mandatory no-fault automobile insurance scheme.25 D. The Relationship between Tort Liability and Liability Insurance
30
In the United States there are two issues on which the tort liability and liability insurance markets come into repeated and close contact – the collateral source rule and the issue of subrogation.26 The collateral source rule is a settled rule of law about the appropriate relationship between payments made to the victim through some third party (such as an employer, charitable organization, or insurer) and the damages that the defendant-injurer owes the plaintiff-victim. Subrogation refers to an insurance contract provision by which an insurance company acquires the “right of one who has paid the claim which another should have paid to be indemnified by the other.”27 In practice, this means that an insured party assigns to the insurer any legal action against another that might have resulted in the payment of claims to the insured party by the insurer. The law on these matters, like tort law generally, has been settled for a long time. 1. The Collateral Source Rule
31
According to the settled doctrine of the collateral source (or collateral benefits) rule, the plaintiff-victim does not need to offset any benefits that she receives from a third-party against the compensatory amount owed to her by a liable defendant-injurer. As an illustration, suppose that A has a first-party insurance policy under which he will be paid 80 percent of his medical expenses in the even that he suffers an accidental injury. B unintentionally causes injury to A in an automobile accident, and A’s injuries require $10,000 worth of medical care. A’s insurer pays him $8,000. One might hypothesize that society would be well served if A is precluded from seeking payment of anything more than $2,000 (and, perhaps, his cost of mounting that claim, a cost that I discuss in Part III.B below) in an action against B. That, at any rate, might be the claim if one were to hold that the central goal of the tort liability system is to make victims whole. The collateral source rule holds, however, that A may 25
26
27
No-fault never seems to remain dead but repeatedly rises, ghoul-like, from the grave to walk the Earth anew. There are still some skilful advocates for this alternative to traditional tort liability, and some states, such as Florida, briefly experimented with no-fault for certain medical injuries in the late 1980s. In a recent important evaluation of the medical malpractice system in the U.S. Professor Paul Weiler of Harvard Law School (Medical Malpractice on Trial (1991)) argued in favor of no-fault for iatrogenic injuries. There are, of course, theoretical and practical contacts between tort liability and insurance. For example, theoretically there is a concern that having first-party insurance might cause victims to be less likely to bring an action against those who injured them, and third-party insurance might make injurers less careful on the theory that their insurer will compensate victims regardless of what happens. Naturally, there are counter-arguments to these theoretical points. And in terms of practical interactions insurers, victims, and injurers are deeply involved with one another. See, for example, H. Laurence Ross, Settled Out of Court: The Social Process of Insurance Claims Adjustments (1970). Black’s Law Dictionary (8th edn. 2004).
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proceed against B for the full extent of his losses, even though he has received partial compensation through his insurer. What theory justifies this holding? There are two principal justifications for the collateral source rule. First, the collateral benefits may be paid pursuant to a contract, as is the case with firstparty insurance. The insured and his insurer have entered into a mutually beneficial relationship in which the insurer assumes the risk of loss in exchange for a periodic payment (the premium). When the loss materializes, the insured is entitled to the benefit of his bargain – namely, compensation for his loss.
32
If we were to follow a theory under which the victim was entitled to receive full compensation but no more, so that the victim may choose between receiving compensation from his insurer or from the injurer or from both, then that might possibly lead to a situation in which victims waive their right to their insurance benefits. But there is no obvious reason why this contractual benefit should be reduced because of the negligence of a third party,28 and, indeed, there are some social costs that might follow if that contractual benefit were to be reduced because of payments to a victim from a third party.
33
Second, and to my thinking more important, if the collateral source rule were not in effect, so that the amount recoverable from a negligent party were reduced by the amount of the victim’s collateral benefits, then the incentive effect of imposing liability on the defendant and on similarly situated injurers in the future might be lost. The result could be a reduction in the amount of care taken by potential injurers and a resulting increase in the likelihood and severity of accidents.
34
The law is so strongly committed to the collateral source rule that in every US jurisdiction jurors in tort liability actions are not to be told whether the plaintiff-victim has insurance coverage (nor that, for example, the victim’s case is really being mounted by lawyers from his insurance company). This extends, for example, to any documents that the jury examines as part of the trial, so that if there is mention of a relevant insurance contract in documents submitted to the jury, that mention must be redacted.
35
One is entitled to be skeptical about whether this rule against mentioning insurance amounts really works. Most jurors have insurance themselves and know that if they suffer an injury, their insurance company will compensate them for much of their losses. And so, regardless of what the judge admonishes them not to consider, they are likely to keep in the back of their minds that the plaintiff has insurance. There is, as a result, some reason to fear that juries
36
28
In practice there may be substitutability between payment from an insurer and an injurer, but that substitutability arises from a subrogation clause in the insurance contract. The next section of this essay discusses the subrogation clause, which figures importantly in a fuller account of collateral benefits. Here I am only discussing the theoretical possibility that public policy would compel victims to choose between taking compensation from one or the other source but not both.
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may give deserving victims less than their full losses, on the theory that they have will receive or have already received compensation from their insurer.29 2. Subrogation
37
A common clause in an insurance contract in the United States entitles the insurance company to “stand in the shoes” of an insured party with respect to any legal claim that the insured might have. By way of illustration, suppose that A has an insurance contract with the XYZ Insurance Company that entitles A to receive all but $250 of his medical expenditures in the event of accidental injury; that the insurance contract contains a subrogation clause by means of which the XYZ Insurance Company acquires the right to any payments that A may have received from another for a payout that XYZ has made to A; and that A has an accident in which his injuries at the hands of B have caused him to incur $30,000 in medical expenses. As we know from the discussion of the collateral source rule, A can take his insurance payout from XYZ and proceed against B for the full amount of his medical expenses (and other compensable losses).
38
However, under the subrogation clause if A receives compensation from B and has also received $29,750 from XYZ, then he must indemnify XYZ for the amount that he has received from them.30 29
30
There is, to my knowledge, no hard evidence on whether jurors behave in this fashion. There are two points worth noting with regard to these matters. First, in addition to their understanding about insurance, jurors may also have understandings about other aspects of litigation that cut the other way. For example, jurors may know that the successful plaintiff must compensate his or her attorney from whatever amounts that the jury awards him or her. If, for instance, a plaintiff must pay his or her attorney one-third of his damages award, then he or she will be left with two-thirds of the award from which to compensate his or her injuries. As a result, if jurors believe that two-thirds of the amount awarded will not adequately cover the compensatory amounts, they may increase the amount awarded so that, after paying their attorneys, plaintiffs have enough left over for full compensation. Second, there is some recent evidence that it is extremely difficult for fact finders to ignore things to which they have been exposed. In a fascinating recent working paper three scholars sought to investigate whether judges could truly ignore inadmissible information that they had been shown in mock trials. The authors devised scenarios in which, for example, a plaintiff seeking contract damages told his attorney, on a tape recording heard by the judge, that a crucial element of his case was factually untrue. The authors presented this and other scenarios to many judges – about half of whom learned the inadmissible information, while the other half did not – and then compared the rates at which the judges would have found in favor of the plaintiff or defendant. In most instances they found that the judges who heard the inadmissible information were far more likely to find in favor of the party in whose favor the inadmissible evidence ran. See A.J. Wistrich/Ch. Guthrie/J. Rachlinski, Can Judges Ignore Inadmissible Information? The Fiction of Forced Forgetting (Presented at the 14th Annual Meeting of the American Law and Economics Association, Chicago, IL, May, 2004). There are three possibilities here. Suppose that the total cost of A’s injuries is $30,000 and that, pursuant to his insurance contract, his insurer pays him $29,750 because A has a $250 deductible in his policy. Now suppose that A brings an action against B for compensation. If successful, A might receive (1) exactly $30,000, (2) less than $30,000, or (3) more than $30,000. Clearly, A is only obliged to pay to XYZ the actual amount recovered from B. If A received $20,000 from B, then he must only indemnify XYZ in that amount so that XYZ bears the
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What typically happens is not that the insurance company waits for the insured party to assert its claim against the injurer and then duns the successful plaintiff for the amount that the company has already paid out to its client. Rather, what happens is that the insurance company “stands in the shoes” of its client and either bargains with the injurer (or, more likely, the injurer’s insurance company) for indemnification for the amount paid out to its client or actually mounts a cause of action against the defendant-injurer for compensation.31
39
In most instances subrogation clauses (and the various legal issues, such as waiver, that arise under them) are readily enforceable, according to settled doctrine, to the extent that they preclude unjust enrichment (and double recovery).32 Many employment and health insurance contracts, as well as insurance contracts, provide for subrogation. Medicare and Medicaid, for example, are government-subsidized health services for the elderly and disadvantaged, respectively, and contain absolute subrogation.
40
Although the legal rule in almost all of the US calls for the routine enforceability of subrogation clauses, there is at least one exception that is worth mentioning. In 1993, in the case of Youngblood v. American States Insurance Co., the Supreme Court of the State of Montana refused to enforce a subrogation clause for medical expenses incurred in an automobile accident and held that subrogation was void for reasons of public policy.33 The Court felt that subrogation clauses might induce negligent third parties to offer a victim less in settlement of a meritorious claim because it knew or suspected that the victim had already been compensated by its insurer, that the insured had a subrogation clause in his insurance contract obliging him to hand over any amounts received to the insurance company, that most victims would probably accept the lower settlement amount rather than incur the expenses of a trial, and that the resulting possibility of under-deterrence of injurers was socially undesirable.
41
But this seems unlikely. To be concrete, suppose that, as in my previous example, A has been injured by B and has incurred medical expenses of $30,000. A’s insurer pays $29,750 for those injuries, reflecting A’s $250 deductible. The Montana Supreme Court’s fear is that A will not proceed against B in exchange for a settlement amount of, say, $5,000. A might be inclined to accept
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30
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$9,750 additional payment itself. If A receives exactly $30,000 from B, he must indemnify XYZ for the $29,750 that they paid for his medical costs. Finally, if A receives $40,000 from B, then XYZ is entitled to receive $29,750. A may keep the overage. In the event that XYZ actually brings an action against B for compensation, the whole proceeding may be a dumb show in which, nominally, A is suing B for the recovery of damages for negligently inflicted harms but, in reality, the XYZ Insurance Company is suing B’s insurance company for indemnification. Frequent though this is, U.S. courts are not eager, as can easily be imagined, to lend themselves to being used in this fashion. I shall provide an economic gloss on this interpretation of subrogation shortly. 262 Mont. 391, 396.
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the settlement because, having already received his payment for his medical expenses from his insurer, the $5,000 represents a net gain for him. The Court’s fear is that this settlement will allow B to get off cheap – having inflicted injuries in the amount of $30,000, he gets off for a payment of $5,000. The problem with this scenario is that it cannot happen if A’s insurer has a subrogation clause. Under that clause the insurer will not let this settlement end the matter. He will not let A settle out for that amount. What the Montana Supreme Court imagines will not happen under a subrogation clause, but it might happen in the absence of a subrogation clause.
43
On balance, what are we to make of subrogation? Is it good or bad? This jumps slightly ahead of the story, but, at least from an economic point of view, subrogation is a good thing. By allowing for the insurer to proceed against the defendant for indemnification, two efficient things happen. First, the defendant-injurer bears the full cost of his wrongdoing. As a result, the deterrent aspect of the exposure to tort liability remains. If there were no subrogation clause and the victim had received full compensation from her insurer, she would have a very weak incentive to proceed against the injurer. The injurer could further weaken that incentive by “bribing” the victim not to sue him in exchange for a small settlement amount. The subrogation clause takes the victim out of the picture altogether and forces the injurer to deal with a far more formidable opponent, the insurer.
44
Second, everyone who purchases first-party insurance benefits from the subrogation clause because, by allowing the insurer to seek indemnification from the injurer or his insurer, the clause keeps the total cost of insurance lower than it would otherwise be. If, for reasons like those articulated by the Montana Supreme Court, subrogation clauses were to become illegal, I have very little doubt that first-party insurance would become much more expensive than it currently is. There might also be more and more severe accidents than there are under the regime in which the subrogation clause is routine.
45
At the end of the day, there are very strong arguments for preserving both the collateral source rule and the subrogation clause. III. The Economic Analysis of Tort Liability and Insurance
46
It would be negligent to discuss the modern tort liability system in the United States without mentioning the economic analysis of that area of the law. That method of examining the working of the tort liability system is an application to this particular area of the law of the more general project of using microeconomic theory to examine legal rules and institutions.34 34
For broad overviews, see R.D. Cooter/T.S. Ulen, Law and Economics (4th edn. 2003) and R.A. Posner, The Economic Analysis of Law (6th edn. 2003).
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The impact of law and economics on the North American legal academy and its legal scholarship can hardly be exaggerated.35 When the interaction between the fields of law and of economics began, it centered on those areas in which the commonality of interest was obvious – taxation, the calculation of money damages, competition law, and regulatory fields. Almost all of the innovative scholarly activity in law and economics since, say, 1980 has been in the core areas of law, such as property, intellectual property, contract, tort, civil and criminal procedure, substantive criminal law, all areas of commercial law, and many statute-based areas of law, such as bankruptcy, corporate law, securities regulation, and the like. I think it fair to report that there is no single area of legal study in the United States that has not been significantly recast through the lens of economic analysis.
47
In all candor, it must be said that the economic analysis of tort law has, so far, had no discernible impact on how common law judges decide tort cases. Nor has it had a noticeable impact on the official commentary on tort law – the Restatement (Third) of Tort Law.36 But it has had an impact on the legislative debates on some tort reform issues and a very significant impact on the administrative agency analysis of new regulations.
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A. An Overview of the Economics of Tort Liability Law and economics explains tort law as that body of rules designed to minimize the social costs of accidents, defined as the sum of prevention, accident, and administrative costs.37 By holding out the possibility of imposing liability on a party for the costs of accidents, tort law seeks to get both potential injurers and potential victims to internalize the costs that their actions or failures to act may impose on others.38 This possibility induces rational parties to take all cost-justified care – i.e., to purchase precaution up to the point at which the marginal benefit of that precaution (in terms of the reduced probability and severity of an accident) equals the marginal cost.39 Doing so minimizes the social costs of accidents. 35
36
37 38
39
See T.S. Ulen, A Nobel Prize in Legal Science: Theory, Empirical Work, and the Scientific Method in the Study of Law, [2003] University of Illinois Law Review (U. Ill. L. Rev.), 1037; T.S. Ulen, The Unexpected Guest: Law and Economics, Law and Other Cognate Disciplines, and the Future of Legal Scholarship, [2004] 79 Chicago-Kent Law Review (Chi.-Kent L. Rev.), 403; and N. Garoupa/T.S. Ulen, The Market for Legal Innovation: Law and Economics in the US and Europe (Illinois Program in Law and Economics Working Paper, November, 2004). The American Law Institute publishes the Restatements of the law and has currently issued a draft of parts of the Restatement (Third) of Torts – specifically, the sections on General Principles, Apportionment of Liability, and Products Liability. See http://www.law.harvard.edu/ library/services/research/guides/united_states/basics/restatements.php. For an elaboration, see R.D. Cooter/T.S. Ulen (supra fn. 34), at 270–292. Consensual agreements cannot generally assign liability ex ante an accident because the transaction costs of doing so are prohibitively high. One does not often know whether he will be a victim or an injurer or whom he will injure or by whom he will be injured. (The exceptions to this last observation – such as product- and personal service-related torts – are telling.) This is the modern law-and-economics formulation of the famous Hand Rule. For the original formulation, see U.S. v. Carroll Towing Co., 159 F.2d 169 (2d Cir. 1947). For an elaboration of the modern formulation, see R.D. Cooter/T.S. Ulen (supra fn. 34), at 281–283.
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50
Consider this view as applied to the economic analysis of negligence. Negligence is the more efficient tort liability standard in situations of bilateral precaution (situations in which both the potential injurer and the potential victim can take precaution to reduce the probability and severity of an accident).40 Imagine a situation in which it is not clear beforehand who will be a victim and who will be an injurer – automobile accidents, for example. Because anyone who is driving might be a victim or an injurer, there needs to be some method of inducing every driver to take care. Negligence does just that. A rational driver recognizes that he might be an injurer or a victim. He calculates that, if he should be an injurer, he will be liable under the negligence standard if he fails to take cost-justified precaution (as interpreted by the modern formulation of the Hand Rule noted above). Therefore, being a rational cost-minimizer or utility-maximizer, he will take all cost-justified precaution and thereby escape liability as an injurer.
51
Now consider how that same rational driver decides how to behave if he should happen to be a victim. He reasons that, if someone should injure him in an accident, that person will be rational and will have reasoned that he should take all cost-justified precaution so as to escape liability to the victim. As a result, the accident costs will be visited upon the victim. This potential victim will further reason that he must take all cost-justified precaution himself because he will have to bear the financial burden of any accident losses that arise.
52
In sum, negligence induces socially-optimal care by both potential victims and injurers, both presumed to be rational actors, in situations of bilateral precaution.41
53
Note an important implication of this account of the rational decision-making regarding liability: automobile manufacturers have an incentive to introduce optional innovations to their cars that improve safety, and rational consumers have an incentive to purchase cost-effective safety options.
54
In this brief overview of law and economics as applied to the tort liability system, I have placed particular emphasis on the rationality of decisionmakers. Many readers may find that assumption about their fellow men and women incredible and, therefore, may discount law and economics if they believe it to require that decisionmakers behave like rational calculating machines.
40
41
Strict liability is the more efficient liability standard in situations of unilateral precaution (in which only the potential injurer can realistically take precaution to reduce the probability or severity of an accident.) I have, of course, left out much of the nuance of the theory. One important oversight is the analysis of how different liability standards might affect the activity levels of potential injurers. For a summary, see W. Landes/R.A. Posner, The Economic Structure of Tort Law (1987), 64–71. The original statement of the activity level argument was S. Shavell, Negligence versus Strict Liability, [1980] 9 J. Legal Stud., 1.
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B. Behavioral Law and Economics and Its Application to the Analysis of Tort Liability Fortunately, there is no need to defend that assumption of rationality in order to find something of value in the economic analysis of tort law. Law and economics – uniquely, in my experience with fields of law – has paid close attention to developments in social and cognitive psychology and behavioral economics and has drawn out their implications for the analysis of legal rules and institutions.42
55
Social and cognitive psychologists and economists familiar with those disciplines have discovered some systematic biases in human judgment that make some of the predictions of rational choice theory untenable. For example, rational choice theory suggests that decisionmakers do not fall prey to the “sunk cost fallacy,” whereby they believe that having already invested resources in a particular decision obliges them to continue pouring more resources into the decision, lest the initially invested resources be wasted. A common example of this effect is this. A business company has invested millions of dollars in the development of a new product. Some problems in the product have become evident, and they are so severe that there are some of your co-workers who want to abandon the entire project. If someone who supports the project says, “We cannot quit now. We need to put more effort and more resources into this project or everything we have spent so far will be wasted,” then he is suffering from the “sunk cost fallacy.”
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Economists, applying rational choice theory to a situation similar to that of the new product development project, would say that the expenditures already made are irrelevant to the decision as to whether to go forward. The only rational consideration is whether there is good reason to think that additional expenditures will result in success. Economists urge decisionmakers to ignore fixed and sunk costs in making current decisions on the theory that “bygones are bygones.” But wishing or assuming that people make decisions this way is not enough; one needs to know how they actually make decisions with regard to fixed or sunk costs. And the evidence is overwhelming that the vast majority of decisionmakers fall prey to the sunk cost fallacy – previous expenditures decisively affect what they do in the current situation.
57
Here I want to describe, briefly, two other systematic judgment biases and draw out their implications for the well-functioning of tort law.
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42
For a review of this literature see R.B. Korobkin/T.S. Ulen, Law and Behavioral Science: Removing the Rationality Assumption from Law and Economics, [2000] 88 California Law Review (Cal. L. Rev.), 1051.
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1. Overoptimism43
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Even when actors know the actual probability distribution of a particular event, their predictions as to the likelihood that that event will happen to them are prone to the “overconfidence bias”: the belief that good things are more likely than average to happen to us and bad things are less likely than average to happen to us.44 Demonstrating that a particular individual is overconfident is difficult to do, because the individual might well differ from the statistically average person in positive ways. For example, a student who believes he will score above the mean on an exam might be overconfident of his ability. On the other hand, he might be smarter or a more diligent studier than his peers, making the prediction quite reasonable. But the pervasiveness of the overconfidence bias has been demonstrated persuasively in experiments that elicit opinions from all members of a group about how they are likely to compare to other members of the group.45 To paraphrase Garrison Keillor, all the children in Lake Wobegon cannot really be above average!46
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The overconfidence bias is well-demonstrated by Neil Weinstein, who asked a sample of students at Rutgers University to estimate whether or not each of a series of events were more or less likely (and how much more or less likely) to happen to them than to their classmates.47 Of 18 positive events, ranging from owning their own home to avoiding a hospital stay for five years, the mean respondent estimated his chances at greater than the average for his peers – i.e., the other survey respondents – in 15 of the events.48 In contrast, subjects on average believed that negative events, ranging from suffering a divorce to losing a job to contracting lung cancer, were less likely to happen to them than to their average peer in 22 of 24 events.49 Similarly, in a survey of Virginia residents who applied for a marriage license, Baker and Emery found that, although most respondents knew that close to half of all marriages end in divorce, when asked to predict the likelihood that their marriage would end in divorce, the median response was 0!50
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The overconfidence bias could have a wide-ranging impact on deterrence policy in a variety of areas of law. Policymakers rarely wish to deter 100 percent 43 44
45
46
47 48 49 50
This and the following section are drawn from R.B. Korobkin/T.S. Ulen (supra fn. 42). See Ch. Jolls, Behavioral Economics Analysis of Redistributive Legal Rules, [1998] 51 Vanderbilt Law Review (Vand. L. Rev.), 1653, 1659 and no. 22 (claiming nearly 200 studies support this descriptive claim). See sources cited in N.D. Weinstein, Unrealistic Optimism About Future Life Events, [1980] 39 Journal of Personality and Social Psychology (J. Pers. & Soc. Psych.), 806, 806. G. Keillor, Leaving Home xvii (1987) (“That’s the news from Lake Wobegon, where all the women are strong, the men are good-looking, and all the children are above average....”). N.D. Weinstein, [1980] 39 J. Pers. & Soc. Psych., at 809. Ibid. at 810 (table 1). Ibid. L.A. Baker/R.E. Emery, When Every Relationship Is Above Average: Perceptions and Expectations of Divorce at the Time of Marriage, [1993] 17 Law and Human Behaviour (Law & Hum. Behav.), 439 (finding that recently married couples are aware that 50 percent of marriages end in divorce but almost unanimously believe that theirs will succeed).
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of even undesirable conduct, because the costs of doing so would likely be too great.51 For any type of conduct that the state wishes to discourage, from criminal behavior to carelessness likely to lead to a tort, rational choice theory advises policymakers to set the penalty for the undesirable conduct such that the desired fraction of the population – say, potential injurers – will calculate that the expected costs of the conduct exceed the expected benefits to them. Where the targets of such policies exhibit overconfidence, however, policymakers will have to set the penalties higher – sometimes substantially so – than they would in a world of utility-maximizing actors who are not systematically overconfident. If bank robbers believe that they are less likely to be apprehended than their peers, if absent-minded drivers believe they are less likely to cause an accident than other drivers, or if physicians believe they are less likely to be found liable for malpractice than other physicians, penalties for the undesirable behavior will have to be higher than policymakers would otherwise think necessary to achieve the desired level of deterrence.52 For policymakers to be able to make effective use of the insights provided by the overconfidence bias, more empirical research needs to be done on which groups and in what situations overconfidence is likely to be most severe.53 Currently, one useful conclusion can be drawn from the literature: at least for events perceived to be negative, actors apparently tend to be more overconfident when the event in question is perceived to be controllable than when it is perceived not to be controllable.54 This finding suggests that an understanding of the overconfidence bias is, in fact, particularly necessary to develop optimal deterrence policies, since such policies are targeted at controllable events.
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Related to the overconfidence bias is the “confirmatory” or “self-serving” bias, the description given to the observation that actors often interpret information in ways that serve their interests or preconceived notions. For example,
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R.D. Cooter/T.S. Ulen (supra fn. 34), at 21–23 (demonstrating that social optimality occurs where social marginal benefit and social marginal cost are equal and that that rarely occurs at a zero quantity of a bad thing). A. Gawande, Why Doctors Make Mistakes, The New Yorker (1 February 1999), 40–52 (arguing that most medical mistakes – even those by very good physicians – are simply oversights and that exposure to malpractice liability does not have an additional precaution effect on physicians). One plausible – but as yet unproven – hypothesis is that older people are less overconfident than younger people. See R.A. Posner, Aging and Old Age (1995), 104. Available data does suggest however, that the bias is not limited to the young, who disproportionately serve as subjects in psychology experiments. See, e.g., A. Guppy, Subjective Probability of Accident and Apprehension in Relation to Self-Other bias, Age, and Reported Behavior, [1993] 25 Accident Analysis & Prevention, 375, 377–78 and tbl. 1 (19; N.D. Weinstein, Unrealistic Optimism About Susceptibility to Health Problems: Conclusions from a Community-Wide Sample, [1987] 10 Journal of Behavioral Medicine (J. Behav. Med.), 481, 487–89.) See N.D. Weinstein (supra fn. 45), at 814. Weinstein concluded that, when subjects perceived an event to be controllable, they tended to compare themselves with the stereotypical victim of the negative event, leading to overconfident predictions. In contrast, when events were perceived as uncontrollable, subjects did not perceive a stereotype of a victim with whom to compare themselves. Ibid.
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Lord and his colleagues found that when experimental subjects were given factual evidence about the effects of the death penalty, subjects identified as proponents of capital punishment said the evidence reinforced their prior beliefs, while subjects identified as opponents of capital punishment said that the information reinforced their prior beliefs.55
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In a series of papers, Loewenstein et al.56 and Babcock et al.57 found a similar effect of information in the litigation context. A group of law student subjects were provided with factual information about a dispute in litigation. Despite being given identical information, subjects who were told to imagine that they were the attorney representing the plaintiff interpreted the facts as favorable to the plaintiff, while subjects told to imagine that they were the attorney representing the defendant interpreted the facts as favorable to the defendant.58
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The conventional law-and-economics approach to trial and settlement, based on rational choice theory, predicts that, because trials are more costly than outof-court settlement, lawsuits will settle out of court unless the parties have substantially different predictions about the likely results of trial.59 Plaintiffs and defendants may reach different predictions about the likely outcome of a trial, but differences in predictions are presumed to be in both directions – i.e., where the predictions of plaintiffs and defendants diverge, half of the time plaintiffs will believe their prospects are worse than defendants anticipate.60 An implication of this conventional account is that because litigation will be less likely when the parties have more accurate estimates of the likelihood of prevailing, anything that improves those estimates – such as expanded pre-trial discovery or better legal representation – is to be favored.
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Evidence of the self-serving bias in the analysis of lawsuits suggests, in contrast, that plaintiffs will systematically anticipate their trial prospects as being 55
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Charles Lord et al., Biased Assimilation and Attitude Polarization: The Effects of Prior Theories on Subsequently Considered Evidence, [1979] 37 J. Pers. & Soc. Psych., 2098, 2102. G. Loewenstein et al., Self-Serving Assessments of Fairness and Pretrial Bargaining, [1993] 22 Journal of Legal Studies (J. Legal Stud.), 135. L. Babcock et al., Biased Judgments of Fairness in Bargaining, [1995] 85 American Economic Review (Am. Econ. Rev.), 1337; see also L. Babcock, et al., Choosing the Wrong Pond: Social Comparisons in Negotiations that Reflect a Self-Serving Bias, [1996] 111 Quaterly Journal of Economics (Q. J. Econ.), 1. G. Lowenstein et al. (supra fn. 56), at 151–52; L. Babcock et al., [1995] 85 Am. Econ. Rev., at 1340. Investigators have identified a closely related effect called “cognitive dissonance.” That is a form of selective perception in which actors give greater weight to evidence that confirms beliefs they already hold and lesser weight to contradictory evidence. See L. Festinger, A Theory of Cognitive Dissonance (1957) and S. Plous, The Psychology of Judgment and Decisionmaking (1993). See G. Priest/B. Klein, The Selection of Disputes for Litigation, [1984] 13 J. Legal Stud., 1, 12, and R.D. Cooter/T.S. Ulen (supra fn. 34), at 338–343 and 349–352. For an excellent review of the literature, see R.D. Cooter/D. Rubinfeld, Economic Analysis of Legal Disputes and Their Resolution, [1989] 3 Journal of Economic Literature (J. Econ. Lit.), 1067. G. Priest/B. Klein, [1984] 13 J. Legal Stud., at 10–11 and Fig. 3; L. Babcock et al., [1995] 85 Am. Econ. Rev., at 1337.
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better than defendants believe. The consequence of this is more trials than would be predicted by the rational choice model, unless steps are taken to mitigate the parties’ evaluative biases. More information – provided, perhaps, in the form of expanded pre-trial discovery – is unlikely to be effective because, as we have seen in the experiments cited above concerning the death penalty controversy, people seem to use more evidence to solidify their views, rather than to alter them. Although the policy implications of this are not obvious, a strong case can be made that evidence of the self-serving bias provides support for legal structures that require litigating parties to view the fact of a dispute through the eyes of their opponents. The modern trend in civil litigation toward mandatory settlement conferences,61 court-ordered mediation,62 and non-binding arbitration63 make little sense from a rational choice perspective, under which parties are presumed to make maximizing decisions about whether to settle or even whether to negotiate with their adversaries. In a rational choice world, mandated interaction would merely increase transaction costs for no useful purpose. But these requirements seem quite defensible when the self-serving bias is understood.
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The implications of self-serving bias for re-examining conventional law-andeconomics wisdom of legal rules potentially carries far beyond the realm of litigation versus settlement, and much research needs to be done in this area. The law-and-economics theory of property law is based largely on the assumption of the Coase Theorem that property rights will be traded when the holder of such a right values it less than does another actor, assuming low transaction costs.64 But the self-serving bias suggests that individuals are likely to estimate the value of property rights differently depending on which side of the transaction they find themselves. This could result in rights being more “sticky” (resistant to exchange) than rational choice theory would predict.
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Undue confidence in the ability of their firms to overcome obstacles and a self-serving perception of information that might objectively signal future problems could lead firms to mislead those who would invest in their securi-
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See, e.g., Cal. Rules of Court, Rule 222 (West 1996) (requiring a mandatory settlement conferences in all “long cause matters”); Haw. St. USDCT Civ., Rule 235 (Michie 1995) (requiring a mandatory settlement conference in every civil action); Fla. Stat. Ann. § 766.108 (West 1987) (requiring a mandatory settlement conference in all medical malpractice actions); Mich. Rule 3 Cir., Rule 2.401 (West 1998) (requiring a mandatory settlement conference in all civil actions). See, e.g., U.S. Dist. Ct. Rules E.D. Pa., Civil Rule 53.2.1 (West 1998) (ordering all odd-numbered cases to participate in an experimental mediation program). See, e.g., Nev. Rev. Stat. § 38.250 (1991) (requiring mandatory nonbinding arbitration for all civil actions under $40,000); Haw. Rev. Stat. § 601–20 (1998) (establishing a program of mandatory nonbinding arbitration for all civil matters under $150,000); Fla. Stat. Ann. § 44.103 (1993) (allowing courts to refer certain civil actions to nonbinding arbitration). See generally R.A. Coase, The Problem of Social Cost, [1960] 3 Journal of Law and Economics (J. L. & Econ.), 1.
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ties. Donald Langevoort has suggested that this likelihood provides a justification for securities law rules – such as “due diligence” requirements for lawyers and accountants under the Securities Act of 1933 – that require third parties who are potentially less likely to suffer from such biases to verify the truthfulness of information that the firm provides to the marketplace. 2. Hindsight Bias
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Another systematic bias to which we are all subject and that has been repeatedly studies is the “hindsight bias,” the tendency of actors to overestimate the ex ante prediction that they had concerning the likelihood of an event’s occurring after learning that it actually did occur.65 In what is arguably the most famous of the many hindsight bias studies, Baruch Fischhoff gave five groups of subjects a passage to read describing the events leading up to a military confrontation between the British army and the Gurkas in Nepal in the 19th century and asked them, on the basis of that information alone, to specify the likelihood that four specified military outcomes would have resulted.66 Each of four groups was told that a different outcome of the four specified outcomes actually occurred, while the fifth group (the control group) was given no information on the actual outcome.67 Subjects in each of the groups to whom the investigators gave an outcome reported an ex ante prediction of that outcome that was considerably higher than the prediction for that outcome made by the subjects in the control group.68 In other words, information about what actually occurred apparently influences our judgments concerning what we thought would occur before we knew the outcome. Events that have actually occurred seem, through the lens of hindsight, to have been almost inevitable.
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Kamin and Rachlinski demonstrated the effect that the hindsight bias can have on the assignment of tort liability.69 Using a fact pattern based on the famous case, Petition of Kinsman Transit Company,70 the experimenters asked a group 65
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For a review of well over 100 studies of the hindsight bias, see J. Christensen-Szalanski/C. Willham, The Hindsight Bias: A Meta-Analysis, [1991] 48 Journal of Organizational Behavior & Human Decision Processes, 147. B. Fischhoff, Hindsight is Not Equal to Foresight: The Effect of Outcome Knowledge on Judgment Under Uncertainty, [1975] 1 Journal of Experimental Psychology: Human Perception & Performance, 288, 289–90. Ibid. at 289. Ibid. at 290. The experiment is discussed in J.J. Rachlinski, A Positive Psychological Theory of Judging in Hindsight, [1998] 65 U. Chi. L. Rev., 571, 576. K.A. Kamin/J.J. Rachlinski, Ex Post ≠ Ex Ante: Determining Liability in Hindsight, [1995] 19 Law & Hum. Behav., 89; see also S.J. Labine/G. Labine, Determinations of Negligence and the Hindsight Bias, [1996] 20 Law & Hum. Behav., 501 (finding that a large minority of subjects playing the role of jurors would find a psychiatrist negligent for failing to prevent a patient’s violence even when the psychiatrist followed a widely approved standard of behavior and the violent act was unpredictable). Petition of Kinsman Transit Co., 338 F.2d 708 (2d Cir. 1964); cert. denied, 85 S.Ct. 1026 (1965).
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of subjects to play the role of jurors and to determine whether a company operating a bridge had been negligent in its failure to take precautions that would have prevented flood damage to third parties. They instructed subjects to use the famous “Learned Hand formula”71 to determine whether or not an act was negligent – i.e., to assess liability only if the costs of precaution to the bridge company would have been less than the expected costs of flood damage to third parties (given the uncertainty of a flood occurring) of not taking the precaution.72 While 57 percent of the juror subjects would have found the bridge company negligent under this standard, only 24 percent of subjects in a control condition, who had the same information except that they did not know that the flood had in fact occurred, believed that the cost of precaution would have been justified by the risks of not taking the precautions.73 Law and economics suggests that precaution is efficient when its benefits outweigh its costs and that tort law should impose liability for negligence when an actor fails to take efficient precaution but not when he fails to take inefficient precaution.74 But if jurors are subject to the hindsight bias, defendants will be found negligent in situations in which they acted in a socially efficient manner (failed to take inefficient precautions) but were struck by bad luck. This, in turn, could provide actors with a private incentive to take an inefficiently high amount of precaution. As is true with many of the deviations from the predictions of rational choice theory, the legal implications of the behavioral phenomenon are not clear cut. If jury instructions could obviate the hindsight bias, such a strategy would clearly be appropriate in a variety of situations in which efficient deterrence requires jurors to impose liability based on ex ante judgments about the likelihood of certain events occurring. Unfortunately, psychologists have yet to find a method of eliminating the hindsight bias, and even reducing its effect has proven quite difficult.75
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Some analysts have suggested that the bias might be countered by raising the standard of proof necessary to find a defendant negligent – e.g., from the existing “preponderance of the evidence” standard to one of “clear and convincing evidence.”76 Jeff Rachlinski has argued that this is one way to understand the business judgment rule in corporate law77: corporate officers and directors are held liable for, in effect, “negligently” operating their companies only when
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The formula was made famous in Judge Hand’s opinion in U.S. v. Carroll Towing, 159 F.2d 169 (2d Cir. 1947). K.A. Kamin/J.J. Rachlinski, [1995] 19 Law & Hum. Behav., at 96. Ibid. at 98. See R.D. Cooter/T.S. Ulen (supra fn. 34), at 281–283. See J.J. Rachlinski, [1998] 65 U. Chi. L. Rev., at 603 (concluding that any procedure that might mitigate against the hindsight bias is “so intrusive [that it] may not be suitable for the courtroom”). Ibid. at 606; and Ch. Jolls, [1998] 51 Vand. L. Rev., at 1532. Cf. J.J. Rachlinski, [1998] 65 U. Chi. L. Rev., at 574 (suggesting the business judgment rule can be viewed as a rule of “no liability,” which might have fewer consequences than the alternative of negligence judged in hindsight).
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there is evidence of “gross negligence.”78 The problem with this approach, of course, is its lack of precision. If the hindsight bias is strong, raising the standard of proof might not eliminate overdeterrence. On the other hand, raising the standard of proof could swamp the bias, leading to underdeterrence. This might happen if the hindsight bias effect, in the event of litigation, is not terribly strong so that liability is difficult to establish under the “clear and convincing evidence” standard and, as a result, potential injurers take less precaution than they ought to because the likelihood of being held liable has fallen significantly.
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Jolls, Sunstein, and Thaler have suggested that the bias might be avoided by shielding juries from evidence concerning what action the defendant actually took until after jurors have determined what decision would have been reasonable ex ante.79 To illustrate how this might work, they give the example of a food processing company that might have subjected its customers to contaminated food if it chose not to use a certain preservative and might subject them to carcinogenic chemicals if it chose to use the preservative.80 Jurors would then be asked to assess the costs and benefits of using and not using the preservative, not knowing what choice the defendant made or the consequences of that choice.
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This is a creative solution, but it can only work in the limited number of cases in which it is plausible that both acting and not acting could subject the defendant to a lawsuit. In most litigation situations, it is clear from the fact that a lawsuit has been filed and a jury impaneled that a particular type of accident occurred (or allegedly occurred). Therefore, as creative as the Jolls-SunsteinThaler proposal is, it does not seem practicable as a general solution to the problem the hindsight bias creates.
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Instead, we believe that the presence of the hindsight bias argues for two other reforms of accident regulation, one within the realm of private tort law, the other within public law. The first is the wider use of strict liability and, consequently, a more restricted scope for negligence liability. The standard, rational choice-based law-and-economics analysis of the choice between those two liability standards focuses on two aspects of accidents: the technology of precaution and the relationship between the underlying risk-creating activity and the scope of harm. When the technology of precaution is bilateral (in the sense that both the potential victim and the potential injurer can take precautionary action that will reduce the probability or severity of an accident), then law and 78
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See, e.g., Aronson v. Lewis, 473 A2d 805 (Del. 1984) (stating the “gross negligence” standard). Of course, there are other ways of justifying that rule. For instance, a standard argument is that shareholders would want managers to have wide discretion to run the company without having to face repeated challenges to their decisions on a close standard like “preponderance of the evidence.” Ch. Jolls, [1998] 51 Vand. L. Rev., at 1527–29. Ibid. at 1527–28.
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economics argues for the negligence standard.81 When, in contrast, the technology of precaution is unilateral (in the sense that only the potential injurer can realistically take action to reduce the probability or severity of an accident), then strict liability is more efficient than negligence.82 Finally, where, in addition to the precaution externality, there is a quantity externality or “activity level effect” (an independent effect that the level of the underlying risk-creating activity has on the likelihood of an accident – e.g., if the more miles one drives, the more likely an accident becomes), strict liability is superior to negligence.83 The pervasive evidence of the hindsight bias provides an additional pragmatic argument for selecting a strict liability standard. The hindsight bias casts doubt on the ability of juries to reach proper negligence determinations because juries are likely to believe precautions that could have been taken would have been more cost-effective than they actually appeared to be ex ante. But the bias presents no similar impediments to the ability of juries to reach proper liability determinations under a strict liability regime, where the jury need only determine that the alleged accident occurred and was caused by the defendant in order for liability to attach.
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The second reform designed to overcome the problems of hindsight bias in adjudication is to downplay ex post adjudication as a method of minimizing the social costs of accidents in favor of broader ex ante administrative agency regulation of safety. Administrative regulation has, of course, a host of problems of its own: inflexibility, political pressures from well-organized interest groups, bureaucratic bumbling, and the like.84 But, holding all other things constant, evidence of the hindsight bias strengthens the argument for protecting public safety prospectively through administrative regulation as opposed to retrospectively through private tort actions.
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The argument is a good example of the thrust of rational choice theory in the economic analysis of law. A rational potential injurer will reason that, if complying with the due care standard is cheaper than expected liability costs, he should comply with the legal duty and thereby escape liability. A rational potential victim will reason that if she is injured in an accident, she will surely be injured by a rational injurer, who will, no doubt, have reasoned that he should comply with the legal duty of care and will, therefore, not be liable for the victim’s losses. That means that the potential victim must bear her own losses in the event of an accident. Faced with this “residual liability,” the rational potential victim will take as much care as necessary to minimize her expected costs arising from an accident. The argument also works when decisionmakers are not certain ex ante an accident whether they will be an injurer or a victim. The real insight of this way of thinking about the negligence standard is its recognition that the standard induces both parties, not just the potential injurer, to take care. See R.D. Cooter/T.S. Ulen (supra fn. 34), at 275–279 for a basic explanation and 303–309 for extensions of the basic theory. There is no point in imposing residual liability on the potential victim if there is nothing that she can do to reduce the probability or severity of an accident. See R.D. Cooter/T.S. Ulen (supra fn. 34), at 272–275. S. Shavell, Strict Liability versus Negligence, [1980] 9 J. Legal Stud. 1. For a useful overview of these and related problems, see S. Breyer, Regulation and Its Reform (1982), and D.A. Farber/Ph. Frickey, Law and Public Choice: A Critical Introduction (1991).
