David B. Torrey

BOOK NOTE

THE LIABILITY CENTURY:
INSURANCE AND TORT LAW
FROM THE PROGRESSIVE ERA TO 9/​11
by Kenneth S. Abraham
Harvard Univ. Press. 2008. 274 pp.

I.

In law school, in torts class, my colleagues and I were read the riot act about one thing right away. That was: that whenever a modern tort precedent depicted an individual or corporate entity as the defendant, there was almost invariably liability insurance in place that would pay all or part of any damages ultimately imposed. An insurance company, we were correctly taught, was almost assuredly defending the case. To me this was an abstraction, but after a few years as an insurance defense lawyer the arrangement seemed completely natural and I took it for granted.

What, however, was the evolution of this arrangement – and, indeed, of the overwhelming primacy of the insurance vehicle that supports the systems of tort and workers’ compensation?

The history of liability and workers’ compensation insurance has no doubt been told before. In The Liability Century: Insurance and Tort Law from the Progressive Era to 9/​11, however, University of Virginia law professor Kenneth Abraham has produced an up-to-date treatment of the subject. It will enlighten the reader on how we arrived at the system that all now take for granted. The book is masterfully organized, beautifully written (free of academic jargon), and so full of insights that it will leave the reader with his or her head spinning.

The Liability Century is easily the most important book of 2008 for the workers’ compensation specialist. The young lawyer will be educated, the old hand will see everything pulled together, and all will be dazzled with insights. Virtually every page will cause the lawyer to reflect on whether his or her own experiences bear out or contradict the author’s observations and contentions.

The Liability Century isn’t just a history. Instead, in his book, Abraham sets out to prove a thesis that he characterizes as having been neglected in prior legal studies. Whereas Prosser asserted that the “availability of insurance actually has only rarely figured in the shaping of tort law doctrine,” Abraham disagrees. He insists that tort and the insurance system interact and influence each other’s development, shape and scope. True, tort liability existed before the advent of liability insurance in the 1880’s. Nevertheless, once it existed, courts became more receptive to creating causes of action, dissolving immunities, and abolishing defenses.

It is this thesis that Abraham seeks to prove in his book. In pursuit of this goal, he treats the range of all the important insurance-based liabilities: workers’ compensation, and its often-forgotten predecessor, tort liability under the early Employers’ Liability Acts; liability for auto accidents; medical malpractice; products liability; and environmental liability under CERCLA. It is in these treatments that the obscure histories and explanations for the present day “scheme of things” are revealed.

He follows these evaluations – and the testing of his thesis – with a more narrow analysis in his chapter, “Which Came First, the Liability or the Insurance?” Here Abraham discusses, among other things, the post-World War II rise of homeowner’s insurance, with its ultimate provision for protection not only against the original fire hazards, but claims of third parties as well. This insurance vehicle was highly favored, and later required, by the home lending industry. In this regard, a protected homeowner was more likely, in the event of a tort suit, to be able to continue paying the mortgage. Judicial awareness of the existence of this type of insurance, Abraham asserts, made it easier for courts to relax rules and permit liability.

In the final chapters, Abraham specially treats the genesis of the collateral source rule, and how it is affected by subrogation and indemnification principles. In this discussion, the author analyzes the unique aspect of life insurance proceeds: these monies can never be raised as a set-off by the tort defendant, but neither does the life insurer ever claim subrogation in the event of third-party recovery. Arguably, then, double recovery is being permitted. The general explanation for the lack of subrogation?:

"The courts have long held that there is “equitable” subrogation, or subrogation by operation of law, only for indemnity insurance. Indemnity insurance is coverage that replaces a discrete, specific monetary loss. Fire insurance and health insurance are both forms of indemnity; they replace particular amounts of monetary loss. Life insurance, in contrast, does not provide indemnity for a discrete monetary loss but a lump sum regardless of the amount of loss resulting from the death of the party whose life is insured. Because life insurance did not provide a specific indemnity in this sense, the courts that addressed the issue held that life insurance was an investment or a way of assuaging grief, and therefore was not indemnity insurance. Whether or not this way of thinking about the nature of life insurance was accurate, it is the reason that the few courts addressing the issue found that life insurance was not eligible to receive a judicially created right of subrogation."

