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Compensation and Responsibility



Martin Grace sets out to ask a philosophical question, "should there be a rational link between compensatory damages and economic harm" but winds up raising a second philosophical question: to what extent should the civil justice system value damages based upon the subjective, ex ante opinion of the plaintiff or upon the objective (replacement cost) value derived from the marketplace?

For most of us, the answer to the first question is fairly obvious: there should be a rational link between compensatory damages and economic harm. The answer is obvious because the obverse (i.e., there should be no rational link?) seems ridiculous.

The more difficult question is how to measure the value of the damage when the plaintiff's past actions suggest that the plaintiff placed little or no value on the thing that was damaged.

Grace points out the classic implications of this question:

Ideally, compensatory damages should reflect the economic loss to the family and society, but in our zeal to make sure that everything is compensable, we often overlook the fact some people do not value ex ante the things for which they receive ex post compensation. No one, for example, buys punitive damage insurance or pain and suffering insurance to cover losses occuring in their everyday activites. However, these warranties come bundled into the price of our products and services because of comepensation law. What we see consumers buying is health insuance, life insurance, and disability insurance--none of which covers pain and suffering or punitive damages.

The problem is one of "hindsight bias". After an injury or loss occurs, the parties involved appreciate the value of the injury suffered and look for compensation. Before the loss occurred, however, the parties discounted the likelihood of loss and behaved in a manner that discounted the implied value of the loss.

The civil justice system tends to work in a way that rewards hindsight bias and relieves actors of the responsibility for their actions. An intervening actor (in this case, the doctor) becomes the proximate cause of the injury (in this case, the decision to delay the patient's transfer) even though the injury was ultimately (though not proximately) the consequence of the decedent's.

Our tort system places responsibility on the proximate cause of the injury, not the ultimate cause, and in valuing loss our tort system seems to undermine personal responsibility by ignoring the implied value of the loss suggested by the plaintiff's own actions.

Past tort reformers have suggested changes to the law surrounding contributory responsibility. Perhaps one future of reform lies in the development of a more rigorous method of calculating loss: one that imposes a discount factor based upon the injured party's ex ante valuation of the damage (before the imposition of hindsight bias).

In the case of the teenage suicide, the decedent's actions suggested that his subjective valuation of his own life was rather low. The jury's proposed award, however, gave the decedent the full, "market value" for his life (i.e., discounted future earnings).

A change in the law that would replace the market valuation with a subjective valuation would not be easy, however, and could raise other, more difficult, questions.

If injured parties (like the deceased suicide in this example) should receive less compensation because their ex ante subjective valuation was low, should other injured parties (who, perhaps, placed extraordinary value on their own lives) receive compensation that exceeds the objective (market) value of their lives?

Imagine, for example, Plaintiff A owns a music box that cost $100. The music box is destroyed by Defendant B. The traditional rule of damages would compensate A for $100 (its market value, or replacement cost).

Under a subjective rule of damages, Plaintiff A's recovery might be reduced to reflect how well Plaintiff A cared for the music box, whether Plaintiff A took pains to ensure its safety, etc.

But imagine an alternative Plaintiff C who owned the same $100 music box that was also destroyed by Defendant B. Unlike Plaintiff A, however, Plaintiff C placed enormous sentimental value on the music box (perhaps its was a death-bed gift from his favorite grandmother). Plaintiff C took extreme measures to ensure the safety of the music box, but they were not sufficient to avoid its destruction as a consequence of Defendant B.

Should Plaintiff C recover more than Plaintiff A? Should Plaintiff's C's recovery exceed the replacement cost of the music box?

A rule that calculated damages based upon the subjective, ex ante valuation implied by the plaintiff's actions would suggest so.

I'm not offering any solution to this puzzle, except to suggest that (a) any solution must offer some "rational link" between the valuation of damages and the value of personal responsibility and (b) a subjective rule of valuation might reduce damage awards in some cases, but increase them in others.

 

 


Rafael Mangual
Project Manager,
Legal Policy
rmangual@manhattan-institute.org

Katherine Lazarski
Manhattan Institute
klazarski@manhattan-institute.org

 

Published by the Manhattan Institute

The Manhattan Insitute's Center for Legal Policy.