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The predictions of rational choice theory often lead to the conclusion that, in the absence of externalities and high transaction costs, bargaining will achieve efficiency and bureaucratic intervention into private ordering is undesirable.85 Consequently, behavioral deviations from the predictions of rational choice theory often provide a basis for plausible arguments in favor of government activism. The hindsight bias, however, carries the seeds of an argument for more restrained government, at least in some circumstances. Just as jurors can be subject to this bias when making negligence determinations (so that they skew their assessment of ex ante probabilities), so, too, can administrative decisionmakers fall prey to the same bias. Thus, government officials should be cautious when enacting new regulatory regimes after an undesirable incident has occurred.86
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For example, regulations sufficient to guarantee with near certainty that there will never be an airline fatality are almost certainly too costly to be efficient. The strengthening of air safety regulations following a fatal disaster is justified if the circumstances surrounding the accident provided new information to the agency that caused them to readjust their cost-benefit analysis of stiffer regulation. But new regulations would not be justified if the statistical possibility of such a crash was recognized ex ante and accepted as justified under a cost-benefit analysis. In other words, agencies need to be careful that the hindsight bias does not cause them to conflate the occurrence of an unfortunate event with the determination that previous cost-benefit analyses were flawed. C. Empirical Studies of the North American Tort Liability System
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Traditionally, legal scholars have not done empirical work on legal topics.87 But that appears to be changing. There is a discernible trend toward more empirical research in law,88 and there is even a new journal – the Journal of Empirical Legal Studies with a distinguished group of editors – devoted to the topic.
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Before we turn to the evidence on the effectiveness of the tort system, let me draw attention to a central problem that has made empirical research on this topic difficult. In so far as they focus on data, doctrinal legal scholars tend to focus on appellate court decisions as their evidence of what the law is and what its effects might be. But these data are useful principally to tell us what 85
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R.D. Cooter/T.S. Ulen (supra fn. 34), at 82 (“When transaction costs are zero, an efficient use of resources results from private bargaining regardless of the legal assignment of … rights.”). This, of course, assumes that regulators’ sole concern is to balance the costs of prevention against the costs of accidents. It is an interesting question whether regulators’ cost-benefit analysis should “count” the utility that citizens might derive from knowing that their government has taken decisive (if perhaps wrong-headed) action after a tragic incident. There have, of course, been notable exceptions to this sweeping claim. For an account of some of them, see generally T.S. Ulen, [2003] U. Ill. L. Rev., 1037 and T.S. Ulen, [2004] 79 Chi.Kent L. Rev., 403. For the empirical evidence of an increase in empirical research in law, see R.C. Ellickson, Trends in Legal Scholarship: A Statistical Study, [2000] 29 J. Legal Stud., 517.
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the courts are doing, not what those subject to the law are doing. To know how effective the law is at achieving its goals we need also to look beyond appellate opinions to see how people are responding to the law. Are manufacturers designing and building safer products or issuing more effective warnings so as to avoid products liability actions? Are automobile manufacturers building better cars because of their exposure to administrative agency regulation and their eagerness to avoid “crashworthiness” lawsuits? Do automobile drivers drive more carefully so as to avoid liability? The upshot of these questions is that to measure the effectiveness of the tort liability system we need to know, among other things, what and how many accidents did not occur because of the imprecations of tort law and safety regulation. Clearly those are very difficult matters to measure.
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And yet some have managed to do so, and their work has allowed us to draw some tentative conclusions about the effectiveness of the tort liability system at minimizing the social costs of accidents. Let me mention just two of those studies.
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In the mid-1990s the late Professor Gary T. Schwartz surveyed empirical studies of the effectiveness of tort law and concluded that “tort law provides something significant by way of deterrence.”89 For example, with respect to workplace injuries Schwartz reports on a study that compared injuries on the job before and after the institution of workers’ compensation systems in the 1910s and reports that “workers’ compensation … reduces the workplace fatality rate by about 33 percent.”90 But Schwartz’ conclusions were tempered, not extreme. His overall conclusion was that tort law provided moderate, not complete deterrence.
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A second study – Don Dewees, David Duff, and Michael Trebilcock, Exploring the Domain of Accident Law (1996) – was a comprehensive study of automobile, medical, product, environmental, and workplace injuries with a view to establishing the effectiveness of tort liability and administrative agency safety regulation at reducing injury in those areas. The authors reach the conclusion that the tort liability system is not achieving its goals at a reasonable cost and should be supplemented by administered compensation systems:
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“[T]he empirical evidence has convinced us that a single instrument, the tort system, cannot successfully achieve all [] of the major goals claimed for it, and attempting to use it in pursuit of objectives for which it is not well suited is both costly and damaging to its ability to perform well with respect to other goals that it is better able to realize. … Since the middle of [the 20th] century, no-fault compensation systems have been adopted in various jurisdictions to
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Reality in the Economic Analysis of Tort Law: Does Tort Law Really Deter?, [1994] 42 UCLA Law Review, 377, 443. Ibid. at 393.
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compensate victims of automobile accidents, complementing regulatory systems for reducing risks to motorists. We endorse these moves and propose extensions of them with three caveats: compensation schemes must be separately funded in each of the accident areas; premiums for compensation schemes must be risk-rated to preserve deterrence incentives; and tort should not be entirely displaced, but should have a residual role in cases of egregious behavior causing serious harm. However, we do not see these compensation schemes operating in the areas of product or environmental injuries.”91
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There is room for much more empirical work on tort law and the liability insurance market. IV. Issues Facing the Modern Tort Liability System in the U.S.
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I have already mentioned the fact that there is widespread popular dissatisfaction with the U.S. tort liability system. Many people believe that the system is so fundamentally flawed that it needs root-and-branch surgery, including, possibly, replacing the entire system with a no-fault insurance scheme.
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It is altogether possible that some of this dissatisfaction is strategic (as, for example, when physicians complain about medical malpractice) or politically motivated (as when Republican candidates for federal office complain about the undue influence of the American Trial Lawyers Association). Still, it is certain that some percentage – perhaps a large one – of the unhappiness with the tort liability system is genuine.
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There are multiple sources of unhappiness with the tort liability system, but I shall concentrate on only one of those sources – the award of damages. First, I shall briefly discuss caps on damages, and second, the recent decision by the U.S. Supreme Court imposing constitutional limits on punitive damages.
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But before I get to that topic, let me say a few words about other sources of unhappiness. One source of dissatisfaction is the feeling that there are far too many people suing others for what are clearly ludicrous claims. I have already mentioned the most famous of these (the McDonald’s coffee spill), but there are others. It is alleged to be true that a drunken driver who rolled his convertible automobile successfully sued Volkswagen for damages for failure to produce a car that was not stable, even when driven recklessly by a drunk driver; that perfume manufacturers have been held liable for injuries suffered by children who poured their mothers’ perfume on an open flame; that lawnmower manufactures have been held liable for injuries that a homeowner received when he picked up his lawnmower, while it was running, and tried to trim his hedges; and more. Whether these stories are true is not clear. But they are widely cited as being further evidence that the legal system is, as a character in a Charles Dickens novel memorably said, “An ass.” 91
D.N. Dewees/D. Duff/M. Trebilcock, Exploring the Domain of Accident Law: Taking the Facts Seriously (1995), at 412.
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There is also widespread sentiment (assiduously fanned by some politicians) that trial lawyers are responsible for much of this legal madness but that the profession is incapable of policing itself against them. Rather, the trial lawyers are said to donate so much money to both political parties (but particularly to the Democrats) that they adversely influence the common good in order to enrich themselves.
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I believe none of this. Indeed, I am persuaded, on the basis of the empirical evidence that I have seen, that the tort liability system works tolerably well. I have already cited some of that evidence at the end of the previous section of this essay. But there is more. Contrary to what one hears, the legal system is not foolish; it awards punitive damages only rarely and then, generally, only in egregious cases.92 Nor are Americans overly litigious. In point of fact, they very rarely sue when they are injured. Paul Weiler and his co-investigators looked at all the incidents of iatrogenic injury in New York State hospitals in one year in the mid-1980s and discovered that far less than 10 percent of all actionable injuries resulted in a complaint being brought to the attention of the hospital administration, an insurer, or a lawyer. The percentage of actionable injuries that resulted in litigation was trivially small. Indeed, it was so small that Weiler et al. thought that the most significant problem facing the medical malpractice system was that not enough lawsuits were being filed.93
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Finally, there are two facts about litigation that are worth noting. First, most legal scholars are familiar with the U.S. empirical fact that 95 percent of all disputes are either dropped or settled well short of a trial. That is, 5 percent or less of all legal disputes result in litigation. Second, there is the much-remarked phenomenon of the “vanishing trial.”94
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A. Damages Caps Illinois’ Civil Justice Reform Act of 1995 put a cap on non-economic damages of $500,000 and limited punitive damages to three times compensatory damages.95 In the mid-1980s Indiana capped medical malpractice awards to a maximum of $500,000 and instituted a professionally administered patientcompensation fund to decide the worthiness of all losses over $100,000. In the 92
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Post-trial interviews with the jurors in the McDonald’s coffee spill case revealed that they were offended by the haughtiness of the McDonald’s attorneys and by the apparent callousness of the McDonald’s Corporation to the possibility of harm. The jurors reported that they calculated their punitive damages by taking the total number of cups of coffee sold in the U.S. each year by McDonald’s and multiplying that figure by a fraction of a dollar. Frankly, if you believe that punitive damages are warranted, I can’t think of a better way of measuring them. See P. Weiler (supra fn. 25), no. 25. See M. Galanter, The Vanishing Trial: An Examination of Trials and Related Matters in Federal and State Courts (2004), and G. Hadfield, Where Have All the Trials Gone? Settlements, Non-Trial Adjudications, and Statistical Artifacts in the Changing Disposition of Federal Civil Cases (University of Southern California Law and Economics Working Paper No. 04-17, 2004). The Illinois Supreme Court found the Act to be unconstitutional in 1997.
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November, 2004, US elections, six states voted on various tort reform proposals, the common theme among them being the limitation of the total amount recoverable or the limitation of some category of damages, such as pain-andsuffering or punitive damages. None of those referenda passed. Common though this urge for reform seems to be, there is a great deal of scepticism among scholars about whether the case for reform exists. B. Punitive Damages
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There is almost no topic about the U.S. tort law system about which there is more misinformation than the awards of punitive damages. Much of this stems from the fact that large punitive damages awards make news (as in the McDonald’s coffee spill incident described earlier), and many people draw inappropriate inferences from these relatively rare instances.96 Thus, if someone who knows nothing about the law reads an account of a punitive damages award in the amount of over $2 million for burns suffered from a coffee spill, they might then jump to the conclusion that the surest way to fortune is to quit their day-job and sue someone for punitive damages for the most trivial of injuries. At a minimum, the inference that punitive damages are rife puts the tort liability system in a very bad light and spurs calls for reform.
98
I have already noted that punitive damages are relatively rare. There is some empirical evidence to demonstrate this. In all product-liability cases between 1965 and 1990 there were only 353 punitive awards, and those averaged $625,000. Appellate panels reduced many of these punitive awards so that, after appeal, the average fell to $135,000. More than 25 percent of those 353 awards involved asbestos. Over the entire period there was an average of 11 punitive-damages awards per year in product-liability cases. At the trial level the ratio of punitive to compensatory damages was 1.2 to 1; in more than one-third of the cases in which punitives were awarded, compensatory damages were larger than the punitives. More than half the states prohibit or cap punitive damages or raise the evidence standard that must be met before they can be awarded.97
99
In a more recent paper Professor Kip Viscusi of Harvard Law School reports on a study of over 60 recent “blockbuster” (over $100 million) punitive damages awards.98 Among many other things, Viscusi demonstrates that almost half of these very large punitive damages come from just two states (California and Texas), that the size of these very large awards has been increasing over time, that the majority of these awards is appealed but that they are almost never reversed on appeal, and that over 90 percent of those awards would 96
97
98
In cognitive psychology this is a common judgment error known as the “representativeness heuristic” in which people draw inappropriate inferences from what they take to be representative data. See M. Rustad, Demystifying Punitive Damages in Product Liability Cases: A Survey of a Quarter Century of Verdicts (1991). W. Kip Viscusi, The Blockbuster Punitive Damages Awards, (Harvard Law and Economics Discussion Paper No. 47, April, 2004), available at www.ssrn.com. The first such awarded occurred in 1985, and the study found 64 such awards through the end of 2003.
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be lowered under the standard articulated by the U.S. Supreme Court in State Farm v. Campbell, which I shall discuss in the next paragraphs. These worries about untethered punitive damages finally resulted, in the Spring of 2003, in a decision by the U.S. Supreme Court that provided some guidance on the computation of punitives. The case at issue, State Farm Mutual Automobile Insurance Co v. Campbell, 538 U.S. 408 (2003), arose in the State of Utah. In 1981 Curtis Campbell, who had liability insurance through State Farm, caused an accident in which one person was killed and another permanently disabled. State Farm contested their client’s liability, refused to settle the claims for the policy-limit amount of $50,000 ($25,000 for each of the victims), and went to trial. In doing so, State Farm assured the Campbells that “their assets were safe, that they had no liability for the accident, that [State Farm] would represent their interests, and that they did not need to procure separate counsel.” A Utah jury determined that Curtis Campbell was 100 percent at fault and returned a judgment for $185,849, far more than the amount offered in settlement.
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At first State Farm refused to cover the excess $135,849 over the limit of the Campbells’ policy. They advised their clients to put their home up for sale and they refused to underwrite a supersedeas bond so that the Campbells could pursue an appeal.
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Campbell then secured his own counsel to file an appeal and then reached an agreement with the estate of the decedent and the permanently disabled victim to the effect that they would not seek satisfaction for their claims against the Campbells. In exchange for this, the Campbells agreed to pursue a bad-faith action against State Farm and to be represented in that action by the attorneys for the accident victims. Additionally, the victims would have a right to play a full part in the bad faith action and would receive 90 percent of any judgment rendered against State Farm on the bad faith claim.
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In 1989 the Utah Supreme Court denied Campbell’s appeal on the wrongful death and tort claims. State Farm then paid the entire $185,840 judgment to the victims of the original accident. The Campbells nonetheless filed their bad faith, fraud, and intentional infliction of emotional distress claims against State Farm. Initially the trial court granted State Farm’s motion for summary judgment on the ground that the matter was moot, the insurer having paid the entire amount assessed against their client. On appeal, however, that summary judgment was reversed, and the bad faith claim went to trial. The jury awarded the Campbells $2.6 million in compensatory damages and $145 million in punitive damages. The trial court then reduced those amounts to $1 million and $25 million respectively. Both sides appealed. The Utah Supreme Court reinstated the $145 million punitive damages award.
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The United States Supreme Court found the Utah Supreme Court’s reinstatement of the $145 million punitive damages award to have been in error and
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held it to be violative of the Due Process Clause of the Fourteenth Amendment. Most importantly, the Court said, “Single digit multipliers are more likely to comport with due process, while still achieving the State’s goals of deterrence and retribution, than awards with rations in range of 500 to 1.”99 That is, the Court may smile favorably on punitive damages that are 9 times the amount of compensatory damages but may strike down punitives that are 10 times the amount of compensatory damages.
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And that is where the matter now rests. V.
Conclusion
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This very cursory sketch of the U.S. tort liability and liability insurance systems has reached some tentative conclusions that are worth summarizing. First, the basic principles for assigning liability have not changed significantly in the past 50 years. What has changed is the intellectual foundations of those principles. Whereas 50 years ago all would have agreed that the goal of the tort system was to achieve corrective justice, today the system is said to have multiple, sometimes-conflicting goals. Under the influence of an intellectual revolution known as “law and economics,” scholars of the tort system have drawn attention to the deterrence aspect of the exposure to tort liability and to the efficiency with which compensation is paid to victims. Law and economics has, among other things, clarified some long-standing gaps in the basic principles of tort – for example, in providing a clear account of the efficiency differences between negligence and strict liability and of the circumstances in which those different liability standards ought to be applied. It has also helped to clarify the appropriate relationship between tort liability and administrative agency safety regulations and between tort liability and liability insurance.
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Second, there has been an increasing dissatisfaction with the tort liability system in the U.S. and calls for its reform, including scrapping the system in favor of administered compensation systems like those for workplace injuries. Although there are multiple reasons that people seem to be unhappy with the tort system (and some of those reasons may be pretextual), the central complaint seems to be that the tort system allows recovery for injuries for which the victim ought not to be able to recover and that victims too frequently receive very large compensatory and punitive damages awards. I have noted reasons for believing that these criticisms are misplaced and that such reforms as the damages caps and the limitation of punitive damages to a single-digit multiple of compensatory damages are not necessary. There is credible evidence that the tort liability and the liability insurance systems in the United States are working tolerably well and need no significant reform.
99
Ibid. at 425.
THE VIEW FROM LAW AND ECONOMICS Michael Faure I.
Introduction
In this contribution to the project I will try to address the issues mentioned in the questionnaire from a law and economics perspective. This seems very useful since the economic analysis of law has on the one hand paid much attention to the functions of tort liability and it on the other hand also examines the influence of insurance issues on tort liability, at least from a theoretical perspective. Hence, as far as possible, the issues mentioned in the questionnaire will be addressed indicating what the law and economics literature has to say with respect to each of them.
1
However, some of the issues in the questionnaire deal specifically with case law or opinions of the judiciary. These can of course not be answered in this contribution, which has a different nature. Whenever possible I will, however, indicate what the law and economics literature has mentioned concerning each of those issues.
2
This is of course not the first contribution on the economic analysis of tort law or insurance for the European Group on Tort Law. I would therefore like to refer to some of these earlier publications where the general approach of economics to tort law and insurance is explained.1 These general issues will therefore not be further debated here. The starting point and basic assumptions of the economic analysis of tort law and insurance can therefore be presumed to be known: tort law is considered as a mechanism to deter accidents worth being deterred on efficiency grounds. The idea of holding the tortfeasor liable after the accident has happened is supposed to give him an ex ante incentive towards prevention. Insurance on the other hand is considered as a mechanism
3
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See e.g. for the economic analysis of fault, M. Faure, Fault. Economic Analysis, in: P. Widmer (ed.), Unification of Tort Law: Fault (2004); for strict liability, M. Faure, Strict liability. Economic analysis, in: B.A. Koch/H. Koziol (eds.), Strict Liability (2002), 361–394; for contributory negligence M. Faure, Economic analysis of contributory negligence, in: U. Magnus/M. Martin-Casals (eds.), Unification of tort law: contributory negligence (2004), 233–256 and for environmental liability M. Faure/D. Grimeaud, Financial assurance issues of environmental liability, in: M. Faure (ed.), Deterrence, insurability, and compensation in environmental liability. Future developments in the European Union (2003), 7–255.
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to provide risk averse persons who are exposed to risk (this can be either the victim or the injurer) with compensation and thus with a protection against their risk aversion. However, since all insurance systems are vulnerable to the well-known risk of moral hazard, economics warns that adequate remedies should be built into the insurance contract to align the interest of the insured party (injurer or victim) with the interests of the insurer. If this optimal control of moral hazard can be achieved in theory, liability insurance can lead to a prevention of accidents in the same way as tort law can.
4
These very basic underlying principles of the economic analysis of tort law and insurance will now be used to address the issues mentioned in the questionnaire. II. Compulsory and Voluntary Insurance A. Compulsory Liability Insurance
5
The law and economics literature has paid a lot of attention to the question why the purchase of insurance, more particularly liability insurance, should under some circumstances be made compulsory.2 There are basically two main arguments that are formulated in favour of compulsory liability insurance, but there are also a few major arguments and warnings against compulsory (liability) insurance. 1. Economic Criteria for Compulsory Liability Insurance a) Information Problems
6
Information problems might arise in case the potential injurer cannot make an accurate assessment of the risk he is exposed to and the benefits of the purchase of insurance. An underestimation of the risk would in that case lead to the wrongful decision of the injurer not to purchase liability insurance. The legislator could remedy this information problem by introducing a general duty to insure. This information problem is probably a valid argument to introduce a generalised duty to insure for motor vehicle owners. The average driver of a car may underestimate the benefits of insurance. If there were no information problem and the legislator nevertheless introduced a duty to insure because this would be “in the best interest” of the insured, this would of course be mere paternalism.
7
If empirical evidence existed that most injurers greatly underestimate the costs of damage caused by specific risks they may cause, and the probability that they will be held liable for this damage, this would then lead injurers to reserve too few resources to cover their potential liability. If these conditions are met and one can indeed assume that injurers underestimate the cost of acci2
These arguments have also been discussed in M. Faure/D. Grimeaud (supra fn. 1), 180–193 with respect to environmental liability insurance.
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dents, this information deficiency may be considered an argument in favour of compulsory insurance. But again, the policy argument based on information asymmetry relates merely to the fact that the injurer would underestimate the potential benefits of insurance. There may, however, be another argument why the (uninformed) decision of an injurer not to insure may lead to under-deterrence. This policy argument is precisely related to the insolvency risk. b) Externalisation through Insolvency Another reason to introduce compulsory insurance is indeed an argument often used by lawyers, being the insolvency argument. The argument goes that the magnitude of the harm will often exceed the individual wealth of an injurer, whereby a problem of under-compensation of victims will arise. Lawyers would, hence, push forward compulsory insurance as an argument to guarantee an effective compensation to the victim. This – more distributional – argument obviously may play a role in the context of insurance of particular risks as well. Take the example of environmental pollution: if an injurer were found judgement proof and hence e.g. a polluted site would be “orphaned”, the costs would be borne by society.
8
It is, however, also possible to make an economic argument that insolvency will lead to under-deterrence problems which might be remedied through insurance. Indeed, this so-called “judgement proof” problem has been extensively dealt with in the economic literature3. If the expected damage largely exceeds the injurer’s assets, the injurer will only have incentives to purchase insurance up to the amount of his own assets. He is indeed only exposed to the risk of losing his own assets in a liability suit. The judgement proof problem may therefore lead to underinsurance and thus to under-deterrence. Jost has rightly pointed at the fact that, in these circumstances of insolvency, compulsory insurance might provide a better outcome4. By introducing a duty to purchase insurance coverage for the amount of the expected loss, better results will be obtained than with insolvency whereby the magnitude of the loss exceeds the injurer’s assets5. In the latter case the injurer will indeed only consider the risk as one where he could at most lose his own assets and will set his standard of care accordingly. When the insurer is, under a duty to insure, exposed to full liability, he will have incentives to control the behaviour of the insured. Via the traditional instruments for the control of moral hazard6, the
9
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4
5
6
More particularly by S. Shavell, The judgement proof problem, [1986] International Review of Law and Economics (IRLE), 43–58. P.J. Jost, Limited liability and the requirement to purchase insurance, [1999] IRLE, 259–276. A similar argument has recently been formulated by M. Polborn, Mandatory Insurance and the Judgement-Proof Problem, [1998] IRLE, 141–146 and by G. Skogh, Mandatory Insurance: Transaction Costs Analysis of Insurance, in: B. Bouckaert/G. de Geest (eds.), Encyclopedia of Law and Economics (2000), 521–537. Skogh has also pointed out that compulsory insurance may save on transaction costs. See also H. Kunreuther/P. Freeman, Insurability, environmental risks and the law, in: A. Heyes (ed.), The Law and Economics of the Environment (2001), 316. These are discussed infra no. 12.
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insurer can make sure that the injurer will take the necessary care to avoid an accident with the real magnitude of the loss. Thus Jost and Skogh argue that compulsory insurance can, provided that the moral hazard problem can be cured adequately, provide better results than under the judgement proof problem. This is probably another explanation why for instance for traffic liability compulsory insurance was introduced. Uninsured and insolvent drivers who have little money at stake which they may lose compared to the possible magnitude of accidents they may cause, may have little incentives to avoid an accident. Insurers might better be able to control this risk and could force the injurer to take care under the threat of shutting him out of the insurance. Thus the insurer comes under a duty to insure the licensor of the activity.
10
Indeed, this economic argument shows that insolvency may cause injurers to externalise harm: they may be engaged in activities, which may cause harm, which can largely exceed their assets. Without financial provisions these costs would be thrown on society and would hence be externalised instead of internalised. Such an internalisation can be reached if the insurer is able to control the behaviour of the insured. Through risk differentiation, the insurer could set appropriate policy conditions and ask an adequate premium. This shows that if the moral hazard problem can be cured adequately, insurance even leads to a higher deterrence than a situation without liability insurance and insolvency.
11
Of course, this argument in favour of compulsory insurance relies on a few assumptions and conditions, which will be discussed in further detail below. One is obviously that the argument is only valid if moral hazard can be controlled adequately and insurers also have appropriate incentives to do so. Another condition is that the insurance markets should be competitive. But one can notice that indeed both from a legal and from an economic point of view the potential insolvency of the injurer is a problem since it can lead to both under-deterrence and to under-compensation. Compulsory insurance may remedy both problems since it may provide adequate victim compensation and – if certain conditions are met – remedy the risk of under-deterrence. 2. A Few Warnings a) Moral Hazard
12
Firstly, one should remember that with insurance there will always be the moral hazard problem. This means that even if a legislator decides to introduce compulsory insurance, he should not limit the possibilities of an insurer to control the moral hazard problem. Otherwise compulsory insurance will create more problems than it solves. Nevertheless, there seem to be problems in that respect since the legislator often limits the possibilities to expose the insured to risk. Indeed, with compulsory insurance the duty to insure is often equal to the total amount of liability and deductibles are not allowed. Hence, the total risk is shifted to the insurer which means that the only instrument available for the insurer to cure the moral hazard problem is a monitoring of
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the insured. If this seemed difficult or very costly, the introduction of compulsory liability insurance might indeed create problems. Shavell even goes as far as to state that if the moral hazard problem cannot be controlled, the only regulatory intervention with respect to insurance should be a prohibition of liability insurance7. In any case an introduction of compulsory insurance does seem problematic if the moral hazard problem cannot be controlled adequately. b) Concentration on Insurance Markets A second, related, issue is that until now we assumed that insurance markets are perfectly competitive and that thus premiums and policy conditions will be nicely tailored to the individual needs and the behaviour of the insured in order to control moral hazard optimally. In practice, however, many restrictions on insurance markets exist. We will give examples below. If monopolistic premiums can be set, an insurer will have fewer incentives to align his premiums to the individual behaviour of the insured and thus there is less control of the moral hazard problem.
13
From a policy viewpoint it also seems highly problematic to make liability insurance compulsory on concentrated insurance markets. Indeed, in that case the inefficiencies in the insurance market would be reinforced by making the purchase of insurance compulsory. The interest group theory of government can of course explain why insurers might want to lobby in favour of compulsory liability insurance. If they already can determine the supply-side of the market through monopolistic premium setting, all such insurers should strive for is that every possible injurer should be forced to purchase insurance coverage. Through this regulatory intervention a certain demand is then guaranteed as well.
14
Nevertheless in practice insurers are never enthusiastic concerning compulsory liability insurance. Cousy claims that this is related to the fact that as a matter of law under compulsory insurance the insurer can often not invoke defences against the third party beneficiary of insurance. Moreover there would be problems related to the implementation and actual carrying out of the obligation to insure8.
15
c) Dependence upon the Insurance Market There are some more reasons to formulate such a cautious warning. One is that the legislator should be aware of the fact that as soon as it introduces compulsory insurance, it becomes dependant upon insurers to fulfil this duty to insure. The practical possibilities of an effective enforcement of a duty to insure will obviously to a large extent depend upon the willingness to insure in that 7 8
S. Shavell, [1986] IRLE, 43–58. H. Cousy, Recent developments in environmental insurance, in: F. Abraham/K. Deketelaere/J. Stuyck (eds.), Recent economic and legal developments in European environmental policy (1995), 241 and J. Rogge, Les assurances en matière d’environnement (1997), 39.
16
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particular market. It will ultimately be the insurers who will decide whether they are willing to cover a certain risk. This may ultimately lead to the undesirable situation that the legislator would introduce a duty to take out compulsory insurance, but that the market would refuse to provide such coverage. Introducing a duty to insure leads to a high reliance of the policy maker upon the insurance market. This seems to have lead to problems with the German Environmental Liability Act of 1990 (Umwelthaftungsgesetz) which requires the owner of an installation that can cause significant damage to take out liability insurance or to have sufficient financial guarantees9.
17
One should indeed realise that if one makes the availability of insurance coverage a prerequisite for the operation of an enterprise, insurance undertakings in fact become the licensor of the industry, which may be questionable from a policy point of view10. In fact, for instance in the environmental case, the insurer becomes the “environmental policeman”11. If that means, however, that the insurer, as a “policeman” controls the ecological performance of the insured company, there is of course nothing wrong with that. It may only be problematic if insurance companies will effectively be able to decide which companies may exercise their activities. This problem obviously especially arises in a monopolistic market.
18
This may, moreover, cause practical problems. Imagine that an insurer has stipulated in the policy conditions that coverage will be excluded in case of non-compliance of the insured written mandatory government regulation. This may well be an effective instrument to control moral hazard. If, however, an accident happens under compulsory insurance, the insured will not be able to call on this exclusion ground vis-à-vis the third party beneficiary of the liability insurance policy. The fact that defences in the insurance contract are not opposable to third parties is a well-known problem under compulsory insurance. The insurer will thus have to compensate the victim and may have a (statutory or contractual) legal right of recourse against the insured, provided that the latter is solvent. This is, as we explained, one of the reasons why insurers are reluctant to introduce compulsory insurances.
19
One could obviously argue that these problems can be remedied if a good cooperation takes place between the policy maker and the insurance world, whereby the insurance world would inform the policy maker on the insurability of systemic risks. However, practice has shown that information provided by insurers concerning the insurability of a certain risk or with respect to the available amounts of coverage may not always be reliable12.
9
10 11
12
See G. Wagner, Umwelthaftung und Versicherung, [1991] Versicherungsrecht (VR), 249–260 and G. Wagner, Die Zukunft der Umwelthaftpflichtversicherung, [1992] VR, 261–272. This point is also made in the Green Paper, 13. See also J. Rogge (supra fn. 8), 40. So A. Monti, Environmental risk: A comparative law and economics approach to liability and insurance, [2001] European Review of Private Law (ERPL), 65. Infra no. 31, we will provide a few examples.
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There seems to be a trade-off in that respect: introducing a duty to insure without any co-operation with the insurance world (which may have been the case in Germany) may lead to the catastrophic result that the government forces industry to take out a certain insurance coverage, whereby the market would not be willing to respond with the provision of such a coverage. However, a close co-operation between the insurers (usually represented via one insurance association) and the government only increases the risk of high concentration in insurance markets.
20
B. Compulsory First Party Insurance 1. Introduction Economists have often stressed the blessings of first party insurance schemes. As well-known, in a first party insurance scheme the victim insures himself directly with an insurer or (in a direct insurance scheme) a third party (like an employer) takes insurance directly to the benefit of the victim. It is often held in the economic literature that these first party insurance schemes have as main advantage that they better enable a risk differentiation than liability insurance. The simple reason is that the victim can signal all his characteristics on whether he is a high or a low risk individual directly to the insurer, who can thus better exercise an adequate risk differentiation.13
21
These economic lessons have been well understood by insurers. Nowadays one can increasingly find a tendency towards a use of first party insurances, for instance in environmental damage insurance14 but a tendency towards an increasing use of first party insurances can, sometimes at the policy level, sometimes only in legal doctrine equally be found in the areas of occupational health,15 traffic accidents and medical malpractice.16
22
However, the question arises whether from an economic perspective these advantages of first party insurance schemes are that high that they merit to be introduced mandatorily. Some indications on economic arguments in favour of such a duty can be found in the literature on social security. Indeed, there is often a small line between on the one hand first party accident insurances or
23
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16
The major arguments in favour of first party insurance can inter alia be found in W. Bishop, The contract-tort boundary and the economics of insurance, [1983] Journal of Legal Studies (JLS) 12, 241–266 and in R.A. Epstein, Products liability as an insurance market, [1985] JLS 14, 645–669; R.A. Epstein, Simple rules for a complex world (1995) and G.L. Priest, The current insurance crisis and modern tort law, [1987] Yale Law Journal (YLJ), 1521–1590. See L. Bergkamp, Liability and the environment (2001) and M. Faure, Environmental damage insurance in theory and practice, in: T. Swanson (ed.), An introduction to the law and economics of environmental policy: issues in institutional design (2002), 283–328. See for the area of occupational health, M. Faure/T. Hartlief, Social security versus tort law as instruments to compensate personal injuries: a Dutch law and economics perspective, in: U. Magnus (ed.), The impact of social security law on tort law (2003), 253–255. See for the area of medical malpractice J. Dute/M.G. Faure/H. Koziol (eds.), Liability for and insurability of biomedical research with human subjects in a comparative perspective (2004).
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health insurances and on the other hand social security systems. Without going into this literature in detail one can indicate that at least two economic arguments are traditionally advanced in favour of compulsory insurance. 2. Information Problems
24
Just as was the case with compulsory liability insurance, also in case of first party insurance or social security could one argue that most potential victims would probably largely benefit from an insurance covering them against risks of, say, hospitalisation. If no insurance were available, the victim would be exposed to enormous costs against which he is likely to be risk averse. Hence, the same information deficiency can be advanced as an argument for making some form of first party insurance (either through private insurance or through social security) mandatory e.g. for major medical risks. The argument then simply is that if victims were fully informed of the benefits of such insurance schemes and if they were fully informed of the risks involved (also the costs of a medical bill), they surely would take out insurance coverage. The information deficiency in this respect is then the motivation for a regulatory intervention.
25
However, in this respect one should again be cautious. It may probably be assumed that persons are highly averse towards e.g. the risks of having to pay a hospital bill, but it is not sure that this is the case as well for smaller risks, such as a visit to the doctor. Thus one can explain why there would be compulsory insurance for the larger risks, but probably not for smaller (health related) risks.
26
A second reason why economists would traditionally still be very cautious with generalised duties to purchase insurance coverage is that preferences among individuals in that respect can largely differ. Some potential victims may have a large demand for all inclusive coverage, but others may have a different attitude towards risk and may not have such a demand. An all inclusive duty e.g. for all citizens to purchase mandatory accident insurance may thus lead to a negative redistribution. Some victims may largely benefit from such an insurance, whereas others may not. A generalised duty then forces the good risk to subsidise bad risks. This form of cross subsidisation can be avoided if a first party insurance like accident insurances are largely offered but not imposed compulsorily. 3. Externality
27
The most important argument probably in case of compulsory first party insurance for e.g. large medical risks is the externality argument. If victims were uninsured (or not covered under social security), they could impose high costs on others, more particularly on society at large if they were hospitalised and unable to pay the bill. Thus uninsured victims could externalise their costs. This is probably the most important reason why ex ante, at least for those larger risks (involving high costs) societies have introduced compulsory first party
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insurances, either through private first party insurances or through social security schemes. 4. Further Warnings The further warnings as they were formulated above concerning compulsory liability insurance apply of course to compulsory first party insurance as well. Also here an adequate control of moral hazard through risk differentiation and sufficient competition in the insurance markets needs to be guaranteed, otherwise adverse results can be generated. The recent debate in the literature, e.g. on the introduction of compulsory insurance for flood risks, can illustrate this point. Victims seem largely to underestimate the risk of being victims of catastrophes such as flooding. Hence, there is a too low demand for disaster insurance. The information deficiency in this respect could thus again be used as an argument e.g. to impose additional disaster coverage on voluntary insurances.17 However, also in this respect, such a mandatory disaster coverage can be considered efficient only if adequate competition exists also with respect to this disaster coverage and if insurers can adequately control moral hazard through risk differentiation.18
28
C. Monitoring One of the questions refers to the issue whether the party who fails to comply with its obligation to insure should be subject to sanctions. The answer from an economic perspective is of course that this should be the case. The traditional economic model of crime and law enforcement indicates that appropriate sanctions should be set taking into account the probability of detection and the potential solvency of the wrongdoer. If compulsory insurance is introduced inter alia because insolvency is feared, then monetary sanctions may be inadequate. However, since non-monetary sanctions may be costly to impose economists would suggest increasing the probability of detection.
29
Indeed, if inadequate monitoring resulted in still many potential injurers exposing others to risks without fulfilling the insurance obligation, the underdeterrence would still follow or they would still be able to externalise their costs upon others. In this respect many differences still seem to exist between even neighbouring European countries. For instance as far as motor vehicle insurance in Belgium is concerned, no driver can obtain a licence plate for his car unless he shows that adequate insurance coverage is available. Moreover, on the occasion of an annual technical control the availability of sufficient coverage has to be shown again. In the Netherlands on the other hand the licence plate belongs to the car and drivers should take out in-
30
17
18
A model which has existed in France since 1982 and is now discussed in several countries as well. For further details see R. Schwarze/G. Wagner, Hochwasser-Katastrophe in Deutschland: Über Soforthilfe hinaus denken, [2002] DIW, Wochenbericht 35-02 (http://www.diw.de). R. Schwarze/G. Wagner, In the aftermath of Dresden. New directions in German flood insurance, [2004] Geneva Papers on Risk and Insurance (GPRI), 154–168.
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surance coverage, but monitoring is weak. One therefore has the impression that in the Netherlands the problem of uninsured driving is far more serious than in Belgium. This example shows that compulsory insurance needs to be accompanied with an ex ante monitoring system that guarantees as much as possible that no one can exercise the risky activity without the availability of insurance. III. The Influence of Liability Insurance on Court Decisions in Tort Cases A. Insurability 1. Legislation
31
In many cases insurability issues seem to influence discussions at the legislative level. During parliamentary debates one often hears discussions concerning the insurability of certain risks, whereby well intending politicians even consult insurers to ask for information concerning the insurability of particular risks. There is some reason to doubt that the limited capacity in the insurance market should, from an economic perspective, influence the legislator’s decision with respect to liability (a). Moreover, one on the other hand notices also that industry will often lobby in favour of a financial cap on liability, arguing that unlimited liability would be uninsurable (b). Finally, we will briefly address a few other features of tort liability that do influence insurability and that hence could play a role at the legislative level (c). a) Limited Capacity and Public Policy Towards Insurance
32
Let us now first address the question what the influence is of the fact that insurance companies will not be able to cover every damage resulting from large risks, simply because their capacity is limited. We will argue below that capacity may obviously be limited, but this should not necessarily lead to all kinds of legislative interventions, e.g. to limit the liability of enterprises. First, we will argue that it is very difficult to provide accurate information on the actually available amounts of capacity; second, one should not only look at traditional insurance markets when judging capacity. If capacity on traditional insurance markets is limited and enterprises remain exposed to liability, this may give them an incentive to develop other financial mechanisms to cover risks.19 Third, limiting the liability of enterprises would not solve but only shift the problem. In that case the financial consequences of risks would not be borne any longer by those who caused them, but the damage would still be there. In other words, as a result of a limitation, the damage costs would then be shifted to the public at large (the general tax payers) which can hardly be seen as an adequate solution. 19
For an impression of alternatives to (liability) insurance to cover risks see M. Radetzki, Private arrangements to cover large-scale liabilities caused by nuclear and other industrial catastrophes, [2000] GPRI, 180–195 and M. Faure, Alternative compensation mechanisms as remedies for uninsurability of liability, [2004] GPRI, to be published.
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The high possible magnitude of the expected damages does not make a certain risk as such uninsurable. One should remember that competitive insurance markets have worked out all kinds of devices to cope with relatively large risks as well. Tyran and Zweifel report for instance that if today an earthquake of the magnitude of the 1906 San Francisco earthquake happened, there would be insurance coverage available up to 39.5 billion US dollar20. As far as environmental insurance is concerned, Ranson reported that the current insurance capacity in the European market would be € 100 million per insurance policy21, which is quite substantial as well. More fundamentally we can refer to the discussion on caps below where it will be argued that the capacity problem is not an argument to introduce a financial limitation on liability. The individual insurer can always limit insurance coverage up to the amount for which he is willing to provide coverage, either himself or in combination with co-insurance, re-insurance or pooling. The capacity problem is therefore not a reason to argue that certain risks would be uninsurable; the capacity will only define the amount of coverage available which will be determined in contractual limitations. It is of course possible that the magnitude of the harm could still be larger than the insured amounts (even with pooling and re-insurance). This may then be an argument to examine whether alternative compensation mechanisms could provide for larger amounts than insurance.
33
Moreover the capacity to cover systemic risks depends on a variety of complex elements and not only upon the individual reserves of one insurer or his capacity to obtain reinsurance. For instance, the method of coverage in time may have a far more important influence on the insurability.22
34
It is, at the policy level, dangerous to infer anything from the possibly limited capacity for covering systemic risks, since it appears to be extremely difficult to obtain reliable information on insurability in general, but more particularly on the capacity, from the insurance market. This difficulty is connected with the fact that insurance markets in countries are relatively highly concentrated. Lobbying theories have predicted that when an industrial sector has been well organised (e.g. in a cartel) their transaction costs will be low and their potential success in the field of lobbying may be large. This justifies the question whether the extent of liability should be judged on the basis of information provided by monopolistic insurers concerning insurance possibilities. If the argument that liability should be “insurable” is taken seriously, it is obviously of high importance for the policy maker to require reliable information on the actual insurability of certain risks (which is of course not limited to the actual availability of insurance in a particular country). Therefore, a well-functioning
35
20
21
22
See J.R. Tyran/P. Zweifel, Environmental risk internalization through capital markets (Ericam): the case of nuclear power, [1993] IRLE, 431–444. This remarkable statement is a literal quote from D. Ranson, Verzekering van milieuaansprakelijkheid, [2000] Milieu- en Energierecht (MER), 66–73, esp. 72. For a summary of the literature in that respect see M. Faure/D. Grimeaud (supra fn. 1), 166– 176.
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competitive market is of importance, so that the policy maker could e.g. consult with several companies what the precise possibilities of insurance coverage are.