A precedent-breaking exception to this principle is found in the 9/​11 Victims Compensation Fund. Abraham provides a concise summary of the operation of the plan and the controversy over the deduction of life insurance proceeds from the survivors’ recoveries.

II.

Abraham’s discussion of workers’ compensation is found in Chapter Two, “The Original Tort Reform.” Here the author provides a fairly familiar history. Still, edifying moments abound, particularly in his observations about the origins of workers’ compensation, its essential difference from tort liability, and the modern day issues affecting the system. Here are just a few highlights of these discussions.

1. Historical background. Abraham first explains that, once the prejudice against liability insurance collapsed in the mid-18th century, it was employers that purchased the bulk of coverage, for personal injury tort claims asserted against them by their employees.

In discussing the run up to the development of workers’ compensation, Abraham stresses that the collapse of the traditional prejudice against liability insurance was a prerequisite to the workers’ compensation idea. Of course, liability insurance was thought contrary to good public policy in the early 19th century. At that time, the main concern of tort liability was ensuring responsible behavior. If individuals and corporations could insure their liability, the whole purpose of tort, it was thought, would be defeated.

In the late 19th century, however, compensating victims had, in its own right, become a goal of the tort system.

This development unfolded because of the same changes in culture and society that are usually identified as being responsible for workers’ compensation: the change from an agrarian society to one industrial in character. With the change came an increase in the number and severity of personal injuries, particularly from railroad accidents. Legislatures and courts came to recognize that the new army of tort victims needed a source of compensation, and liability insurance provided it.

Abraham explains that fire and marine insurance had long been in existence, and he identifies the 1880’s as the period during which insurers began to sell liability insurance. As noted above, the principal product was employer’s liability insurance, sold to employers to protect them from suits for work-related personal injuries filed against them by their employees. This insurance became popular as legislatively-enacted employer liability laws made it easier for injured employees to succeed in their suits. (These laws typically abolished the “fellow servant rule” and allowed vicarious liability.)

Abraham posits that how workers’ compensation was enacted “provides [in the present day] a general template” for other tort reform. This was and is so because the principal concern of any tort reform is to ensure that satisfactory compensation remains, that the goal of deterrence against accidents or torts is preserved, and that administrative costs are brought under control.

Abraham reviews the interesting background of the workers’ compensation revolution. While usually thought a progressive reform, the fact is that employers, fearful of increasing exposure under the employer liability laws, also favored the innovation. This is the reason why 43 states enacted laws within just ten years.

An arguable irony was the attitude of organized labor. Although Samuel Gompers, the head of the AFL, ultimately supported the reform, for many years he was against the idea of workers’ compensation. Gompers, like many in the labor movement, favored further reform of the tort system as the answer to uncompensated work injuries.

Gompers and the AFL found suspect programs, like workers’ compensation, that made employees dependent on management or government. (When labor finally came around to supporting such programs, they tended to favor state-run workers’ compensation insurance funds as the source of the insurance. And, as other scholars have pointed out, it was in states where labor was strong that, initially, exclusive state funds were more likely to be employed.)

Abraham gives a familiar background with regard to the crisis that led to the swift enactment of workers’ compensation laws. The particular flaws in the pre-reform system were (1) under-compensation of injured workers via the tort system; (2) inability of employees to purchase adequate first party insurance to protect themselves; (3) failure of tort law to effect deterrence, i.e., the specter of tort liability did not encourage employer accident prevention strategies; and (4) excessive administrative costs of the liability system.

