Assessing the Insurance Role of Tort Liability After Calabresi

I INTRODUCTION In his landmark 1961 article, Some Thoughts on Risk Distribution and the Law of Torts, Judge Calabresi provides a theoretical framework for analyzing tort liability as a risk-spreading device that functions in a manner similar to (1) In our article, we examine the insurance objective of tort liability from the standpoint of modern tort law. Since Calabresi's foundational article, there have been many changes in tort law as a consequence of the rise in mass toxic torts, design-defect cases, hazard-warnings cases, and punitive-damages awards. changes in tort law over the past half century have altered the legal landscape in a manner that compromises the private-insurance analogy for tort liability. In many situations, tort liability does address the losses suffered by injured parties, but the tort analog to an insurance premium for this coverage is either absent or incomplete. Nonetheless, understanding how tort liability serves an insurance function is critical to assessing the role of modern tort liability. In this article, our objective is to examine the performance of tort liability, focusing particularly on its insurance role. We examine the situations in which tort liability is well suited to providing compensation and circumstances in which its role is more limited. In situations in which there are impediments to the successful role of tort liability, we examine whether these same impediments also hinder insurance markets. Despite impediments to achieving an outcome that provides both efficient incentives for safety and optimal levels of insurance, on balance tort liability performs a socially constructive role. Calabresi's insight that the tort system serves a fundamental insurance function has proved to be a seminal contribution to the discipline of law and economics, which at the time of his article largely consisted of only one other major contribution, Coase's analysis of externalities. (2) Unlike the Coase theorem, which highlighted the potential efficiency of private bargains, Calabresi emphasized that the tort system serves a critical insurance role in ensuring that the price of goods reflects their true cost. (3) Calabresi's risk-spreading theory of tort liability has had tremendous impact on the conceptualization of the role of tort liability. Law-and-economics theories derived from Calabresi's seminal insight continue to regard insurance and deterrence as the two principal objectives of tort law. (4) Much of the impetus for the adoption of strict liability rather than negligence-based liability can be traced to this insurance function. Strict liability for product-related accidents has an attractive feature in that it establishes a form of product-risk insurance for all product damages irrespective of concerns regarding negligence. (5) fundamental role of tort liability in providing insurance is so great that it serves as one of the chief criteria for determining whether strict liability is the applicable liability rule. In particular, the widely used risk-utility test for strict liability for products includes the following insurance concept: The feasibility, on the part of the manufacturer, of spreading the loss by setting the price of the product or carrying liability insurance. (6) Thus, based on this approach, whether a firm should be found liable for the harm under strict liability depends on whether the cost can feasibly be spread by the seller of the product. In that instance, exploiting the risk-spreading role of tort law makes imposing liability on the seller more desirable. How and when tort liability does in fact serve this insurance function given the structure of modern tort law is the focus of our article. In this article we provide only a partial assessment of the role of tort liability, focusing primarily on the insurance function. Tort liability also serves a deterrence role, which we document. Moreover, even if tort liability has shortcomings, the appropriate reference point for assessing its performance is not a hypothetical perfect social institution, but rather is the performance of institutions that currently exist or which feasibly could be established, such as safety regulations. …