36
Experience with the nuclear field has taught that the information provided may be unreliable if the policy maker becomes completely dependant upon information provided by a monopolistic insurer. Take the example of nuclear insurance which is dominated in every country by the so-called nuclear pools. In the Netherlands the Dutch government relied almost blindly on information provided by the Dutch nuclear pool on the availability of coverage for liability insurance when fixing the liability limit in the Dutch Act on Nuclear Liability of 26 June 1991. Minister Kok declared during the parliamentary debate that “during the whole preparation of the draft negotiations have taken place with the nuclear pool. In all cases the nuclear pool could agree with the proposals. There has hence been an optimal involvement of the sector”23. Critical voices have asked the question whether at the time the liability limit for the licensee of a nuclear power plant had to be set at the amount of 500 million Dutch guilders (approximately € 250 million) and should not be tested periodically according to the increasing possibilities of coverage in the private insurance market24, but the availability of insurance remained fully based on information provided by the nuclear pool25.
37
The fact that the policy maker often relies on information provided by monopolistic insurers to judge the capacity of the insurance market is obviously not merely a Dutch phenomenon. Precisely the same took place when the Belgian Act of 22 July 1985 concerning the liability of the licensee of a nuclear plant was discussed in parliament. Also in Belgium the government contacted the Belgian nuclear pool Syban, with the question whether an amount of more than 4 billion Belgian Francs (approximately € 100 million) would be available in third party liability coverage. Syban, the nuclear pool in Belgium, fiercely denied this. Later it turned out that the nuclear power plant itself is insured in first party insurance (property insurance) for an amount of more than 40 billion Belgian Francs. It is obviously relatively unclear why the nuclear pool only had an amount available for third party liability insurance of 4 billion Belgian Francs, whereas the damage to the nuclear installation itself could apparently be insured for 40 billion Belgian Francs26. This Belgian act has, by the way, meanwhile been changed, since the parliament accepted a legislative proposal to increase the amount of the licensee of a nuclear power plant to 12 billion Belgian Francs (approximate23 24
25
26
Parliamentary Documents, Second Chamber of Parliament, 23 April 1991, 72-4061. See in this respect among others the critical questions by Van Rijn-Vellekoop, Second Chamber of Parliament, 23 April 1991, 72-4046 and of the De Korte, Second Chamber of Parliament, 23 April 1991, 72-4052. For further details see M. Faure, De verzekering van het nucleaire risico, in: In volle verzekerdheid, Essays offered to Prof. Mr. A.J.O. Van Wassenaer van Catwijck (1993), 241–254. For a critical analysis see also M. Faure/R. Van den Bergh, Liability for nuclear accidents in Belgium from an interest group perspective, [1990] IRLE, 241–254.
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ly € 300 million)27. But that obviously does not change the points made here: again the amount was based on the insurability according to insurers. These “nuclear” examples obviously also have importance for the question whether the legislation should take into account opinions of insurers on insurability when deciding on liability issues. The examples show that one should be careful with judging the “insurability” of a particular risk, more particularly concerning the capacity aspect, on the basis of information provided by insurers, at least when there is a high degree of concentration in this insurance market. It is striking that, with respect to the nuclear insurance, all national pools do not compete (in order to increase the capacity) but again co-operate. The national nuclear pools indeed only insure the nuclear installations on their own territory, so that there is no competition between these pools. This example shows that in the nuclear case the pooling takes the restrictions of competition further than would be necessary to increase the insurability of the nuclear liability risk.
38
This discussion shows that one has to be very careful with the argument that capacity may be limited. The policy one can recommend is to allow co-operation between insurers on the condition that it increases competition, which is precisely the spirit of the report of the European Commission of 12 May 1999 on the operation of the exemption regulation number 3932/92. Discussions on capacity obviously often play a role in justifying a financial cap on liability. We will, however, argue below that a limited capacity (regardless of how difficult it may be to judge this) should not necessarily lead to a limitation of the liability via financial caps but may eventually lead to a limitation on the amount of coverage provided by an individual insurer.
39
b) Financial Caps to Increase Insurability? i) Capacity as Insurability Problem We can now turn to the question whether statutory caps on liability are a necessary tool to guarantee the insurability of risks. This argument is often advanced in the context of compulsory insurance. Often the legislator introduced compulsory insurance (as a result of international conventions) and consequently argued that the amount of compensation in tort liability should be limited to make the particular risk insurable.
40
Generally one can argue that within liability insurance it is usually not (only) the amount of the expected damage that causes uninsurability of risks, but
41
27
See Parliamentary Documents, Belgian House of Representatives, Doc 1999/2000, 50 0560/ 001, of 3 April 2000. The act has meanwhile been passed and has become the Act of 11 July 2000, Moniteur Belge, 4 October 2000. For a comment see T. Vanden Borre, Recente ontwikkelingen in het nucleaire aansprakelijkheidsrecht: innovatie of renovatie?, [2000] MER, 25–49 and T. Vanden Borre, Efficiënte preventie en compensatie van catastroferisico’s. Het voorbeeld van schade door kernongevallen (2001), 323–326.
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more often the unpredictability of certain risks28. The insurability question is indeed analysed by looking both at the probability and the magnitude of the risk. The amount is not necessarily the main problem since competitive insurance markets have worked out all kinds of devices to cope with large risks as well. Reinsurance, co-insurance, or pooling of risks are well-known phenomena that allow insurers to provide large amounts of insurance coverage. The high magnitude of the risk itself therefore does not make certain industrial accidents uninsurable per se. Moreover, as we shall discuss below, by adjusting the policy conditions the insurer can limit the amount for which he is willing to provide coverage.
42
Usually the problem of insurability of major risks refers to the “hard to predict” character of those risks which may make insurers both ambiguous and averse towards these risks. They might respond to insurer ambiguity29 by requiring an additional risk premium. The insured, however, may not be willing to pay the additional risk premium if they do not recognize the ambiguity an insurer is confronted with30. ii) Contractual Limits as Alternative
43
More principally, one can also argue that even in cases where there is a limited availability of insurance coverage (which is already hard to judge for the legislator, if possible at all) this should not necessarily lead to a limitation of the liability of the injurer who causes the particular systemic risk. If it appears indeed that the possibilities to obtain liability insurance coverage are limited to a certain amount, there is no reason to limit the liability itself to that same amount. A clear alternative would be to introduce a duty to insure up to the available amount of insurance coverage, but to keep the liability of the injurer unlimited. This will on the one hand have the advantage that the duty to insure is limited to realistic amounts, whereas on the other hand the incentives for the injurer to take care remain at least partially in existence because the injurer is still exposed to risk in case the magnitude of the harm would be higher than the insured amount.
44
From an economic point of view there are therefore very few convincing reasons to limit the amount of compensation due to the victim of a systemic risk. If insurability problems exist, they can be solved by limiting the duty to insure. Recent examples have also shown that, with respect to the nuclear liability conventions, some countries have introduced a duty to insure up to a limited amount, but have left the liability of the licensee of the nuclear power plant 28
29
30
An event is defined as insurable when insurers can set a premium which reflects the risk and enables them to make a profit and subsequently a market emerges (M. Faure/P. Fenn, Retroactive liability and the insurability of long-tail risks, [1999] IRLE, 487–500). See generally on insurability problems the papers published in [1995] GPRI, 407–462 and M. Faure, The limits to Insurability from a Law and Economics Perspective, [1995] GPRI, 454–462. See for the basic literature on insurer ambiguity H. Kunreuther/R. Hogarth/J. Meszaros, Insurer ambiguity and market failure, [1993] Journal of Risk and Uncertainty (JRU), 71–87. These problems have been discussed extensively in M. Faure/P. Fenn, [1999] IRLE, 487–500.
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itself unlimited. This has been done for instance in Austria31, Germany, Japan, Switzerland and Sweden32. The advantage of this approach is that in those cases where injurers have assets at stake that outweigh the limited amount for which they had to purchase insurance coverage, they will still have incentives to further reduce the accident risk. A generalized limit on liability does not take into account the differing financial possibilities of injurers and their insurers. Although there are thus very few arguments in favour of a generalized statutory limitation of liability, this does not mean that there may be no reasons for a contractual limitation in insurance policies, covering systemic risks. In many insurance policies these limitations already exist since an insurer will hardly ever provide unlimited coverage for the particular risk concerned.
45
iii) Moral Hazard There is another argument related to insurance which can be put forward against financial caps introduced in legislation. Statutory limitations could be contrary to the insurer’s interests, since they eliminate one way of reducing the moral hazard problem, which we will discuss in further detail below. There we will indicate that this remedy consists in exposing the insured party to risk for the uninsured top slice of liability33. It should apparently be in the insurer’s interest to have a system of unlimited liability, where a partial exposure to risk may be used by the insurer as a device to control moral hazard and where on the other hand the insurer may put contractual limitations on the amount of coverage (in the absence of a duty to insure up to a certain amount) depending upon the demand for insurance of the particular injurer and the willingness to provide coverage of the insurer. Thus contractual limitations seem a better device which allow for an optimal differentiation of risk, thus providing optimal control of moral hazard.
46
iv) An Interest Group Perspective So far we have argued that financial caps introduced in legislation might cause efficiency problems since they dilute the deterrent effect of tort rules, especially in those accident cases where the expected amount of the loss exceeds the limited amount of the cap. Caps would only make sense in a bilateral setting if one would argue that the victim’s care cannot be sufficiently controlled through a contributory negligence defence that he should still be exposed to risk. That seems, however, doubtful, given risk aversion of victims. If the leg31
32 33
See M. Hinteregger, La nouvelle loi autrichienne sur la responsabilité civile pour les dommages nucléaires, [1998] Bulletin de Droit Nucléaire 62, 27–34. See M. Trebilcock/R.A. Winter, The economics of nuclear accident law, [1997] IRLE, 221. See generally on the devices to control moral hazard, S. Shavell, On Moral Hazard and Insurance, [1979] Quarterly Journal of Economics (QJE), 541–562. See also M. Faure/T. Hartlief, Remedies for expanding liability, [1998] Oxford Journal of Legal Studies (OJLS) 18, 681–706.
47
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islation which introduced financial caps were to pursue a public interest goal, one would therefore in principle expect them to abstain from the introduction of those caps. Reality is, however, often very different. For instance in the area of the nuclear risk, some countries have seriously limited the liability of the licensee of a nuclear power plant. For instance in Belgium the limitations were that low that the victim’s right to compensation is reduced to less than 1% of the average costs of an accident34.
48
The reason that these caps are often introduced can be found in interest group theories. Indeed, until now we have adopted the relatively unrealistic assumption that politicians act in the public interest and will therefore promulgate legislation with respect to liability rules and safety regulations only if this is welfare maximizing. Reality, however, shows that financial caps are not in the public interest. Especially the victim-protection argument which is sometimes used to defend the financial caps is a very weak defence for the existing liability schemes, e.g. with respect to a risk such as nuclear liability35. Given the low limitations in some of the national implementation legislation one can conclude that in some cases the victims were better “protected” before the implementation of the nuclear liability legislation than after36. These inefficiencies can be explained by public choice theory which regards regulation as the product of demand for regulation by interest groups and the supply by wealth maximizing politicians37.
49
How did this lobbying take place for instance with respect to the nuclear liability conventions? In the 1950s the nuclear industry feared that the future of nuclear power could be endangered by unlimited liability. In the preparatory documents preceding the Paris Convention on Nuclear Liability it can clearly be read that the goal of the regulation of nuclear liability was not so much the protection of victims, but the protection of the nuclear industry itself38. There is qualitative evidence of the influence of the nuclear industry both in drafting the international conventions and especially in the national implementing legislation39. Both insurers and the nuclear industry lobbied in a joint profit maximizing strategy for the limitation of liability. Indeed, some have argued that the object of these nuclear liability and oil pollution conventions was not so 34
35 36 37
38
39
For estimates see M. Faure, Economic Models of Compensation for Damage Caused by Nuclear Accidents: Some Lessons for the Revision of the Paris and Vienna Conventions, [1995] European Journal of Law and Economics (EJLE), 29–31. As a result of recent changes the amount has, however, been increased. See T. Vanden Borre (supra fn. 27), 47–48. See for instance M. Faure, [1995] EJLE, 33. This point has been made by M. Faure/R. Van den Bergh, [1990] IRLE, 241. See the basic insights by J.M. Buchanan/G. Tullock, The calculus of consent, Ann Arbor (1962); M. Olson, The logic of collective action (1971); S. Peltzman, Toward a more general theory of regulation, [1976] JLE, 211–240 and R. Posner, Theories of Economic Regulation, [1974] Bell Journal of Economics (BJE), 335–358. This has been convincingly proven in the recent dissertation by T. Vanden Borre (2001), 101– 111 and 225–246. M. Faure, [1995] EJLE, 33–35.
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much to increase protection for the victim, but to limit the risks of, for example, a nuclear power plant operator40. One can wonder why both insurers and nuclear power plant operators lobbied in favour of a limitation of compensation. The interests of industry are clear: financial caps lower the exposure to liability and (in case of insurance) the insurance premiums. Industry will lobby in favour of limiting its liability to the insured amount available. In that case the licensee of a nuclear power plant would bear no liability apart from the insured amount. At first glance it might seem strange that the insurance industry, for instance in Belgium, also favoured a reduction of the liability of the operator of a power plant. We already indicated that this may reduce the possibilities for the insurer to control moral hazard; in addition it also reduces the demand for insurance. However, one can clearly note in many national parliaments that the insurance industry lobbied for a limitation of the third-party liability of the operator to the “insurable” amount. One possible explanation is that, because of the unpredictability of the loss, premium calculation in a profit-maximizing manner is impossible, whereas premiums in other classes of insurance are profitable. Indeed the insurer of the nuclear risk prefers to cover property damage instead of third-party liability. One possible reason for this preference might be the fact that administrative costs can be much higher in a third-party nuclear insurance. This seems to be a plausible additional explanation for the lobbying in favour of a reduced third-party liability by the insurance industry. Hence, the influence of industrial pressure groups in the process of drafting legislation explains to some extent why financial caps have been introduced nevertheless.
50
Notice, in the European context, that the European Product Liability Directive had the optional possibility to put a financial ceiling on the liability of manufacturers in case of serial damage41. However, only Germany, Spain and Portugal made use of this option42. Now the Green paper has opened the debate to increase the option for a ceiling to € 140 million43, but the question is equally asked whether the existence of financial limits is strictly justified44. Hence, apparently the limit in the product liability directive is now put on the agenda for reform.
51
40
41 42
43
44
See, for instance, G.E. Van Maanen, Pleidooi voor verbetering van de rechtspositie van slachtoffers van kernongevallen, [1986] Nederlands Juristenblad (NJB), 1342; and G.E. Van Maanen, De civielrechtelijke aansprakelijkheid voor kernongevallen naar Nederlands Recht, in: M. Faure (ed.), Aansprakelijkheid voor het Nucleaire Risico (1993), 19. Note, however, that both with respect to oil pollution and nuclear accidents, there is a tendency to amend the existing conventions to increase the available amounts as a result of political pressure. See, for the nuclear conventions, T. Vanden Borre, [2000] MER, 40–42. Art. 16 of the Product Liability Directive. See the overview of the transposition in domestic law of the Product Liability Directive, provided in the Green Paper on liability for defective products, 35–36. It was set at 70 million ECU in art. 16 of the Directive for damage resulting from death or personal injury if it was caused by identical items with the same defect (serial damage). Green paper on liability for defective products, 26.
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v) Summary
52
The conclusion is relatively simple: although we realise quite well that the capacity of insurance and financial markets may be lower than the damage which may be caused by large risks, there seem to be relatively few reasons to introduce financial caps for those risks. Even if liability insurance were not available, the appropriate policy answer hardly seems to be the introduction of a cap, given risk aversion of victims. The better option seems to be to agree on the optimal amount of compensation via contract, which is, however, only possible when transaction costs are low, e.g. when victim and injurer stand in a relationship to each other via the price mechanism.
53
The basic argument against financial caps assumes that the injurer has assets at stake which exceed the amount of the financial cap and that the expected amount of the damage will be higher than the cap. However, a judgement proof problem may still arise. In that case the appropriate answer is not to limit liability to the amount the injurer has available, but to seek insurance coverage. Through diversified contractual arrangements between the insurer and the injurer an optimal amount of coverage can be determined in an individual case. The incentives can then be controlled via the risk differentiation in insurance and unlimited liability can apply for the excess, in case the expected loss would (ex post) be higher than the insured amount and the injurer would still have assets at stake. In some cases compulsory insurance might be an appropriate mechanism to control the judgement proof problem, but even compulsory insurance is no reason to introduce financial caps in legislation. The duty to purchase insurance coverage can be limited to a certain amount, but liability could remain unlimited. c) Other Issues
54
There are, however, other ways in which the legislator, fixing the scope of liability, can take into account insurability issues. Indeed, some legislative decisions can increase the insurability of certain risks, whereas others will have the opposite effect. These concern more particularly the introduction of retroactive liability (i), shifting the risk of causal uncertainty (ii), joint and several liability (iii) and the channelling of liability (iv). Again, these issues have already been discussed in other contributions for the Group dealing with the economic analysis of tort law.45 Therefore here only the major results will be summarised. These other issues are important in the sense that these elements can indeed have an important bearing on liability and therefore the legislator could take important decisions to improve the insurability of specific risks. i) Retroactive Liability: Uninsurable
55
It has been often stated in the economic analysis of law that, since tort law is a system aiming at providing incentives for future behaviour, a retroactive 45
See inter alia M. Faure/D. Grimeaud (supra fn. 1), 160–179.
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change of the liability system should be avoided since it can never affect the future incentives. The question whether a change in the liability regime can also affect the insurability can be answered relatively easily since a retrospective liability is no longer foreseeable and therefore collides with a principle requirement of insurance, being predictability of risks. If the insurer were not aware that the behaviour of his insured party might potentially have been considered wrongful, at the time no premium would have been charged for this risk, no preventive measures would have been required in the policy conditions and no reserves against losses would have been set aside. Therefore it has often been held that a real retroactive liability where any change in the law was not foreseeable will pose problems for insurers. At the policy level one can therefore, as far as this issue is concerned, come to an easy conclusion: if the legislator wishes to increase the insurability of risks, retrospective liability should be avoided.
56
ii) Shifting the Risk of Causal Uncertainty One of the major challenges in liability today is the issue how to deal with causal uncertainty. Often there is uncertainty concerning injurers or victims. With a view on victim protection the risk of causal uncertainty is often shifted to enterprises/injurers in general. Earlier I argued that this may be counter to the principles of liability law46 but it may also endanger the insurability of risks. The danger of shifting the burden of causal uncertainty to the enterprise is that the insurer of the specific employer or producer will be required to compensate for damage which, on the whole, had probably not been caused by the insured party.47 Unless a proportionate liability rule is followed, it is not possible to cover a risk if that would mean that the insurer would not only cover the damage of his own insured parties but also the damage that might possibly have been caused by another party. The upshot of these trends is that enterprises would be liable for risks that they have not caused themselves (in the case of causal uncertainty) or for risks that were not foreseen at the time when the tort was committed (in the case of retrospective liability). These tendencies stem largely from a hidden redistributive agenda: the wish to provide victim protection no matter what it may cost. These trends may be problematic from an insurability point of view.
57
At the policy level again the conclusion is simple: if there should be any influence of insurability on decisions of the legislator with respect to liability law, a proportionate liability rule should be preferred.
58
46
47
M. Faure, Causal uncertainty, joint and several liability and insurance, in: H. Koziol/J. Spier (eds.), Liber Amicorum Pierre Widmer (2003), 79–98. Also K. Abraham, Environmental Liability and the Limits of Insurance, [1988] 88 CLR, 959– 960 and M. Katzman, Pollution liability insurance and catastrophic environmental risk, [1988] Journal of Risk and Insurance (JRI), 89–90. See also L. Bergkamp, The proper scope of joint and several liability, [2000] TMA, 154–155.
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iii) Joint and Several Liability
59
There are other features which depart from the principle that an insurer can only be held liable for damage caused by the party insured by him. Joint and several liability is another departure from that principle. In that case the insurer can also be held liable for damage that another party may have caused. Although it has been advanced in the literature that joint and several liability may have a beneficial effect on prevention since it may lead to mutual monitoring by potential injurers, this benefit only remains valid if there is no insolvency of these injurers.48 From an insurance perspective, joint and several liability may be dangerous for the simple reason that the insurer is then no longer merely insuring the risk posed by his insured party (which he can still control), but also the risk caused by all the others.49 The welfare losses resulting from such a system of joint and several liability may be large. Mutual monitoring may ex ante not always be possible and the transaction costs involved (also in the systems of redress) can be huge. Hence, on balance it is doubtful that joint and several liability will have positive incentive effects. The insurance effect is, obviously, as the case of causal uncertainty illustrated, that an insurer will be held liable for the risks that his insured party never caused. The example of the DES-case, where the Dutch Supreme Court applied a joint and several liability rule de facto, may be recalled. This means that any victim can claim full compensation from any of the manufacturers. The insurer of the particular manufacturer then becomes de facto the insurer of the whole market. This trend towards joint and several liability seems therefore to endanger insurability.50
60
At the policy level the conclusion is again easy: if insurability issues were to be taken into account by the legislator, the legislator should be careful with the introduction of a so-called joint and several liability. iv) Channelling of Liability
61
There is another feature of some statutes and/or conventions dealing with risks like environmental or nuclear risks which again departs from the principle that only the injurer who caused the damage should be held fully liable for the loss. This is the so-called channelling of liability. Whereas with joint and several liability a victim can in principle claim full compensation from any of the multiple insured, under channelling the liability is channelled to one party who then becomes fully liable for the damage. This channelling, which indicates which party will be held liable for the loss, is often exclusive, meaning that the victim can only sue the “channelled injurer” and not another party who might have contributed to the loss as well. Channelling can be found again in international conventions concerning nuclear liability and oil pollu48 49 50
This issue has equally been further developed in M. Faure (supra fn. 46). See H. Cousy (supra fn. 8), 235. A. Monti, [2001] ERPL, 51–79. And see L. Bergkamp (supra fn. 47), 154 who argues that under joint and several liability, civil liability becomes unpredictable and hence uninsurable.
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tion. In nuclear liability conventions, the liability is channelled to the licensee of a nuclear power plant; in the conventions concerning damage caused by marine oil pollution there is a channelling to the tanker owner. It has been argued that this channelling is inefficient because it has perverse effects on the incentives to take care when the liability applies exclusively to one operator.51 This is the case if channelling means that victims no longer have the right to sue another party who could influence the accident risk as well. Excluding that third party from liability is inefficient since his incentives to take preventive measures would be diluted. This effect is obviously reduced if the licensee or operator who would be held liable still has a right of recourse against the third party or if liability could be passed on e.g. on the basis of contract. In that case, one could argue that the liability is simply transferred and that such a reallocation complies with the principles of the Coase theorem52. However, this private reallocation of liability may not always be possible and some of the conventions, moreover, even restrict the possibilities of a right of recourse. Channelling can hence hardly be considered as an efficient mechanism for the prevention of accidents.
62
The reason that we discuss channelling within this paper on the relationship between liability and insurability is that some have argued that channelling might improve the insurability of risks. Some have held that e.g. as far as nuclear liability is concerned channelling has the advantage that only the licensee of a nuclear power plant would have to take out insurance coverage.53 Also, channelling in oil pollution cases is defended by arguing that it would reduce insurance costs since only the tanker owner would have to take out insurance coverage.54 This insurance argument is wrong55. Let us assume that parties other than the licensee or tanker owner would be held liable; they could obviously purchase liability insurance as well. Otherwise as with an exclusive channelling, the insurer of the channelled operator would have to cover accidents also in case these have not been caused by his insured, but are allocated to him because of the channelling. Channelling thus creates a greater risk exposure for the operator and therefore creates higher uncertainty for the insurer. If the channelling has any effect on insurability, it is more likely to decrease insurability than to make liability more insurable, as is sometimes
63
51
52
53
54
55
For a critical economic analysis of the channelling of nuclear liability see T. Vanden Borre, Transplantatie van ‘kanalisatie van aansprakelijkheid’ van het kernenergierecht naar het milieu (aansprakelijkheids)recht: een goede of een gebrekkige zaak?, in: M. Faure/K. Deketelaere (eds.), Ius Commune en Milieurecht, Actualia in het Milieurecht in België en Nederland (1997), 329–382. See M. Trebilcock/R. De Winter, The economics of nuclear accident law, [1997] IRLE, 232– 235. See H. Cousy, Een nieuwe vorm van schuldloze aansprakelijkheid voor schade veroorzaakt door het vreedzaam gebruik van kernenergie, [1974–1975] Jura Falconis, 46. See A. Popp, Liability and compensation for pollution damage caused by ships revisited – report on an international conference, [1985] Loyds Maritime and Commercial Law Quarterly, 120 (bibliography 118–131). So T. Vanden Borre (supra fn. 51), 366–367.
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argued56. In sum, there seem to be few arguments in favour of a channelling of liability. This may dilute the incentives for prevention and could even endanger insurability. 2. Case Law
64
Also the issue whether insurance and insurability issues should influence tort decisions by courts has been discussed in the law and economics literature.57 To be very clear: as a starting point economists would argue that the choice between a strict liability and a negligence rule should not primarily be made on the basis of insurability arguments, but on the basis of economic arguments and criteria for strict liability, as they have been developed in the economic literature.58 Moreover, economists believe that a finding of liability ex post will affect the incentives of victims and injurers ex ante. Simply taking into account the actual availability of insurance does therefore not fit into the economic model. Economists would even argue that such an ad hoc policy, based on availability of insurance, could lead to perverse incentives, e.g. not to insure if one knew that this mere fact could give rise to liability.
65
As a starting point in court decisions, insurance and liability issues should therefore, at least from an economic perspective, be separated. Two different situations can be distinguished here: on the one hand sometimes arguments are heard that enterprises, manufacturers and in general companies would be better risk bearers and would thus better be able to insure their risks than victims or consumers. This argument can be called “assurabilité oblige” and needs some attention (a). On the other hand one could also decide in case law that the fact that one of the two parties in the accident setting purchased insurance is implicitly or explicitly an argument to make that party liable. That “assurance oblige” argument needs some attention as well (b). However, taking into account the famous Coase Theorem, economists would argue that the situation might be different in a contractual setting. Except for the product liability case (or perhaps medical liability) this will, however, rarely be the case in tort law. We, however, explicitly address the contractual case separately (c). a) Assurabilité oblige i) Cheapest Insurer
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A first way in which this influence of insurance on liability issues appears is that the judge could take into account the insurability of a certain risk. This 56
57
58
For further arguments see M. Faure/R. Van den Bergh, Objectieve aansprakelijkheid, verplichte verzekering en veiligheidsregulering (1989), 357–358. More particularly by M. Trebilcock, The role of insurance considerations in the choice of efficient civil liability rules, [1988] Journal of Law, Economics and Organisation (JLEO), 243– 265, although the following analysis is somewhat different than the one by Trebilcock. These I have discussed in more detail in M. Faure, Strict Liability. Economic Analysis, in: B.A. Koch/H. Koziol (eds.), Unification of Tort Law: Strict Liability (2002), 361–394, so I will not discuss these further in this contribution.
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could be indicated as “assurabilité oblige”. The judge would thus examine which party can best purchase insurance coverage and should thus be held liable. This can also be referred to as “the cheapest insurer”-argument. What can be said with respect to this insurability argument from an economic point of view? Sometimes it is argued, for instance with respect to product liability, that the liability should rest with the manufacturer since he can purchase insurance coverage at lower costs than all the individual consumers who might become victims.59 Hence, it is an argument which is often heard, being that enterprises would better be able to spread risks than individual consumers or victims. This “better risk spreader” argument takes different forms. Sometimes it is suggested that enterprises would better be able to obtain insurance than victims. Usually this is then presented as an argument in favour of strict enterprise liability.
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ii) Wrong Focus Firstly one could mention that it will often be impossible for a judge in a specific accident situation to look for the party that could have insured at the lowest costs. One should indeed not forget that the first task of the judge in a tort case is to examine whether all the parties involved took efficient care and to hold them eventually liable when the due care standard was not met. The risk of just looking for “the cheapest insurer” would be that the judge would not focus any more on the actual level of care of the parties involved in the accident. Moreover, it will be impossible for a judge to examine which party could have better insured unless one does so in very general terms mentioning for instance that a producer will always better be able to get insurance coverage than a poor victim.
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iii) Who is “Better Insurer”? The argument that producers/enterprises would better be able to carry risks and thus would be the “better insurer” would hint in the direction of strict (producer) liability. However, the insurability argument presented in this manner is simply wrong. Indeed, above it was already indicated that economic literature points at the fact that first party insurance better enables a risk differentiation than third party liability insurance. First party victim insurance better enables the narrowing of risk pools than third party liability insurance. If the insurability of the risk should therefore be an argument that should be taken into account in the liability case, it would rather be an argument against a strict producer liability. Indeed, from an insurance perspective victims are “better insurers” than injurers, given the advantages of first party insurance. 59
See M. Lehmann, Eine spezifische Versicherung des Abnehmers gegen Produktgefahren wäre sehr unökonomisch, denn jeder einzelne Verbraucher müsste einen eigenen Versicherungsvertrag – für welche Produktrisiken? – abschließen; die damit verbundenen Transaktionskosten wären prohibitive, in: Bürgerliches Recht und Handelsrecht. Eine juristische und ökonomische Analyse (1983), 123.
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This obviously has implications at the liability level. Indeed: a strict liability rule will, assuming that the injurer is fully solvent, not lead to a demand for insurance with the victim, since the (presumably risk averse) victim will be fully covered through the strict liability rule. Strict liability will, however, lead to a demand for third party liability insurance by risk averse injurers. Negligence on the other hand does not lead to a demand for liability insurance with injurers since in the ideal case, injurers will always follow the optimal care standard in order to avoid liability. Hence, if the economic model works optimally, injurers will not have a demand for insurance coverage under negligence. This however has as effect that under negligence the victim in principle is not compensated. Risk averse victims will therefore have a demand for first party insurance under negligence.
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If one therefore believes that the insurability should be taken into account at all at an abstract level of deciding which liability rule should be preferred, the economic reasoning is contrary to the legal intuition: since negligence leads to first party insurance by victims and strict liability to third party insurance by injurers, a negligence rule would be preferred since this better enables the risk differentiation through first party insurance. That is a standard result of economic literature60. b) Assurance oblige: The Tort Case
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Sometimes legal doctrine or case law even goes one step further by deciding the liability in tort not just on the basis of a theoretical better insurability, but by taking the availability of insurance in a particular case into account in the liability issue.
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This second approach of “assurance oblige” more or less bluntly states that the one who is insured should be held liable. Of course one can clearly recognize a “deepest pocket” argument here, which seeks a redistribution from the rich insurer to the poor victim. However, many objections can be made against this tendency especially if one believes that liability rules should have a deterrent effect as well. Moreover, one can also question whether this tendency can be upheld as “just”.
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In the first place it should be mentioned that an automatic finding of liability of the insured person neglects the deterrent function of tort law. If a non-insured knows that he will be fully compensated if he gets involved in an accident with an insured, this will reduce his incentives for taking care. Moreover, in bilateral accident situations both parties have to take efficient care to reach an optimal reduction of the accident risk. Thus also the “victim” should take efficient care to avoid the accident. An automatic finding of liability of the insured will therefore not give the correct incentives to potential victims and 60
See in this respect especially the publications by Epstein mentioned in fn. 13.
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might in the long term lead to an increase of the accident risk. It will indeed lead to a reduction of the incentives to take care of non-insured. Secondly, it can be argued that the aforementioned tendency does not only negatively affect the victim’s incentives to take care, but also the incentives of the potential injurer. If the injurer knows ex ante that he will always be held liable because he is insured, this might also lower the deterrent effect of tort rules. Thus it will become even more complicated for an insurer to control the moral hazard problem via policy conditions.
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Thirdly, it can be argued that, from a policy viewpoint, this tendency in case law has the strange effect of punishing a risk averse injurer that has been cautious enough to purchase liability insurance. He will indeed be sanctioned with liability if he has the bad luck of getting involved in an accident with a non-insured party. In the long run this might even give wrong incentives not to purchase liability insurance. A risk-averse party would even prefer not to purchase liability insurance to reduce the risk to be held liable automatically.
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Fourthly, the idea to hold the insured party liable seems to be based on wrong ideas on the functioning of insurance. A finding of liability will of course lead to an ex post sharpening of policy conditions by the insurer such as the raising of premiums. Thus the consequences of the accident will be shifted to the injurer even though he might not have been able to take efficient care to avoid the accident. On the other hand, the imprudent victim who purchased no first party insurance is rewarded for his imprudence by getting the compensation paid by the injurer’s liability insurance. Here, once again, judges often seem to neglect that victims are already protected by compulsory first party insurance mechanisms designed by the social security system. An automatic finding of liability of the insured injurer will once more only lead to a right of redress of the first party health insurer of the victim against the injurer. Thus one could also argue that such an automatic finding of liability based on the principle “assurance oblige” is not only inefficient but also unjust.
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Finally, it could be argued that it gets very complicated for the insurer to make an accurate actuarial assessment of the risk. In this case the insurer is indeed not covering any more the risk that his insured causes an accident, but the risk that he will hit an uninsured party. This, of course, makes a probability calculation highly complicated.
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In sum, the conclusion of the economic literature on this point is relatively clear: the actual availability of insurance should not play any role in a tort case. The influence of the availability of insurance on liability issues may, on the contrary, even have adverse effects.
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c) The Contract Case
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Until now we assumed that we were dealing with the influence of insurance on tort liability; in that respect we claimed that, from an economic point of view, the availability of (or possibility to purchase) liability insurance should not influence tort liability issues. This outcome might, however, change if we are not merely discussing tort liability but liability for damage caused in a contractual setting. The main difference between the two systems is that in a contractual system free negotiations on risk between both parties are possible. Noble Prize Winner Ronald Coase indicated that if transaction costs are zero, an optimal allocation of resources will always take place, whatever the legal rule is.61 In for instance a product liability setting this means that if a purchaser of a product is fully informed of the possible defects and the product risk, he will always take into account the expected damage and add this to the market price to decide whether or not to purchase the product. The well-informed consumer will always take into account the full price of the product, which includes the expected damage.62 In that case the agreement on the distribution of risk might be reflected in the contract price. The price mechanism can have this signaling function to the consumer. If the market price reflects the expected damage, the consumer can know that the producer bears the accident risk. If, however, the market price only reflects the cost price of the product and not the expected damage, the well-informed consumer would know that he bears the accident risk himself.
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This will of course also have an influence on the demand for insurance. If the price reflects the fact that the producer is going to bear the accident risk, a risk-averse injurer will purchase liability insurance and the consumer will in principle be compensated for his damage via the producer or the insurer. If, however, the price reflects that the consumer bears the risk himself, the riskaverse consumer might purchase first party insurance.
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Thus, in a contractual setting the influence of the availability of insurance is a totally different one. The question is not so much which of both parties might be “the best insurer”, but what party can be assumed to bear the accident risk, taking into account the price of the service or product. In some case law it is argued that given the low price it cannot be assumed that it has been agreed that the producer bears the accident risk. This case law seems to follow the aforementioned line of reasoning. Also the fact that one of both parties purchased liability insurance can, in a contractual setting, indeed be considered as an indication that that party is assumed to bear the accident risk. Thus, as long as parties can be assumed to be reasonably well-informed on the accident risk, there seems to be an argument for case law to take into account the availability of insurance in a contractual setting. 61 62
R.H. Coase, The problem of Social Cost, [1960] Journal of Law and Economics, 1–44. W.Y. Oi, The Economics of Product Safety, [1973] BJE, 3–28 and M. Adams, Produkthaftung – Wohltat oder Plage – Eine ökonomische Analyse, [1987] Betriebs-Berater, 1–24.
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3. Cost and Benefits of Insurance Above, we discussed the issue mentioned in the questionnaire whether courts should base their judgment on the objective of risk spreading. We argued that from an economic perspective, it seems dangerous to base either decisions on an optimal liability rule or (especially) specific decisions in a liability case on this idea of risk spreading. If risk spreading is considered a relevant policy consideration, one instrument to reach this (but there are many other alternatives available as well) is insurance. Thus potential injurers and potential victims can take out insurance coverage and there is no a priori reason to believe that e.g. enterprises or producers would be in a better position to insure against a risk than consumers or potential victims. On the contrary, strictly speaking, victims and consumers are even in a better position to insure against risks since they can purchase first party insurance which enables a better risk differentiation. In this respect, we can refer to the discussion above.
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B. Standard of Care The economic notion of moral hazard is of course the core of insurance economics. Moral hazard is the well-known phenomenon that the behaviour of the insured injurer (and every insured for that matter) will change as soon as the risk is removed from him. This is precisely the essential contradiction in liability insurance. The disutility the injurer suffers because of his exposure to risk was precisely needed to give him correct incentives for taking care.
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If risk is fully removed from the injurer and shifted to the insurer, the injurer will indeed miss the incentive for taking care that was exactly given to him by the deterrent effect of having to pay compensation in case of an accident. Marc Pauly has, however, indicated that in fact this behaviour of the injurer is not immoral but completely rational since he simply reacts to varying costs for his behaviour63. For the insurer of course the problem arises how nevertheless incentives can be given to the insured to behave in exactly the same way as if no insurance were available. This is of course the goal of an optimal control of moral hazard64.
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1. Remedies a) Monitoring In the literature two ways of controlling the moral hazard problem are indicated65. The first is a control of the insured and an appropriate adaptation of the premium; the second is exposing the insured partially to risk. A first best 63
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M. Pauly, The Economics of Moral Hazard: Comment, [1968] American Economic Review (AER), 531–545. See G. Wagner, Versicherungsfragen der Umwelthaftung, in: M. Ahrens/J. Simon (eds.) Umwelthaftung, Risikosteuerung und Versicherung (1996), 104–105. See S. Shavell, [1979] QJE, 541–562.
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solution is a detailed control of the insured66. In that case the premium conditions would be exactly adapted to the behaviour of the insured and the premium would reflect the care taken by the insured. In an optimal world this should give the insured incentives to behave exactly as if no insurance were available and the premium would reflect the true accident risk. Of course this first best solution is only possible in the ideal world where control by the insurance company would be costless and information on the behaviour of the insured readily available. In practice this is of course not true. There are, however, some means for a control of the insured and a differentiation of premium conditions is possible according to certain groups of risk. This can either be an ex ante screening with a higher premium for certain high risk groups or an ex post premium increase or change of policy conditions, based on previous loss experience. This is the so-called experience rating. Much of insurance legislation is also aimed at reducing moral hazard. Think in this respect e.g. of the prohibition, contained in many insurance laws, to insure accidents which are caused with intent67. b) Exposing the Insured to Risk
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A second best solution is exposing the insured partially to risk. This is considered second best because insurance should ideally exactly aim at removing risk from the injurer. Exposing the insured to risk means that some degree of risk aversion will remain. This has on the other hand the advantage that the insured injurer will still have some incentives for taking care although he is insured. This exposure to risk can be either at the lower level of damage or at the higher level. One could indeed think of a system with a deductible whereby a lower threshold applies or one could introduce an upper limit on coverage whereby the insured bears his own loss in case the damage exceeds the insured amount. c) Combination
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In practice one will of course see a combination of both systems of the control of moral hazard. Usually there is some degree of differentiation within the policy conditions, a deductible and an upper limit on coverage. Of course the methods used depend upon the information costs, but also on the value of the insurance policy68. Obviously an insurer will more readily tend to invest resources in making a nicely tailored insurance policy for a large company that pays a substantial premium than in case of consumer risks.
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M. Spence/R. Zeckhauser, Insurance, Information, and Individual Action, [1971] AER, 380– 391. See J.C. van Eijk-Graveland, Verzekerbaarheid van opzet in het schadeverzekeringsrecht (1998). J. Marshall, Moral Hazard, [1976] AER, 880–890.
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2. Result If moral hazard is controlled optimally through the use of the above mentioned devices, the insured will again behave as if no insurance coverage were available, with the benefit that the disutility of risk is removed from him. The incentives for taking care are in that case no longer given by liability law since the threat to have to pay compensation to a victim is shifted to the insurance company. In case of insurance that the injurer takes care is achieved through an appropriate adaptation of the policy conditions to the behaviour of the individual insured. This also explains that liability insurance has a very important social function. Under liability insurance the insurer has to guarantee that the insured will take efficient care and thus have an incentive to avoid accidents. This makes clear that an appropriate control of moral hazard is not only in the interest of the individual insurer, but also of society. If there was no efficient control of moral hazard, insurance would on the whole do more bad than good. In sum, if moral hazard can be controlled optimally through insurance, the availability of liability insurance should have no influence at all on actual care levels. If there were such an influence, this would mean that moral hazard has not been controlled optimally.
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3. Other Issues Influencing Care Levels As we have argued above, the mere fact that the defendant is insured should, from an economic perspective, have no influence at all on the standard of care required from him, nor should it have any influence on the determination of comparative negligence. In this respect, we can refer to the discussion above.
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Also the fact that the victim would be covered through a first party insurance should, from an economic perspective, have no influence at all on the care level required from the injurer. If the reverse were true, this would mean that a defendant would be rewarded for the fact that his victim had a first party insurance. From an economic perspective, that would give wrong signals to the injurer whose incentives for prevention would be negatively affected. Hence, economists would hold that injurers should be held fully liable (of course if the efficient conditions for such a liability are met), irrespective of the availability of first party cover by the victim. If, however, a victim were already fully covered by his first party insurer, this should not have an influence on the level of care, but it can of course have an influence on the level of damages. In order to avoid a double compensation of the victim, the right procedure would be that the first party insurer who has compensated the victim exercises a right of recourse against the injurer. The rationale for the necessity of a right of recourse by private and social insurers vis-à-vis the injurer who is liable in tort is simple: the injurer who creates the risk has to be exposed to the full cost. The absence of a right of recourse would lead to under-deterrence of the injurer69.
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See further on the economic rationale of the right of recourse M. Faure/T. Hartlief (supra fn. 15), 255–263, nos. 86–109.
