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By W. Kip Viscusi
Until recently, property and liability insurance was a small cost of doing business. But the substantial ex-
pansion in what legally constitutes liability over the past thirty years has greatly increased the cost of liability
insurance for personal injuries. For U.S. producers of private aircraft, liability insurance expenses now average
$100,000 per plane produced, leading Cessna to cease production and Beech Aircraft to all but eliminate private
aircraft production as well. These substantial costs arise because accident victims or their survivors sue aircraft
companies in 90 per cent of all crashes, even though pilot error is responsible for 85 per cent of all accidents.
Riders on the Philadelphia Mass Transit system pay 17 per cent of every fare dollar to cover liability insur-
ance costs for passenger injuries. Similarly, 15 to 25 per cent of the cost of every ladder purchased is used to
defray liability expenses. Major firms, such as A.H. Robins, and entire industries, such as the asbestos industry,
have been shut down by the rising liability burden. Ten of the thirteen companies manufacturing vaccines for
the five serious childhood diseases exited the market because of rising liability costs.
The dominant legal criterion for determining a firm's liability had traditionally been that of negligence.
Firms were responsible for accidents arising from their products only if they did not provide an efficient level
of safety. Over the past three decades, however, broader liability doctrines, some of which have nothing to do
with negligence, have placed greater responsibilities on product manufacturers. The adoption of what is called
strict liability in the sixties required producers to pay for accident costs in a much broader range of circum-
stances. One of the stated rationales that the courts have given for this expansion was that producers could serve
as the insurers of the accident victims' costs and spread these costs among all consumers through a higher prod-
uct price.
Another expansion in liability has occurred through a broader concept of what constitutes a design defect.
This had been reflected in, for example, a surge of litigation claiming that an inadequate warning – a warning
that does not fully inform the user of a product's risks – is enough to deem a product's design to be defective. A
federal appeals court found Uniroyal liable for the death of a professional truck driver because it failed to warn
of the risks from underinflated tires. FMC lost a product-liability suit involving a crane because there was no
warning in the cab about hitting power lines with the machine. Many asbestos cases have focused on whether
companies properly informed workers of the cancer risk and the need to avoid breathing asbestos dust.
Increases in liability enhance the incentives to provide safer products. But liability costs also discourage
product innovation. In a 1990 report the National Academy of Sciences concluded that the United States had
fallen a decade behind Europe in the development of new contraceptives, partly because of the chilling effect of
rising liability costs. In one case, G. D. Searle and Company spent $1.5 million in a single year to successfully
defend itself against four lawsuits for its intrauterine device Copper-7. Since annual sales of the product were
only $11 million, the company chose to discontinue it.
The substantial increase in liability is reflected in the extent of litigation. Between 1974 and 1989, product-
liability lawsuits in the federal courts increased sixfold. The product-liability share of all federal civil litigation
raised from 2 per cent in 1975 to 6 per cent in 1989. These increases cannot be accounted for by greater product
riskiness. For the period 1977 to 1987, federal product-liability lawsuits increased by 400 per cent, whereas to-
tal U.S. accident rates declined by 20 per cent, motor vehicle accidents – by 11 per cent, work accident rates –
by 25 per cent, and home accident rates – by 26 per cent.
The price tag associated with liability suits is also substantial. Million-dollar liability awards have become
increasingly common, even for less highly publicized accidents. The median verdict in product-liability cases
doubled in nominal terms from 1980 to 1988. Whereas the median product-liability verdict was under $100,000
in 1971, it had risen to $405,000 in 1988, a 48 per cent increase after adjustment for inflation.
The principal components of these awards are economic damages (lost earnings and medical expenses) and
compensation for pain and suffering. Economic damages have risen in part because the cost of medical care has
risen. Pain and suffering damages have attracted the most attention from product-liability reformers because
their conceptual basis remains ill defined. The legal criteria for such compensation are not well articulated. On
an economic basis pain and suffering represents an economic loss that one would generally not choose to in-
sure.
The result of this lack of a conceptual base has been substantial uncertainty in the determination of com-
pensation for pain and suffering. But juries seem willing to see pain and suffering almost anywhere. After an
Illinois refinery explosion, for example, a jury awarded $700,000 to the victim's survivors, even though there
was no evidence that the comatose victim was conscious and would have experienced any pain. Nevertheless,
the fact that such awards are granted is one reason why the U.S. Department of Justice and various legal reform
groups advocate schedules and limits for compensating pain and suffering. Most recently, there has been a tre-
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