“ A STUDY ON THE POSITIVE AND NEGATIVE IMPACT THAT TORT REFORMS HAVE ON

BUSINESSES “

“PRAJWAL.S

PES1PG21MB238

(Prajwal2111997@gmail.com)

DEPARTMENT OF MANAGEMENT STUDIES

PES UNIVERSITY, BANGALORE”

“Submitted to: “

“Professor Vishruth Vidyadhar Prasad “

“DEPARTMENT OF MANAGEMENT STUDIES”

Abstract :
Since many years the proponents of tort reforms have said that the huge products lability
that they have to incur decreases the overall economic activities that they can undertake by
having extreme and volatile liability costs in place. The tort reform developments over the
past few decades like the increase in the people buying insurance covers , the consumers
having better access to information regarding the product and the regulatory safety
measures and the growing costs of litigations and the change in the levels of the liability and
benefits has led to policy makers to rethink the appropriate scope of tort reforms. The
impact of these reforms on the overall economy has been the main topic of interest for
policy makers , the impact it has on the business and there function is also a key factor , as
business are the driving force behind the economic development of a country . If business
are making decisions in a conservative manner fearing tort litigation ,they loss there
innovation and edge to other emerging countries were there no tort reforms. This study
tries to show the impact that tort reforms have had on the businesses both positive and
negative .

Keywords : Tort , Tort reform , product liability , litigation , damages , injury

Introduction:

A tort is a civil wrong that leads to someone to suffer injury or loss, creating legal financial
liabilities by the person who has committed the act in question.

Tort reforms are said to be the changes that are to be implemented in the civil justices
system . This reforms are intended to bring about a change to the tort litigation procedures
and outcomes . The companies or businesses are involved in the tort reform procedure to
reduce the liability or compensation that they may have to pay to the victims if they are
successful in the litigation . The consumers may look towards the tort reform in order to
increase their ability to seek more compensation from the companies for the damages that
they have suffered due using a particular product or service .

Most of the policy makers are concerned about how to limit the levels of liabilities that a
company may have to incur as this may adversely affect the overall economy of the country
instead of increasing the liabilities and are also looking enforce tighter regulations in order
to make companies comply with safety standards and reduce their risky behaviour.

In the 1970s and 1980s, there was liability related crisis, this crisis resulted in the increase in
prices of insurance premiums , accounting liability as losses to the company.

The tort reforms were initially brought about to contain this crisis the most important
reforms are related to capping the punitive damages , bringing a limit on the joint and
several liability , capping on the non economic damages and reformations related to
collateral source rules . These reforms directly impacted the compensation that was
awarded to the victims of a faulty product or service.

Punitive damages refers to the damages that awarded in order to punish the wrong doing of
the company like malicious intent or reckless behaviour in order to discourage them from
any potential future misconducts.

Joint and Several Liability refers to the case in which the victim can claim damages from
several defendants or from each individually .

Non Economic damages refers to the losses that are suffered as a result of pain and
psychological impact that is accused due to the product or service being harmful or faulty.

Collateral Source reforms refers to the rule that bans the use of evidence thatb the victim
has been compensated from other alternate source , this is used to award the adjusted
compensation from other sources.

Literature Review :

“Peltzman, 1989 and Becker, 1983”

The economic theories in these research works describe how the policy making process of
the legislature and the competition between the interest groups that world be impacted
due to the reform , the organised business corporations and professionals and the general
public or the consumers through forums saw the organised corporations having a major say
in the reforms.

“Joskow and Noll, 1981”

This research work represents the general public interests and how a benevolent legislature
must primarily focus on the social welfare . The policy makers here try to identify the gap
between the currently existing justice measure and try to make correction by bring in tort
reforms for a social cause.

“Born and Viscusi, 1994”

The examination of the 1980 tort reforms and the noteworthy downward impact on the
general liability insurance outlays but with mixed suggestion on medical negligence on the
insurance costs. The reforms have had very little impact on the defensive medicine and
supply of medical personnel.

“Kessler and McClellan (1996)”

This research paper examines medicinal recipients treated for stern heart ailments and
found that tort reforms lead to drops in medical spendings of five to nine percent without
considerable effects on death or medical difficulties.