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C. General Duty to Insure
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The question is asked whether, according to economics, there should be a general duty on parties to obtain insurance coverage which should be sanctioned in case of non-compliance. Generally, economics is, as was indicated above, careful with suggestions towards compulsory insurance. Moreover, the most important reason for imposing such a duty could be found in market failures such as information deficiencies or externalities. In the absence of market failures, economists would not generally argue that there should be a duty to obtain insurance coverage. Moreover, market failure would lead to a preference for a legislative intervention and not for corrections by a judge in a tort case, as is suggested in the questionnaire.
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The underlying assumption in the questionnaire is that a party had failed to obtain liability insurance, would therefore be found insolvent and would thus be punished for this failure of obtaining insurance coverage. This reasoning is, however, from an economic perspective rather strange. The issue of liability should, again, be treated differently from the question whether a risk averse person might have a demand for insurance. The liability issue in itself should therefore never be decided only on the basis of the availability of insurance. From an injurer’s perspective this also becomes rather strange: on the one hand, lawyers would argue that someone is liable because he failed to take insurance coverage; on the other hand, the fact of having insurance coverage might precisely lead to a finding of liability as well (assurance oblige). This illustrates that the availability of insurance in itself is no meaningful criterion to decide the liability issue.
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Moreover, the question whether an injurer should or should not take out liability insurance depends upon a number of factors, one of them being his attitude towards risk. One may not forget in this respect that for economists, liability insurance is a mechanism to protect a potentially liable injurer against disutility suffered from risk aversion. It is not primarily an instrument to guarantee compensation to the victim. If one would, at the policy level, desire a victim compensation, mandatory first party insurance by victims would be the better alternative. If, on the other hand, the absence of insurance by the injurer constituted a market failure, the appropriate remedy would seem to be a legislative intervention forcing the potential injurer to take out insurance coverage. Deciding that an injurer be held liable solely on the basis of the fact that he did not take out insurance coverage seems odd. The issue of liability should be decided in itself upon the relevant criteria. If the court comes to the conclusion that the injurer should be held liable and then finds that there is insolvency because of the failure to take out insurance coverage, a second finding of liability does not seem to be a very effective remedy.
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As far as the issue is concerned whether employers should be under a duty to take out liability insurance covering the torts of their employees, again the general principles mentioned above can be applied: if there were generally an
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information deficiency concerning the advantages of liability insurance or if there were a serious insolvency risk whereby employees of employers could cause damage largely exceeding the employer’s wealth, this would mean that employers could, through their insolvency, externalize costs. That would be a general argument in favour of compulsory liability insurance. But again, the general warnings (appropriate control of moral hazard and sufficient competition in insurance markets) need to be taken into account as well. Remember, moreover, that it has been indicated in the literature that specifically for the issue of occupational health, a direct insurance of the employer to the benefit of employees who suffer occupational hazards might be more efficient than an outright system of employer’s liability. Again, such a direct insurance might better enable risk differentiation and would therefore be preferred70.
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D. Insurance and Damages 1. General The issue whether the availability of insurance with the defendant should affect the assessment of damages was briefly touched upon above: in principle, economics would hold that an injurer should be exposed to the full costs of the risk he created which will provide the correct incentives to follow the optimal care standard in order to prevent the risk. The fact that through liability insurance the risk has subsequently been shifted to an insurer, in principle makes no difference. In that case the optimal level of care will not be induced through liability rules directly, but through the efficient control of moral hazard by the insurer71. Hence, there is from an economic perspective prima facie no reason to be more lenient or strict with the assessment of damages as a result of the mere fact that an injurer is insured. Any decision concerning the assessment of damages will in principle be passed on by the insurer to the insured injurer, e.g. through an adaptation of the premium or other policy conditions. Hence, if one were e.g. to assess the damages at a lower amount because the injurer is insured, the insurer would have less incentives to control the injurer’s behaviour and under-deterrence would follow.
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2. Punitive Damages Some question could be asked on the insurability of punitive damages. It is well known that in particular countries where liability risks for insurers have been expanding, it was more particularly the introduction of punitive damages that was seen as a great danger. Also in the US system, the unpredictability of jury awards and punitive damages cause major headaches to insurers.
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This issue has been further developed in M. Faure/T. Hartlief (supra fn. 15), 254–255, nos. 82– 85. See supra no. 12.
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Here again, the general principles apply. Of course for every insurance scheme, it is crucial that the insurer possesses accurate information on the likelihood that the event will occur (the probability) and on the possible magnitude of the damage once the accident occurs. These expectations on probability and magnitude of the loss are essential for the insurer to be able to calculate his so-called actuarially fair premium. Increased with the so-called loading costs (for among others administrative expenses) and, depending on the market structure, a profit margin, this will constitute the premium to be paid by the insured.
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If the insurer ideally has ex ante perfect information on the predictability of the probability and the magnitude of the damage, we call the particular risk insurable. It is precisely on the basis of statistics that the insurer will acquire information on the likelihood that the risk will occur with a particular insured; statistics may also provide information on the possible magnitude of the damage. Both these requirements may, however, be a problem in the case of the insurance of punitive damages. Several elements may negatively influence the ex ante predictability of the risk72. The ex ante information on the predictability of the risk is often low, given the unpredictable nature of the imposition of punitive damages. Reliable statistics may sometimes be missing both with respect to the probability of the event occurring (the imposition) and with respect to the amount of the punitive damages.73 Hence, there may not be a “law of large numbers” to be applied. This obviously is not only a problem for punitive damages, but occurs in every case where insurers are confronted with relatively new risks, where reliable data may be missing. As far as for instance natural resource damage is concerned, a problem lies in the fact that generally accepted measurement techniques to quantify environmental damage may be lacking74.
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A similar problem may arise with punitive damages. In that case, both the likelihood that e.g. a jury or court will impose punitive damages may be difficult to assess and the same may be true for the precise amount. This may make insurability more difficult, but it must not necessarily make the risk uninsurable. Indeed, the question therefore arises whether the predictability of the liability risk can be increased, even in the absence of reliable statistics or whether in that case the particular risk should be judged as uninsurable. The literature has indicated that uncertainty concerning the probability or the damage is of course an element with which the insurer can – in principle – take account ex ante. If there is uncertainty because of a lack of reliable statistics, this should not necessarily lead to the conclusion that a particular risk is uninsurable. We are then dealing with the concept referred to as “insurer ambiguity” 72
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Monti rightly points out that the fact that there may be both factual and legal uncertainty: A. Monti, [2001] ERPL, 51–79. The unpredictability of punitive damages, especially when awarded by juries was recently confirmed in an empirical research by J. Hersch/W.K. Viscusi, Punitive Damages: How Judges and Juries Perform, [2004] 33 JLS, 1–36. White Paper on environmental liability, 23.
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addressed by Kunreuther, Hogarth and Meszaros75. They argue that the insurer can react to this uncertainty concerning either the probability of the event or the magnitude of the damage by charging a so-called risk premium to account for this unpredictability. Hence, an insurer can in principle also deal with a “hard to predict” event, by charging an additional premium. Hence, on the basis of this analysis, one can argue that even a “hard to predict” risk like punitive damages should be insurable, but that an additional risk premium should be charged. The alternative is obviously that insurers would simply ex ante exclude coverage for punitive damages. 3. Non-Pecuniary Loss As far as the relationship between insurance and non-pecuniary loss is concerned, again one can argue that the fact that a liable injurer has third party insurance should not affect the amount of the damages awarded for non-pecuniary losses. From an economic perspective, non-pecuniary losses are to be compensated to provide deterrence to injurers. It remains important to expose injurers to the full costs of their activity and this may also include exposure to non-pecuniary losses. However, note that several economists have stressed that as such, there would be no (first party) demand for the compensation of non-pecuniary losses. It is for that reason that economists stress that it is particularly for the deterrent effect of tort law that non-pecuniary losses should be compensated, but not for the compensatory function76.
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E. Privileges The issue of privileges has also been addressed from an economic perspective in the report on fault77.
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Economists generally argue that everyone should be held to the efficient level of care, even if that would mean that some individuals with lower capacities were not able to reach that efficient level of care. Economists would then hold that the liability will give them incentives to change their activity. However, for persons who are totally incapacitated, a liability rule would make no sense for the simple reason that liability could never positively affect their incentives for care. Remarkably in some legal systems, such as e.g. in Belgium, mentally disabled persons have a greater chance of being held liable as soon as an insurance policy covers their liability78. These are cases (probably also in other legal systems) where insurability is explicitly taken into account. In case of the availability of insurance, the privilege for the mentally disabled person apparently no longer applies.
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H. Kunreuther/R. Hogarth/J. Meszaros, [1993] JRU, 71–87. This argument is further developed in my contribution to the Liber Amicorum for Helmut Koziol (M. Faure, Compensation of non pecuniary loss: an economic perspective, in: U. Magnus/J. Spier (eds.), European tort law, Liber amicorum for Helmut Koziol (2000), 143–159.) M. Faure, Fault. Economic analysis, in: P. Widmer (ed.), Unification of Tort Law: Fault (to be published). See further on this issue M. Faure/R. Van den Bergh, Negligence, strict liability and regulation of safety under Belgian law. An introductory economic analysis, [1987] GPRI, 95–114.
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F. Insurance and Agreements to Limit or Exclude Tort Liability
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In this respect, we can be brief and refer to the discussion above. There it was argued that in a contractual case, where there is thus an implicit or explicit agreement to exclude or limit tort liability it does make sense to take the availability of insurance into account. In the contract case, parties can (if we assume away information problems) negotiate on the optimal level of care to be taken, the liability in case of non-performance and the allocation of damages. This can result in an implicit agreement on who should take out insurance coverage and on the price to be paid. IV. Concluding Remarks
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In this contribution to the project on the relationship between tort liability and insurance, the influence of liability law and insurance and vice versa was addressed from an economic perspective, following as far as possible the questionnaire. Attention was paid to influences on the legislator and on case law.
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The fear of insolvency of the injurer has led several legislators to take steps to guarantee an effective compensation to the victim. One of these steps has traditionally been the introduction of a statutory duty to insure. In that case apparently the fear that a tort judgment could not be executed leads to an interference in insurance markets by making the purchase of liability insurance coverage compulsory in some cases. But exactly this phenomenon of compulsory insurance has also led several legislators to limit tort liability because unlimited risks would be uninsurable. Hence, the insurability itself influences the amount of compensation due under tort law. These types of influence between insurance and tort law can also be found in case law where the insurability or even the availability of insurance is taken into account to decide upon the liability under tort law.
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The introduction of compulsory insurance can be justified by the lack of information on the benefits of insurance on the part of some injurers and as a means to cure the externality caused by the insolvency problem. However, in many cases other mechanisms exist that might cure the insolvency problem at lower costs. Especially the possibilities of a compensation fund or first party victim insurance need further examination in that respect. If insurance markets are not competitive and/or the moral hazard problem cannot be controlled, the introduction of a duty to insure will probably cause more problems than it solves; therefore the legislator should always be extremely cautious with the introduction of compulsory insurance. Nevertheless, one can note that the legislator often introduces either a limitation of liability or a duty to insure if the economic conditions for these interventions are not met. In those cases these interventions can be explained as the result of lobbying by interest groups.
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As far as the influence on case law is concerned, one can note an increasing tendency to take into account both the possibility to insure (assurabilité oblige) and the availability of insurance (assurance oblige) to decide tort law
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cases. This “insurability argument” is not very useful since, contrary to what is often assumed, victims will often be the better insurers than providers of services or products since victims can purchase first party insurance. This allows better for a narrowing of risk pools than third party liability insurance. Also the tendency in case law to hold the party who has insurance coverage liable does not fit into the economic model of accident law. It neglects the deterrent function a liability suit has. This tendency can also be criticized from a corrective justice point of view since it punishes the careful party who purchased insurance coverage with a finding of liability and thus with an ex post premium increase. Taking into account the availability of insurance makes, however, more sense in a contractual setting, where a victim and injurer can in principle ex ante negotiate on the distribution of risk among others via the price mechanism. The price mechanism could give an indication of which of the parties was supposed to bear the risk in case of an accident. In such a contractual situation the availability of insurance might also be one of the indications on the agreed distribution of risk between the parties. We have, however, indicated that if the legislator wished to increase the insurability of certain risks, there would certainly be specific elements that the legislator could take into account when drafting liability legislation. Law and economics can provide a few clear tips in that respect: avoid the introduction of retrospective liability, introduce, in case of causal uncertainty, a proportionate liability rule and be careful with the introduction of joint and several liability. These are all elements where the risk exists that one would depart from the principle that the insurer should only be held to compensate for the damage caused by his insured injurer. It should therefore be avoided that he be held liable as well for damage that his insured injurer has not caused or that could not be influenced by his insured (like in the case of retrospective liability). Channelling of liability on the other hand has sometimes been advanced as an instrument to increase insurability, but we have argued that it is very doubtful that channelling does improve insurability. It may, on the contrary, have negative effects on prevention.
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In this paper I have also tried to demonstrate generally the usefulness of the economic analysis of legal rules. By making a clear distinction between the various goals of tort law, such as deterrence and compensation, the economic methodology can indicate what legal instruments can be used to reach those goals. Law and economics can also point at some negative and unexpected effects of legislative and or jurisprudential interventions. Of course, law and economics remains in the first place a positive theory that attempts to explain the existing legal rules as they are. But if, however, efficiency is considered as one of the goals of European policy, law and economics can also provide some useful insights that can be used when new legislative instruments such as financial caps or compulsory insurance are considered.
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THE VIEW OF AN INSURER: THE IMPACT OF LIABILITY INSURANCE ON TORT LAW Peter Thalmair The impact of liability insurance on tort law is considerable in Germany. An area where this is evident is compensation for pain and suffering. However, there is also an influence in other legal areas, for example in assessing the scope of physicians’ or attorneys’ duties or the extent of parental duty of care.
1
In what follows, main aspects of the impact of liability insurance on the development of tort law will be outlined on the basis of a few notable cases that have been decided by the Supreme Court.
2
Then insurance clauses through which primary insurers provide coverage even in cases where no liability exists will be described.
3
Finally, reference will be made to a few proposals for the reform of the German law on insurance contracts that will probably be implemented in the next few years and which will increase the impact of liability insurance on tort law to an even greater extent.
4
I.
Court Decisions
1. Compensation for Pain and Suffering According to § 253 I Bürgerliches Gesetzbuch (German Civil Code, BGB) monetary compensation for non-pecuniary loss can only be claimed in cases stipulated by law.
5
a) § 253 II BGB (formerly § 847 BGB) provides that in cases in which compensation must be paid due to bodily injury, impairment of health, deprivation of liberty, or sexual assault, reasonable monetary compensation can also be claimed for non-pecuniary loss.
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The question arises as to what circumstances are relevant pursuant to § 253 II BGB when determining what constitutes “reasonable compensation”:
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8
For a long time it was disputed whether or not the fact that the liable party has liability insurance coverage is of significance when considering his/her financial circumstances.
9
The pre-1945 Reichsgericht (Supreme Court, RG) held that the liable party’s liability insurance cover could not be taken into consideration because liability insurance cover logically presupposes the insured’s liability.1
10
However, the Bundesgerichtshof (Federal Supreme Court, BGH) argues that a liable party who is covered by liability insurance and therefore unaffected is placed in a better financial position than a liable party who has to pay for the loss or damage out of his own pocket; this, in the Federal Supreme Court’s opinion, also affects the scope of the liable party’s obligation towards the claimant.2
11
Since this decision courts have taken the fact that a liable party has liability insurance coverage – regardless of whether voluntary or compulsory – into account in determining compensation for pain and suffering.3
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This approach is supported by the fact that, in view of the logical priority of liability, it follows that the provision establishing liability is free to attach either liability-establishing effect or liability-heightening effect to liability insurance coverage4; the term “reasonable compensation” in § 253 II also allows these interpretations.
13
b) However, this situation can also trigger problems. Example:
14
For some years personal liability insurance policies have been offered in the German market that enable the policyholder not only to cover his own liability risk, but also to cover himself – for an additional premium – against the risk of the liable party not having liability insurance and also not being able to afford to pay compensation.
15
The question arises whether this specific coverage of the claimant increases his claim to compensation for pain and suffering.
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A reason for an increase is that it operates in favor of the claimant, who in these circumstances has a particular entitlement to protection, as he incurred expenses (i.e. higher insurance premium) to obtain insurance against the eventuality that the liable party is not covered. 1 2 3
4
Bundesgerichtshof (BGH) in [1955] Versicherungsrecht (VersR), 615, 618. BGH in [1955] VersR, 615, 618. Oberlandesgericht (OLG) Frankfurt in [1990] VersR, 1287; OLG Köln in [1994] VersR, 1248; M. Wolf, [1998] VersR, 812, 818. H. Stoll, Haftungsfolgen im bürgerlichen Recht (1993), no. 88.
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On the other hand, such an increase in damages will be charged to the liable party, if the claimant’s liability insurer seeks recourse against the liable party. However, in practice recourse usually does not take place because one of the prerequisites for coverage by this special personal liability insurance policy is that the liable party’s inability to pay compensation has been established; in such circumstances there will be no recourse.
17
The following case is also interesting: If, in accordance with § 158 c Vertragsversicherungsgesetz (insurance contract law, VVG), the liability insurer must provide cover, but is entitled to seek recourse against the insured (e.g., because of breach of conditions of a compulsory insurance), the question arises whether, when calculating the amount of compensation which the claimant claims from the liability insurer, the liable party should be deemed affluent (in view of the liability coverage) or not (because of the possibility of recourse).
18
If the insurer has the possibility of obtaining recourse, the policyholder is put in the same position financially as in those cases in which he has no coverage whatsoever and which may even cast him into serious financial difficulties if sentenced.
19
However, according to court decisions5, the determination of reasonable compensation based on § 253 II BGB has to include consideration for all circumstances, i.e. not only the liable party’s financial circumstances but also the degree of fault and hence the fact that in such recourse situations a policyholder must ascribe the loss of insurance coverage to himself:6 Reprehensible conduct on the part of the liable party could suppress the idea of protecting him from pecuniary need.7
20
In these cases, the Federal Supreme Court thus no longer bases decisions on the liable party’s actual assets, rather the liable party is ultimately assessed in terms of the assets that he ought to have had.8
21
In summary it can be said that the existence of liability insurance and its classification as a part of the liable party’s assets has a considerable influence in court decisions on compensation for pain and suffering.
22
2. Scope of Physicians’ Duties In a judgment of 8 April 2003 the Federal Supreme Court9 assumed that (compulsorily insured) physicians have very far-reaching duties towards their patients in the following circumstances: 5 6 7 8 9
BGH in [1963] VersR, 185; BGH in [1955] VersR, 615. BGH in [1957] VersR, 573. BGH in [1961] VersR, 727, 728; BGH in [1955] VersR, 615, 617. H.-L. Weyers, Unfallschäden (1971), 127. BGH in [2003] VersR, 1126.
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24
The plaintiffs sued the defendant, chief of medical staff at a hospital, for lost maintenance payments. The father/husband of the plaintiffs was the defendant’s patient.
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Prior to commencement of the out-patient treatment, the defendant explained the risks to the patient and informed him that he would not be allowed to drive a motor vehicle after surgery. The patient’s family doctor had already informed him accordingly. The patient told the defendant that although he had driven his own car to the hospital, he would take a taxi home.
26
However, in spite of this, the patient left the clinic two and a half hours after the out-patient surgery without first having been discharged, drove off in his own car and shortly afterwards, for unknown reasons, veered over to the opposite side of the road, where he collided with a truck. He died at the scene of the accident. a) Assessment by the Federal Supreme Court:
27
In complete deviation from all lower courts the Federal Supreme Court affirmed the defendant’s liability.
28
In the opinion of the Federal Supreme Court the defendant violated the duty of supervision incumbent upon him.
29
The Federal Supreme Court recognized a supervision deficiency because the patient’s departure from the hospital should not have gone unnoticed.
30
Given the special circumstances of the case it would have been necessary to put the patient in a room in which he would have been under constant surveillance and, if necessary, reminded that he must not leave the hospital of his own accord (the room could thus have been a special waiting room).
31
In the case in question the Federal Supreme Court refused to recognize any comparative negligence on the part of the patient because the prevention of the ensuing accident was the sole responsibility of the defendant. b) Arguments against a violation of the duty of supervision:
32
This Federal Supreme Court decision, that has considerable repercussions, is called into question with notable arguments – because it extends the duty of care of the medical profession excessively:
33
The patient was sufficiently informed more than once (by his family doctor and the hospital physician) that he must not drive a motor vehicle after surgery. He had also promised to take a taxi home.
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Moreover, after surgery the patient had acted as agreed with the physician for several hours. During this period the defendant had spoken to his patient on a number of occasions.
34
On the basis of all this was it not reasonable for the physician to conclude that the patient had been reminded of his responsibility more than once and would continue to be cooperative until he was discharged?
35
If the Federal Supreme Court – unlike both the lower courts – requires that the patient be kept under constant surveillance, that is also not practicable.
36
Not only does it entail a considerable input of resources, it also places excessive demands on the responsible persons in the following respect:
37
The supervisors would never be able to take their eyes off the patient even for a second and logically would also have to accompany him to the toilet, so that he would not be able to leave the clinic through a window.10
38
With this verdict the Federal Supreme Court contradicts its own past decisions in which a duty of care incumbent on the physician was only postulated within the realm of what is reasonable.11
39
Another problem is posed by the Federal Supreme Court’s view that there is no comparative negligence incumbent on the patient.12
40
Ultimately this ignores the patient’s personal responsibility – it takes no account of the circumstance that the patient, though forewarned a number of times, drove to the clinic himself, thereby creating one of the causes of what happened later.
41
In spite of the physician being insured, the requirements of care should not be set so high as to be unachievable.
42
Undoubtedly the traffic accident that caused the patient’s death is very tragic.
43
However, the fact that the attending physician had liability insurance must not lead to requirements of care being imposed that are so unachievably exacting as in the case in question or to the patient’s comparative negligence being denied in spite of his considerable joint responsibility.
44
10 11
12
A. Laufs, [2003] Neue Juristische Wochenschrift (NJW), 2288, 2289. BGH in [2000] VersR, 1240, 1241; B. Konradt, Überwachungspflichten des Arztes bei ambulanten Eingriffen – praktisch unmöglich?, [2004] Recht und Schaden (r + s), 133. C. Katzenmeier, Überlagerungen des Schadensrechts durch das Versicherungsrecht, [2003] Medizinrecht (MedR), 631, 632.
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3. Extent of Parental Duty of Care
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There is a noteworthy Federal Supreme Court decision of 27 February 199613 on this topic, which, briefly summarized, was based on the following facts:
46
A plaintiff claims compensation for a fire in the building in which her workshop is housed.
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A 10-year-old boy, whose single mother is the defendant, had been playing with matches in the yard of the building.
48
The boy had already attracted attention on numerous other occasions in the past when he had played with fire. His mother had tried to counteract his habit with repeated reprimands and even a visit to a psychological advice center.
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However, on the day of the fire he was alone without supervision for three hours, in which time he set fire to paper that was being stored against the outer wall of the workshop building. The fire destroyed the plaintiff’s entire store of materials.
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The plaintiff’s insurer only paid compensation for the damage to the building.
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The plaintiff therefore sued the 10-year-old’s mother – on the grounds that she had breached her duty of supervision – for compensation for the material destroyed in the fire. Assessment by the Federal Supreme Court:
52
According to the comprehensible prevailing case law of the Federal Supreme Court parents of minors with a tendency to play with fire have an increased duty of parental supervision.
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Quite rightly the Federal Supreme Court assumes that the defendant failed to fulfill this increased duty of supervision, because she had allowed the 10-yearold to play outdoors and unsupervised for several hours.
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However the verdict is nevertheless remarkable in that the Federal Supreme Court specified the duty of supervision as follows:
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The child’s special disposition (…) calls for a constant monitoring of his behavior.
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Contrary to the opinion of the court of appeal in the Federal Supreme Court’s view, the duty to carry out constant surveillance is reasonable even for a single working parent. 13
BGH in [1996] NJW, 1404.
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Although the Federal Supreme Court conceded that supervision of this intensity is difficult to carry out in practice, especially for a working and single parent, it nevertheless argued as follows:
57
Moreover, the defendant had the possibility of insuring this risk (…).14
58
While the Federal Supreme Court certainly does acknowledge that the duty of supervision it imposed in this case is very exacting and not always feasible, it considers this to be endurable, because the financial consequences of violations (of this duty) do not have to be borne by the parents, but by the community of insureds:
59
The Federal Supreme Court made this quite clear by not only addressing the insurability of this risk in its verdict but also the fact that in this specific case insurance coverage did in fact exist.
60
Hence, in this verdict insurance coverage has an explicit and decisive impact on the assessment of liability.
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4. Scope of Attorneys’ Duties In a decision of 17 January 200215 the BGH found that the court of the previous instance had passed an unfounded judgment, but declared the attorney responsible for this misjudgment as he failed to notify the court of the divergent prevailing opinion.
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In a verdict of 12 August 200216 the Bundesverfassungsgericht (Federal Constitutional Court, BVerfG) clearly pointed out that, from an objective point of view, the opinion of the Federal Supreme Court cannot be justified, particularly not with the attorney’s liability insurance coverage.
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Facts of the case: The defendant, an attorney, had represented the plaintiff in a divorce case before the family court.
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The attorney agreed to the following settlement on behalf of his client, the plaintiff, as part of divorce proceedings:
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In the event of any substantial change in the present income situations, especially in the event of a change of the husband’s tax bracket, it is to be possible to alter the terms of this settlement (…).
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14
15 16
The BGH had already used this argument in an earlier verdict (BGH in [1995] NJW, 3385, 3386), there it speaks of “appropriately insuring” the risk. BGH in [2002] NJW, 1048. Bundesverfassungsgericht (BVerfG) in [2002] NJW, 2937.
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67
On conclusion of the settlement the spouses were in complete agreement that upon any change of the tax bracket – regardless of the size of the resultant reduction of net income – the alimony payments were to be recalculated.
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However, when the plaintiff’s tax bracket was altered, his ex-wife refused to accept a reduction of the alimony payments.
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The petition for amendment filed by the plaintiff, who was represented by the defendant, was rejected by the family court on the grounds that his net income had been reduced by less than 10% and thus not substantially.
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In reply to the defendant’s general comment that he could in principle appeal against the verdict the plaintiff stated that he wished to let the matter rest.
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This judgment became unappealable.
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However, the plaintiff then sued the defendant for compensation, alleging the latter had not advised him correctly on conclusion of the settlement before the family court and in the petition for amendment. a) Assessment by the Federal Supreme Court:
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In the opinion of the Federal Supreme Court the defendant violated his professional duties when drawing up the protocol for the alimony settlement, because the settlement wording did not express the wish of the spouses that the alimony payments were to be recalculated upon any change in tax bracket – regardless of the size of the resultant reduction of net income – with the necessary clarity.
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The case is of a special nature in that the Federal Supreme Court accurately established that not only the attorney had committed an error, but the family court was also clearly at fault:
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The judge failed to appreciate that as far as the possibility of amending this type of settlement is concerned it is the will of the parties that counts and not how the term substantial change is understood in legal provisions.
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This legal misjudgment by the judge of the family court prolonged the consequences of the attorney’s vagueness.
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However, surprisingly, the Federal Supreme Court is of the opinion that the attorney is to blame for the judge’s error. b) Assessment by the Federal Constitutional Court:
78
The Federal Constitutional Court, with which the attorney filed a complaint of unconstitutionality against the Federal Supreme Court’s verdict, rightly criticized the Federal Supreme Court’s decision:
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Such a shift of liability at the expense of the attorney is questionable from a constitutional law point of view (encroachment on the attorney’s freedom to practice a profession).
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The Federal Constitutional Court explicitly and clearly pointed out that attorneys are not liable, as an alternative, for erroneous court decisions just because they have taken out liability insurance.17
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II. Insurance Clauses 1. Children Incapable of Tortious Liability Personal liability insurance policies currently available on the market contain the following clause:
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In addition the following shall apply to children covered by this policy:
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The insurers will not invoke incapability of tortious liability in respect of children covered by this policy provided that is the wish of the policyholder and no other insurer (social security carrier) is liable to pay indemnity.18
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The insurers’ limit of indemnity for such loss or damage is 3000 euros per loss occurrence and policy year.”
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This additional coverage19 is offered irrespective of any legal liability of the policyholders (parents) or the insured (child covered by the policy).20
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Hence in these cases coverage is offered although no liability exists.
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This coverage is designed to enable individual policyholders to compensate voluntarily in order to safeguard their relations with neighbours or friends.
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2. Acts of Courtesy The usual clauses in the market have the following wording:
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Coverage includes legal liability due to loss or damage caused in connection with an act of courtesy; the following shall apply in addition:
89
17
18
19 20
In spite of this the Federal Constitutional Court did not accept the complaint because, if he shared the blame for an unfavourable legal position of his client that had been reinforced by court decision and a correction of the error could still have been achieved by pursuing the official stages of appeal, the attorney ought to have informed his client of the prospects of success of an appeal against the family court’s verdict. The insurers reserve the right to seek recourse for their expenses against liable third parties (e.g. persons with a duty of supervision), provided they are not insured under this policy. Optimum personal liability family coverage. The exception of comparative negligence remains.
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90
In the case of personal injury and property damage resulting from acts of courtesy the insurers will not invoke possible exceptions to liability, if the policyholder so wishes and no other insurer (e.g. social security carrier) is liable to pay indemnity.
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The insurers’ limit of indemnity for such loss or damage is 3000 euros per loss occurrence and policy year.”
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Hence here, too, coverage is offered although no liability exists.
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One of the purposes of the clause is to avoid disputes with friends and acquaintances if coverage is rejected due to exceptions of liability (generally accepted individual care).
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Because of clauses such as the two presented above insurers can possibly be said to have a certain amount of blame for the questionable development of increased liability owing to the existence of insurance coverage. III. Proposals for a Reform of the German Insurance Contract Law (Versicherungsvertragsgesetz)
95
In future, German insurance contract law is to lend even more weight to consumer protection.
96
This will result in a significant alteration that will considerably increase the impact of liability insurance on tort law in the future.
97
Example: 1. Abolition of the prohibition of acknowledgement of liability and satisfaction of claims as well as of the prohibition of assignment of claims
98
At the moment the policyholder is not entitled to acknowledge or satisfy a liability claim without the prior authorisation of the insurer.21
99
In future this prohibition is to be abolished.
100
The same applies to the permissible clause whereby insurance claims may not be assigned prior to their final determination without the express consent of the insurer.22
21
22
§ 154 II Versicherungsvertragsgesetz (VVG), § 5. 5 Allgemeine Bedingungen für die Haftpflichtversicherung (General Terms and Conditions of Liability Insurance, AHB). § 7. 3 AHB.
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2. Legal consequences of the two planned amendments Example: A medium-sized screw manufacturer (policyholder) supplies its specialised products to an automobile manufacturer.
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It does so in a volume that renders it dependent on the latter, a situation that is not infrequent.
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Following the insertion of the screws in the steering systems and delivery of the cars to the customers, some of the cars develop steering problems.
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The cause is unclear.
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Possible reasons are badly made screws, faulty insertion by the auto manufacturer or other sources of error for which the auto manufacturer is responsible.
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As a precaution all cars of the production run are recalled.
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a) The policyholder might possibly be forced, for economic reasons, to acknowledge the automobile manufacturer’s putative claim to compensation due to allegedly wrongly produced screws and assign its right to indemnity to the automobile manufacturer. b) A crucial consequence of the planned amendments is that – unlike hitherto – as a result of this assignment the policyholder is no longer a party to legal proceedings and, as a consequence, can also appear as a witness to prove the justification of the claims he has acknowledged himself. The danger of collusion between liable party and claimant is obvious.
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This example shows that as a result of the planned legal amendments the influence of liability insurance on the law of torts is likely to increase.
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THE VIEW OF A REINSURER: ON THE RELATIONSHIP BETWEEN LIABILITY INSURANCE AND TORT LAW Christian Lahnstein I.
Introduction
“Among the great modern problems of attributing loss or damage, the relationship between tort law and liability insurance remains the least clarified. There is no reliable information regarding all the relevant facts in the different countries – there are only widespread assumptions – nor has any conceptual framework been devised...”1
1
Weyers’ observations are still valid today, although the object of his remarks has undergone further development in the intervening decades.
2
For a long time, until about the late 1970s, the expansion of tort law ran parallel to the extension of the welfare state’s preventive and compensatory functions. It was the time of “no fault” debates about replacing tort law with firstparty insurance cover. On the one hand, tort law was masked by the continual expansion of social security. On the other hand, tort law evolved and new areas of application were discovered such as tort liability for pure financial losses. “It was suggested, perhaps not wholly in jest, that tort law was behaving rather like a bacterium faced with a new antibiotic and seeking to mutate itself in a fight for survival.”2
3
In the meantime, the process of extending the state’s functions and expenditure has stopped. The expansion of tort law, by contrast, is continuing. In most countries, tort reform means extending tort law.3 Tort reforms in the USA and
4
1
2
3
H.L. Weyers, Unfallschäden, Praxis und Ziele von Haftpflicht- und Vorsorgesystemen (1971), 423. W.V.H. Rogers, “Third-party” versus “first-party” insurance from the point of view of a tort lawyer – blown by contrary winds, in: Munich Re, 4th International Liability Forum (2000), 38. Overview in European Centre of Tort and Insurance Law: H. Koziol/B.C. Steininger (eds.), European Tort Law 2001 (2002); H. Koziol/B.C. Steininger (eds.), European Tort Law 2002 (2003); H. Koziol/B.C. Steininger (eds.), European Tort Law 2003 (2004) and H. Koziol/B.C. Steininger (eds.), European Tort Law 2004 (2005).
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Australia which restrict tort law (“in the books” though not necessarily “in action”) are exceptions. The global extension of tort law is another reason for looking at the interdependency of tort law and liability insurance, which appear to have a reciprocal effect on each other’s development.
5
There is no simple answer. Liability insurance on the side of the defendant, as well as first-party insurance on the plaintiff’s side, both shape tort law in two ways: they limit and they extend the areas where tort law is applied. Liability insurance has impacts on the prevention and compensation effects of tort law. It works in the opposite interests of the two parties involved: the legal protection interest of the defendant and the compensation interest of the plaintiff. And as third-party insurance – based on liability of the defendant – it also employs elements of first-party insurance more or less independent of liability.
6
Clarification of the relationship between liability insurance and tort law is not only of academic interest. Among other things, it helps liability insurers to identify and be more conscious of options they have in critical issues. II. Impact of First-Party Insurance on Tort Law
7
Does first-party insurance on the plaintiff’s side influence, supersede, limit or extend tort law? Does it motivate decisions against or in favour of liability?
8
Two mechanisms can be observed in the relationship between first-party insurance and tort law. On the one hand, they form an alternative or complementary system. On the other hand, there are parallel developments if specific trends and dynamics of first-party insurance are transferred to tort law.
9
– In many cases, first-party insurance cover renders tort law superfluous. Despite the prevalent litigiousness, most medical malpractice cases even in the USA do not actually lead to claims. This can be explained by the existence of health insurance and its low tendency to systematically pursue subrogation. Without health insurance, the victims of medical practice would be more prepared to litigate, if just for the higher medical costs. In Germany, health insurance and liability-replacing workers’ compensation insurance contribute to a situation where, apart from a few product liability cases, diseases are scarcely relevant as objects of tort law. Explicit or de facto waiver of subrogation on the part of property insurers makes liability rules redundant, e.g. in the case of co-insured liable parties such as tenants or lessees. The better the first-party cover, the smaller the role of tort law. The converse of this relationship then applies in the crisis of the welfare state: the less compensation is granted under social security (deductibles, waiting periods, cuts and caps of benefits, reduction of periods during which benefits are obtained), the more victims rely on tort law.4 Given that at the same time, de jure or de facto, the subrogation practice of health and disability insurers becomes more stringent, one can in4
U. Magnus, Comparative Report, in: U. Magnus (ed.), The impact of social security law on tort law (2003), 304, 305.
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deed speak of a “come back” and “renaissance” of tort law in the field of compensation for personal injuries.5 – On the other hand, there are parallel developments of first-party insurance and tort law. The increase in the size of serious personal injury claims in motor liability insurance in Germany, France and the UK, as well as the general development of costs in US liability insurance, can be explained to a substantial extent by medical cost inflation, which is in turn inconceivable without the specific dynamics between the healthcare industry and health insurance. The rise in the number of recognised pension claims in Swiss disability insurance involving what may be considered dubious post-traumatic stress disorder or whiplash cases not only triggers a series of other insurance benefits but also impacts liability insurance via subrogation.6 Liability is influenced, too, by extended concepts of material damage in the property insurance of IT risks. Conversely, cost control in the healthcare sector or more restrictive practices in disability insurance may reduce the costs of tort law again.
10
III. Impact of Liability Insurance on Tort Law A. Impact on the Preventive Function Does tort law have a preventive effect? Is its preventive effect weakened by liability insurance or is it made more concrete – through risk analyses and variable conditions and rates? Opinions differ on this, and there is a lack of empirical studies on most of the aspects.7
11
– Prevention through anticipation of liability situations: The preventive effect of tort law, especially where there is no tight public law regulation, results from the “indirect influencing of behaviour”.8 Tort law is intended to prevent hazardous activities, production processes or products or to make them more expensive. But even after extensive analysis of the experience with the German Environmental Liability Act, the empirical foundation remains weak. A decline in environmental damage cases was observed, but could not be attributed to increased liability, given the usual instrumental mix in environmental law. A preventive effect presupposes that liability situations are perceived in time.9 Unfortunately they are often badly understood and documented. This is
12
5 6
7
8 9
Cf. supra fn. 4. E. Murer, Die verfehlte rechtliche Behandlung der „Versicherungsfälle unklarer Kausalität“ und ihre Auswirkungen auf die Rentenexplosion in der IV, in: E. Murer (ed.), Die 5. IVG-Revision: Kann sie die Rentenexplosion stoppen? (2004), 3, 4. Although the preventive effect of the German Environmental Liability Act of 1991 has been the subject of a veritable battery of studies, especially by sociologists and economists, cf. infra fn. 9. Cf. M. Kloepfer, Umweltrecht (2nd edn. 1998), 263 et seq., 403 et seq. In Germany a “striking weakness in the preventive effect of environmental liability” has been explained by the fact that “through risk transfer to insurers, the economic preconditions and, owing to the lack of risk knowledge, the cognitive preconditions for prevention are not fulfilled.” U. Hapke, Umwelthaftung, Versicherung und Prävention. Möglichkeiten und Grenzen haftungsinduzierter Prävention unter den Bedingungen von Wissen und Nichtwissen, [1999] Zeitschrift für Rechtssoziologie, 20, 55.
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the case with internationally operating industrial firms, owing to the many different constituent facts, legal systems and cultural parameters involved, the temporal dimensions of slowly developing damage and claims processes and the speed of mergers and acquisitions. Anticipating complex liability situations and setting adequate prices for them is one of liability insurance’s contributions to prevention, or at least it should be.
13
– Prevention through risk segmentation and premium differentiation: Just as tort law allocates costs through causal attribution, liability insurance can determine through rating structures how the costs of liability losses are allocated to more or less broadly defined groups of responsible parties. In the case of narrow allocation, making hazardous activities more expensive can have a prohibitive effect. Sometimes this is an undesired effect as in the case of obstetricians in the USA.10 However, the costs of liability insurance are normally too small to produce major preventive effects.
14
– Prevention through technical analyses and inspections: Even if these do not directly remove the source of the hazard, they at least improve the “cognitive preconditions” for a preventive effect of tort law.11 In fact, compulsory liability insurance serves more to compensate injured parties than to prevent hazardous activities, a task that is mostly left to other institutions. In connection with environmental damage, moves towards deregulation through tort law and liability insurance, towards transferring public prevention tasks to liability insurers have not succeeded so far.12 The same applies on the international level where a proposal for insurers to assume preventive functions through individual risk assessments in compulsory insurance was being discussed in connection with the Basel Convention.13
15
– Prevention through insurance cover for loss minimisation costs: The rule that expenses for preventing imminent loss or damage are indemnified is a common principle of both damages and insurance contract rules.14 It applies on the one hand to expenses of the potential injured plaintiff and on the other to expenses of the potentially liable defendant and policyholder, which are included in the cover as loss minimisation expenses. With damage processes of long duration (e.g. toxic torts in products, environmental or employers’ liability insurance), the criterion “imminent” is dubious. In this grey zone, first-party insurance has been developed, especially for recall and clean-up costs. Through third-party and first-party insurance elements, which partly comple10
11 12
13
14
More usual in this case is a legal or economic channelling of liability and insurance through the hospitals. Cf. supra fn. 9. The Chile example: environmental regulation and liability in Ley 19.300 of 1994 with simultaneous attempt to make provisional licences for operation dependent on the firm having liability insurance. Protocol on Liability and Compensation for Damage Resulting from Transboundary Movements of Hazardous Wastes and their Disposal. Cf. P. Schimikowski, Ersatz von Kosten zur Schadenabwendung in der Haftpflichtversicherung, [1999] Versicherungsrecht (VersR), 1196.
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ment each other and partly overlap, loss prevention and loss minimisation measures are financed prior to or in the initial stages of a liability loss. B. Impact on Compensation Tort law and liability insurance have mostly developed parallel to one another. This says nothing about their interdependency, however. The question is less whether than how liability insurance influences tort law rules and practices. Does it have the effect of limiting liability and damages rules in the interest of the defendant’s legal protection or does it have the effect of extending them in the compensation interest of the plaintiff?
16
Liability insurers’ contractual obligations to satisfy justified claims and to defend unjustified ones are fulfilled under the competitive constraints of cost minimisation on the one hand and public relations on the other. The parameters vary considerably. A distinction can be made between two situations: The role of liability insurance in the gradual implementation of tort law in basic areas of application (mainly in developing countries, mainly tort law “in action”); and the role of liability insurance in the further development of tort law in developed liability regimes and insurance markets.
