The American tort system functions as market-based regulation. Instead of prohibiting certain ways of doing business, or banning the sale of dangerous products, the tort system imposes the risk of being sued with all its attendant costs, including the cost of bad publicity. A company must decide for itself whether the downside risk of a lawsuit outweighs the upside potential. Banks extending business loans must make the same calculation. It’s a system of regulation without any central controlling authority, which adds the spice of unpredictability. The regulatory scheme is a little different in every court that enforces it.
Tort liability has two dimensions. One is horizontal, as liability spreads outward, attaching itself to an ever-wider range of activities. For example, 50 years ago it was settled law that landlords weren’t responsible for criminal acts committed on their property. Now it’s settled law that they are, in certain circumstances.
Tort liability also has a vertical dimension. Even when a company is found liable, most damage awards are moderate. Some are piddling. But sometimes, as the headlines remind us, juries award millions and millions of dollars in damages. Tort damages are like lottery awards in that way, but with this difference: for every lucky winner there’s an unlucky loser.
Insurance companies have a huge incentive to control the vertical dimension of tort liability, to prevent the big payouts that screw up their actuarial calculations. Every “tort reform” agenda sponsored by the insurance industry is chiefly concerned with capping damage awards. But just as obviously, insurance companies have an incentive to encourage the horizontal spread of tort liability, which obligates business owners to buy ever more insurance. That basic conflict of interest lies right at the heart of the tort system in America. Insurers provide attorneys for their insureds, but that doesn’t mean insurer and insured are always on the same side.
In one area of personal injury law, employers avoid the risk of lawsuits altogether. In this one area, the risk of a ruinously enormous damage award is entirely eliminated, always provided the employer follows the rules. The regular payment of insurance premiums, and the occasional faked injury, give business owners plenty of reason to hate the worker’s compensation system. But it exists not only to compensate workers injured in job-related accidents but also to shield business owners from the risk of being sued.
However, an employer’s immunity from lawsuits for workplace injuries can be lost. A recent case from the New Mexico Court of Appeals illustrates some of the risks an employer assumes when it fails to abide by the rules governing worker’s compensation claims. Justin Goodman was a server at an Outback steakhouse in Las Cruces. According to the Court of Appeals’ opinion, he suffered an ankle injury on the job. He immediately notified his supervisor. “Several minutes later (Goodman) discovered that his ankle was discolored and swollen to a size larger than a grapefruit.”
According to the court’s opinion, the supervisor then made a series of squirrelly moves, all apparently geared toward trying to prevent Goodman from receiving comp benefits. For instance, he first told Goodman a formal claim wasn’t necessary, then gave him incorrect information about the process for filing one. Those might have been simple mistakes, but he also told Goodman that if he persisted in filing a claim he would become ineligible for promotion.