Executive Summary

In Michigan today, you cannot buy the popular "CJ" Jeep, safe new IUDs, advanced aircraft ignition systems, safe substitutes for asbestos, or a broad array of other products and services. These products are not on the market because products liability insurance for them is either too expensive or not available at any price.

This study examines the popular theories behind the products liability insurance crisis, including the idea that the crisis has been contrived by the insurance industry, and finds them deficient. The insurance conspiracy theory, for example, is unsupported by both fact and theory, and has been rejected by the Federal Trade Commission, the U.S. Department of Justice, and a select commission appointed by New York Governor Mario Cuomo.

The source of the problem is judicial changes in tort law that undermine the predictability of risk and the independence that insurance markets require to adequately measure risk. As a result, insurance companies and self-insured manufacturers, governments and non-profits must add an "uncertainty tax" to the cost of insurance. In some cases, the interference with insurance markets is so severe that the risk cannot be accepted at any price.

One of the most destructive changes in tort law has been the eagerness of courts to override contractual allocations of liability. The study cites cases in which the court ignored express provisions in warranties even were no showing of duress or fraud was made.

Implicit contractual allocations of risk have also been brushed aside by courts. The manufacturer of glue is found liable for injuries suffered by a person who intentionally sniffs the glue to get "high", even though aware of the health risks. A man reads and ignores a warning against hitting a bearing with a hammer and when injury results, the court nevertheless holds the manufacturer liable. This willingness to ignore voluntary risk allocation and acceptance prevents manufacturers- and insurers from controlling the use of their product or their resultant liability.

Coupled with the overriding of contractual risk allocation is the extension of the meaning of causation to include the most tenuous links between a product and a harm. When plaintiffs are unable to show even these links of causation, the courts simply shift; the burden to the defendant to prove that his product did not cause the harm – a far cry from traditional notions of "innocent until proven guilty."

Other modern tort law doctrines have added to the crisis. Joint and several liability ;has been expanded to hold defendants liable for harm that all parties know they didn't cause. Damages are now allowed for the mere fear, that actual harm may be suffered at a later date. Plaintiffs' negligence has sometimes been excused, and juries have found whole product lines "defective" despite their approval by govern­ment agencies and private experts.

These changes are all motivated by a poorly conceived attempt to guarantee some compensation for all accident victims. The tort system is simply not designed, and cannot be designed, to provide universal social insurance from accidents. Efforts to make it do so destroy private insurance markets and have helped immensely to produce the present crisis.

The burdens of these new tort law applications fall heaviest on the poor. The "uncertainty tax", uniformly added on to the cost of a product, has the same regressive effect as a sales tax. Trade-offs in the quality of workmanship, materials, and design are necessarily made to lower the cost of products. These products are therefore less safe, so liability insurance adds more to their cost. If insurance is not available, the less expensive products are pulled from the market entirely, depriving low income individuals of desired products and services.

Yet the poor get fewer benefits from the system. They are less likely to undertake the time and expense of bringing a lawsuit. Their earnings are lower, and so their damage awards are lower when they win lawsuits. The system penalizes low income individuals on both ends.

While reform efforts such as restricting the application of joint and several liability or placing caps on damages can have a positive impact on the crisis, restoring liability insurance markets to long-term health will require major changes in current thinking about tort law. The goal of the system should be to redress violations of rights, not to serve as a judicial substitute for a universal insurance system.

Perhaps surprisingly, the study concludes that this can be best accomplished through a system of "strict liability," in which the manufacturer's negligence is not at issue in determining liability, provided that such a system includes a properly narrow definition of causation and allows for contractual allocation of risks through express warranties and an assumption of risk defense.


This Executive Summary is based on a Mackinac Center Report, "Tort Law and the Products Liability Insurance Crisis" by Brad Smith. Copies of the full 56-page report are available from the Center for $10.00, or at no charge for Michigan media. Copyright 1989 by the Mackinac Center. Nothing in this summary should be construed as an attempt to aid or hinder, the passage of any particular legislation.

Bradley A. Smith is a Senior Policy Analyst with The Mackinac Center.