Interestingly, though some thought that the imposition of workers’ compensation would enhance workplace safety, Abraham is not convinced that this was a major concern of the reformers. I certainly reached that same conclusion some years ago from reading the early cases, but scholars who have gone beyond the precedents have found safety to be on the minds of at least some reformers.

Abraham further explains that the enactment of workers’ compensation marked the first time that risk spreading, or “enterprise liability,” via insurance, was discussed as a purpose of reform. Though not “first place” in the minds of reformers, workers’ compensation was nevertheless the first innovation to stress this purpose.

2. Funding of the system. Abraham explores at length one twist to the workers’ compensation scheme, past and present. That is, by the state mandating employer purchase of workers’ compensation insurance, employee wages are likely decreased correspondingly. Thus, workers’ compensation insurance should not really be conceptualized as a “free benefit” to workers. To the contrary: a mandatory system in effect requires employees, via subtle wage concessions, to purchase insurance on themselves.

3. Concern over the existence of insurance, the promise of periodic payments, and “moral hazard.” Providing workers with no-fault, weekly installments of insurance benefits has always made employers worry that some will take advantage of the system. In discussing this issue, Abraham frequently applies an interesting term – mundane to the economists who study compensation, but rarely used by lawyers – to define the worker’s temptation to remain off of work for an unjustified period: “ex post moral hazard.”

“Ex ante” moral hazard, meanwhile, describes the purported risky, pre-injury behavior in which an insured may engage because he or she knows of the protection of insurance.

4. Goals of the programs: Tort versus workers’ compensation. An interesting contrast between the goals of tort and those of workers’ compensation is revealed by Professor Abraham’s work.

The traditional goals of tort, according to Abraham, were (1) promoting optimal deterrence by potential tortfeasors; (2) ensuring compensation for the victim; (3) providing “corrective justice” or moral redress; or (4) some combination of the three. Workers’ compensation has deterrence and compensation as a goal, but as the basis of liability is no-fault, “moral redress” is really not the point. Instead, risk spreading, or enterprise liability has, from the outset, been a purpose.

What is interesting, Abraham stresses, is that as the years have passed, risk spreading has grown to become a key purpose, or even a partial definition of, liability insurance as well. Indeed, Abraham ultimately produces intriguing subchapters entitled “Spreading Loss by Imposing Liability: Tort as Insurance”; and “Preventing Loss While Insuring It: Insurance as Tort.”

5. Irony: Receipt of workers’ compensation as supporting tort liability. Abraham discusses an arguable irony: the creation of workers’ compensation was intended to reduce tort liability, and it has done so, but only in the context of employee versus employer. Ironically, receipt of such monies by the injured employee may have facilitated the growth of tort liability on the part of third parties. Indeed, the receipt of workers’ compensation by a worker injured by a third party has the effect of providing monies to fund the third-party liability action.

6. Workers’ compensation as a system always in search of balance. Abraham engages in a familiar reflection about workers’ compensation: that a successful program seeks to achieve balance. Workers’ compensation programs are always subject to a political back-and-forth over time, and he considers this a natural phenomenon.

It is often said, and it often seems, that no one is ever completely happy with the workers’ compensation program. Perhaps this is not reflective of some sort of pathology chronically infecting the system, but a situation that is to be expected:

"But the political factors that generated [the recent California reforms] are unlikely to be stable. It is no surprise that workers’ compensation is rarely in political equilibrium. Either employees complain that benefit levels are inadequate and benefit restrictions unduly constraining, or employers are critical of the high cost of workers’ compensation insurance premiums and seek relief through reforms that limit benefits in one way or another. The very nature of workers’ compensation makes conflicts over its scope and generosity inevitable. Whenever periodic payments are a structural feature of the system, either increases in benefit payments or cost-containment efforts will always be putting pressure on the other. The more nearly adequate the benefits provided, the greater the aggravation of ex post moral hazard; the more effectively costs are controlled, the more severe must be the restriction of benefits to levels lower than would otherwise be optimal. The pendulum has continued to swing between cost increases and benefit controls, and will always do so."