17
1. “Law in Action” in Developing Markets Looked at worldwide, a frequent situation is that of undisputed but not applied tort law rules. This situation exists in a substantial portion of the 100,000 asbestos-induced deaths that occur each year, of the million fatal occupational accidents,15 or of the half a million deaths on the roads.16 Here even a moderate application of basic tort law rules – not to mention the more sophisticated rules in the globally booming product liability and consumer protection laws – would cause whole sectors of the economy to collapse. An appropriate description of tort law in this situation presupposes a sociological investigation of the structural reasons for its non-application.17
18
Everywhere the possibilities of causing loss exceed the capacity to pay. Everywhere tort law, especially the all-or-nothing principle, contradicts economic realities. Liability insurance offers a way out of this dilemma – a process of gradual internalisation of claims costs in combination with social security and private insurance first-party covers.
19
In view of the difficulties of this process, especially in developing markets, motor liability insurers often fear the dynamic effect of an increase in compensation for bodily injury. The share of motor insurance in the gross business of private insurers is high. And its share of the net business retained by the companies is even higher, since motor insurance is not so extensively rein-
20
15 16 17
Estimates of the ILO. Estimate by Munich Re. Cf. N. Luhmann, Das Recht der Gesellschaft (1995), 568–571.
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sured.18 The insurance limits are sometimes high in developing countries as well, owing to statutory regulations for compulsory motor liability insurance. In other countries they are kept low. In both cases, claims departments – in view of the duration and risks of legal action – tend to propose low out-ofcourt settlements. Increasingly, however, even in developing countries, the legal protection function of liability insurance is seen as settling most cases out of court without hiding behind structures and procedural rules that are hostile to claimants, for example by stipulating in the policy that a legally effective judgement is a precondition for payment.
21
In developing countries, the practice of out-of-court settlement – in the case of smaller amounts without closer examination of the question of liability – is frequently formalised in a “medical expenses” clause, which represents a firstparty element with low limits. In some cases this “no-fault” approach has been extended and made compulsory as an alternative to compulsory motor liability insurance.19
22
The current role of liability insurance in developing markets remains ambivalent: things will not function without it, but they do not function with it either. Wordings are too narrow and claims are settled too restrictively. Low insurance limits work like liability caps. As long as no default interest is due, these low limits as a nominal debt are additionally devalued by inflation in the case of a long term damages. There remains much to do for a gradually globalising market. 2. Developed Liability Regimes and Insurance Markets
23
– It is now the rule in tort reform projects that legislators “at least bear liability insurance in mind”20. Examples of close coordination are the German Pharmaceuticals Act of 1976 and Environmental Liability Act of 1990, or the 15-year debate preceding the European Environmental Damage Directive of 2004. In projects involving strict liability, insurers try partly to oppose this in the interest of the parties being targeted and partly to draw borders of insurability in their own interest; or they just see new liabilities as a business opportunity and develop products, appropriate specialisation and sales strategies.
24
Insurance debates in connection with tort reform projects are often unsatisfactory. Insurers argue with abstract insurability criteria or with loss-trend statements that have scant empirical basis. Legislators and stakeholders have unclear ideas about the relationship between liability and coverage or between liability caps and compulsory minimum sums insured. A lack of empirical evidence on the role of liability insurance again proves a handicap. 18
19 20
“General” liability insurance, especially industrial liability insurance, which is less homogenous than motor liability insurance, is traditionally reinsured to a substantial extent. This contributes to higher insurance limits and higher compensation. For example in Brazil, Chile and Colombia. H.L. Weyers (supra fn. 1), 426.
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– To what extent are standard-of-care decisions influenced by liability insurance? Without it, as has often been observed, the extension of negligence liability would be scarcely explicable.21 The objectivisation of liability through court judgments means not only improved compensation but frequently also “juridification of the different areas of life” (e.g. in the question of how safe ski pistes or adventure playgrounds must be). Thus liability insurance contributes to the tendency of liability judges – as has been critically observed – to consider such “regulating to be something normal”.22
25
Certainly, the definition of duties of care is largely determined by broader societal influences, be it towards more safety or towards a more risk-taking behaviour. Does it depend on whether the judge takes into account the existence of a liability insurance policy? Does the influence of liability insurance not consist in the fact that, as things are, the judge frequently just does not have to concern himself at all with the ability of the defendant to pay?
26
– Policyholders are mostly themselves communities with certain insurancelike features: families, companies (not only in relation to employees and managers but also to subcontractors and subsidiaries), public institutions, owners and users of vehicles. The legal channelling (regulation of liability relations internally between the individual members of the group and externally) is masked or overruled by economic channelling in liability insurance: worldwide “master covers” which protect all group companies under the same insurance capacity, regulation of co-insurance and non-subrogation which corresponds with similar contract rules in first-party insurance.
27
– Legal and economic channelling through liability insurance also takes place in the further context of causal attribution. If one regards causality as “technological or institutional settings of relationships between causes and effects”,23 institutional attribution conventions may be seen when loss burdens tend to be transferred to those areas where there is liability insurance. Decisions on compulsory insurance are consequently decisions about which of several causal attributions under tort law are to be systematically implemented in practice.24
28
IV. Final Remarks Stapleton refers to both first-party and liability insurance when she argues that “neither actual insurance nor insurability should be relevant to the reach and 21
22
23 24
H.L. Weyers (supra fn. 1), 428, and C.v. Bar, Wandel der Haftpflichtversicherung, [1981] Archiv für die civilistische Praxis (AcP) 181, 292–294. E. Steffen, Haftung im Wandel, [1993] Zeitschrift für die gesamte Versicherungswirtschaft (ZversWiss) 82, 23. N. Luhmann, Risk and causality, in: Munich Re, 1st International Liability Forum (1997), 62. In Spain, strong professional representation has organised professional liability insurance for all architects, engineers and master builders since the 1950s. From this there has developed a notable tradition of causal attribution of damage in the building sector to these professional groups.
29
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shape of tort liability”.25 Of course she knows that facts speak against this: that broad application areas of tort law have de facto been supplanted by first-party insurance; that other application areas will only come into being as a result of liability insurance. Nevertheless, she considers this “clear relevance of insurance to the operation of tort law in daily life” to be “not inconsistent with the traditional view of the irrelevance of insurance for liability”. On this point, Baker quotes Ross: “Such legal philosophy has lost contact with the reality of modern society.”26 Two concluding considerations:
30
Those who emphasise the role of liability insurance in tort law do not want to replace tort law with insurance. In contrast to first-party insurance and nofault models, liability insurance does not replace liability and damages rules, but refers to them even whilst it influences them.
31
It is no longer a matter of ideology – the establishment of a consistent and efficient compensation system inevitably based on a national welfare state. Rather, it is a matter of better recognising the unavoidably inconsistent and inefficient reality of tort law. This is necessary not only in the light of deficiencies in developing countries and contradictions in US tort law; particular features of continental tort practice are also questionable: the cost and effort, for example, devoted by insurers and courts in Germany to minor personal injuries and material damage arising from traffic accidents.
32
The traditional descriptions of tort law do not give enough consideration to these realities. But insurers, too, should make clear and better substantiate their functions; as described in Baker’s casebook on “Insurance Law and Policy”: 27
33
“Insurance ideas and practices define central priveges and responsibilities within a society. In that sense, our insurance arrangements form a material constitution, one that operates through routine, mundane transactions that nevertheless define the contours of individual and social responsibility. For that reason, studying who is eligible to receive what insurance benefits, and who pays for them, is as good a guide to the social compact as any combination of Supreme Court opinions.”
25
26 27
J. Stapleton, Tort, Insurance and Ideology, [1995] 58 The Modern Law Review (M.L.R.) 820, 825. Baker’s Report in this book, no. 42. T. Baker, Insurance Law and Policy (2003), (introduction).
THE VIEW OF AN AMERICAN INSURANCE LAW SCHOLAR: SIX WAYS THAT LIABILITY INSURANCE SHAPES TORT LAW Tom Baker1 A highlight of the European Centre of Tort and Insurance Law conference that prompted this essay was the opportunity to engage in extended conversation with Continental torts scholars. In these conversations I was struck by the depth of feeling that accompanied my Continental colleagues’ insistence that liability insurance had not had an impact on tort law and, moreover, that it would be illegitimate for liability insurance to have such an impact. I had arrived at the conference with a laundry list of what we knew and did not know about the impact of insurance on tort law, ready to discuss research agendas for extending that knowledge, and here I was confronted with a challenge to the basic premise.
1
My answer was less immediately persuasive to the Continental challengers than I expected. They dismissed my explanation of the role of liability insurance in the narrowing of traditional tort immunities (e.g., intra-family, governmental, charitable) as a marginal development. Moreover, they could explain that development within their framework of law as an autonomous field. In their view, the narrowing of traditional immunities simply reflected the successful expansion of tort law into the realms of the family, the state, and the church. Insurance had little or nothing to do with it.
2
In addition, they dismissed as irrelevant my description of the role that insurance plays in organizing the behavior of legal actors and therefore in shaping tort “law in action.” That was sociology, not law.
3
Crossing back over the Atlantic, I pondered my response. The challengers’ point about the narrowing of tort immunities was a good one. Of course I was ready to explain how liability insurance allowed lawmakers to believe that inserting tort law into the domain of the family, the state and the church would be less disruptive than might otherwise be supposed (try telling that to the
4
1
University of Connecticut.
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Catholic Church today) and, moreover, that liability insurance encouraged some defendants to attempt to abandon their immunity in order to force their liability insurers to compensate their victims. But I recognized that the story of cause and effect here was not a clear one, and that even a carefully argued and documented story about immunities was unlikely to persuade my Continental colleagues.
5
And so I resolved to rest my case on sociology, in the hope that I could persuade them to adopt a view of law that is encompassing enough to include the behavior of lawyers and litigants. Adopting that view, they could not help but see the impact that insurance has had on tort law more broadly understood. I.
A Brief Note on Method
6
Because I am describing the behavior of litigants and lawyers, traditional legal sources such as statutes, cases, and treatises are of little assistance. Instead, drawing on a long tradition of sociological jurisprudence in the United States, I have gone into the field. The sources for the quotations that I will use to illustrate my points are the Florida and Connecticut lawyers I interviewed for the studies reported in the Wisconsin Law Review and the Law and Society Review.2 I will also be drawing on my experience as a participant observer in a legal career that has kept me in near constant contact with lawyers, litigants, and a variety of insurance institutions.
7
This approach can be dismissed as anecdotal,3 but it offers a view inside the workings of the legal system that no ordinary law book can provide. While qualitative research of this sort does not provide conclusive evidence regarding the prevalence or extent of the practices observed, it can be used to frame more systematic, quantitative analysis that may provide that evidence. In the meantime the persuasive power of qualitative research depends, like traditional doctrinal and policy argument, on the reader’s response to the coherence and plausibility of the analysis. II. The Impact of Liability Insurance on Tort Law
8
Leaving aside difficult to interpret doctrinal developments, such as the abrogation of traditional immunities, liability insurance has at least the following six impacts on tort law in action. First, for claims against all but the wealthiest individuals and organizations, liability insurance is a de facto element of tort liability. Second, liability insurance limits are a de facto cap on tort damages. Third, tort claims are shaped to match the available liability insurance, with the result that liability insurance policy exclusions become de facto limits on 2
3
T. Baker, Transforming Punishment Into Compensation: In the Shadow of Punitive Damages, [1998] Wisconsin Law Review (Wis.L.Rev.), 211–236; T. Baker, Blood Money, New Money, and the Moral Economy of Tort Law in Action, [2001] 35 Law & Society Review, 275–319. E.g. D. Kessler/D. Rubinfeld, Empirical Study of the Civil Justice System, National Bureau of Economic Research, Working Paper W10825 (October 2004).
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tort liability. Fourth, liability insurance makes lawsuits against ordinary individuals and small organizations into “repeat player” lawsuits on the defense side, making tort law in action less focused on the fault of individual defendants and more focused on managing aggregate costs. Fifth, liability insurance personnel transform complex tort rules into simple “rules of thumb,” also with the result that tort law in action is less concerned with the fault of individual defendants than tort law on the books. Sixth, negotiations over the boundaries of liability insurance coverage (which appears nowhere in tort law on the books) drive tort law in action. The sections that follow briefly describe each. A. In Practice, Liability Insurance is an Element of Tort Liability The legal elements of tort liability are well known. The defendant must have a legal duty to avoid harm to the plaintiff. The defendant must have breached the standard of care that applies in the particular situation. And that breach must have caused damage to the plaintiff. For a lawyer considering whether to take a particular case on a contingency basis, however, or for a litigant considering whether to finance a claim upon some other basis, these legal elements are only a starting point. Liability by itself is not enough. The defendant must have the ability to pay.
9
In typically colorful language, the tort lawyers I interviewed emphasized this basic point:
10
“I was taught on my first day of practice there are three things: liability, damages, collectibility. I need collectibility first. I need damages second. I’m a good lawyer, I’ll prove liability.”
11
Insurance has a fundamental effect on what this lawyer called collectibility – the defendant’s ability to pay and the facility with which the defendant can be made to pay.
12
Given the extent of consumer debt, the availability of bankruptcy to discharge civil liabilities, and the existence of limited but important exceptions to the assets that must be liquidated in a bankruptcy proceeding, the practical reality of tort litigation in the United States is that liability insurance is the only asset that plaintiffs can count on collecting.4 As one lawyer put it:
13
“The ideal case, from a plaintiffs’ perspective, would be a rear ender [automobile accident], with terrible injuries, and a big insurance policy. On the other hand, if you have a fall down on a private property with no homeowners [insurance], that sounds like the worst case.”
14
4
See S. Gilles (unpublished manuscript on file with the author).
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15
My field research confirmed the obvious point that insurance is the asset that matters for all but the wealthiest individual defendants and small organizations.5
16
There is some evidence that this is also the case in many commercial disputes. Professor Lynn Lopucki has advanced and defended the controversial but plausible thesis that corporate groups increasingly locate risk in entities with no assets and place assets in entities with no risk,6 with the result that the liability insurance of the risky entity is all that is available for victims if and when the risk matures into harm. Professor Lopucki may well have overstated the case for ordinary tort litigation, but for mass tort claims he is not far from the mark. The increasing use of corporate bankruptcy as mass tort litigation risk management tool makes liability insurance the asset that matters for mass tort victims as well.
17
If liability insurance is a de facto element of tort liability, then people without liability insurance will not be subject to tort liability. In practice, people are required, either by law or contract in the U.S., to purchase liability insurance in a wide variety of settings (a fact that shows that lawmakers and strong contracting parties understand that liability insurance is a practical predicate for tort liability). But people are not required to purchase liability insurance in all settings. For example, people who rent their home in the United States are rarely required to purchase general liability insurance and rarely do so voluntarily. The only liability insurance most renters purchase is automobile liability insurance. As a result, most renters are as a practical matter immune from civil suit in the U.S., except in the case of an automobile accident.
18
This practical immunity does not show up in tort law on the books. But if broader renter’s insurance were required, and if the requirement were enforced, a new domain of opportunity would open for tort lawyers, and the resulting flow of cases would surely have some effect on the development of tort doctrine. That effect might be as imperceptible on a day-to-day basis as the effect of lawyers’ feet walking up the steps to the courthouse. But over time, pits and grooves will show. Even if they do not, however, the shape of tort law as a field of action will have changed. B. Liability Insurance Policy Limits are De Facto Caps on Tort Damages
19
In contrast to what I understand to be the case in some European jurisdictions, liability insurance policies in the United States are sold with limits on the amount of money that the liability insurer is obligated to pay for a particular claim or event, even if the damages owed by the insured are much larger. For example, as my European colleagues were shocked to learn, the limit on the mandatory automobile liability insurance policy in my state of Connecticut is 5 6
T. Baker (supra fn. 2). L. Lopucki, The Death of Liability, [1996] 106 Yale Law Journal (Yale L. J), 1.
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$20,000 per person, $40,000 per accident, meaning that the maximum amount that the liability insurer must pay any one person is $20,000 and the maximum amount that the insurer must pay all victims from any one accident is $40,000. Of course, many people voluntarily purchase automobile liability insurance policies with limits that are much higher, but many people do not. In addition to these per claim or per event limits, many liability insurance policies also contain a specified dollar limit on the total amount of money that the insurer is obligated to pay for all claims or events covered by the policy. In my experience, such “aggregate” limits are universal in both personal and commercial general liability policies in the U.S. (but not in automobile liability policies). For defendants who would not be sued in the absence of liability insurance, the fact that the insurance policy limit functions as a de facto “cap” on the defendants’ tort liability is obvious. What may not be quite so obvious is that the policy limit more often than not functions as a cap even for defendants who have other assets. There is good evidence that payments in excess of the policy limits are extraordinarily rare in cases involving individual defendants,7 and nearly as rare in cases involving commercial defendants.8 I have concluded that this situation results from a combination of factors: the existence of a cause of action for breach of the insurer’s “duty to settle,” the anchoring effect of the policy limit during settlement negotiations, the liability insurer’s power to control settlements within the policy limits but not beyond the policy limits, and the related development of settlement norms within the tort litigation bar.9
20
For present purposes, however, the reasons that liability insurance policy limits function as a cap on tort damages do not matter. What matters is the consequence: Even tort litigation against wealthy individuals and large organizations has become, in all but the unusual case, an exercise in recovering money from liability insurance companies and only from insurance companies.10
21
C. Tort Claims are Shaped to Match the Available Liability Insurance This next effect of liability insurance on tort law in action is a corollary to the first two. If only people with insurance are sued, and if the suits are targeted at 7
8
9 10
T. Baker (supra fn. 2); B.S. Black/B.R. Cheffins/M. Klausner, Outside Director Liability, Stanford Law and Economics Olin Working Paper No. 250 (available at www.ssrn.com) (reporting that directors and officers of corporations do not as a practical matter face any individual liability in securities fraud actions because claims are virtually always settled within the limits of their D&O insurance policies). See Texas Department of Insurance, 2002 Texas Liability Insurance Closed Claim Annual Report, 2 (reporting that there was a payment in excess of policy limits in only 31 out of 9723 liability insurance paid claims in 2002 and that the total amount paid above the limits in those cases was $9 million, as compared to $1.8 billion in total liability payments in Texas in 2002; by comparison settlements by commercial insured within their deductible totaled $41 million in Texas in 2002). See generally, T. Baker (supra fn. 2). The widespread recent publicity surrounding the fact that members of the WorldCom board of directors were paying some of their own money to settle the WorldCom securities fraud litigation provides some evidence in support of my claim.
22
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recovering insurance money, then claims that fit into one of the exclusions in the applicable liability insurance policy (and thus would not be covered by the policy) are not worth bringing. Of course there are exceptions. Some defendants have enough assets that insurance does not matter. And some plaintiffs have the interest and the means to bring a lawsuit even when the defendant is not able to pay the damages. But the existence of these exceptions does not change the effect that the general rule has on the shape of tort law in action: Exclusions in liability insurance policies create, in effect, remote islands of tort liability that lawyers and law professors know about, but almost no one goes to visit.
23
One important example is the exclusion for intentional harm, which is nearly universal in liability insurance policies in the U.S. covering bodily injury. This exclusion explains the dearth of intentional bodily injury tort actions brought in the U.S. The plaintiffs’ lawyers I interviewed explained this situation as follows:
24
“If you allege that he intentionally whacked her over the head, say with a baseball bat, okay, then the homeowner’s policy doesn’t come into effect. If you say that he negligently and carelessly struck her or did something that he shouldn’t have done, then the homeowner’s policy comes into effect. So, you’ve got to be very careful about what you allege – what your facts are.
25
I’m not dealing with intentional torts and when I have what I think is an intentional tort, I couch my complaint in negligence and hopefully I’ll get the same efforts from personal counsel for the defendant, the individual defendant or corporate defendant, to say we didn’t mean it.”
26
The defense lawyers corroborated this practice and explained that their duty to their clients means that they support the plaintiffs’ effort to shape the claim to meet the coverage:
27
“So what does the plaintiff’s lawyer do? He doesn’t even bother to sue for assault and battery, if he has any sense. He just proceeds on a negligence theory and does not bring the assault and battery theory, because there’s no coverage in assault and battery and he runs the risk of the jury filling in the assault and battery line instead of the negligence line, and how does he explain that to his client? He got a hundred dollar judgment. Try and collect it. There’s no coverage.
28
What about the scenario where the suit is just pled in negligence and it’s not pled as an intentional tort? Now the insurance company hires you and you are there defending the negligence action. What are you going to do, say it wasn’t negligence but he did do it intentionally?”
29
Both legal rules and professional norms require defense lawyers to place the interests of the insured defendant ahead of the interests of the insurance com-
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pany paying the defense costs.11 As a result, defense lawyers in the U.S. to some extent cooperate with the plaintiffs’ lawyer in shaping the claim to fit the available coverage. D. Liability Insurers are the Ultimate “Repeat Players” Tort doctrine treats tort liability as the responsibility of a particular defendant to a particular plaintiff for a particular wrong. Liability insurance shifts the liability of the particular defendant to an entity for which that liability is simply one among an enormous portfolio of contingent financial obligations. Legal norms obligate the insurance company, and to a greater extent the lawyer employed by the insurance company, to handle the liability claim so that the interests of the particular defendant are paramount,12 and in my experience insurance companies largely attempt to honor that norm.
30
But, insurance companies also recognize and act upon the fact that they hold a portfolio of claims. This means that the results in one case can affect the results in another. As a result, liability insurers have an interest in the development of tort law rules and settlement norms that goes far beyond the interests of any ordinary defendant. In the terms of Mark Galanter’s classic study, liability insurers are the ultimate “repeat player.”13
31
As reflected by the statement that follows, this portfolio approach to litigation management frustrates plaintiffs’ lawyers, but there is little that they can do about it:
32
“Unless your client’s a quadriplegic, they don’t want to pay. And I think that’s unethical, because I think what they do is they … They’re supposed to be dealing with each case separately under the canons and I think what they’re doing is they say – they won’t verbalize this exactly – ‘Yes, this case is worth the policy. However, if we settle this case, then the next case will be brought, and we want to have a chilling effect on people suing our clients and reduce the overall amount we pay. And the way to do that is by using this case as an example.’ They definitely do that. That’s unethical. That’s like me saying, ‘I know that Mary Jones, my plaintiff here, I know that her case is worth thirty five thousand, but I’ll settle for twenty because my other client’s case for the same company, I think I can get an extra ten thousand for that, so it’ll wash. Plus they’re a better client, because they have three cases.’ I don’t see the difference.”
33
The repeat player phenomenon makes tort law in action less focused on the fault of individual defendants and more focused on managing aggregate costs.
34
11
12 13
See generally, T. Baker, Liability Insurance Conflicts and Defense Lawyers: From Triangles to Tetrahedrons, [1998] 4 Connecticut Insurance Law Journal (Conn. Ins. L. J.), 101. Idem. M. Galanter, Why the “Haves” Come Out Ahead: Speculations on the Limits of Legal Change, [1974] 9 Law & Society Review, 95–160.
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35
Many liability insurance company executives would assert that their repeat player advantage is more than outweighed by the bias of judges and juries. Judges and juries know that defendants have insurance, and as a result they are more likely to award the plaintiff damages, or so the argument goes.14 Interestingly, empirical research on jury behavior suggests that juries are at least as concerned with the health and other first party insurance held by the plaintiffs, and with making sure that the plaintiffs do not get a double recovery,15 but the direction of the bias is less important than the widespread belief that it exists. Since cases are settled in the “shadow of the law” based on the parties’ predictions about what will happen in court,16 a widespread belief that juries act in certain ways has the same effect whether juries in fact act in that way or not.
36
Liability insurance helps transform tort litigation into a multi-player iterative game that develops and transmits beliefs and norms that become part of the rules of that game. In my view, those beliefs and norms constitute the real tort law for far more people than does the tort law on the books. E. Liability Insurance Transforms Tort Rules into Simple “Rules of Thumb”
37
Ross’s classic study of automobile accident claims handling provides the most extended account of the way that insurance adjusters transform complex tort rules into simpler and more easily administered rules of thumb.17 In an important sense, this effect of liability insurance on tort law in action is simply an instance of the “repeat player” effect just described. But the practical implications of insurance adjustment are worth special mention. Otherwise, one might be misled into thinking that the repeat player status of the liability insurance company primarily affects only the development of tort law on the books.
38
One of Ross’s best examples is the rear end collision – an automobile accident in which one car hits another car from behind. According to the formal tort law rule, liability depends on a careful and case-specific analysis of the accident and a consideration of whether the drivers exercised the degree of care that a reasonable person would ordinarily exercise in that situation. Ross’s adjusters applied a simpler, easier to administer rule that probably had the same result as the formal rule in most situations. Their rule was that the driver of the car in back was liable in all cases.
14
15
16
17
See, e.g., K. Syverud, On the Demand for Liability Insurance, [1994] 72 Texas Law Review (Tex. L. Rev.), 1629. See S.S. Diamond/N. Vidmar, Jury Room Ruminations on Forbidden Topics, [2001] 87 Virginia Law Review (Virginia L. Rev.), 1857. R.H. Mnookin/L. Kornhauser, Bargaining in the Shadow of the Law: The Case of Divorce, [1979] 88 Yale L.J., 950. H.L. Ross, Settled Out of Court: The Social Process of Insurance Claims (1970).
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Such rules are not universally applied. The greater the stakes, the more likely that the rules of thumb will give way to the particularized assessments that formal tort doctrine requires.18 But, in the aggregate they combine to make tort law in action less focused on the individual fault of individual defendants than tort law on the books.
39
Ross generalized from this example as follows:
40
“Adjustment of insurance claims compromises the legal mandate for individualized treatment with the need of a bureaucratic system for efficient processing of cases. This compromise can be observed at many points in the processes of investigation and evaluation. Investigation is vastly simplified, for instance, by presumptions as to liability based on the physical facts of the accident. Accidents are thus seldom individualized to an insurance adjuster or a claims attorney. Rather, they are rear-enders, red-light cases, stop sign cases, and the like, and the placement of an accident into one of these categories ordinarily satisfies the requirements for investigation of liability. …
41
These observations are not meant as criticism of the good faith of the insurance industry or other parties associated in the handling of claims. Rather they are meant to put claims handling into proper context; to show that here as elsewhere – for example in handling pleas to criminal charges, or in making decisions as to whether a mental condition merits institutional commitment – a large scale society proceeds by routinizing and simplifying inherently complex and difficult procedures. This is how the work of the world is done. This is the law, as it is experienced by its clients rather than by its philosophers. Perhaps in the light of some kinds of legal philosophy it is bad law. In my opinion, such legal philosophy has lost contact with the reality of modern society.”19
42
Ross’s larger point about the nature of tort law is worth noting.20 Ross’s point has taken hold in the American legal academy, and to a lesser extent in other jurisdictions influenced by the “law and society” approach that Ross’s classic study exemplified.
43
I would never argue that tort doctrine and the consistent behavior of insurance adjusters are “law” in exactly the same sense, nor would I argue that tort doctrine is irrelevant.21 But I would argue that any law professor who thinks that
44
18
19 20
21
Idem (“An injury situation that can qualify a claim as a ‘big case’ may receive something of the individualized treatment envisaged by the appellate courts.”). H.L. Ross (supra fn. 17), 135. Cf. P. Bourdieau, The Logic of Practice (1990), 103 (“[T]he rule … is the obstacle par excellence to the construction of an adequate theory of practice”). P. Bourdieau (supra fn. 20), 108 (“[T]he official description of reality is part of a full definition of reality ….”). For an extended example of research incorporating doctrinal and law-in-action analysis, see T. Baker, Constructing the Insurance Relationship: Sales Stories, Claims Stories and Insurance Contract Damages, [1994] 72 Tex. L. Rev., 1395.
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the routine behavior of “street level bureaucrats”22 like insurance adjusters is not “law” needs to spend some time representing real people in the ordinary, low value accident cases that constitute the bulk of the tort law universe. F. Negotiations over Insurance Boundaries Drive Tort Law in Action
45
The final way that liability insurance shapes tort law is a bit harder to describe, perhaps because this point may well be the only truly new idea in this essay. The main idea here is to generalize an implied corollary of impacts one, two and three, above. As you may recall, those three are: liability insurance is a de facto element of tort law, liability insurance limits are de facto caps on tort damages, and tort claims are shaped to match the available liability insurance coverage. Each of these, of course, overstates the case. There are exceptions.
46
Each of these impacts calls attention to a different kind of liability insurance boundary: who has liability insurance, for how much, and with regard to what kinds of liabilities. Each of these kinds of boundaries exerts a shaping force on tort law.
47
As a philosophical and doctrinal matter, tort liability certainly could exist outside the boundaries of liability insurance coverage, but we are not going to go through the effort of establishing liability “out there” very often, because there is no return in it. This suggests that liability insurance coverage establishes to some extent the boundaries of tort law itself, or at the very least the boundaries of tort law in action.
48
Alternatively, we might say that uninsured individuals are “outlaws” with regard to tort law and that liability insurance industry practices have the effect of making people “outlaws” with regard to tort liabilities. The kinds of practices that turn people into tort law outlaws include exclusions in liability insurance policies, marketing practices that leave populations uninsured (e.g., “redlining”23), and the practice in the U.S. of bundling liability insurance with some kinds of property insurance but not others.
49
As this suggests, negotiation over who gets insurance, for how much, and against which kinds of liabilities drives tort law in action. These negotiations occur in legislatures debating what kinds of liability insurance to require and when; in administrative agencies debating how much effort to devote to enforcement of the insurance mandate; within large organizations debating whether to include an insurance clause in a standard form contract, how to word the clause, and whether to allow waivers; among contracting parties negotiating whether to include insurance requirements in their deals; and in the many places in which liability insurers establish and apply rules regarding 22
23
See generally M. Lipsky, Street Level Bureaucracy: Dilemmas of the Individual in Public Services (1980); see also, T. Baker, Constructing the Insurance Relationship: Sales Stories, Claims Stories and Insurance Contract Damages, [1994] 72 Tex. L. Rev., 1395. G. Squires (ed.), Insurance Redlining (1997).
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who gets insurance, for how much, and against which kinds of liabilities. These kinds of negotiations establish the boundaries of liability insurance coverage. They mark the frontier between the domesticated, insurance purchasing tort law citizen and the tort law outlaw, as well as the frontier between the “lawed” and “unlawed” activities of that domesticated, insurance purchasing tort law citizen. A second kind of negotiation over boundaries takes place within the context of tort claims. These are negotiations over whether this particular defendant has insurance, whether the insurance is sufficient to cover the amounts claimed as damages, and whether the particular liabilities at issue are covered by the defendant’s insurance policy. Because of the profoundly practical effect of these negotiations – among other things, they determine whether and how much the plaintiffs’ lawyer will get paid – it is not surprising that they have spawned a host of secondary legal rules and professional norms. These secondary rules and norms define the boundaries of liability insurance coverage, so that a reasonably complete understanding of tort law in action requires not only an appreciation of the formal liability rules and the shape and extent of liability insurance coverage, but also the rules and norms that govern the resolution of questions regarding people and liabilities that lie in close proximity to the liability insurance boundaries.
50
On the whole, my experience is that these secondary rules and norms operate to extend the liability insurance boundaries, but I would not make strong claims in that regard. My field research suggests that these norms and rules allow plaintiffs to partially transform uninsurable punitive damages into insurable compensatory damages, partially transform uninsurable intentional torts into insurable negligence actions, obtain a larger share of the recovery than the formal subrogation or lien rules allow, and increase the present value of the available insurance coverage by increasing the potential liability of an insurance company that refuses to offer a quick settlement.24 On the other hand, my field research also suggests that in some circumstances plaintiffs care very deeply that the defendant pay with his or her own money – “blood money” some lawyers call it – because money from the insurance company will not adequately right the moral wrong that the defendant committed.25
51
For present purposes we need not be very precise about these secondary rules and norms, because my point is simply that they exist and that they are worthy and indeed even necessary objects of study for those who seek to chart the place of law in society.
52
24 25
T. Baker (supra fn. 2). Idem.
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III. Conclusion
53
This essay has described six ways that liability insurance shapes tort law in action. For most practical purposes, liability insurance has become an element of tort liability for all but the wealthiest potential defendants. The contractual limits on the amount of liability insurance place a practical limit on the amount of tort damages that plaintiffs can receive. Liability is shaped to match the available insurance coverage. Liability insurance generally makes tort litigation into a repeat player game in which the insurance companies’ handle individual cases according to their long-term interest in the development of tort law rules and settlement norms. Liability insurance personnel transform tort rules into more easily administered “rules of thumb.” Finally, negotiations over insurance boundaries drive the development of tort law in action.
54
I will conclude with a metaphor that may help to illustrate the power that liability insurance has to shape the development of tort law. Imagine a network of streams and rivers carrying water through the countryside to the sea. Water represents claims for relief. Tort law is the network of streams, rivers and lakes through which the water flows into the sea. Water that makes it into the sea represents the successful requests for tort law relief. Within this metaphor insurance is an invisible force that affects how much it rains and where, erects dams in some places, and sends huge torrents of water down others; insurance is a force that turns some small tort rivulets into streams, and some tort streams into wide, straight rivers of tort liability.
55
Studying a snapshot of the landscape, we would clearly see how the tort law streams and rivers channel the flow of requests for relief, but we would miss the channeling force of liability insurance. Anyone who goes out and lives in the countryside would soon notice the strange pattern of rainfall, the odd placement of dams. Observing the landscape over time she might even start to wonder what, exactly, is channeling what. Does the network of tort law streams and rivers channel the requests for relief or do those requests channel the streams and rivers? And what explains why it rains so heavily on that hillside, while this other one is dry?
56
This metaphor is far from perfect, but it illustrates a powerful insight into the role that liability insurance plays in shaping tort law. The insight is not mine, though I may have extended it a bit. In the spirit of Nathan Isaacs, Roscoe Pound, Fleming James, and Laurence Ross I offer this insight across the Atlantic in the hopes of further conversations about insurance, law and society.
Comparative Report and Final Conclusions
TORT LIABILITY AND INSURANCE: COMPARATIVE REPORT AND FINAL CONCLUSIONS Gerhard Wagner I.
Introduction
From the start of this project, the inherent difficulties were obvious. The relationship between tort law and liability insurance is not a topic easily to be found in a table of contents or subject matter index of every decent treatise of either tort law or insurance law. Rather, it is a topic that thrives in the sphere of oral communication, e.g. in conversations of lawyers in the hallways of court buildings, in discussions between teachers and students in the classroom and in arguments over tort law at conferences. Lawyers from all branches of the profession – attorneys, judges, academics, insurance executives – entertain certain views about the relationship between tort law and liability insurance but very few of them get to writing down what they think. This is not a problem in itself but for the fact that the lack of written statements stands in the way of progress on the matter. The private theories flying around the room remain untested against hard evidence or even against a standard of plausibility. To the extent that the views are contradictory these contradictions are not discussed and thus remain unresolved.
1
This was the state of affairs when most of the contributors met each other at a conference held in Munich in June 2004 and discussed the issues together. It immediately became clear that there are different “schools of thought” harbouring different views on the same subject matter. In addition, it also turned out not to be too easy to initiate a dialogue between these schools as each one treats the subject from a different angle. Whether such schools of thought map on to the different countries which the participants “represented” remained an open question. On the one hand, there certainly are countries where a particular view of the cathedral is apt to gain more support than in others. However, there are also huge differences between scholars educated within the same legal culture. For this reason, one should read the country reports with a good deal of suspicion. It may well be that what the respective authors really do is to express their personal views rather than describe the state of affairs in the jurisdiction they are reporting on. Of course, the same suspicion must also be applied to this comparative report.
2
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II. The Impact of Liability Insurance on Tort Law: General
3
The question of the interplay between liability in tort and liability insurance is anything but a focal point for debate in all of the legal systems surveyed. However, the degree to which the topic receives attention and treatment varies.
4
Under the traditional approach to the subject, which is still dominant at least in Austria, Germany and Switzerland the insurance issue is thought to be a problem for the lawmakers, not for the courts.1 The tort system itself is thought to be operated independently of the insurance aspect. In these countries the courts are expected to arrive at their decisions on liability issues regardless of the fact of the defendant being covered by an insurance policy. In this sense, the liability issue is to be kept separate from and independent of the insurance issue. The two worlds are kept strictly apart from one another. It is only in special areas that the principle of separateness is set aside and it is openly admitted that the availability of an insurance cover does have an impact on the determination of liability in the first place.
5
These areas are roughly the same within all three systems. The insurance issue is relevant within the following contexts: (1) (2) (3) (4)
Liability in Equity. Damages for Pain and Suffering. Privileges and Immunities. Implied Agreements to Exclude or Limit Delictual Liability.
6
These topics will be explored in more detail below.2 At this point it suffices to point out that these four areas, even if taken together, are of minor importance only. The heart of the law of delict, i.e. fault-based liability under the more or less general clauses of the civil codes, is thought to beat independently of insurance issues.
7
Whether this view of the cathedral is correct or even realistic is the central issue of this project. Thus, the temptation to plunge into the discussion at this point must be resisted. Instead, the answers to the many questions presented to the reporters will be surveyed. In doing so, a lot of “hidden information” about the relationship between tort law and insurance will come to the fore. Only after this has been done, we will come back to the critical questions whether liability insurance does in fact determine the fate of tort law and whether it ought to do so. The conclusions at the end of this report aim at drawing some conclusions from the material presented.3 In addition, they also include the law and economics perspective elaborated on in the report by Michael Faure and the sociological approaches represented by the contribution of Tom Baker, but also by the English report written by Richard Lewis. Of course, hardly any of the conclusions will be uncontroversial. 1 2 3
Austrian Report, no. 1. Infra nos. 18 et seq. Infra nos. 66 et seq.
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III. Compulsory and Voluntary Insurance A. Scope of Mandatory Liability Insurance The most important area where liability insurance is mandatory all across Europe is of course the case of traffic accidents. Another common feature of Western legal systems is that accidents suffered and illnesses contracted during the course of employment receive special treatment. The fact that only English law imposes a legal duty upon the employer to insure potential liabilities stemming from workplace accidents is astonishing only upon first sight.4 Such a duty is unknown on the European continent not because these countries put their faith into the wealth of the employer, i.e. rely on the employer being solvent enough to satisfy claims for compensation brought against him. The truth of the matter is that these countries organized the compensation system for injuries sustained at work not within the framework of the private market, employing the combination of tort law and mandatory liability insurance but as a part of the social security system. In many ways, these public workers’ compensation systems look much like a state-run insurance company, paying up on the claims brought against the employer under a regime of strict liability for workplace accidents. Therefore, liability insurance of workplace injuries is de facto mandatory for all the states surveyed, the difference only concerns the forms in which such insurance is organized.
8
The other categories of compulsory insurance within the jurisdictions surveyed comprise a colourful variety of cases which come close to a mirror image of the categories of strict liability. The focus both of compulsory liability insurance and of strict liability is on risks inherent in the use of technical installations and other devices. Nuclear power plants, for instance, are not only an example of liability irrespective of fault but also an easy case for compulsory insurance.5 This is hardly surprising as the obligation for the operator of a nuclear installation to carry liability insurance is imposed by Art. 10 (a) of the Paris Convention.6 The Paris Convention does both, it establishes a regime of strict liability for nuclear incidents (Art. 3) and an obligation to cover this risk by means of insurance or other financial security.
9
The operation of nuclear reactors is only the most obvious example of someone operating something to his own benefit which creates substantial risks of damage for others. The same principle applies to the operation of aircraft,7 railways,8
10
4 5
6
7
8
English Report, no. 14. Austrian Report, no. 8; German Report, no. 26; Italian Report, nos. 4 et seq.; Swedish Report, no. 8; Swiss Report, no. 8; English Report, no. 15. (Paris) Convention on Third Party Liability in the Field of Nuclear Energy of 29th July 1960, as amended by the Additional Protocol of 28th January 1964 and by the Protocol of 16th November 1982. Austrian Report, no. 8; German Report, no. 23; Italian Report, nos. 4 et seq.; Swedish Report, no. 8; Swiss Report, no. 9; English Report, no. 15. Swiss Report, no. 8.
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ships,9 cableways10 and “equipped skiing areas”,11 pipelines,12 technical installations creating a danger to the environment13 and to the production of genetically modified organisms.14 Not each and every activity mentioned above is subject to mandatory liability insurance in every jurisdiction surveyed but there are large areas of overlap. Part of the legal diversity is certainly due to differences in the relevant circumstances: mandatory insurance for cableways simply makes more sense in Austria, a country famous for its skiing resorts, than in England.15 In other cases the absence of an obligation to insure may be the result of successful lobbying efforts of interest groups at the national level. And some of the divergence may even be due to the fact that a reporter missed some cases as it is easy to make mistakes in this murky and poorly organized area of the law. However, with respect to compulsory insurance for technological hazards it is possible to identify a common denominator apt to explain why the duty to insure is imposed. This denominator is the same as the one explaining strict liability, i.e. the operation of hazardous activities to one’s own benefit. In order to avoid externalization of harm to the detriment of victims, to provide incentives for careful operation of the facility and to induce the operator to select the efficient level of activity, liability is irrespective of fault.
11
It is more difficult to justify the imposition of a duty to insure as insurance seems to destroy much of the incentives to take care and avoid accidents generated by strict liability. Looked at from the deterrence side, mandatory insurance has some beneficial effects, particularly in case of activities which cause damage only in the long run, after a considerable latency period has elapsed. Under such conditions, mandatory insurance prevents operators of dangerous facilities to adopt a looting strategy, i.e. to incorporate as a separate legal entity, thereby shielding assets from the claims of victims and dumping the corporate vehicle into insolvency once the injuries materialize and the claims mature.16 The major policy objective behind obligations to insure is the protection of potential victims. It is thought to be a matter of social justice that compensation is guaranteed where someone suffered harm at the hands of another who operates a dangerous facility to his own benefit.
