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Terror Risk and the Trial Bar

The Secretary of the Treasury doesn�t want to reenact the Terrorism Risk and Insurance Act (TRIA) in its current form. This makes tremendous sense as the way the law was structured was that the Federal government was essentially providing free reinsurance at a relatively low attachment point. What is interesting about the Secretary's letter  to Rep Oxley introducing the report is that he takes a swing at the trial bar where he says:

It is also important to keep in mind that the program would cover damages awarded in litigation against policy holders following a terrorist attack. Current litigation rules would allow unscrupulous trial lawyers to profit from a terrorist attack and would expose the American taxpayer to excessive and inappropriate costs. The Administration supports reasonable reforms to ensure that injured plaintiffs can recover against negligent defendants, but that no person is able to exploit the litigation system.

This brings up an interesting point that follows the discussion on the ongoing discussion on tort compensation started by my Atlanta neighbor Jonathan Wilson. For example, is a terrorist attack foreseeable and what must one do before the fact to ensure that they have behaved reasonably? Under the current law and economics approach we look to set the marginal benefit of making our product/property safer against the marginal cost of the safety. Ideally, this gives us the Learned Hand Rule where we balance the benefit of the precaution against the risk. This is inherently a "before the fact" calculation. So the question arises, if terrorists use an airplane in an unforeseeable way to kill people, should the airlines or the property owners be liable if they did not act unreasonably before the fact? Evidently Congress was fearful that "unscrupulous trial lawyers" would go after domestic defendants in the 9-11 terror attack claiming a breach of some duty. The fear was so strong that Congress changed incentives to sue and set up a special compensation system funded by the taxpayers. If these types of fears of litigation are so strong when, presumably, the terroristic act was unforeseeable, we need to rethink what a compensable tort injury actually is. Should the law remedy all losses? If so, then that is an expensive proposition, as everyone becomes an insurer with the corresponding problems of moral hazard. Arguably, just tort reform would stabilize expectations about what is reasonable behavior and put constraints on Monday morning quarterbacking. Evidently, the administration is trying to leverage re-anacting a modified TRIA with some additional fixes in the litigation system.



Rafael Mangual
Project Manager,
Legal Policy

Manhattan Institute


Published by the Manhattan Institute

The Manhattan Insitute's Center for Legal Policy.