“Priest (1987)”

This research work points that liability emergency is due to the non understanding of
modern tort law. It further states that judicial conclusions of larger levels of liability in
insurance , combined with a deterioration in the interest rate, led to insurers rise prices and
limit coverage.

Methodology :

This research paper gives details about the impact both negative as well as positive that tort
reforms has had on the business. The research was carried out by analysing numerous data
sources from numerous research papers that study the impact of tort reforms and the
impact that it has had on the businesses.

The data has been compiled from Moody’s , Bloomberg and Vanderbilt Law reviews as a
source of secondary data for the research that has been carried out.

Research Analysis :

There has been a historical fluctuation in the nature of scope that the tort reforms can have
on the liability law and the ever changing interpretation of the outlays and the aids that in
can cause . The initial notion was that the reforms were not acting as a method for creating
deterrence for fake suites being filed and also about the compensation to be fair . Later on
the policy makers feared that the reforms had far exceed the limits they had set and was
now starting to affect the overall economic environment by stifling businesses.

In the following research we intend to outline the benefits as well as the expenses that the
tort reforms have had on the business system.

Benefits that are in place because of the tort reforms are :

 Compensation that has to be provided to the victims has reduced :

The main cause for the implementation of the tort reforms are that of compensating the
victims. The reforms have been put in place such that the users of products or services that
have caused harm or that are defective in nature are compensated in order to help them
restore the previous state they were I before using the product or service.

The reforms have helped the businesses to know the overall costs that they may incur if a
user of their product has suffered any damages due to it , they would be in much better
position to offset these compensation expenses by knowing the overall liability they may
incur and price there products accordingly.

With the emergence of insurances coverage system across the country , subrogation
provisions and the growing price of attorneys and also the delays in the judicial system have
to some extent undermined the compensation function of the tort reforms .

During the early twentieth century there was need for the compensation system in order to
provide relief to the victims of harmful products as were no other source for them to to
restore there previous state . But now a large number of people have taken insurance to
protect themselves from the risks of suffering damages from unpredictable causes.

The insurance covers the costs of reimbursing the victims and also the related costs of the
injury , this helps the businesses to offset the costs of providing compensation to the
victims. Most of the victims who have the necessary coverage provided by there insurances
don’t even try to file for tort claims , this results in the compensation claims litigation to
become redundant.

The costs of hiring an attorney and other costs related to the litigation and also the time
consuming nature of the litigation process discourage them filing the tort claims . There are
many researches that show that the increasing in the costs of legal fees has caused the
victims to get only about forty five percentage of the compensation that they are paid in a
tort litigation . The growth of costs to file a litigation as well as the reduced compensation
levels has resulted in the overall value of any compensation they are awarded to be
reduced.

 The improvement of the quality and safety of the products

This is also one of the primary reasons for the tort reforms , the law here provides those
businesses that take measures to prevent any damage from there products and try to avoid
unnecessary risky behaviour .

The tort reform law makes the producer or the manufacture to pay the compensation to a
victim that has been caused due to their product even though the levels of compensation
have come down drastically due to the reforms , there exists a financial benefits for the
company to reduce the risks that their products can cause .

There has been an increase in the scrutiny by companies of there product quality and as
well their levels of safety as this affects their brand image in the market . They also are
under a lot of regulatory pressure from the government safety certifying
organisations .There has also been an growth in the access that consumers have about the
product information and also they are much more aware of the effects any of the
component of a product might have on them. This consumer awareness has made
companies to be more careful about the safety and the quality level of their products .

The technological advancement and also the increasing growth of social media as well as the
news media has created channel for victims to communicate their grievances to other
potential users , this many cause the potential user from being discouraged to buy the
product. The access of safety information and other product related information , the better
alternative so that are available in the market has resulted in the companies being more and
more conscious of the products that produce to be safe and this level of discipline and
commitment to produce goods that are safe is rewarded in the market.

There are numerous studies the show the association between the tort reforms and the
number of accidents that have occurred due to a safety failure . There has been a decrease
in the number of accidents as companies are more aware about the consequences that the
would face in case of product failure and have greatly enhance their product safety and
quality through between total quality management.