12
Next to the operation of technical installations and activities the second large field of application for the duty to insure is the professional arena. In most countries practising lawyers – attorneys and solicitors, and even mediators in Austria – are required to cover their risk by taking out liability insurance.17 In England, Germany and Sweden, the same duty applies to public notaries and 9 10 11 12 13 14 15 16 17
English Report, no. 15; Swedish Report, no. 8; Swiss Report, no. 8. Austrian Report, no. 8; Italian Report, no. 23. Italian Report, nos. 4 et seq. Austrian Report, no. 8; Italian Report, nos. 4 et seq.; Swiss Report, no. 8. German Report, no. 25; Swiss Report, no. 9. German Report, no. 24; Swiss Report, no. 9. Cf. Austrian Report, no. 8; see also Italian Report, nos. 4 et seq. G. Wagner, [1999] Versicherungsrecht (VersR), 1441, 1448 et seq. Austrian Report, no. 9; English Report, no. 15; German Report, no. 32; Swiss Report, no. 10.
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to the medical profession.18 In some jurisdictions mandatory insurance regulations are extended to the professions of the financial sector, like banks,19 fiduciaries and trustees,20 insurance brokers,21 financial advisers,22 real estate brokers,23 brokers dealing in financial instruments,24 bank and insurance auditors25 or even to the “middle management”.26 It is not readily discernible what all these cases have in common. Strict liability does not provide the missing link as practising lawyers, doctors, banks and the like are liable for fault only. Apart from this, the applicable liability regime is usually not tort law but contract law, and the claim often is for compensation of pure economic loss, not of physical injury. Attorneys and doctors may be subjected to a duty to insure in order to protect victims from financially weak debtors, to enlist the insurance industry in the task of weeding out substandard suppliers of these services, to avoid externalization of the consequences of careless behaviour on the part of uninsured doctors and attorneys and thus to protect the incentives generated by the liability system. Unfortunately, the same line of reasoning would carry over to many other sectors of the service industry. However, members of these industries are not subjected to mandatory insurance but may operate without cover. Banks and other participants in the market for financial services may cause high losses but at least banks are usually able to pay up their debts. In addition, these are cases where only money is at stake, not physical integrity as in the case of medical malpractice. The question thus arises why Swedish law subjects real estate brokers to mandatory insurance, but does not extend this obligation to construction companies, architects, engineers and members of similar callings. With respect to these areas, a common principle explaining the imposition of mandatory insurance in some cases but not in others is impossible to discern.
13
B. Basic Features of Mandatory Insurance Schemes The design of compulsory insurance schemes is more or less the same across the jurisdictions surveyed. The obligation to cover the risk through an insurance contract is clearly the norm. Bank guarantees serve a supplementary function only, and their eligibility is limited to particular cases, ordinarily in connection with the operation of a major technical facility.27
18 19 20 21 22 23 24 25 26 27
English Report, no. 15; German Report, no. 31; Swedish Report, no. 12. Swedish Report, no. 10. Austrian Report, no. 9; Swiss Report, no. 10. Austrian Report, no. 9; Italian Report, nos. 14 et seq.; Swedish Report, no. 9. English Report, no. 15. Swedish Report, no. 9. Swedish Report, no. 9. Austrian Report, no. 9. Italian Report, nos. 14 et seq., without any limitation to the financial sector industries. Cf. Austrian Report, no. 12; German Report, no. 34; Italian Report, no. 29.
14
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15
Sanctions for failure to comply with the duty to insure are an affair of administrative law.28 Common penalties include the retraction of licences or the imposition of fines. In Sweden, however, business associations may become liable themselves in case one of its members operates without the necessary insurance cover.29
16
With the exception of Sweden,30 the action directe is not the rule but rather is available only where specified by statute.31 Outside the traffic accident sector, the victim normally has no direct cause of action against the insurer. However, as the Italian and the German report have explained, the situation in these countries is somewhat of a paradox as both statutes and courts have gone to great lengths in order to provide the victim with the same benefits he would have enjoyed under a regime of action directe.32 In particular, the insurer is stripped of defences growing out of the contract of insurance vis-à-vis the victim, and the claim for compensation is excluded from seizure by third parties, either in enforcement proceedings or in the case of bankruptcy. In sum, the claim of the tortfeasor against the insurer is set aside for the benefit of the victim.
17
Market penetration of liability insurance is considerable in Europe but exact figures are hard to come by. In Austria, only 30% of all citizens are insured,33 but this figure merely states the ratio of the number of insurance contracts to the population in total. However, usually a single insurance contract covers a whole family or household such that the number of insureds must be higher. In Germany it is 66% of all households and an estimated 90% of businesses.34 The numbers in Switzerland are similar.35 In Sweden they are much higher, with 85%–90% of all households carrying liability insurance.36 IV. The Influence of Liability Insurance on Court Decisions in Tort Cases A. Insurability 1. The Concept of Insurability
18
The question of what role insurability plays in the law of torts carried some ambivalence with it. Within the context of insurance economics, the term insurability has a technical meaning. In this context insurability is a concept 28
29 30 31 32 33 34 35 36
Austrian Report, nos. 15 et seq.; English Report, no. 19; German Report, no. 40; Italian Report, nos. 38 et seq. Swedish Report, no. 16. Swedish Report, no. 15. Austrian Report, no. 14; German Report, no. 36; Italian Report, no. 31; Swiss Report, no. 14. German Report, nos. 36 et seq.; Italian Report, nos. 31 et seq. Austrian Report, no. 19. German Report, nos. 42 et seq. Swiss Report, no. 16. Swedish Report, no. 17.
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designating the prerequisites a certain risk or class of risks must meet in order for an insurance market to develop. The major criteria of insurability are randomness, quantifiability, mutuality and non-correlation, and manageable severity.37 Randomness means that the insured event must not be a matter of the insured’s wilful actions, i.e. its occurrence must be independent of his intent. Quantifiability requires that the risk, to be insurable, must lend itself to being identified, quantified and estimated, both in terms of magnitude of loss and probability of occurrence. The condition of mutuality is satisfied if a large number of similar risks may be joined into one pool, where the several risks cancel each other out since they are not correlated with one-another. Finally, the market for insurance covers has its economic limits such that risks beyond a certain threshold of severity are not insurable, i.e. not insurable in their full amount. The information provided in the several reports is not limited to an inquiry into the role insurability in this narrow sense plays within the law of torts. Rather, the reports address the broader question of whether and how the fact that one of the parties to a lawsuit is insured influences legal outcomes. Furthermore it has been asked whether it is also relevant that one party did not carry insurance but would have been in a better position than its adversary to buy insurance. These additional topics are also included in the comparative analysis although they are clearly different from the original concept of insurability.
19
2. Legislation In the majority of countries, lawmakers are responsive to the insurability issue. However, it is impossible to establish a link between strict liability and insurability in the sense that the former is contingent on the latter. Even in Sweden, with its explicit policy in favour of victim compensation through strict liability and liability insurance in tandem, such a link does not exist.38 There are areas of strict liability without insurability or comprehensive insurance coverage, and the most prominent across Europe seem to be environmental risks.
20
In Germany, the concept of insurability had its day in the sun during the preparation of the Environmental Liability Act at the end of the 1980s and the beginning of the 1990s.39 The same discussion was rehearsed before in Sweden40 and later continued in Switzerland.41 Whether the German discussion about the insurability of environmental risks was founded on real concerns or whether it was little more than a lobbying effort staged by the insurance industry is
21
37
38 39 40 41
Cf. B. Berliner, Die Grenzen der Versicherbarkeit (1982), 13, 23 et seq., 43 et seq.; for a short account see G. Wagner, [1991] VersR, 249, 254 et seq. Swedish Report, nos. 19 et seq. German Report, no. 45. Swedish Report, no. 21. Swiss Report, nos. 30 et seq.
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hard to tell.42 Be this as it may, in the end strict liability was enacted in the face of the reluctant insurance industry, and the same happened in Sweden43 and in Italy.44 Still the German lawmakers failed to define the scope and conditions of the insurance cover which was made mandatory for operators of dangerous facilities in the Environmental Liability Act. These contradictory outcomes are best explained by the account given in the Swiss report, i.e. that insurability plays a role when it comes to the definition of obligatory insurance covers but is more or less irrelevant in the context of liability.45
22
Apart from environmental law, a major topic where insurability was discussed concerned the magnitude of the risk, or rather its limitation through caps on the amount of damages. As insurance covers are practically always limited to certain sums, there is incongruence between liability and insurance; i.e. liability goes further than the insurance cover available on the market. In Germany and Austria there is a common tradition to employ caps in the most important branch of strict liability, i.e. liability for traffic accidents.46 Such caps work to the effect of keeping premiums low rather than making insurable what would otherwise be an uninsurable risk.47 Thus, even in Germany strict liability is not always and in all areas limited to the scope and magnitude of the insurance cover available on the market. Liability for nuclear accidents is one of the striking examples as it is unlimited under Austrian as well as German law although the Paris Convention, in its Art. 7, contains such limits.48
23
The emerging legal trend to sever the issues of strict liability and insurability did not cause major problems for the insurance industry. None of the countries surveyed went through an insurance crisis similar to the one haunting the United States during the 1980s.49 Again, it seems that the exaggerations of the American tort system are much more a creature of the peculiarities in the law of civil procedure – jury system, extensive discovery, contingency fees – than of the common law of torts or U.S. insurance law. Steep increases in premiums in some years have been reported in Britain but they never led to anything like a crisis and were caused by an inflation of the average damage award per claim, not by growth in the number of claims.50
42 43 44 45 46 47 48 49
50
German Report, nos. 45 et seq. Swiss Report, no. 23. Italian Report, nos. 47 et seq. Swiss Report, no. 17. Austrian Report, no. 24. German Report, no. 44. Austrian Report, nos. 29 et seq. Austrian Report, no. 41; German Report, nos. 50 et seq.; English Report, nos. 81 et seq., 85; Italian Report, nos. 62 et seq.; Swiss Report, no. 29; Swedish Report, no. 36; as to the American problems cf. G.L. Priest, The Current Insurance Crisis and Modern Tort Law, [1987] 96 Yale Law Journal (Yale L.J.), 1560. English Report, no. 84.
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3. Courts The question of insurability does not loom large in court decisions. With respect to the concept of insurability in the technical sense it seems fair to say that it is never even mentioned in judicial opinions.51 There are exceptions to this rule but they pertain to certain well-defined areas.
24
What courts sometimes do is try to downplay the practical consequences of a decision introducing a new head of liability by hinting at the possibility to insure the attendant risk.52 The English report cites decisions by the famous Lord Denning who did not shun away from the confession that, in contrast to common preaching, liability insurance was not secondary to tort liability but, from time to time, dragged tort along: “Thus we are moving away from the concept: ‘No liability without fault.’ We are beginning to apply the test: ‘On whom should the risk fall?’”.53 It is no accident that it was an English judge who was outspoken enough to confess to the relevance of insurance for the determination of liability in tort as the common law style of individualized opinion as opposed to the anonymous style of court decisions on the continent is more apt to address issues of policy. In light of these favourable circumstances it serves some disappointment that the reporter concludes that judges tend to raise the insurance issue “only occasionally”.54
25
As the Swedish report explains, the courts in this country are particularly prone to justify an expansion of liability with the availability of insurance.55 Maybe it is no accident that the examples provided concern the potential liability of firms rather than individuals. Other than the latter a business enterprise is able not only to insure itself against liability but also to re-distribute the costs of such insurance among its customers by adding the premium to the prices charged for its products.
26
4. Commentators In most countries, the concept of insurability in its technical sense is largely ignored within the academic discourse on the relationship between tort law and insurance.56 Not surprisingly, Sweden is the exception to the rule, being the country where commentators are most prepared to welcome the insurance issue into the law of torts.57 The idea again is to use the expansion of strict liability in order to achieve compensation of victims at the expense of the public at large, with the tortfeasor and the insurance carriers serving as conduits that channel the costs of compensation from the victim to the society of policy holders. For the purpose of providing this principle with the broadest range of 51 52 53 54 55 56 57
German Report, no. 49; Italian Report, no. 55; Swiss Report, nos. 18 et seq. Austrian Report, no. 34. English Report, no. 29. English Report, no. 32. Swedish Report, nos. 24 et seq. Austrian Report, no. 42; Italian Report, nos. 65 et seq.; German Report, nos. 52 et seq. Swedish Report, no. 37.
27
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application, Swedish commentators have sought to downplay concerns voiced by the insurance industry with respect to limits of insurability. According to Bengtsson, the presumption should be slanted in favour of insurability with the insurance industry bearing the burden of proof that a particular risk is not insurable.58 This point is fully supported by the report on Law and Economics where the well-known claims of insurers alleging the uninsurability of certain classes of risk or the limited capacity of insurance are discarded as lobbying efforts.59 A pertinent example may be the argument about the insurability of environmental risk witnessed in Germany in the course of the Environmental Liability Act.60
28
The discussion in other countries is less focused on insurability as such and instead oriented towards the general issues of how insurance carried by the potential tortfeasor or his role as superior risk bearer impact on the law of torts. In England those scholars working in the tradition of the no-fault movement entertain the view that the courts hide their true motives behind a smokescreen of legal reasoning – and that insurance is the “hidden hand” that “invisibly” drives the development of tort law.61 Interestingly, this kind of analysis seems to be inextricably linked to the normative view held by these scholars that insurance ought to play a major role, i.e. that it ought to influence the determination of liability in a given case as well as the overall evolution of tort law.62 Together with the decline of no-fault concepts throughout the Western world, the assumption of insurance as the invisible hand behind tort law has been challenged as well. Jane Stapleton, in particular, has worked to unmask the insurance rationale of tort law as “ideology” and explained that there is no evidence to accord the insurance factor such an important weight in the development of modern tort law.63 It might be that we see a fundamental swing of perspective here, away from the rather collectivistic notions of the 1960s and 1970s and towards the more individualistic and market-oriented attitudes of today. In Germany the situation is similar to the one in England as much of the recent literature on tort law abandons the supposition that the mere fact that the defendant carries insurance or appears to be the superior risk bearer is a sufficient basis for making him liable.64 The main difference between the two jurisdictions seems to be that the no-fault movement in Germany was never as strong as its sister across the channel.
29
The Austrian situation is special, maybe because Wilburg’s concept of a “flexible system” of the law of delict provides a framework for taking the relative ability of the parties to absorb the loss for which compensation is claimed into 58 59 60 61 62 63
64
Swedish Report, no. 37. Law and Economics Report, nos. 31 et seq. German Report, nos. 45 et seq. English Report, nos. 33, 34. English Report, no. 33. English Report, nos. 35 et seq., quoting J. Stapleton, [1995] 58 Modern Law Review (M.L.R.), 820. German Report, no. 52.
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account.65 In this respect two different approaches are on the table. Some commentators would go so far as to allow imposition of liability on the superior risk bearer even where the other grounds for liability – fault or strict liability – are weak. A more modest solution would be to allow the relative ability to absorb the risk of loss to influence the calculation of damages. Under this approach, a rich party would have to pay more than a poor tortfeasor under the same factual circumstances. It is hard to tell how market insurance blends into these theories. Today, it is possible to buy insurance for a broad variety of risks, and in most instances it is equally possible for the tortfeasor and for the victim to transfer the risk to a professional carrier. In such an environment, it is anything but clear how the crucial question of who is the financially stronger party should be answered. Should it matter in a given case whether the tortfeasor is actually protected by liability insurance, and what are the consequences if the victim is protected by first-party insurance? Who is the party better able to absorb the loss if the tortfeasor is an ordinary citizen with limited assets who could have easily contracted for liability insurance but failed to do so? Finally, one would have to determine whether the criterion of superior ability to bear the loss is to be decided in every single case or with respect to classes of case. Under the first theory, the financial position of the parties to a lawsuit would influence the outcome in the sense that a rich defendant would be held liable although the same claim brought against a poor party were bound to fail. The uncertainty created by such a principle strongly counsels against its adoption. B. Loss Spreading through the Liability System 1. Strict Liability: Open and Covered Across all the countries surveyed, courts are reluctant to base their judgments explicitly on the objective of risk spreading.66 In most jurisdictions, the courts have not asserted the authority to invent new heads of strict liability or to even apply the existing statutes to similar cases on the basis of per analogiam reasoning.67 Whether negligence liability is misused by the courts, i.e. whether their desire to place the loss on the party better able to absorb it is the hidden motive behind decisions imposing liability for fault, is a matter of speculation. Each report cites examples where, in the eyes of the respective reporter, the court overreached in the sense that it applied an over-restrictive standard of care in order to fix liability with the party who carried insurance or for some other reason appeared to be the superior risk bearer.
30
The Austrian report points to the inflation of employer’s liability and to the extension of strict liability for motor accidents which was thought to cover even
31
65 66
67
Austrian Report, nos. 42 et seq. Austrian Report, nos. 52 et seq.; English Report, nos. 47, 53; German Report, no. 53; Italian Report, no. 70; Swiss Report, nos. 35 et seq.; Swedish Report, nos. 38, 42, 51. German Report, no. 49; English Report, no. 53; but see also Austrian Report, no. 37; Italian Report, nos. 51 et seq.
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vehicles not in motion at the time of the accident.68 Both classes of case also exist in German law, however, the German report cites another example where the BGH (Federal Supreme Court) has imposed fault liability for the explosion of a soda bottle severely injuring a child.69 In the parallel American case, the Californian justice Traynor expressly based his decision on the objective of risk spreading: “Even if there is no negligence, however, public policy demands that responsibility be fixed wherever it will most effectively reduce the hazards to life and health inherent in defective products that reach the market. It is evident that the manufacturer can anticipate some hazards and guard against the recurrence of others, as the public cannot. Those who suffer injury from defective products are unprepared to meet its consequences. The cost of an injury and the loss of time or health may be an overwhelming misfortune to the person injured, and a needless one, for the risk of injury can be insured by the manufacturer and distributed among the public as a cost of doing business.”70 The German court did not say anything like this but came up with the same result as the manufacturer of the soda bottle was held liable even though the plaintiff was unable to prove that the bottle had been defective at the time it was put into the stream of commerce. The English report also cites a number of examples where judges have openly acknowledged that the insurance factor carried some weight in the process of decision-making.71
32
However, it is impossible to know whether the expansion of liability witnessed during the last century really had anything to do with the growth of liability insurance. As an example, think of the problem mentioned in the Austrian report, i.e. the liability of the keeper of a car which is not in motion but parked at the curb. In spite of this, the Austrian Supreme Court was prepared to apply the principles of strict liability established for “traffic accidents”, and the German RG (Imperial Court) has done the same. However, in Germany the extension of liability preceded the introduction of mandatory liability insurance in this branch of the law by a full decade!72 Thus, the inclusion of cars not in motion into strict liability for traffic accidents cannot be explained on insurance grounds. Against this historical background, it is more plausible to assert that the expansion of strict liability precipitated the introduction of a system of mandatory liability insurance rather than the supposition that the availability of insurance caused an expansion of strict liability.
33
In the same vein, the developments both of the insurance industry and of the system of tort liability in England were anything but congruent with one another.73 While the insurance industry has been continuously growing in capacity and 68 69 70 71 72
73
Austrian Report, nos. 54 et seq. German Report, nos. 54 et seq. Escola v. Coca-Cola Bottling Co. of Fresno, 150 P.2d 436, 440 et seq. English Report, nos. 29 et seq. Reichsgericht (RG) 1929 in [1929] Juristische Wochenschrift (JW), 2055 et seq.; RG (1929) in Entscheidungen des deutschen Reichsgerichts in Zivilsachen (RGZ) 126, 333, 335 et seq.; RG (1931) in RGZ 132, 262, 264 et seq.; mandatory liability insurance for the keepers of motor cars was only introduced in 1939; cf. C.v. Bar, [1981] AcP 181, 289, 315 et seq. English Report, nos. 47, 53.
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market penetration, tort law saw times of expansion as well as times of contraction. In particular, during the 20th century the House of Lords has been working hard to contain the principle of strict liability under the rule in Rylands v. Fletcher rather than extending it to similar “sources of danger”.74 Today, it is hardly an exaggeration to say that strict liability in the true sense of the term is virtually unknown within the common law of England and has become an exclusive domain of the legislature. Likewise, negligence liability for pure economic loss saw a significant expansion during the 1960s and 1970s only to be cut down again in the 1980s and 1990s.75 Nobody seems to assert that these fluctuations had any causal connections with developments in the insurance markets or in the law of insurance. 2. Liability in Equity On the European continent, an exception must be made with respect to liability in equity which exists in the countries of the Germanic legal culture, i.e. Austria, Germany, Switzerland, but also in Italy and in Sweden.76 The idea of liability in equity is that a tortfeasor who did not act with blameworthiness for reasons of mental handicap, being a minor, or other want of capacity, will nonetheless be held liable if equity so requires. Equity requires liability if there is a substantial difference in wealth between the tortfeasor and the victim. In this context, the question arises whether an insurance cover on the part of the defendant is to be treated like an asset, improving his overall financial condition, or whether it should be ignored when making the comparison of the wealth of the parties. If the principle that insurance is of no relevance to the finding of liability were followed here, the insurance coverage would have to be disregarded in determining liability. However, the law is otherwise. In Austria and Switzerland it is settled law that an insurance cover improves the financial condition of the tortfeasor, enabling the court to fix liability where none would exist without insurance.77 Swedish law, in Chapter 2 Section 4 Damages Act, even provides a statutory provision explaining that the liability of a minor depends – amongst other things – upon his or her being protected by liability insurance.78 Thus, the Swedish courts will hold a child to the same standard of care as an adult and hence make him or her liable if covered by liability insurance but apply a different standard where the child lacks such protection. The position of German law is similar as it is agreed that liability in equity may fill the gap in all cases where negligence liability is defeated only because the potential tortfeasor was a minor.79 74
75 76
77 78 79
English Report, no. 53; see also G. Wagner, Grundstrukturen des Europäischen Deliktsrechts, in: R. Zimmermann (ed.), Grundstrukturen des Europäischen Deliktsrechts (2003), 278 et seq. English Report, no. 47; cf. also G. Wagner (supra fn. 74), 230 et seq. Austrian Report, no. 52; German Report, nos. 56 et seq.; Italian Report, nos. 70 et seq.; Swiss Report, no. 37; Swedish Report, nos. 78 et seq., 83 et seq. Austrian Report, no. 52; Swiss Report, no. 37. Swedish Report, no. 78. Bundesgerichtshof (BGH) (21.5.1963) in Entscheidungen des deutschen Bundesgerichtshofs in Zivilsachen (BGHZ) 39, 281, 285 et seq.; BGH (8.1.1965) in [1965] VersR, 385, 386; Oberlandesgericht (OLG) Braunschweig (23.12.1953) in [1954] VersR, 460; G. Wagner, in: Münchener Kommentar, Sect. 829, nos. 8 et seq.; E. Deutsch, [1964] Juristenzeitung (JZ), 86, 90.
34
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However, the German BGH still hesitates to treat liability insurance like an asset of the child even where insurance is not mandatory. If the defendant – or rather, his parents – bought the insurance cover voluntarily, liability in equity does not play a role save for the case that an asymmetry between the wealth of the tortfeasor and the financial condition of the victim may be established even without taking the insurance cover into account.80 In Italy, the question has not reached the courts as of yet but it seems likely that they would be prepared to take the insurance cover into account, i.e. to treat it as a financial asset.81
35
The treatment of equitable liability in the four jurisdictions mentioned is interesting for several reasons. True enough, by and large the courts reverse the irrelevancy principle and are prepared to fix liability only because the tortfeasor carries liability insurance. On the other hand, the scrupulous and tentative approach of the BGH is evidence of the weight the irrelevancy principle carries in the mind of judges. This is particularly striking in light of the fact that liability in equity is expressly based on a financial inequality as between the parties. Given that the ability to absorb risks is correlated with wealth, the crucial question is not whether superior risk bearing qualities may be taken into account but only whether insurance supports a finding that the defendant is better able to absorb the loss. Framed in this way, the answer is obvious as insurance is the common tool for ordinary people to cure their risk aversion by improving their capacity to absorb losses. In the end, the state of the law with regard to liability in equity may be more supportive of the supposition that, within the general law of torts, courts are honest in determining liability irrespective of insurance.82 3. Moral Hazard
36
The concept of moral hazard is well-received among insurance economists. Scholars working in the field of law and economics have elaborated on it and made it accessible to legal discourse. Today, it is well-known in all jurisdictions surveyed, although in some countries it has still not reached the mainstream of legal literature.83 It has also been pointed out in the reports that the insurers are in command of various instruments in order to counteract the effects of moral hazard, like deductibles, monitoring and experience rating.84
37
What is missing, however, is the acknowledgement that the efforts of the insurer to counteract moral hazard undermine the loss-spreading function attributed to the liability system.85 In a world of perfect risk-rating the insurer only 80 81 82 83
84 85
German Report, nos. 59 et seq. Italian Report, no. 73. See infra nos. 38 et seq. Austrian Report, no. 58; German Report, no. 61; Italian Report, no. 83; Swiss Report, no. 48; Swedish Report, no. 49. Austrian Report, no. 59; Italian Report, no. 84. Law and Economics Report, no. 97.
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bears the actuarial risk which in turn disappears immediately if the risk is pooled with other homogenous but independent risks. The flipside is that the endogenous risk remains with the insured, and that the terms of the insurance policy will immediately be tightened once a meritorious claim is brought. Contrary to a belief popular in the sixties and seventies, insurance cannot achieve risk-spreading and at the same time avoid adverse effects for deterrence.86 C. Negligence and Insurance 1. The Standard of Care and Insurance Whether insurance is a factor influencing the standard of care determined by the courts in applying fault-based liability is one of the central questions of this survey. In this regard, little progress was made. In all the jurisdictions surveyed, courts shun the insurance issue when defining the level of precautions a reasonable man in the shoes of the defendant would have maintained.87 Under the English jury trial of the old days, the juries were not to be told at all about the fact that the defendant carried liability insurance.88 Today the professional judges hearing tort cases in the various European countries are of course aware of the fact that “all prudent professional men carry insurance”,89 in addition to most families and virtually all keepers of cars. Whether this knowledge has changed anything is a difficult question to answer. An affirmative answer would suppose that a court said to a defendant: “You are at fault because you are insured”.
38
However absurd such a proposition may be, throughout the countries surveyed experts of the tort system seem to entertain the view that the standards of care employed today owe their existence to the fact that most defendants are insured.90 Writing from the perspective of a major German insurer, Peter Thalmair, in his report, offers some examples of cases where he thinks that the courts have overstretched the duty to take care.91 He supposes that the true motive behind these decisions was to shift the cost of injury or property damage to the insurer, regardless whether the defendant “really” was at fault. It is possible to take argument with this view from two different angles. One is to deny that the cases cited by Thalmair have been wrongly decided, even if the insurance policy is blended out of the picture. But even assuming that the court overstretched the duty to take care it may still be disputed that the reason for
39
86 87
88 89
90
91
See infra nos. 77 et seq. Austrian Report, no. 60; English Report, nos. 52–54; German Report, no. 64; Italian Report, nos. 86 et seq.; Swiss Report, no. 46; Swedish Report, nos. 42, 51. English Report, no. 43. English Report, no. 43, citing Smith v. Bush [1990] 1 Appeal Cases (AC) 831, 858 (House of Lords, HL 1989, per Lord Griffiths). Austrian Report, no. 60; English Report, nos. 46 et seq.; German Report, no. 63; Swiss Report, nos. 46 et seq.; Swedish Report, nos. 42 et seq.; only Italy seems to be an exception; Italian Report, nos. 86 et seq. Thalmair Report, nos. 23 et seq.
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this judicial mistake was the fact that the defendant carried liability insurance. Upon closer inspection, Thalmair’s evidence is not strong enough to defeat either of those counts. The case of parental liability for a fire caused by a 10year-old boy with a strong inclination to play with fire may serve as an example.92 In a long-standing line of jurisprudence the BGH has always held that parents must go to great lengths in order to keep their children from setting neighbouring houses ablaze. The reason for applying a strict standard is of course that the damage in cases of arson are likely to be very substantial, both in terms of destruction of property and loss of life and health. Thus, it is far from obvious that the BGH went too far in the parental duty case. On the second count, i.e. the hidden motive of insurance, it is true that the court referred to the possibility of the mother to protect herself against crushing liability by taking out liability insurance.93 In the context of the decision, this advice serves the end of justifying the imposition of a strict standard thought to be applicable on other legal grounds – i.e. fault – rather than providing a motive for imposing such standard.94
40
Of course, the language of the judgment may just serve the purpose of a smokescreen, hiding the true motives of the judges. The Swiss report is particularly outspoken on this point: “Without insurance, the standard of care, which is quite high in some cases, would not be conceivable”.95 Whether this statement is true or false is impossible to know for sure. The English report, citing Jane Stapleton, admits to the fact that, tempting as the insurance explanation may be, “other explanations are possible”.96 In Switzerland, the high degree of market penetration by the insurance industry, caught in the saying that the country is “overbanked and overinsured”, destroys the foil against which reality could be compared.97 If everyone is insured, the question what tort law would look like absent insurance becomes a matter of pure speculation.98 To a lesser degree, this is true with regard to the other countries surveyed as well. Liability for traffic accidents, for example, is deeply ingrained with compulsory liability insurance. Thus, it is impossible to identify cases which could be explained in terms of insurance as there is no counterpart, i.e. not a single motor accident where the tortfeasor is not insured.
41
The Swedish report draws on the works of Bengtsson who distinguished cases where the liability of individuals (consumers) was at stake and others where enterprise liability was on the line.99 According to Bengtsson, the Swedish courts employ a lenient standard of care if the personal liability of an individual or of a small business enterprise is at stake provided that the defendant is 92 93 94 95 96 97 98 99
Thalmair Report, nos. 45 et seq. Thalmair Report, no. 58. See infra nos. 46 et seq. Swiss Report, no. 49. English Report, no. 53. Swiss Report, no. 34. Swiss Report, nos. 41, 49. Swedish Report, nos. 43 et seq.
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not insured. If the potential tortfeasor is protected by liability insurance, however, he is treated like a powerful enterprise and a strict standard of care is employed. Still, even in the latter category, “nothing supports the assumption that the liability insurance could create a presumption of liability or a strict liability independent of fault”.100 2. Contributory Negligence and Reduction Clauses In most of the jurisdictions surveyed insurance matters do not have a bearing upon the determination of contributory negligence.101 The fact that the defendant is protected by liability insurance seems to be as irrelevant as the protection of the plaintiff by first-party insurance. The situation is different in countries with special provisions on the reduction of damages which do not merely restate the principle of contributory or comparative negligence, i.e. which do more than simply order a reduction of damages where the plaintiff, through careless behaviour, contributed to the accident or even caused it intentionally.
42
An example of a legal system providing special rules for the assessment of damages in cases of contribution is Swiss law. Art. 43, 44 para 1 OR (Swiss Law of Obligations) restate the principle of comparative negligence, ordering the court to take all the circumstances into account. Art. 44 para 2 OR goes further in stipulating that, in cases of simple negligence, the court may reduce the damage award, if otherwise the defendant would “be subject to distress as result of his payment of damages”. Although the existence of Art. 44 para 2 OR could have been used as a door-opener for the consideration of the financial situations of the parties and, in this context, of the existence of insurance cover, Swiss courts and commentators have resisted this temptation.102 As a general rule, the financial position of the parties is as irrelevant to the calculation of damages as the existence of insurance cover, either on the part of defendant or on the part of plaintiff. Art. 44 para 2 OR is understood as an exception to this principle which has to be interpreted narrowly. The provision is confined to cases where the damage award, calculated in the ordinary way and without regard to the financial position of the parties, would work hardship on the defendant. It is only in this situation that the Swiss Bundesgericht has allowed the insurance issue in. The court has held that the liability to pay damages in the amount calculated by applying ordinary principles of tort law must never be reduced to the benefit of the insurer.103 This jurisprudence is in full harmony with the established principles of liability in equity. In both contexts, the insurance cover is treated like a ready asset of the insured.104 Thus, the
43
100 101
102
103 104
Swedish Report, no. 48. Austrian Report, no. 63; German Report, nos. 66 et seq.; English Report, no. 60; Italian Report, no. 88. Swiss Report, nos. 40, 42; R. Brehm, in: Berner Kommentar zum schweizerischen Privatrecht VI (2nd edn. 1998), Art. 43 nos. 63–67. Swiss Report, nos. 39, 40; R. Brehm (supra fn. 102), Art. 44 no. 72. See supra nos. 30 et seq.
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award of damages in the full amount against a defendant carrying liability insurance may never work hardship on him.
44
Swedish law also orders the judge to take the careless behaviour of the victim and other relevant circumstances into account with regard to a possible reduction of damages.105 Obviously, the “other circumstances” clause of this provision is thought to encompass the financial position of the parties in the sense that a reduction might be denied in spite of contributory negligence of the victim if such measure would work hardship on him. Again, hardship is ruled out if the victim carries first-party insurance.106 In this respect, Swedish law appears as a counterpart to Swiss law, where the latter denies hardship on the part of the defendant if he carries liability insurance and the former denies hardship on the part of the plaintiff-victim where he is protected by first-party insurance. In Sweden, however, the courts enjoy more leeway in applying this rule as, in cases of personal injury, the law on contributory negligence requires intention or gross negligence on the part of the victim for a reduction of the damage award.107 This privilege is founded on the belief that the cost of personal injury should be distributed among the general public.108 As the standard of gross negligence is rather vague, it is at the discretion of the court to order the reduction of a damage award for personal injury only where the victim is protected by first-party insurance.109 3. Culpa in eligendo
45
The question was posed whether it constitutes fault if the duty of care incumbent upon a potential tortfeasor is delegated to an independent contractor who is financially weak and uninsured and may thus not be able to satisfy tort claims brought against him. As it seems, the issue is not discussed at all in most jurisdictions surveyed.110 However, the English courts have accepted the proposition that an occupier of land must take reasonable steps to ascertain that independent contractors employed on their property have taken out liability insurance.111 In Germany the issue is discussed by commentators who have come up with differing results.112 Under German law, negligence liability is limited to the infringement of protected interests and does not extend to pure economic loss. The critical point then becomes whether liability for culpa in eligendo in the way just described falls into the category of pure economic loss or whether it is liability for the infringement of protected interests, provided that the financially weak contractor caused personal injury or damage to property. 105 106 107 108 109 110
111 112
Swedish Report, no. 53. Swedish Report, no. 53. Swedish Report, nos. 56 et seq. Swedish Report, no. 57. Swedish Report, nos. 58 et seq. Austrian Report, nos. 64 et seq.; Italian Report, nos. 89 et seq.; Swiss Report, nos. 51 et seq.; Swedish Report, no. 66. English Report, no. 23. German Report, no. 68.
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D. Liability for Failure to Take out Insurance? 1. General May a party be held liable for the simple reason that it failed to take out liability insurance? This question is not very interesting if liability for failure to comply would be directed against the same party that is liable for the damage to be covered by insurance anyway. Insofar, the victim would now have two heads of liability for his claim – one growing out of the original tortious conduct, e.g. the traffic accident or the distribution of a defective product and another one for failure to insure against the liability resulting from the tortious conduct. Such duplication of claims would not even enhance the practical chances of being compensated in full.
46
However, the problem may gain weight once the claim for failure to insure could be directed towards third parties with a different pool of assets to levy upon. Thus, directors of a limited company may be held personally liable for failure to provide adequate insurance for the torts “committed” in the course of business. In England, such a case has come before the courts, but the Court of Appeal declined to impose liability.113
47
In none of the countries surveyed, are the parents made responsible for failure to take out liability insurance for the whole family such that tortious acts of their children would be included.114 However, to the extent that the parents have signed a policy for themselves, their children are usually included into the scope of coverage as a matter of course.115 In countries such as Italy where parents are strictly liable for the torts of their children, the question of an obligation to insure growing out of the law of delict is moot anyway.116
48
As to the liability of employers for the torts of their employees the matter is more complicated. The general principle seems to be the same as in the case of parental liability, i.e. the failure to take out insurance for torts of the employee does not constitute negligence on the part of the employer. However, the employer has a strong incentive to voluntarily seek insurance, either because he is strictly liable vis-à-vis the third party for the damage caused by the employee or because the employee has a claim for indemnification against his employer. In any case, the loss ends up with the employer such that he is well-advised to take out liability insurance.117 This is exactly what seems to happen in the countries surveyed.118 Only in Austria have the courts
49
113 114
115
116 117
118
English Report, no. 21. Austrian Report, no. 73; English Report, no. 22; German Report, no. 70; Italian Report, no. 92; Swiss Report, no. 56; Swedish Report, no. 89. For a detailed treatment of this feature which seems to be common all over Europe cf. Swiss Report, nos. 56 et seq. Italian Report, no. 92. For detailed treatment see German Report, nos. 71 et seq.; Swedish law seems to achieve the same results under the rather general provision Chapter 4 Section 1 Damage Act; cf. Swedish Report, no. 96. Italian Report, no. 93; Swiss Report, no. 59.
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gone one step further and stipulated a legal duty of the employer, growing out of the contract of employment, to take out liability insurance covering torts of the employee.119
50
Finally, the failure of the victim to insure him- or herself against loss which turns out to be attributable to the defendant under the principles of tort law is no defence to liability.120 Unanimous as this result appears, some qualifications must be noted. One concerns the willingness of courts to imply exclusion of tortious liability in the context of contractual relations established between injurer and victim before the accident happened, a subject to be treated separately.121 Apart from this special case, Swiss commentators are prepared to consider it as negligence on the part of the victim not to comply with a statutory obligation to take out first-party insurance, as it exists in many countries with respect to the destruction of a building through fire.122 The Bundesgericht, however, has not followed suit and refused to mitigate damages on account of the fact that the plaintiff, in contravention of a statute, had underinsured his house against destruction by fire.123 2. The Swedish Model
51
Swedish law goes much further than the comparatively “timid” suggestion of Swiss commentators to reduce damages in case the victim failed to comply with a statutory duty to take out first-party insurance. As the Swedish report explains, the law in this country has abandoned the principle of restitutio in integrum in favour of a two-track system that distinguishes between cases where the loss is insured and others where either the tortfeasor would have to pay damages out of his or her own pocket or the victim would have to put up with the loss as first-party insurance cover is missing.124 However, Swedish law never went as far as to found liability directly on the fact of insurance but established a system of intermediate principles in order to allow the insurance factor some influence on the determination of liability and the amount of damages. Looked at with the eyes of an outsider, the system looks rather complex because it establishes a kind of hierarchy between third-party, first-party insurance, and uninsured loss and in addition distinguishes between personal injury and damage to property. The special categories of minor tortfeasors and of the mentally disturbed are excluded from consideration here as the treatment they receive in Swedish law seems to be more or less a variant of liability in equity as it is known in other European countries.125
119 120
121 122 123 124 125
Austrian Report, no. 74. Austrian Report, nos. 77 et seq.; English Report, no. 17; German Report, no. 74; Italian Report, nos. 94 et seq.; Swiss Report, no. 55. Infra nos. 62 et seq. Swiss Report, no. 55; cf. R. Brehm (supra fn. 102), Art. 44 OR no. 53. Swiss Report, nos. 55, 62 et seq. Swedish Report, no. 76. Cf. Swedish Report, nos. 77 et seq., and supra nos. 34 et seq.
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In cases of personal injury, the tortfeasor who is covered by liability insurance will hardly be able to fend off a claim for damages. The courts will expand liability by applying a strict standard of care,126 and Chapter 6 Section 1 Damages Act will allow reduction of damages for personal injury only if the victim precipitated the injury intentionally or with gross negligence.127 It seems that with regard to property damage, the original idea behind the general provision on contributory negligence in Chapter 6 Section 6 Damages Act was to reverse these rules and to place the loss on the first-party insurer.128 As a consequence, the victim’s claim for compensation would have to be denied even where the defendant acted carelessly if the victim failed to take out first-party insurance. Provided that the Swedish people had followed suit, the costs of personal injury would have fallen upon the liability insurers, and the costs of damage to property on first-party insurers. With regard to personal injury, tort law would have been a mere conduit to make the insurer liable, and with respect to damage to property it would have been superfluous altogether.
52
As the Swedish report notes, these ideas were never put into practice. The Swedish legislator made it clear that it wanted the property insurer to have a right of recourse against the liability insurer of the person who caused the damage.129 The Swedish Supreme Court refused to throw out or reduce a claim for compensation of property damage for the simple reason that the victim failed to insure him- or herself against loss.130 Finally, Bengtsson, the spiritus rector of the system explained above, distanced himself from the ideas he himself had developed during the 1960s and 1970s.131 With all respect, it seems fair to summarize this development in concluding that the theory of insurance as a factor determining the attribution of loss to one party or the other has seen its best days and is on the decline today.
53
E. Insurance and Damages The general position in all the jurisdictions surveyed is that insurance has no bearing on the assessment of damages.132 Save for special areas like liability in equity133 it is the rule that neither will the damages awarded be increased only because the tortfeasor is covered by liability insurance nor will they be decreased if he is uninsured and thus has to pay compensation out of his own pocket. Again, the familiar qualifications must be added: nobody knows for sure what is going on in the minds of judges who make decisions in the area of non-contractual liability. It may very well be that judges are biased to grant an increase in the amount of compensation in cases where the defendant is in126 127 128 129 130 131 132
133
Swedish Report, nos. 42 et seq. Swedish Report, nos. 56 et seq. Swedish Report, nos. 68 et seq. Swedish Report, no. 70. Swedish Report, no. 73. Swedish Report, no. 75. Austrian Report, no. 80; English Report, nos. 69 et seq.; German Report, no. 75; Italian Report, no. 96; Swiss Report, no. 64; Swedish Report, no. 92. Supra nos. 34 et seq.
54
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sured. As this supposition is impossible to prove, it remains a matter of speculation.134 But how plausible is it to speculate in this way?