 Research and development:

The tort reforms have led the companies to invest more in products that are non hazardous
in nature . In the quest to create non hazardous products they invested huge capital in the
research and development to produce and analyse ingredients that are used and what are
the potentials risks that a product or ingredient might cause . This investment in research
and development has led to plenty of innovation and increase in the scientific knowledge of
the companies to produce better safety products .

 Good Smartian Clause :

This clause in the tort reforms protect individuals from being framed in the litigation process
even if the misjudgement in providing the service has caused the damage . This provision in
most cases is just limited to the emergence healthcare service sector , there emergence
health worker are expected to carry out tricky procedures and if there is a burden of any
future litigation they may not even get involved in these procedures that may lead to even
more people suffering , by behaving this clause in place the workers would be more free to
perform there duties in the healthcare sector.

Costs or negative impact of tort reforms on businesses :

 Extreme operation Costs :

The tort reforms have become more and more inefficient in transferring the money that a
company pays as compensation to the victims .The transaction costs include the legal fee
the company has to pay to the attorney , administrative costs incurred , other third party
related charges but this does not include the compensation that has to paid to the victims.

The transaction cost itself are huge burden for the company instead of the compensation
awarded , companies would prefer to settle the issue out of court rather than indulge in the
judicial fight because of these increased transactional costs. The transaction costs incurred
the companies in the 2009 amounted to 250 billion dollars that as at an as=verage3 of 800
dollars per citizen but if you compare if to the transaction costs in 1960 , that is before the
tort reforms the overall transaction cost was around 5.4 billion dollars and came down to an
average cost of 215 dollar per citizen when is adjusted to the current inflation levels.

 Dissuasion of socially valuable consumptions :

The growing costs of litigation may discourage the socially valuable consumption of
products and services. The producers have to include the costs of any potential litigation
that they may face into the product price , this prices will generally be high and this may
discourage many people from buying such products even though its it is highly beneficial to
them and the society at large .

 Targeting certain specific industries :

The tort reforms that have been brought in target the healthcare industry in particular .This
also includes the pharmaceutical industry. This targeting of specific industries that are
critical to human health may drive costs up further for the companies that will be
transferred to the consumers ultimately .This additional costs may have been use better in
driving innovation in this critical sector . These companies would also be very hesitant to
bring out products that may have an emergence requirement in the society like a pandemic
situation even when the benefits of the product out weights that of its harms due to the
fear of litigation . This would be detrimental to bringing the emergence situation under
control.
  Deacceleration of the economic activity :

As a consequence of the liability of products system there may be a slow down in economic
activities . The liability may directly impact the decision making process in companies with
respect to how they design , produce and market their products or services. In 2009 the
costs that businesses incurred due to alleged harm that they caused which were never
proven in the court of law was 150 billion dollars . Although companies pass the costs to the
consumers , there is an element of uncertainty that exits and all of the costs cannot be
predetermined and this liability would be an additional burden and hit the bottom lines of a
company . Companies also tend to relocate or close there operations entirely in markets
where there are such consequences due to the tort reforms that can lead to
unemployment.

 Stock Valuation and Brand reputation :

The liability that a company has to pay as compensation is not the victim is not the only
damage that a company has to face , there have been reduction in the stock value of a
company when tort allegation shave been made that resulted in negative investor
sentiment that impacted the business . The automobile and pharma industry are especially
prone to this risk and it influences the way in they take their business decisions . The brand
image also takes a severe hit and this is one of the main cause for the decline of companies
when they have to pay for alleged tort litigations losing market share.
Conclusion :
The tort reform developments over the past few decades like the increase in the people
buying insurance covers , the consumers having better access to information regarding the
product and the regulatory safety measures and the growing costs of litigations and the
change in the levels of the liability and benefits has led to policy makers to rethink the
appropriate scope of tort reforms. The impact of these reforms on the overall economy has
been the main topic of interest for policy makers , the impact it has on the business and
there function is also a key factor , as business are the driving force behind the economic
development of a country . If business are making decisions in a conservative manner
fearing tort litigation ,they loss there innovation and edge to other emerging countries were
there no tort reforms. This study tries to show the impact that tort reforms have had on the
businesses both positive and negative . There is a need to create balanced reforms in which
the interests of the general public and the business are also not compromised as both are
crucial for the overall development of a country.

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