55
The English report develops the view that insurance has been and still is of utmost importance to the assessment of damages as it “provides the lifeblood of tort”.135 Damage awards in personal injury cases, in particular, would be unthinkable without liability insurance as nobody would be able to pay compensation in such extraordinary amounts out of his own pocket.136 However, as is noted as well, both the courts and the Law Commission have not subscribed to this view but openly rejected the notion that “decisions as to where liabilities should be imposed will be made on the basis of who happens to be insured”.137 The other citations are indeed evidence of the fact that judges are fully aware of what they are doing when they promulgate rules for the assessment of damages in cases with a high “leverage” like certain kinds of personal injury. Just as the German BGH,138 the House of Lords is sensitive to the possibility that a single decision inflating damages for personal injury may trigger a rise in insurance premiums that affects the majority of citizens.139 From a comparative perspective one might add that, in other countries, the rules on the assessment of damages for personal injury have seen very little change during the last century.
56
One lesson from the surveys presented in this volume is that the several jurisdictions vary in their ability – or willingness – to integrate the insurance factor into the assessment of damages. The more this task is left to the discretion of judges, the easier it is for them to take insurance into account, and to remain silent about this. Where judges are bound to rules which allow, or even call for an exact “calculation” of damages, any attempt to vary the award with regard to the existence or absence of insurance becomes difficult if not impossible. Thus, in all jurisdictions, the insurance factor carries particularly little weight in assessing pecuniary loss. As to non-pecuniary loss, the answer depends on whether its “calculation” is left to the discretion of the judge – as it is in England and in Germany – or whether the courts are guided, or have to let themselves be guided, by tables or barèmes, detailing the amount of compensation to be granted for different kinds of injury. This explains why in Italy, the assessment of compensation for danno biologico is likely to be utterly independent of insurance issues as the courts are bound to follow standardised “reference values” defined by statute.140 In Sweden, these tables are not in the 134
135 136 137
138 139
140
Cf. English Report, nos. 64 et seq.; Italian Report, no. 97; Swiss Report, no. 64; Swedish Report, no. 92. English Report, no. 65. English Report, nos. 66 et seq. English Report, no. 69, citing the Law Commission Report, Damages for Personal Injury; Medical, Nursing and Other Expenses (1999), No. 262, para 3.74, and Hunt v. Severs [1994] 2 AC 350. German Report, no. 13. English Report, no. 70, citing Wells v. Wells [1999] 1 AC 345, 405, and Lim v. Camden Area Health Authority [1980] AC 174, 187. Italian Report, nos. 103 et seq.
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form of a public law but have been developed by the Swedish insurance industry.141 Although it might be thought that the fact of these tables stemming from a big player in the compensation game somewhat contaminates their quality, the Swedish courts have been prepared to accept them and the numbers presented therein. In Germany and in England, special rules also apply to damages for pain and suffering.142 In these jurisdictions, judges are not bound to official tables (barèmes), listing the damages to be awarded in the different cases of bodily injury or illness. In addition, the constraints are missing which make the assessment of pecuniary losses a rather technical enterprise. For these reasons, the court enjoys broad discretion in the assessment of damages for non-pecuniary loss in a given case. The German BGH, in a judgment dating from the 1950s has subscribed to the view that insurance should be a relevant factor in this context.143 The relevance of this confession is hard to evaluate, if only because in the great majority of personal injury cases – traffic accidents – every defendant is insured. It is a recurrent theme of this inquiry that the influence insurance might have on tort law in general or on the assessment of damages in particular is impossible to isolate because in one of the main arenas of liability, everybody is protected by insurance. Maybe this is the explanation for the fact that the decision admitting to the influence of insurance on damage assessment did not prevent practitioners from preparing compensation schedules which compile cases and damage awards in order to provide the judge hearing a particular case with some notion about how much a certain limb is “worth”.144 Of course, these schedules are not binding upon the court, but they are “valuable tools” most welcomed by the courts in this difficult area.145
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Another question was whether insurance might have a bearing on the award and assessment of punitive damages. It turned out to be rather pointless as punitive damages are unknown in Europe. England, of course, is an exception but under English law, insurance is of no relevance in the award of exemplary damages.146 This result is not astonishing as insurance clearly reduces whatever deterrent effect such an award may have. If anything, exemplary damages should be excluded from the scope of insurance cover but this is not the case, neither in England147 nor in the U.S.148 The Italian report cites some interesting examples of punitive damages “in disguise”, of which media torts involving
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141 142
143 144
145 146 147 148
Swedish Report, no. 94. English Report, nos. 71 et seq.; German Report, no. 77, see also Thalmair report, nos. 5 et seq., but not in Austria, Austrian Report, no. 85. German Report, no. 77. Cf., for example, S. Hacks/A. Ring/P. Böhm, Schmerzensgeldbeträge (22nd edn. 2003); A. Slizyk, Beck’sche Schmerzensgeldtabelle (4th edn. 2001). H. Heinrichs, in: O. Palandt (ed.), Bürgerliches Gesetzbuch (64th edn. 2005), § 253 no. 22. English Report, no. 73. English Report, no. 74. A.M. Polinsky/S. Shavell, Punitive Damages: An Economic Analysis, [1998] 111 Harvard Law Review (Harv. L. Rev.) 869, 931 et seq.
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public defamation of celebrities is the most interesting.149 Again, insurance does not seem to make a difference.150 This outcome is also anything but surprising as the typical media tort is the wrongful appropriation of personality rights of celebrities which is done intentionally. F. Privileges
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In most of the countries surveyed, employers are exempt from liability for personal injury suffered at work or on the way to work and back home. The privilege also applies to fellow employees where they negligently injured one of their colleagues. Of course, the victim is not left without compensation as this is provided by a social insurance carrier. These well-known principles of workers’ compensation schemes do not apply without qualifications to road accidents. Under Austrian law, the exemption in favour of employers and coemployees is lifted such that the social insurance carrier may claw back the monies paid to the victim from the employer or fellow worker who caused the road accident.151 The Austrian report identifies the existence of mandatory liability insurance for road accidents as the rationale of this exception. As the parties personally responsible for the accident do not have to bear its cost anyway, the interest of the social insurance carrier to recoup the benefits allotted to the victim prevails.
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The German law of workers’ compensation is very similar to its Austrian sister but differs precisely in the point relevant here. Under German law, the exception piercing the exemption in favour of employers and fellow workers does not apply to road accidents tout court but only to those accidents which happen on the way to work and back home.152 This state of the law cannot be explained on insurance grounds as mandatory liability insurance for road accidents of course also applies to company cars while used in the course of employment and not on the private way to work and from there back home. The concern of the German legislature was not so much to enable the social insurance carrier to claw back the compensation payments from the injurer but to allow the victim to claim damages for pain and suffering from the injurer. In contrast with Austrian law, this claim would be covered by the exemption principle of workers’ compensation although damages for non-pecuniary loss are unavailable within the German workers’ compensation scheme.
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The privileges granted by German law for tortious acts within the family are pushed aside by the courts in the area of road accidents. In England, both the rule and the exception seem to be provided by statute.153 Mandatory liability insurance clearly is the motivating force behind such exceptions which in fact impose strict liability for torts within the family. 149 150 151 152 153
Italian Report, no. 101; cf. also Austrian Report, no. 86. Italian Report, no. 101. Austrian Report, nos. 89, 91. German Report, no. 81. English Report, no. 80.
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G. Exclusionary Agreements In most countries, courts refrain from addressing the insurance issue openly when discussing defences such as consent or the conclusion of an exclusionary agreement. In England, Lord Denning delivered one of the rare exceptions when he advised to grant a wrongful-death claim brought against the organizers of an old-car race in spite of the fact that signs warning the spectators had been posted upon the request of the liability insurer.154 The learned judge noted that
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“it was disclosed in evidence that the organisers had insured against accidents such as this: and that the warning notices were put up because the insurance company so required. So the insurance company are behind all this. If their argument is correct, they can take the premiums, and yet exclude their liability by getting the insured to put up these warning notices.”155
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In Germany the courts are very determined in their reluctance to allow agreements excluding liability whose effects would only work to the benefit of insurers.156 As to the BGH, a car dealer who allows his customers to take a vehicle on test drives may easily take out first-party insurance whereas there is virtually no possibility for a prospective buyer to cover the risk of damaging the car through third party insurance. In order to place the risk of destruction on the “better insurer”, the BGH implies an agreement which excludes liability of the buyer for simple negligence in damaging the car.157 The same kind of reasoning applies to another case which, in the relevant respects, is the flipside of the one just mentioned. Here, the liability of the owner of a horse is on the line, with the gratuitous borrower acting as claimant.158 Given the gratuitous nature of such transactions one would be strongly inclined to imply an exclusionary agreement, shielding the gratuitous lender from liability. However, the BGH holds otherwise, forcing the owner of the horse to compensate the rider for his mishap. Although the court does not say so explicitly, the rationale behind this jurisprudence appears to be the desire of the judges to shift the loss to an insurance carrier. As horse owners are typically covered by liability insurance the court can be reasonably certain that it may apply its principle across the range of cases belonging to this category.
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V.
Procedural Issues
Outside the domain of the action directe, the liability insurer is no party to the legal proceedings initiated by the victim against the tortfeasor.159 However, in all the countries surveyed, the liability insurer assumes the role of master and 154 155 156 157 158 159
Cf. English Report, no. 61. White v. Blackmore [1972] 2 Queen’s Bench (QB) 651, 657 (Companies Act, CA 1972). German Report, nos. 82 et seq., 87. German Report, no. 84. German Report, no. 85. Cf. Swiss Report, nos. 88 et seq.
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manager of the claim for compensation brought against the insured.160 It also seems that the liability insurer is bound to a judgment rendered against the insured on the issue of liability and may only deny coverage by invoking defences growing out of the insurance contract.161 VI. Final Conclusions A. Complexities of the Subject
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The interplay of liability in tort and liability insurance is a vexing subject which takes on various shapes if looked at from different angles.162 In addition, tort law itself is a complex matter which, since the times of classical Roman law, has been oscillating between the two functions of compensation of victims and deterrence of potential tortfeasors. At different times and places the attempt has been made to discredit one of those functions, i.e. to deny that tort law serves the compensatory function since it fails to achieve or even guarantee compensation to all victims who are in need of it, or to discredit the preventive function of tort law by suggesting that potential tortfeasors disregard the incentives generated by this branch of the law altogether. As a matter of fact, there is no doubt that the purposes of tort law are not borne out in reality to the fullest extent. This is true of all human institutions, however, and does not entail that the whole enterprise is in vain. B. More Genius than Locus
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One should also be cautious of associating whole countries or legal systems with particular views on the functions of tort law and the role of liability insurance. Quite obviously, some theories are more popular in certain countries whereas others are popular some place else. However, there is a split of opinion in every jurisdiction such that it would be wrong to say that England, Germany or Switzerland each are a home to a particular view or solution only. Divergent views are entertained by individual scholars, and it is a well-known fact that scholars almost never agree. Likewise, the comparative report delivered here is replete of subjectivity. Had another one written it, the conclusions very likely would have been different too. With these caveats on the table, I now turn to my own conclusions. C. Normative and Sociological Approaches 1. The Sociological Perspective
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As has been noted at the outset, the critical questions of this project have been whether liability insurance has a de facto influence on the development of tort 160
161 162
Austrian Report, no. 103; German Report, no. 92; Swiss Report, no. 92; Swedish Report, no. 110. Austrian Report, no. 102; German Report, no. 91; Italian Report, no. 122. Cf. the thoughtful and particularly rich contribution of H.A. Cousy, Tort Liability and Liability Insurance: A Difficult Relationship, in: H. Koziol/B. Steininger (eds.), European Tort Law 2001 (2002), 18 et seq.
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law and whether it ought to have such an influence. The second question is clearly normative in nature but even the first point – the real influence of liability insurance on tort law – presents a normative issue in the sense that the substantive rules and principles of tort law are made the subject of inquiry. The English report by Richard Lewis is based on a completely different view of the underlying issues, and the contribution of Tom Baker, written from the perspective of the American legal system is very similar. The vantage point for the authors of these papers is not the law of tort “on the books” but the law of tort “in action”. Looked at from this angle, it becomes immediately clear that the insurance companies are major actors in the compensation game.163 After all, insurance companies are the ones who defend claims, it is their choice to enter into settlement negotiations or to refuse to do so, and the money ultimately paid to the victim comes out of their pockets. As it is part of the insurer’s job to defend and satisfy claims, they enjoy the advantage of a “repeat player” over the victim who is a typical “one-shotter”.164 The continuous involvement of insurers in the compensation procedure also influences the way they deal with contested facts and issues. Complex legal doctrines and the outcomes they generate in a particular case are melted down into hard and fast, easy-to-apply “rules of thumb”.165
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The individual tortfeasor himself, in contrast, usually lacks the funds to pay up on a judgment such that it is not worthwhile to sue him anyway. With these facts in mind, the decision whether to bring suit or not will be made with regard to the availability of insurance, and the law enforcement process will be channelled towards insurance companies as solvent debtors. Thus, insurers attract the bulk of tort claims. The flipside of this channelling effect is that claims against individuals are being left unenforced.166
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2. Discussion a) Intentional Torts Some points raised by Baker in his description of the American tort and insurance systems do not carry over to European systems, at least not to those on the European continent. One example is the observation that, in the U.S., trial lawyers try to avoid intentional torts in order not to lose the insurance cover which excludes harm caused by intentional acts. In Germany, for example, the law of insurance is quite the same as in the U.S. but tort law is different. Intentional torts are not in a separate category but are an indistinguishable part of the general clause of the law of delict in Sect. 823 para 1 Civil Code. The same is true for other continental European systems like Austrian, Swiss and French law. In all these jurisdictions, courts do not bother with intention for 163 164 165 166
See also supra nos. 65 et seq. English Report, no. 7; Baker, nos. 30 et seq. English Report, no. 6; Baker, nos. 37 et seq. English Report, nos. 4, 8; Baker, nos. 9 et seq., 19 et seq., 22 et seq.
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the simple reason that liability attaches in exactly the same amount if the defendant acted only carelessly. In addition, in the German law of insurance, for example, it is generally accepted that the exclusionary rule with respect to intentional acts is not necessarily congruent with the delictual concept of an intentional act. Within the context of insurance law intention requires that the harm complained of was caused intentionally, not only that the wrongful act was committed wilfully.167 Thus, the concept of intention in insurance law is less broad than its sister within the law of delict. b) Collectibility
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An essential part of the argument that it is insurance that drives the development of tort law is based on the fact that, in practice, the existence of insurance cover serves as a clue for the selection of defendants. The simple reason is that where the damages suffered are not negligible in amount, the question arises whether the tortfeasor will be able to pay up on a judgment won against him.
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As to the selection of claims, the issue of collectibility may be of much less importance in Europe than in the U.S. Although only a fool would deny that collectibility matters over here as well, the regime governing the allocation of legal costs is utterly different from the American one, and these differences alter the structure and the outcome of the decision of whether to enforce a claim and bring suit. In Europe, the winner in a civil suit is awarded costs and fees and thus the legal costs incurred are added to the damage award. Counsel, in turn, is paid on the basis of a fee schedule or per hour. Contingency fees are banned in most European countries. Instead, poor plaintiffs who cannot afford to hire counsel, but also poor defendants in the same position, are entitled to legal aid such that the public takes on their legal fees if they lose their case. All these mechanisms together work to the effect that the enforcement of a claim against an ordinary individual without insurance cover is much less risky than it is in the U.S. Of course the plaintiff bears the risk of losing his case, but this is a risk he has to bear anyway. If he wins, however, chances that he may be able to recover are considerable. Having won an award, the prescription period for the claim is 30 years in most European countries,168 and the plaintiff may wait and see whether it is possible to recover at least part of the claim in the many years to come. This is not to say that suing poor parties in Germany or other European countries is pure fun – it is not. However, it would be equally wrong to suppose that the only parties worth suing are insurance companies. 167
168
W. Voit/U. Knappmann, in: E.R. Prölss/A. Martin (eds.), Versicherungsvertragsgesetz (27th edn. 2004), § 152 Rdnr. 5. Gemany: Sect. 197 para 1 No. 3 Civil Code (BGB); France: Art. 2262 Code civil; P. le Tourneau, Droit de la responsabilité et des contrats (2004), no. 2270; for a comparative overview see O. Lando/E. Clive/A. Prüm/R. Zimmermann, Principles of European Contract Law III (2003), 167 note 1 to Art. 14:202 which itself stipulates a period of ten years for claims established by legal proceedings.
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But the crucial point is not to question the attractive effect of liability insurance but to investigate whether the existence of insurance really lies at the core of the matter. The simple answer is that it is not. What turns a potential tortfeasor into a worthwhile defendant is not that he carries liability insurance but that he is in command of sufficient funds that his ability to pay up on any judgment rendered against him may reasonably be assumed. Where these funds come from is irrelevant; the only thing that matters is the financial health of the defendant. American tort law furnishes particularly striking examples of the practical impact of the financial attributes of potential defendants. It is difficult to imagine that insurance issues played any role when the big tobacco companies were singled out as targets for personal injury claims. The outrageously large sums awarded against these companies are definitely not covered by liability insurance as they exceed the cover available on the market by quantities. However, the absence of insurance did not deter the plaintiffs and their lawyers as the companies themselves were financially strong enough to make them worth suing. Similar claims may be made with regard to the fast food industry currently facing a wave of litigation, but also in respect to the asbestos manufacturers, the producers of breast implants and the like. Therefore, it may well be said that enterprise liability was allowed to develop and thrive thanks only to the financial strength of corporate defendants. In short, it is the deep pocket – and not the insurance cover – that attracts plaintiffs. The only – though still important – thing insurance does is to turn ordinary people with modest financial means into reasonably rich ones vis-à-vis those people who become the victims of their careless acts.
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c) Normative Implications Lewis and Baker focus on the “law in action”, suggesting that this is the most important thing to do, whereas other scholars are preoccupied by the question of whether and how liability insurance shapes liability rules. Quite obviously, these two approaches do not exclude each other. One might very well contend that liability insurance has little influence on the development of liability rules and still believe that the office buildings of insurance companies “are the important centres of tort practice”.169 As Stapleton rightly said “… it is not inconsistent with the traditional view of the irrelevance of insurance to liability, to acknowledge the clear relevance of insurance to the operation of tort law in daily life”.170
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Although it turns out to be feasible to bring the two approaches together in the way just indicated, this inclination to harmonize should be resisted. The contributions of Baker and Lewis, at least in their subtexts, reveal a criticism of established tort law doctrine. It seems that in the minds of these two scholars, the focus on the “law on the books” is old-fashioned, and out of step with the true needs of society. That might very well be the case. However, one is tempt-
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169 170
English Report, no. 2. J. Stapleton, [1995] 58 M.L.R. 820, 825.
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ed to ask the critics what their new approach is really aiming at. If it is true that tort law is all about insurance – so what? What follows from that? In spite of some concerns voiced about the advantage enjoyed by insurance companies,171 the suggestion is certainly not to abolish liability insurance. Such a move would leave many more victims without adequate compensation than today. If that is not the solution, should liability insurance be inflated, made mandatory even in areas where it is voluntary today? Should everybody be insured around the clock as a matter of law? Should the courts always impose liability if the defendant carries insurance and throw out claims brought against uninsured tortfeasors? As long as these questions are not tackled it is hard to tell what we might learn from the “sociological” view of the cathedral. D. The Two Normative Models 1. Putting Tort Law and Deterrence First a)
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Insurance and Incentives to Take Care
In the tradition of the civil law, delict is the sister of crime, and tort law, like criminal law, serves a deterrence function, in addition to compensating victims.172 Economic analysis of law has contributed to a revival of this view as its focus is the deterrence function of tort law, rather than its properties as a compensation mechanism.173 This should hardly come as a surprise since the economic analysis of tort law rests on the assumption that legal rules influence the behaviour of actors, and that the rules of tort law in particular provide potential tortfeasors and victims with the incentive to take efficient precautions against harm. In this perspective, liability insurance is more of a problem than a solution. The shifting of the costs of harm to insurance companies and from there on to the public at large obviously destroys the incentives tort law generates.174 The potential tortfeasor relaxes in his efforts to take due care in order to avoid harm and succumbs to the sweet sirens of moral hazard. In this sense, insurance is anathema to a concept of tort law geared towards the production of incentives for efficient behaviour. b) The Benefits of Insurance
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The economic analysis of tort law does not discard insurance altogether, of course. Insurance is a valuable tool to increase the welfare of risk-averse actors by transferring the risk of crushing liability to an insurance company. There, it is pooled with other similar but non-cumulative risks such that the uncertainties cancel each other out. In this sense, the risk disappears in the hands of the insurance company by becoming an actuarial certainty. For the risk-averse actor insurance transforms the threat of an uncertain, large loss 171 172 173 174
English Report, no. 7. See supra nos. 66 et seq. Law and Economics Report, no. 3. Law and Economics Report, nos. 12 et seq., 84 et seq.
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into the certainty of a constant stream of relatively small premium payments. These benefits of insurance have to be compared with its costs in terms of a lower level of care as a consequence of moral hazard. c) Containing Moral Hazard Fortunately for the law of torts, insurance companies doing business in the area of liability insurance have an incentive to contain moral hazard on the part of their clients. The relaxation of precautionary measures by insureds leads to more numerous and more severe accidents which in turn cause the payments of the insurance company to rise. Within a competitive market, insurance companies will work hard to control their compensation payments in order to keep the premiums low and to attract more business. There are several instruments available to an insurance company to counteract the effects of moral hazard. In accordance with the report on law and economics issues, these measures fall into two classes.175 One strategy of the insurance company is to monitor the behaviour of the insured in order to adapt the insurance premium immediately once the client relaxes his safety measures. If seamless monitoring were possible, the insurance company would always charge a premium which fully reflects the accident risks run by the client. The client, in turn, would take efficient precautions against harm because any deviation from the efficient standard would trigger a rise in the insurance premium greater than the cost savings obtained by economizing on the side of safety measures.
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Of course, seamless monitoring of the insured by the insurance company is not possible and even to the extent monitoring is possible, it is not even desirable because monitoring is not costless either. Therefore, insurance companies have developed a second device to control moral hazard, and that is to limit the insurance cover and to leave parts of the risk of liability lying where it was before conclusion of the contract for insurance, i.e. within the lap of the insured. Pertinent examples are caps on the insurance cover, deductibles and various sorts of exclusions such as the exclusion of damage caused intentionally.176
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In spite of these options, insurance remains a double-edged sword for the economic analysis of tort law. Along with the impossibility of restoring the incentives generated by the threat of being held personally liable to their full bloom with the help of caps, exclusions and like measures, a major problem is that insurance markets do not work perfectly either, as evidenced by the fact that many insurers are reluctant to employ sophisticated techniques of risk-rating in favour of lumping together in one pool large numbers of risks of very different degrees.177
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175 176 177
Law and Economics Report, nos. 86 et seq. Law and Economics Report, no. 87. Law and Economics Report, nos. 13 et seq.
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d) Separation of Liability and Insurance Issues
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As the primary concern of law and economics is with incentives to take care, it places tort law first and supports the principle of separateness of tort law and liability insurance. The fact that the tortfeasor is covered by insurance in itself is no justification for imposing liability. As such, law and economics may serve as a background theory for the state of the law in most of the jurisdictions surveyed. These systems do not allow the insurance issue to trump tort law but define liability on its own terms, without regard to insurance.
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However, there are a few exceptions, like liability in equity, privileges and legal or contractual exclusions of liability in tort. In these situations, courts in most of the “traditionalist” jurisdictions tend to take liability insurance into account. May these exceptions be explained on the basis of a law and economics approach? The answer is in the affirmative. In the case of liability in equity it makes perfect sense to fix liability with the superior risk bearer where the tortfeasor lacked the capacity to act rationally and to adjust his own actions accordingly. Where deterrence is unattainable, the next goal to pursue is an efficient allocation of risk. The setting aside of legal privileges and the reluctance to imply contractual exclusions of liability where the tortfeasor is covered by insurance are more complex problems. The rationale of the rule prevalent in the legal systems surveyed seems to be that the purpose both of legal privileges and of implied contractual agreements is to protect potential tortfeasors against ruinous liabilities and not to benefit an insurance company which collected a premium in return for accepting the risk. This argument neglects the fact that the premium the insured would have had to pay would have been lower if privileges were enforced in the face of insurance, or rather, to the benefit of insurance companies. On the other hand, it may be doubted whether this reduction would be significant enough to justify enforcement of a legal privilege. 2. The Swedish Model: Compensation of Victims and Distribution of Costs a) Placing Insurance in the Front Seat
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Among the legal systems surveyed in the course of this project, Swedish law clearly has gone furthest in turning the relationship between tort and insurance upside down. In Sweden, liability insurance has been accepted and developed as a necessary companion of liability in tort. With some exaggeration it might be maintained that, within the Swedish system, liability insurance even takes priority over liability in tort such that the two institutions have switched roles.178 Whereas the traditional principle of separateness places tort first, in the sense that liability in tort must be established regardless of insurance coverage, the Swedish approach is to look for insurance first and then to fix liability with those actors who have contracted for insurance coverage. As the main ingredients of the Swedish approach have been worked out within the frame178
Swedish Report, nos. 2 et seq.
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work of the Nordic Legal Cooperation, the reversal of roles is a pervasive feature of Scandinavian compensation systems.179 The promotion of insurance to the front seat is based on a fundamentally different view of the functions of tort law. The two masterminds of Scandinavian tort law in the second half of the 20th century, Strahl and Hellner, “did not believe in the idea of prevention”.180 According to them, the main objective of tort law was – or should have been – the protection of victims. Achieving the ultimate goal of optimal protection of victims required to move the law of torts towards the principle of strict liability, and to supplement strict liability with liability insurance. Under this approach, the insurance company is the ultimate risk bearer who will then distribute the costs incurred by compensating the victim among the pool of policy holders. To the extent that insurance is mandatory or is bought by most enterprises and citizens on a voluntary basis, the risk is spread among the general public. The liability of the policy holder is nothing more than a conduit, an intermediate albeit necessary step, in order to trigger the obligation of the insurance company and then to shift the costs on to society at large.181 In this sense, the Swedish approach turns the relationship between liability in tort and liability insurance on its head – or rather on its feet, depending on the political views of the observer. Whereas the “traditional” view would start with the issue of liability, and think about insurance only after liability has been established on its own normative turf, the Scandinavian view is to start with the objective of shifting the losses incurred by the victim on to a class of insureds, and then to ask which actor may be used as a conduit for making the insurance pool liable.
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b) Generous Compensation of Personal Injury It is on this normative platform that the rules and concepts of the law of delict are interpreted and applied. As a consequence, with regard to negligence liability, the standard of care varies in accordance with the insurance status of the tortfeasor. If he carries liability insurance, the standard is strict, if he does not, the standard is lenient.182 The view of tort law as a key for allowing victims access to insurance funds also explains the generosity of Swedish tort law in the area of contributory negligence.183 In cases of personal injury, compensation will not be reduced if the victim behaved carelessly himself and thereby contributed to the causes of the accident. It is only if the victim acted intentionally or with gross negligence that his contribution will be taken into account.
179 180 181 182 183
Swedish Report, no. 2. Swedish Report, no. 5. See also English Report, no. 27. Swedish Report, nos. 42 et seq. Swedish Report, nos. 56 et seq.
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c) No Compensation for Damage to Property
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As has already been indicated, the dominance of liability insurance in the way just described is limited to the field of personal injuries. Property damage is governed by another principle which is at once antagonistic and similar to the one followed in the area of personal injury compensation.184 In the area of personal injuries, it is the policy of Swedish law to ultimately shift the costs of compensation to liability insurers. With regard to damage to property, the policy is that these losses should best be dealt with through first-party insurance taken out by the victim. This objective explains the reluctance of Swedish law to grant compensation for property damage under the rules of tort law. In this context, the standard of care against which the behaviour of the tortfeasor is compared is lenient, whereas the standard imposed upon the victim is strict. Again, the concepts of negligence and of contributory negligence are employed in order to achieve the objective that the costs of property damage are ultimately borne by property insurers. However, Swedish law seems to go even a step further in that the assumption of contributory negligence may be based not upon a failure to take due care – whatever the standard is – but upon a failure to take out first-party insurance. The Swedish report suggests that contributory negligence on the part of the victim may be assumed and his claim reduced for the sole reason that he failed to insure his own property!185 d) The (Limited) Functions of Tort Law
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Both branches of Swedish tort law thus rest on one and the same principle, i.e. that the costs of damage should be shifted to an insurance carrier. It is only in the kinds of insurance coverage that the compensation systems for personal injury and for property damage differ. In the former case, the appropriate mechanism is thought to be liability insurance; in the latter case, first-party insurance is preferred. This divergence explains why tort law has an important role to play in the area of personal injury compensation but not as far as property damage is concerned. In the former case it is needed to provide a link between the victim and his need for compensation and the insurance carrier administering the funds collected from the collective of premium payers. Within the area of property damage even this auxiliary function is moot. All that is needed here is a rule throwing out claims for compensation brought by individuals as uninsured victims of property damage. Here, the sole function of tort law may be to provide a legal basis for some sort of settlement between the first-party insurer and the liability insurer. 3. The Two Approaches Compared
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At the outset, it is important to note that the sketches of the two approaches provided above are stylized and exaggerated. Even in Sweden, damages for 184 185
Swedish Report, nos. 60 et seq. Swedish Report, no. 74: “it seems possible that the Court may have accepted the idea that B had been negligent in not insuring the dog and that a reduction in damages should therefore occur”.
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personal injury will be reduced where the victim caused the accident intentionally or with gross negligence. Likewise, traditional tort law theories have always allowed for a considerable degree of flexibility which was then used to take the “victim’s interests” into account. Even economic analysis is prepared to accommodate concerns regarding the distribution of accident costs across a pool of individuals with the help of an insurance carrier in order to achieve an efficient structure of risk-bearing. At the conceptual level, however, the two approaches are irreconcilable because they rest on deeply antagonistic assumptions about the functions of tort law and liability insurance, respectively. One theory places tort law first, building on a normative account of liability which is independent of the objective of victim compensation and risk spreading. Without going into the details of theories of accountability and attribution here, it is safe to contend that within these systems, the mere fact that there is a victim who suffered damage to personal integrity or tangible property is not enough to find a claim in tort against somebody else. Rather, normative concepts like fault or the control of a source of danger are needed in order to provide a legal basis for a claim for compensation. Under this approach, insurance is, at least primarily, a device for potential tortfeasors to control their risk aversion, not so much an instrument for protecting victims against harm caused by insolvent or financially week tortfeasors. The same principle also applies to the area of contributory negligence. In most of the countries surveyed, it would be absurd to argue that the owner of a dog shot dead during an elk-hunt should go without compensation or that damages should be diminished for the simple fact that he could and should have bought property insurance for the animal.186 The sole question to be asked in the context of contribution is whether the victim was at fault himself where fault means that the victim behaved carelessly or inflicted the damage upon himself intentionally.
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What is the better view of the relationship between tort law and liability insurance? The answer is impossible to be given in an “objective” way as it is a political one on which people with different political beliefs will give different answers. Quite obviously, those commentators putting a strong emphasis on equality and social security are more likely to favour the Scandinavian approach, whereas others who put their belief into private autonomy and the self-regulatory forces of the market will tend to hold the view that tort law should come first. The acknowledgement of this split on a fundamental political level should not prevent us from arguing on the merits.
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4. Discussion a) Historical Developments A first point to note is that there have been massive fluctuations in the esteem the two models have been held in, both within the community of scholars and 186
Cf., however, Swedish Report, no. 73.
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within the political arena. During the late 1960s and the 1970s, the prevalent mood inside and outside academia tended to favour the Scandinavian approach. It is no accident that these decades saw the crest of the welfare state in Western Europe. It was a time that saw more than two decades of peace after the destructions and horrors of the Second World War, a time that generated the proverbial baby-boom which had caused the population to boost, and a time of a dramatic increase in overall production. It seemed that the democratic promise of freedom, security and prosperity for everyone in society was about to be honoured or its fulfilment at least within reach. In all the countries of Western Europe, the ultimate guarantor of these promises was the State with its various programs of social security churning out benefits to the needy. All across Europe, massive bureaucracies were established in order to run public health care and pension systems, either in the form of a public service or in the form of social insurance.
93
Within such an environment private insurance looked much like a substitute for social insurance and tort law as a somewhat clumsy sibling of the social security system. This view of the cathedral lay at the heart of the no-fault movement to be dealt with subsequently.187 Within the present context, it bears emphasizing that there is no deep gap between no-fault schemes and the Swedish system of running tort law as a conduit towards insurance funds. With a grain of exaggeration it may even be maintained that a legal system such as the Swedish amounts to a no-fault scheme in the guise of the private law institutions of tort and insurance. The belief underlying such a quasi-nofault system may be summarized in two propositions: One is a deep scepticism towards the deterrent function of tort law. The second proposition is a flipside of the first in the sense that the compensatory function of tort law is placed in the centre. However, this move is supplemented by the belief in the benefits of insurance in the sense that the best state of the world would be one where every risk was insured – be it liability insurance or first-party insurance.
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In spite of the existence of political disagreement it should be noted that, today, the welfare state in the European style has approached its limits and may even have moved beyond those limits. All over Western Europe, the member states grapple with the financial burden imposed on them through inflated welfare systems in need of ever more funding. It is highly unlikely that we will see further expansions of the welfare state within the near future. Just as the rise of the Scandinavian model of liability in tort as a mere conduit to shift accident costs from victims to insurance companies is intellectually linked to the rise of the welfare state it may also be tied to its decline. The fact that the law and economics movement appeared on the academic scene just at the time when welfarist theories peaked is remarkable and perhaps no accident. Law and economics set the intellectual scene for a roll back of the welfare state in general and for a rehabilitation of the traditional functions of tort law in particular. In addition, liability insurance lost its privileged role and turned into a 187
Infra nos. 104 et seq.
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problematic institution, in fear of destroying the benefits that tort law created in the first place. Mere observations of the ebb and flow of political moods, public opinion and academic theories do not provide a substantive argument in favour or against certain institutional arrangements. The re-discovery of the deterrent effect of tort law by law and economics does nothing to prove that this effect actually exists. For obvious reasons it is impossible to embark on this fundamental issue here and to provide an answer to one of the eternal questions of tort law. In spite of trying the impossible a few specific comments will be made.
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b) Incentives to Take Care and Incentives to Insure Looked at from the outside, it appears that Swedish law is rather selective in accepting or denying the influence of tort law on the behaviour of potential tortfeasors and potential victims. On the one hand, little faith is put into the deterrent function of tort law. The framers of the Swedish law of delict throughout the second half of the 20th century “did not believe in the idea of prevention”.188 But if one does not believe that tort law has an influence on the behaviour of citizens, why then would one expect those citizens to buy insurance? If potential tortfeasors do not care at all about liability, how come that so many people, particularly in Sweden, spend real money in order to buy liability insurance? Of course one could answer that a risk-averse individual cares a lot about liability but only as long as he is not insured. Once the insurance cover is in place, the attitude towards liability changes and becomes one of indifference. This reasoning has a lot of truth to it but it brings the discussion back to the issue of moral hazard. If the above description paints an accurate picture of the behaviour of potential tortfeasors, then liability insurance is a problematic institution indeed. Furthermore, it is in desperate need of riskmanagement mechanisms in order to restore some portion of the deterrent effect of tort law.
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The same contradiction may be observed in the area of damage to property where the contributory negligence defence may be based on a failure to buy first-party insurance. Here, Swedish law wants the victim to take out liability insurance and tends to reject claims of victims who failed to insure themselves. The denial of liability for property damage is meant to penalize the victim for his reluctance to buy insurance. Such a “penalty” will have beneficial effects only if one expects the victim to anticipate such consequence and to buy first-party insurance in order to protect himself against this peril. However, if the victim is thought to respond to an adverse judgement by buying first-party insurance why would he not also respond by taking more care? Again, it is difficult to accept the proposition that the incentive effects of tort law are strong enough to induce potential tortfeasors and potential victims to take out insurance but not strong enough to induce them to take (more) care.
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Swedish Report, no. 5.
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c) Intentional Torts and Gross Negligence
98
In a world where every loss is covered either by first-party insurance or by the tandem of tort law and liability insurance nobody would be held accountable for the consequences of his or her actions. It is very hard to believe that such an institutional setting would not adversely affect the behaviour of potential tortfeasors and victims. Swedish law itself seems to acknowledge these problems in excluding intentional or grossly negligent wrongdoing from the insurance regime. In particular, even claims for compensation of personal injuries are to be reduced if the victim caused the accident intentionally or acted with gross negligence.189 In cases of serious misbehaviour the incentive effects of tort law are obviously regarded as indispensable. But if the threat of being held liable to pay damages is strong enough to deter intentional wrongs and gross negligence, why should it not deter simple negligence likewise, i.e. provide incentives to take care?
99
This criticism might be rebuked by pointing to the various mechanisms available to insurance carriers to contain moral hazard. But again, if the incentive effects of these measures – bonus/malus-schemes, deductibles, experience rating – are conceded, how can the incentive effects of negligence liability be denied? After all, what these measures do is nothing else than restoring, in part at least, the incentive effects of liability in tort, i.e. the same effects that insurance destroyed in the first place. 5. Balancing the Two Models
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Up to this point, much criticism has been directed at the Swedish Model. The recurrent theme of this criticism is that a legal system which is aiming at comprehensive insurance coverage for all kinds of losses which were caused negligently underestimates the incentive effects of tort law and undermines the individual’s sense of responsibility for the consequences of his or her actions. This argument certainly has merit but it may carry less weight than theoretical reasoning suggests.
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Without having looked into any empirical studies, it might be suggested that Sweden and other countries following the Swedish example are not wrought with an exceptionally high number of accidents. Obviously, the incentive effects of comprehensive insurance are not so severe that potential tortfeasors and victims relax completely and abandon the duty to take care altogether. As a matter of fact, some interest in precautions is likely to remain alive. How may this outcome be explained? One explanation has already been mentioned, i.e. the fact that insurance companies operating in a competitive market will work to restore as much as possible of the incentives generated by tort liability with the help of measures like bonus/malus-schemes, deductibles and the like.190 Another part of the explanation is that in many areas of modern tort 189 190
Swedish Report, no. 56. Supra nos. 79 et seq.
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law, injury of another person carries with it injury to the tortfeasor himself. Automobile accidents are the best and most important example. In modern traffic, it is almost impossible to endanger somebody else without putting one’s own bodily integrity and personal property on the line as well. Since every individual has an inborn instinct to avoid collisions and bodily harm in general, care will be taken in order to prevent accidents not because of concern for the integrity of others but out of concern for one’s own well-being.191 How strong these self-regarding incentives to take care are depends on the particular type of accident under consideration. In the area of motor traffic, the self-concerned incentives will be strong with respect to collisions involving other motor cars as these accidents typically entail symmetric risks of injury to both parties. Things change dramatically if one looks at accidents involving pedestrians or bicycle riders. Here, one would not like to count solely on the interest to avoid harm to oneself but provide the driver with incentives to also avoid harm to the interests of others who are particularly vulnerable. Products liability and medical malpractice are again entirely different from road traffic accidents. In these areas, misbehaviour on the part of the manufacturer or doctor does not create any risk of injury to himself but the risk is solely directed towards others. Thus, the interest in avoiding harm to oneself does nothing to induce potential injurers to take care. In sum, it would be highly surprising if there was no downside at all to a legal system that aims at shielding the individual from having to confront the consequences of its own actions. This is particularly obvious where the Swedish report promotes the rule that property damage should not be compensated if the victim failed to take out first-party insurance. In the end, this entails that the person having caused the harm will never be answerable in person, either because there is no liability or because his liability insurer picks up the loss by reimbursing the property insurer of the victim. If that is the state of affairs, why should anyone care to avoid property damage? Why should a hunter be careful with his shots even where he has positive knowledge of the fact that dogs of fellow hunters are moving in the line of fire? Why should students playing football close to residential homes be careful about not smashing a window?
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It seems that even in Sweden, commentators are beginning to rethink the relationship between tort law and insurance law. Some evidence of this is mentioned in the Swedish report which notes that Bengtsson, during the 1990s, moved away from the principle that failure to take out first-party insurance should trigger the defence of contributory negligence in cases of property damage.192 Maybe the views that were developed in the 1960s and 1970s are beginning to fade away in order to be replaced by an approach which, again, places tort law first.
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191 192
D. Dewees/D. Duff/M. Trebilcock, Exploring the Domain of Accident Law (1996), 16. Swedish Report, no. 75.
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E. No-Fault Schemes: Doing away with Tort Law? 1. Introduction
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If the Scandinavian approach regards the combination of tort law and liability insurance as a substitute of social insurance schemes, no-fault programmes go one step further in that they actually replace this combination with a system of firstparty insurance. Whether the first-party insurance system is itself a public entity like the carriers of social insurance or rather a framework for a market of private insurance companies is of secondary importance only. Regardless whether one or the other solution is adopted, the essential feature of no-fault schemes is the abolition of liability in tort and of its insurance in favour of direct insurance of victims against losses. The topic of no-fault accident insurance schemes has not been the focus of this project as it requires comprehensive actions by legislators rather than incremental adjudication which is the domain of the courts.193 However, the basic normative issues of no-fault liability are more or less the same as the ones involved in this study. As it seems, the same notions of victim protection and loss-spreading that underlie the Swedish model also lie at the heart of the various no-fault schemes that were proposed over the last 50 years. 2. A Short History of No-Fault
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Beginning in the 1950s the idea of abolishing the tort system altogether in favour of private or social first-party insurance has gained support, particularly with regard to motor accidents. With the exception of New Zealand no country has implemented a comprehensive scheme of first-party insurance for personal injury,194 but many North-American jurisdictions have adopted more modest versions of it which at least provide basic protection of the traffic victim on a no-fault basis. No-fault schemes rest on the same assumptions as the Scandinavian approach to the relationship between tort law and liability insurance discussed above. The combination of tort law and liability insurance is discredited for its inability to funnel compensation to every victim who deserves it. In the area of medical liability for example, liability is contingent on malpractice, and only those victims who succeed in proving malpractice are allowed to collect. Patient insurance schemes try to go further in dispensing with the fault requirement and instead merely demand proof of iatrogenic injury.195 On the other hand, the concern with deterrence is played down. In reality, it is said, people do not think about liability issues before they act. If doctors, for instance, are deterred from careless behaviour, it is out of concern for their reputation, both among their peers and among potential customers, and not because of the threat of being held liable for the damage caused. These as193
194
195
On the introduction of no-fault in the area of medical accidents see the volume of J. Dute/ M.G. Faure/H. Koziol (eds.), No-Fault Compensation in the Health Care Sector (2004). D.R. Harris, Accident Compensation in New Zealand: A Comprehensive Insurance System, [1974] 37 M.L.R., 361; R. Mahoney, New Zealand’s Accident Compensation Scheme: A Reassessment, [1992] 40 American Journal of Comparative Law (Am. J. Comp. L.), 159. For an overview see D. Dewees/D. Duff/M. Trebilcock (supra fn. 191), 139 et seq.; L. Wendel, in: J. Dute/M.G. Faure/H. Koziol (supra fn. 193), nos. 28 et seq.
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sumptions underlie the Swedish Model of first-party patient insurance that has replaced tort law in the medical malpractice area.196 Over recent years, however, the once powerful no-fault movement has lost much support. In the United States no fault saw its crest in 1976 and has declined since, with several states repealing their already modest (“add-on”) nofault schemes.197 New Zealand, which is still the most prominent example of a broad substitution of a no-fault insurance scheme for liability in tort, has run into considerable difficulties with regard to the financing of the scheme.198 Likewise, in many European countries public opinion has turned away from collectivistic solutions in the tradition of the welfare state written bold face. Together with the proliferation of scepticism vis-à-vis the ever greater expansion of social insurance the attractiveness of no-fault schemes has suffered, even if they were organized within a market framework. Within academia, prominent supporters of a wholesale shift towards first-party insurance like Patrick Atiyah have defected from the flag.199
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Switzerland quite recently considered the option of either reforming the law of tort or of switching to a system of insurance with respect to personal injury compensation, and opted in favour of tort law.200 The major argument was that an insurance solution, in pure form, would sacrifice the deterrent effect generated by liability rules, and that any attempts to restore incentives to take care through a system of administrative fines or risk-rated premiums would compromise whatever cost savings the switch to an insurance system yielded.201 Currently, the introduction of a no-fault scheme is still being discussed with respect to medical malpractice. In Austria and in Switzerland, this discussion has already left academia and reached the political sphere.202 As the Austrian report makes clear, however, there are good reasons to doubt that the advantages of such a system outweigh its disadvantages in terms of weakened incentives to take care.203
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3. Problems of No-Fault a)
Deterrence
This is not the place to discuss in detail these assumptions, popular as they are among the proponents of no-fault schemes.204 The heart of the critique 196 197 198 199 200 201 202 203 204
Cf. C. Oldertz, [1986] 34. Am. J. Comp. L., 635. U.S. Report, no. 29. R. Mahoney, [1992] 40 Am. J. Comp. L., 159, 168 et seq. P. Atiyah, The Damages Lottery (1997), 183. Swiss Report, nos. 3 et seq. Swiss Report, no. 3. Austrian Report, nos. 4 et seq.; Swiss Report, nos. 100 et seq. Austrian Report, no. 4. A recent and comprehensive study favourable of no-fault schemes is the book D. Dewees/D. Duff/M. Trebilcock (supra fn. 191); a comprehensive survey of no-fault schemes and proposals in the area of medical malpractice is presented in J. Dute/M.G. Faure/H. Koziol (supra fn. 193); for my own – sceptical – views of the matter G. Wagner, in: R. Zimmermann (ed.), Grundstrukturen des Europäischen Deliktsrechts (2003), 328 et seq.; cf. also A. Burrows, Understanding the Law of Obligations (1998), 120 et seq.
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launched against first-party schemes is of course the same as in the case of the focussing of tort law on private insurance discussed above, i.e. substandard deterrence. If every victim of personal injury is compensated out of public funds with the person responsible going scot-free why should anybody take costly measures of precaution aimed at avoiding the harm? The counterargument of the proponents of no-fault schemes is a general denial of the deterrence effect of tort law, combined with the contention that deterrence should not be left to the haphazard workings of the tort system but instead be taken care of by criminal or administrative law. It will readily be accepted that the deterrence effect of tort law is not a perfect one, and that the economic models suggesting otherwise lose some of their explanatory force once they are transferred to the real world. However, it would be wrong to maintain that the threat of liability has no deterrence effect at all as such a contention would entail the assumption that people behave irrational. One would also like to ask why the proponents of no-fault believe in the incentive effects of administrative sanctions while at the same time rejecting the notion that the sanctions imposed by tort law might influence the behaviour of actors in a beneficial way. If someone is responsive to an administrative fine of, e.g. € 200, he is likely to respond to a tort judgment in an amount of € 2000 as well. In fact, a recent American/Canadian study has shown that no-fault plans only work satisfactorily in terms of deterrence if the premiums paid are risk-rated.205 This condition is at once crucial and rarely born out in reality as in most practical examples, premiums are not risk-rated but flat. The explanation for this disappointing state of affairs may not only be the influence of interest groups but also the high costs of calculating premiums adequately reflecting each risk insured. If this is done with the necessary care and precision, much of the cost that introduction of the no-fault regime was meant to save will come back. b) Administrative Costs
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One would also like to question the assumption that a no-fault scheme would economize on administrative costs. Assuming that such a system would be introduced to replace medical malpractice, the task remained to separate the cases of iatrogenic disease, i.e. situations where the adverse condition of the patient was caused by the intervention of doctors and hospitals or even some “mistake” has been made, from other situations where the condition of the patient is deteriorating for “natural” reasons.206 In the same vein, the most problematic issue in medical malpractice litigation usually is causation and not negligence, i.e. even where negligence may easily be established causation often remains opaque.207 Thus, an investigation of each particular case is inevitable anyway, and it is hard to see how this effort could be significantly less extensive and costly as the investigation of a case within a medical malpractice suit. 205 206 207
D. Dewees/D. Duff/M. Trebilcock (supra fn. 191), 22 et seq., 26, 427. Supra fn. 195. A. Simanowitz, Law Reform and Medical Negligence Litigation: The UK Position, in: S. Mc Lean (ed.), Law Reform and Medical Injury Litigation (1995), 119, 137.
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c) Compensation Finally, it is a misunderstanding to think that the primary goal of tort law is to compensate victims in the sense of extending help to those people in need of support, regardless where this need comes from and who bears responsibility for it. This misunderstanding seems to have been born at the moment where scholars started to compare the financial needs of a victim of a traffic accident which had been caused through the fault of another with the condition of another victim, having sustained the same injuries but without being able to blame another driver for them. The former victim receives full compensation, the latter walks away with nothing. An unjust result? This question could be asked and answered in the affirmative only because the inquiry was limited to these two classes of victims. If one looks instead at the whole class of people sustaining personal injury for whatever reason or cause there is, matters change dramatically. Throughout the western world, most traumatic injuries are incurred within the confines of the home or garden. The whole array of personal suffering also includes non-traumatic diseases, only part of which have or may have human-made causes. How many people suffer from congenital diseases during their whole lifetime, how many suffer from poor health, without any human factor playing a significant role? Nobody has ever tried to discredit tort law for its failure to provide these “victims” with compensation. But in what sense is a person suffering from a congenital disease different from the victim of a traffic accident that was caused by an act of God? If there is no difference in terms of need, then it becomes immediately clear that tort law was never meant as an instrument to provide help to the needy. Victim compensation in the broad and comprehensive sense of coming to the help of those people who need assistance simply lies beyond the reach of tort law, irrespective of its design.
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It was Jane Stapleton who asked the indeed central question as to why victims of accidents should fare any better than victims of disease in that only the former group is allowed to collect damages from an insurance carrier whereas the ill are relegated to whatever social security benefits are available.208 From a European perspective, one might add the observation that on this continent comprehensive protection against personal injury as well as against disease is supplied already, if only under the guise of the social security system, i.e. through the social health insurance schemes. Of course, these systems do not operate on the basis of full compensation of all losses, pecuniary or non-pecuniary, but this is precisely the level of compensation that the proposed no-fault schemes would be providing as well. As a consequence, those victims which now receive full compensation of pecuniary and non-pecuniary losses via the tort system would fare worse under no-fault, and those victims, now receiving nothing out of the tort system would fare hardly better as they would be moved from one branch of the social security system – health care – to another one – the no-fault insurance vehicle for traffic accident victims or victims of
111
208
J. Stapleton, Disease and the Compensation Debate (1986), 142 et seq., 150 et seq.
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iatrogenic injuries.209 Under present conditions it is highly unlikely that the benefits obtainable from a no-fault insurance vehicle would be substantially higher than the comparatively modest benefits available under the various social insurance programs. All over Europe, social insurance schemes undergo a period of retrenchment. The partial rollback of the welfare state is no accident of history but caused by serious practical problems. If the experience of the European nations proves anything it is the fact that generous welfare schemes are impossible to maintain for long as these systems are exploited by everyone having a stake in it, from the public authorities running such systems, the doctors and hospitals retrieving their incomes from it to the patients and victims seeking access to the fund. 4. Conclusion
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Although the U.S. report forecasts that “no-fault never seems to remain dead but repeatedly rises, ghoul-like, from the grave to walk the earth anew”,210 the combination of tort law and liability insurance lies in a much safer harbour today than 30 years ago. Its replacement by a comprehensive scheme of firstparty insurance within the foreseeable future in any European jurisdiction is unlikely.
209
210
Cf. L. Wendel, in: J. Dute/M.G. Faure/H. Koziol (supra fn. 193), no. 89: “Since it is unlikely that a mandatory insurance system like the Swedish one could ever provide any considerable amount of compensation as is the case in some countries where cases concerning medical liability are settled in courts according to tort law, it must be combined with an extensive social security system.” But why are patients suffering from iatrogenic injury treated any different from other patients who suffer from injuries caused by their fall from a tree or household ladder? U.S. Report, no. 29 fn. 25.
Index The numbers refer to the marginal notes, the letters refer to the reports. The country reports are marked by the international letter symbols: A stands for Austria, CH for Switzerland, D for Germany, I for Italy, S for Sweden and UK for England. The abbreviations used for the general reports are: JS for the report of Jaap Spier, LE for the report on Law and Economics, VI for the report on the view of an Insurer, VR for the report on the view of a Reinsurer, US for the report of the United States of America, VA for the report on the view of an American Insurance Law Scholar and CC for the Comparative Report and the Final Conclusion. action directe A 14; CC 16; CH 2, 6, 14, 89, 91, 98, 106; D 15, 36–39; I 31– 36; S 15 administrative agency US 17, 19; VAI 49 costs CC 109; D 20; LE 50; UK 20; US 49 law A 16; CC 15, 108; US 78 offence A 16 sanction CC 108; D 21; I 38 asbestos CC 74; D 46; UK 55; US 98; VR 18 assessment of damage, see damage, assessment of of risk LE 6, 78; VR 14 auditors’ liability A 26; I 29, 49 automobile accident, see motor accident bank A 55; CC 13; I 80; S 10 bank guarantees A 11; CC 14; CH 13; D 34; S 14 bankruptcy CC 16; D 38; VA 13 benefit A 60, 72; CC 10, 78, 111; CH 44, 96–98; D 52, 60, 87; LE 6, 7, 21, 24, 83; UK 80; US 31–34, 44, 80 boni mores A 50, 55, 98 burden of proof CC 27; CH 102; D 54; I 71; JS 5; S 37
calculation of damages, see damages, calculation of care duty of ~, see duty of care standard of ~, see standard of care caps A 23, 26; CC 22; D 44; LE 31, 39, 40, 47, 52, 53; US 91, 96; VA 8, 19– 21; VR 22, 24 case law CH 22, 27, 29; I 51; LE 2, 72, 82; VI 52 causation CC 109; D 46; JS 5; S 112; UK 55–58 children, see minors compensation CC 66, 110, 111; CH 2; D 64; I 98; LE 3, 8; UK 4, 7, 40 compensation funds CH 100–105; LE 108; UK 21; US 96 compulsory insurance A 56; CH 49; LE 53; UK 14–25 compulsory liability insurance A 5, 59; CC 40; CH 8–12, 106; D 22–33; I 3 et seq., 89; LE 5–20; S 8–13; VR 14 consent CC 62; UK 1, 61; VI 100 constitutional court I 100, 125; VI 63, 78–80 consumer A 21; CC 41; CH 47; I 22; LE 65–67, 80–83, 88; US 53; VI 95; VR 18
354 contract breach of ~ A 75, 76, 99; I 114 insurance ~ A 11, 100; CH 92; D 89; I 84; LE 3; S 37; US 41; VR 15 contractual liability A 100; CC 54; CH 86; D 3, 64 obligation VR 17 contributory negligence A 61, 63; CC 42, 44, 86, 87; CH 39; D 66, 67; I 94, 95; LE 47; S 71; UK 60; US 6 costs of administration, see administrative costs of injury A 89; CC 31, 39, 44, 52; UK 27, 79 of damage CC 88; LE 32 of insurance CC 26; CH 34; UK 81, 82; US 44; VR 13 of transaction, see transaction costs of accidents D 71; LE 7; US 49, 78, 84 coverage insurance ~ A 5, 58; CC 34; CH 41; D 31, 39, 42, 60, 94; I 1, 19, 96; LE 16, 18, 24, 33, 41, 43, 46, 53, 92; S 22, 71, 109; US 35; VA 49 criminal law CC 77, 108; CH 52; D 40; S 105; UK 19; US 47 culpa in eligendo A 65, 66; CC 45 damage CH 74; UK 84 assessment of ~ A 80; CC 43, 54 et seq.; D 75; I 75, 97; LE 97; S 94, 95; UK 37, 64–72 claim D 11, 51, 59, 90–94 environmental ~, see environmental damage non-pecuniary ~ A 86, 88; S 95 property ~ CC 39, 52, 87; S 60–62, 70; UK 56 risk of ~ CC 10 damages award CC 23, 43, 44, 55, 57, 73; D 13, 14, 92; UK 64, 68; US 91 calculation of ~ CC 29, 43, 56; D 13 punitive ~, see punitive damages dangerous activity A 74; CH 27; D 44; S 21; US 24
Index danno biologico CC 56; I 62, 103, 105– 108 defamation CC 58; I 75, 98; UK 72 defective product, see product, defective defences CC 16, 62, 65; CH 14; LE 15, 18; UK 59–61 deterrence CC 37, 66, 77, 108; D 21, 62; LE 10, 47, 74, 75, 85, 102; UK 35, 41; US 61, 62, 72, 85, 104 development risk A 37 direct claim, see action directe disability CH 95, 97; I 105, 108; UK 8; VA 9, 10 duty breach of ~ A 104; UK 64 of care A 60, 63, 77; CC 39, 45, 101; D 68; UK 46–51; US 21, 22; VI 32, 39; VR 26 to inform A 79; I 123 to insure A 58; CC 10, 13, 49; CH 15, 54; D 28, 70, 71; LE 6, 9, 12, 16, 43, 92; UK 23, 24, 81 economic loss A 66, 104; UK 15, 47, 48, 53 employee A 2, 6, 89 employees’ liability A 54; CC 59; D 71– 73; S 96, 98 employer A 2; D 81; UK 60 liability privilege of the ~ A 70, 90, 91; CH 61; UK 9 employers’ liability A 34, 57, 70, 75, 76, 78, 82, 90; CC 8, 31, 49, 60; CH 58– 61, 71, 72; I 77, 79–81, 93; JS 5, 7; LE 96; S 22, 27, 69, 90, 97; UK 14, 20, 62 enterprise liability A 36, CC 41, 74; LE 69; S 35, 48, 87 environmental damage I 15; LE 100; S 32; VR 12, 14 law D 46; S 20, 21; VA 12 liability D 45; I 46, 47, 66, 100; LE 16; VR 23 insurance LE 33 risk CC 21, 27; S 21 exclusion to liability, see liability, exclusion to expansion of liability, see liability, expansion of
Index of strict liability, see strict liability, expansion of fault, see also intent, negligence A 3, 66; CC 25, 90; CH 39, 46; S 42; UK 18, 22, 38, 53, 54; US 7, 21 fault liability A 3, 9, 25, 26; CC 30, 31, 38; D 15; I 1, 46 fault insurance S 21; US 26, 89 first-party insurance A 63, 77; CH 50; D 17; I 88, 119; LE 21–29; UK 56; VR 29 gross negligence, see negligence, gross health insurance, see insurance, health illegal, see also wrongful A 52; UK 82; US 44 industrial accident LE 41 production A 21, 48 sector LE 35; UK 9 information problems LE 6, 7, 24–26 injury bodily ~ A 51; CC 57; VA 23; VR 20 costs of ~, see costs of injury occupational ~ A 82, 90 personal ~ A 83, 104; CC 52, 87; D 51, 67; S 56–59; UK 60 immunity CH 78, 81; VA 4, 18 insolvency CH 14; D 38; LE 7, 8, 11, 59 insurability A 20–27, 42; CC 18 et seq.; CH 17, 30–33; D 44–52; I 45, 55, 65; JS 20; LE 19, 31 et seq., 55, 56, 66, 107; S 18–21; UK 28, 41 insurance broker A 9, 13, 16; D 12; I 20, 31 compulsory ~, see compulsory insurance contract, see contract, insurance coverage, see coverage, insurance duty, see duty to insure first-party ~, see first-party insurance health ~ CC 111; CH 105; D 51; I 28; LE 23; US 40; VR 9, 10 liability ~, see liability insurance mandatory ~, see mandatory insurance
355 market CC 18, 33, 81; D 34; LE 11, 13, 16–20, 32; S 37; UK 53, 85; US 9, 30; VR 17, 23 et seq. market ~ CC 29 no-fault ~, see fault insurance policy CC 4; CH 19, 68; D 60, 80; I 37, 73; LE 33, 104; S 109; UK 23, 68; US 31; VA 20; VI 17; VR 26 social ~, see social insurance third party liability ~, see third party liability insurance intent A 90; CC 44, 98; LE 86; S 7; VA 23 interest protection of ~ A 66, 76; CC 45 keeper of an animal CC 64; CH 10; D 85; I 118; S 73 lawmaker CC 4, 21; D 49; US 13; VA 4, 17 legislator LE 58, 60, 110; VR 23, 24 liability contractual ~, see contractual liability enterprise ~, see enterprise liability environmental ~, see environmental liability exclusion to ~ A 30, 98; D 10, 82; I 116, 117 expansion of ~ A 51; CC 26, 32; I 67; JS 5; S 24 et seq.; UK 35 fault ~, see fault liability indeterminate ~ UK 46 in equity A 40; CC 34, 35, 51; CH 21–23; D 7, 56–59 limits of ~, see limitation of liability privilege A 26, 87, 93–96; D 78–81 proportionate ~ LE 57, 58, 110 risk A 20, 21, 23, 25, 34–36, 72; CH 8, 30, 54; D 35; LE 38, 98, 101; VI 14 third party ~, see third party liability traffic ~, see traffic liability vicarious ~, see vicarious liability liability insurance A 12, 19; D 52; S 23; UK 8 compulsory ~, see compulsory liability insurance
356 limitation of liability A 23–25, 51; CC 22; D 65; I 125; JS 8; LE 32, 33, 45, 47, 49; S 105; VA 8, 19 litigation costs UK 4 loss economic ~, see economic loss non-pecuniary ~, see non-pecuniary loss pecuniary ~, see pecuniary loss pure economic ~, see pure economic loss mandatory insurance A 96; CC 11; D 13, 22, 60 market insurance, see insurance, market mass media A 48, 86; CC 58; CH 30 mass tort I 1, 66; VA 16 medical care CH 100; US 31 costs VR 9, 10 expenses CH 95; I 62; US 6, 25, 31, 37, 41; VR 21 malpractice A 3, 4; CC 105, 109; CH 100; D 14, 19; UK 15; VR 9 risks LE 24, 27 minors A 52, 73, 81; CC 34, 39, 48; CH 37, 56, 57; D 56, 57, 67; I 92; S 79– 82, 99; UK 22; VI 52 mitigation, see reduction of compensation moral hazard A 58; CC 36, 37, 79–81; D 61; I 83–85; LE 3, 9, 11, 12, 18, 28, 46, 75, 84, 89, 97; S 49 motor accident A 104, CC 31, 101; D 67, 80, 84; UK 10, 60; US 41; VA 38 insurance D 15; I 32, 33; LE 30; UK 21; VR 20 liability insurance A 16–19, 92; UK 14; VA 19 negligence CC 87; CH 19, 62, 63; D 66; LE 70; US 21, 23, 50, 71, 76; VA 28 contractual ~ CH 87 contributory ~, see contributory negligence gross ~ A 89; CC 44, 98; CH 86; D 89; S 56 slight ~ A 3, 26, 63, 79, 89, 98, 99
Index non-pecuniary loss A 41, 85; CC 56; D 20, 77; I 62, 99, 105, 109; LE 102; VI 5, 6 nuclear liability LE 49, 61, 63 liability insurance A 16; LE 36, 49, 61, 63; UK 15 power plants CC 9; I 30; LE 37, 47 occupational accident A 90, 91; CH 78, 98; VA 18 health LE 22, 96 injury, see injury, occupational pain and suffering A 85, 90; CC 57; D 8, 20, 77; I 62, 99, 106; US 8, 25; VI 11, 22 parents A 73; CC 39, 48; CH 56, 57; I 77, 92; S 89; UK 22, 80; VI 52 pecuniary loss A 48; CC 56, 57; I 62; UK 71 personal damage, see damage, personal injury, see injury, personal precaution CC 38, 77, 79, 101, 108; CH 57; D 15, 55; US 22, 49–51, 71, 73, 76; VI 106 presumption of liability CC 41; S 48 prevention A 58; CC 96; CH 2, 3, 55; LE 3, 59, 91; S 5, 37; VR 5, 11 et seq. product defective ~ A 21, 22; CC 31, 46 liability A 12, 21; JS 7; LE 51, 66, 69, 80; S 32, 107; US 82, 98 property damage, see damage, property proportionate liability, see liability, proportionate public liability JS 5; UK 16, 82 punitive damages A 41, 84; CC 58; CH 70; D 50, 76; I 98; LE 98–101; S 93; UK 73, 74; US 6, 8, 16, 25, 91, 94, 97–104; VA 51 pure economic loss A 41, 65, 66; CC 12, 33, 45; D 32, 68 recourse A 2–4, 59, 82, 93; CC 53; CH 2–7, 59, 79–86; D 71, 88, 89; LE 18, 62, 91; S 7, 16, 70, 97, 111; VI 17–20 reduction clause A 45, 80, 81; CC 42–44
Index of damages A 63; CC 42; CH 55; S 19, 53–55, 68, 73, 86 of liability A 54, 81, 96 remedies CH 2; LE 3, 6, 46, 86 et seq. restitutio in integrum CC 51; S 76 risk community A 21, 22, 48 development ~, see development risk of damage, see damage, risk of of loss CC 29; US 32 spreading A 52, 56; CC 30, 31, 37, 85, 90; D 53–56, 65; I 74, 78, 97; LE 67, 83; S 57 social insurance A 2, 82, 88, 91, 104; CC 59; CH 2, 5–7; D 17; S 7 social security CC 8, 92; I 37, 70; LE 23, 27, 77; UK 67; VR 9 source of danger A 65, 92; CC 90; D 5 standard of care A 58, 59, 63; CC 30, 34, 39, 41, 86; CH 46, 49–52; D 63; I 86, 88; LE 9, 68, 70, 90, 97; S 42–48; UK 29, 52–54; VA 9; VR 25 state liability, see public liability strict liability A 2, 8, 21, 31; CC 9, 20; CH 25; D 22; LE 64, 70; S 20, 21, 24; UK 53, 54; US 4, 24, 76, 77 expansion of ~ CC 27, 32; D 62 subrogation CH 7, 95, 99; S 70; UK 44; US 30, 37–45; VR 9 technical installation CC 9, 10, 12 technological hazard CC 10 terrorism A 28, 30; JS 7 third party insurance CC 64; D 59, 60, 79; LE 71, 102; UK 10; VR 5
357 liability A 71; LE 50 liability insurance LE 37, 69, 109; S 78, 81, 83 tortfeasor A 44, 52, 83; CC 28, 83; S 84 tort liability CC 25, 33, 101; D 4; LE 80; S 2, 70; UK 11, 35; US 5, 25, 31, 84, 86; VA 9, 47; VR 3 traffic accident A 2; CC 32; D 13; US 27 transaction costs D 13; LE 35, 52, 59, 80; UK 56; US 67, 79 uncertainty CC 29; LE 54, 57, 59, 63, 101, 110; UK 7, 10, 32, 68, 85; US 71 under-compensation LE 8, 11 under-deterrence LE 7, 9, 11, 30, 91, 97; US 41, 73 uninsurability A 36; CC 27; I 53; JS 7, 12, 17; LE 31, 41; S 21 unjust enrichment US 40 vicarious liability A 51; I 76; UK 62, 63, 74 victim A 52; CC 11, 85; D 38, 60; JS 8, 17; LE 21, 28, 62; S 2, 67; UK 7; US 2, 51,102 war A 28, 30; CC 92 welfare state CC 92, 94, 106; D 18; UK 65; VR 3, 9, 31 work accident UK 8, 9, 53, 54, 60 wrongful act CC 62, 71; D 46; I 79, 80, 89, 92, 98, 99, 114; S 96; US 26, 103 wrongfulness CC 58; CH 39; D 52; LE 56
Publications Principles of European Tort Law Volume 1: The Limits of Liability: Keeping the Floodgates Shut. Edited by Jaap Spier. Kluwer Law International, The Hague. Hardbound. ISBN 90-411-0169-1. 1996, 162 pp. Volume 2: The Limits of Expanding Liability. Eight Fundamental Cases in a Comparative Perspective. Edited by Jaap Spier. Kluwer Law International, The Hague. Hardbound. ISBN 90-411-0581-6. 1998, 244 pp. Volume 3: Unification of Tort Law: Wrongfulness. Edited by Helmut Koziol. Kluwer Law International, The Hague. Hardbound. ISBN 90-411-1019-4. 1998, 144 pp. Volume 4: Unification of Tort Law: Causation. Edited by Jaap Spier. Kluwer Law International, The Hague. Hardbound. ISBN 90-411-1325-8. 2000, 161 pp.
Volume 5: Unification of Tort Law: Damages. Edited by Ulrich Magnus. Kluwer Law International, The Hague. Hardbound. ISBN 90-411-1481-5. 2001, 255 pp. Volume 6: Unification of Tort Law: Strict Liability. Edited by Bernhard A. Koch and Helmut Koziol. Kluwer Law International, The Hague. Hardbound. ISBN 90-411-1705-9. 2002, 444 pp. Volume 7: Unification of Tort Law: Liability for Damage caused by Others Edited by Jaap Spier. Kluwer Law International, The Hague. Hardbound. ISBN 90-411-2185-4. 2003, 335 pp. Volume 8: Unification of Tort Law: Contributory Negligence. Edited by Ulrich Magnus and Miquel Martín-Casals. Kluwer Law International, The Hague. Hardbound. ISBN 90-411-2220-6. 2004, 300 pp.
360
Volume 9: Unification of Tort Law: Multiple Tortfeasors. Edited by W.V. Horton Rogers Kluwer Law International, The Hague. Hardbound. ISBN 90-411-2319-9. 2004, 313 pp.
Publications
Volume 10: Unification of Tort Law: Fault. Edited by Pierre Widmer. Kluwer Law International, The Hague. Hardbound. ISBN 90-411-2098-X. 2005, 393 pp. (forthcoming).
Tort and Insurance Law Volume 1: Cases on Medical Malpractice in a Comparative Perspective. Edited by Michael Faure and Helmut Koziol. Springer, Vienna/New York. Softcover. ISBN 3-211-83595-4. 2001, 331 pp.
Volume 5: Deterrence, Insurability and Compensation in Environmental Liability. Future Developments in the European Union. Edited by Michael Faure. Springer, Vienna/New York. Softcover. ISBN 3-211-83863-5. 2003, 405 pp.
Volume 2: Damages for NonPecuniary Loss in a Comparative Perspective. Edited by W.V. Horton Rogers. Springer, Vienna/New York. Softcover. ISBN 3-211-83602-0. 2001, 318 pp.
Volume 6: Der Ersatz frustrierter Aufwendungen. Vermögens- und Nichtvermögensschaden im österreichischen und deutschen Recht. By Thomas Schobel. Springer, Vienna/New York. Softcover. ISBN 3-211-83877-5. 2003, 342 pp.
Volume 3: The Impact of Social Security on Tort Law. Edited by Ulrich Magnus. Springer, Vienna/New York. Softcover. ISBN 3-211-83795-7. 2003, 312 pp. Volume 4: Compensation for Personal Injury in a Comparative Perspective. Edited by Bernhard A. Koch and Helmut Koziol. Springer, Vienna/New York. Softcover. ISBN 3-211-83791-4. 2003, 501 pp.
Volume 7: Liability for and Insurability of Biomedical Research with Human Subjects in a Comparative Perspective. Edited by Jos Dute, Michael G. Faure and Helmut Koziol. Springer, Vienna/New York. Softcover. ISBN 3-211-20098-3. 2004, 445 pp. Volume 8: No Fault Compensation System in the Health Care Sector. Edited by Jos Dute, Michael G. Faure, Helmut Koziol. Springer, Vienna/New York. Softcover. ISBN 3-211-20799-6. 2004, approx. 492 pp.
Publications
Volume 9: Pure Economic Loss. Edited by Willem H. van Boom, Helmut Koziol and Christian A. Witting. Springer, Vienna/New York. Softcover. ISBN 3-211-00514-5. 2003, 214 pp. Volume 10: Liber Amicorum Pierre Widmer. Edited by Helmut Koziol and Jaap Spier. Springer, Vienna/New York. Softcover. ISBN 3-211-00522-6. 2003, 376 pp. Volume 11: Terrorism, Tort Law and Insurance. A Comparative Survey. Edited by Bernhard A. Koch. Springer, Vienna/New York. Softcover. ISBN 3-211-01867-0. 2004, 313 pp. Volume 12: Abschlussprüfer. Haftung und Versicherung. Edited by Helmut Koziol and Walter Doralt. Springer, Vienna/New York. Softcover. ISBN 3-211-20800-3. 2004, 180 pp.
361
Volume 13: Persönlichkeitsschutz gegenüber Massenmedien/The Protection of Personality Rights against Invasions by Mass Media. Edited by Helmut Koziol and Alexander Warzilek. Springer, Vienna/New York. Softcover. ISBN 3-211-23835-2. 2005, 713 pp. Volume 14: Financial Compensation for Victims of Catastrophes. Edited by Michael Faure and Ton Hartlief. Springer, Vienna/New York. Softcover. ISBN 3-211-24481-6. 2005, Approx. 400 pp. (forthcoming). Volume 15: Children in Tort Law. Part I: Children as Tortfeasors. Edited by Miquel Martín-Casals. Springer, Vienna/New York. Softcover. ISBN 3-211-24480-8. 2005, Approx. 600 pp. (forthcoming).
European Tort Law Yearbook European Tort Law 2001. Edited by Helmut Koziol and Barbara C. Steininger. Springer, Vienna/New York. Softcover. ISBN 3-211-83824-4. 2002, 571 pp.
European Tort Law 2003. Edited by Helmut Koziol and Barbara C. Steininger. Springer, Vienna/New York. Softcover. ISBN 3-211-21033-4. 2004, 493 pp.
European Tort Law 2002. Edited by Helmut Koziol and Barbara C. Steininger. Springer, Vienna/New York. Softcover. ISBN 3-211-00486-6. 2003, 596 pp.
European Tort Law 2004. Edited by Helmut Koziol and Barbara C. Steininger. Springer, Vienna/New York. Softcover. ISBN 3-211-24479-4. 2005, approx. 620 pp. (forthcoming).
W
Tort and Insurance Law Vol. 16 Edited by the
European Centre of Tort and Insurance Law together with the
Research Unit for European Tort Law of the Austrian Academy of Sciences
Gerhard Wagner (ed.) Tort Law and Liability Insurance With Contributions by Tom Baker Urs de Maddalena Vincent Brulhart Daniel Rubin Guy Chappuis Alessandro P. Scarso Bill Dufwa Jaap Spier Michael Faure Peter Thalmair Attila Fenyves Thomas S. Ulen Giovanni Iudica Gerhard Wagner Christian Lahnstein Jürg Waldmeier Richard Lewis Stephan Weber
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European Centre of Tort and Insurance Law Landesgerichtsstraße 11 1080 Vienna, Austria Tel.: +43 1 40127 1688 Fax: +43 1 40127 1685 E-Mail:
[email protected] Austrian Academy of Sciences Research Unit for European Tort Law Landesgerichtsstraße 11 1080 Vienna, Austria Tel.: +43 1 40127 1687 Fax: +43 1 40127 1685 E-Mail:
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This work is subject to copyright. All rights are reserved, whether the whole or part of the material is concerned, specifically those of translation, reprinting, re-use of illustrations, broadcasting, reproduction by photocopying machines or similar means, and storage in data banks. © 2005 Springer-Verlag/Wien Printed in Germany Springer-Verlag Wien New York is part of Springer Science + Business Media springeronline.com Product Liability: The publisher can give no guarantee for the information contained in this book. This also refers to that on drug dosage and application thereof. In each individual case the respective user must check the accuracy of the information given by consulting other pharmaceutical literature. Typesetting: Composition & Design Services, Minsk, Belarus Printing and binding: Strauss GmbH, 69509 Mörlenbach, Germany Printed on acid-free and chlorine-free bleached paper SPIN: 11382775
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Preface The interrelationship between tort law and liability insurance is a topic that lacks an entry within the indexes of most textbooks either on the law of torts or on insurance law. Insurance specialists focus their attention on an exposition of the many legal issues associated with liability insurance as a legal product. Tort law specialists concern themselves with the definition and explanation of the conditions which have to be met in order to find the defendant liable. Relatively few scholars care about the link between the two legal islands, and raise the issue of if and how liability insurance affects the operation of tort law. Precisely because the relationship between tort law and liability insurance is a borderline topic, it proved difficult to research. To begin with, it was anything but easy to find scholars ready and willing to contribute. To our deep regret, it was not possible to solicit the participation of a French reporter who could have provided valuable input since French law clearly occupies a distinguished position in the murky area between tort law and liability insurance. All the more grateful we are to Professor Dufwa of Stockholm for his contribution that – hopefully – filled the void by adding the perspective of the Swedish legal system which highlights the compensatory function of the tandem of tort law and liability insurance. As the learned reader will notice, the topic of this book also touches upon the borderline between the normative and the sociological analysis of tort law. Interestingly, the economic analysis of law roughly corresponds to the “traditional” view of two separate spheres whereas legal realist theories about the “law in action” are on the other side of the divide. No attempt has been made to exclude or discriminate any of the competing theories as the aim was to stimulate the discussion rather than to quash it. The Comparative Report offers some, albeit controversial conclusions. At the end of the road, I wish to express my gratitude to everyone who helped to make this project a success. Special thanks go to the national reporters and to those contributors who focussed on special aspects of our topic. Munich Re organized and hosted a conference in Munich which provided a perfect and conducive environment for the participants to discuss their views with distinguished practitioners. The staff at the Research Unit for European Tort Law and of the European Centre of Tort and Insurance Law provided invaluable assistance. Mag. Stefan Strahwald and Mag. Nora Wallner were relentless in pushing things forward, while Donna Stockenhuber M.A. and Denis Kelliher B.L. meticulously read the proofs of the entire manuscript. Bonn, May 2005
Gerhard Wagner
Foreword Since the inception of liability insurance, many people – especially in the UK, Germany, France and the USA – have questioned how it interacts with tort law, without anyone coming up with a completely plausible answer. The capacity of major companies or the state to pay losses may be equal to their capacity to cause losses. Liability insurance cover is welcome here but not a decisive factor. In some areas such as motor liability, the reality of tort law lies mainly in the hands of liability insurers. It takes place only within insured limits and only as far as constructive loss settlement allows, depending on the deep- or empty-pocket policy of the insurers. In other areas such as the liability of directors and officers, tort law and liability insurance develop side by side and have a mutual effect. Then, rather like the chicken and the egg conundrum, the question as to what came first is sometimes difficult to answer. The intention of this study, the result of a joint research project between ECTIL and Munich Re, is to encourage liability insurers to rethink and be more aware of their own role in actively shaping tort law. And this in critical developments of tort law in industrialised countries, for instance in connection with pure economic loss; but also – in connection with personal injuries – during phases of growth in emerging markets. Christian Lahnstein (Munich Re)
Table of Contents QUESTIONNAIRE ....................................................................................... 1 Preliminary Advice .................................................................................... 1 I. General .............................................................................................. 1 II. Compulsory and Voluntary Insurance .............................................. 1 III. The Influence of Liability Insurance on Court Decisions in Tort Cases – Focus on the Courts ................................................. 1 IV. Blank Space....................................................................................... 4 COUNTRY REPORTS ................................................................................. 5 Tort Liability and Insurance: Country Report Austria (Attila Fenyves and Daniel Rubin) .................................................................. 7 I. General .............................................................................................. 7 II. Compulsory and Voluntary Insurance ............................................ 11 III. The Influence of Liability Insurance on Court Decisions in Tort Cases – Focus on the Courts ............................................... 15 IV. Further Topics ................................................................................. 46 The Relationship Between Tort Law and Insurance in England and Wales (Richard Lewis)....................................................... 47 I. The Influence of Insurance on the Tort System in General ............ 47 II. The Areas of Compulsory Insurance (Questions 2–4).................... 54 III. The Influence of Insurance upon Particular Cases and Rules: General Views................................................................................. 60 IV. The Influence of Insurance upon Particular Cases and Rules: Analysis of Specific Areas .............................................................. 66 V. Insurance and Statute ...................................................................... 80 VI. Liability Insurance Crises (Question 7) .......................................... 82 VII. Conclusion ...................................................................................... 84 Tort Liability and Insurance: German Report (Gerhard Wagner).......... 87 I. General ............................................................................................ 87 II. Compulsory and Voluntary Insurance ............................................ 94 III. The Influence of Liability Insurance on Court Decisions in Tort Cases – Focus on the Courts ............................................... 98
VIII
Table of Contents
Tort Liability and Insurance: Italy (Giovanni Iudica and Alessandro P. Scarso).................................................................................. 119 I. General .......................................................................................... 119 II. Compulsory and Voluntary Insurance .......................................... 120 III. The Influence of Liability Insurance on Court Decisions in Tort Cases – Focus on the Courts ............................................. 128 IV. Further Topics ............................................................................... 146 Liability in Tort and Liability Insurance: Sweden (Bill W. Dufwa)....... 147 I. General .......................................................................................... 147 II. Compulsory and Voluntary Insurance .......................................... 149 III. The Influence of Liability Insurance on Court Decisions in Tort Cases – Focus on the Courts ............................................. 151 IV. Further Topics ............................................................................... 172 Switzerland (Vincent Brulhart, Guy Chappuis, Urs de Maddalena, Jürg Waldmeier and Stephan Weber) .......................................................... 173 I. General .......................................................................................... 173 II. Compulsory and Voluntary Insurance .......................................... 176 III. The Influence of Liability Insurance on Court Decisions in Tort Cases – Focus on the Courts ............................................. 178 IV. Further Topics ............................................................................... 196 V. Conclusion .................................................................................... 198 GENERAL APPROACHES ..................................................................... 199 The Need for More and Detailed Information (Jaap Spier) ................... 201 The View from Abroad: Tort Law and Liability Insurance in the United States (Thomas S. Ulen) ....................................................... 207 I. Introduction ................................................................................... 207 II. The General Principles of the United States Tort Liability System .................................................................... 210 III. The Economic Analysis of Tort Liability and Insurance .............. 220 IV. Issues Facing the Modern Tort Liability System in the U.S. ........ 234 V. Conclusion .................................................................................... 238 The View from Law and Economics (Michael Faure)............................. 239 I. Introduction ................................................................................... 239 II. Compulsory and Voluntary Insurance .......................................... 240 III. The Influence of Liability Insurance on Court Decisions in Tort Cases ................................................................................. 248 IV. Concluding Remarks..................................................................... 272 The View of an Insurer: The Impact of Liability Insurance on Tort Law (Peter Thalmair).................................................................... 275 I. Court Decisions............................................................................. 275 II. Insurance Clauses.......................................................................... 283 III. Proposals for a Reform of the German Insurance Contract Law (Versicherungsvertragsgesetz) ...................................................... 284
Table of Contents
IX
The View of a Reinsurer: On the Relationship between Liability Insurance and Tort Law (Christian Lahnstein) ........................................ 287 I. Introduction ................................................................................... 287 II. Impact of First-Party Insurance on Tort Law................................ 288 III. Impact of Liability Insurance on Tort Law ................................... 289 IV. Final Remarks ............................................................................... 293 The View of an American Insurance Law Scholar: Six Ways that Liability Insurance Shapes Tort Law (Tom Baker) ......................... 295 I. A Brief Note on Method ............................................................... 296 II. The Impact of Liability Insurance on Tort Law............................ 296 III. Conclusion .................................................................................... 306 COMPARATIVE REPORT AND FINAL CONCLUSIONS................ 307 Tort Liability and Insurance: Comparative Report and Final Conclusions (Gerhard Wagner)........................................................ 309 I. Introduction ................................................................................... 309 II. The Impact of Liability Insurance on Tort Law: General ............. 310 III. Compulsory and Voluntary Insurance .......................................... 311 IV. The Influence of Liability Insurance on Court Decisions in Tort Cases ................................................................................. 314 V. Procedural Issues........................................................................... 333 VI. Final Conclusions.......................................................................... 334 INDEX......................................................................................................... 353 PUBLICATIONS ....................................................................................... 359
