Liability Law and Firm Size

by on March 20, 2008 at 7:28 am in Law | Permalink

I would like to tile my front porch steps and have been shopping.  Lowe’s and Home Depot have plenty of tile but although they advertise installation they won’t install it outdoors.  The salespeople, however, will surreptitiously recommend small family contractors.  Call Jose, they tell me handing me a number.  Why won’t the big firms install outdoor tile?

As best as I can figure the answer is liability.  A few slips, falls and an enterprising lawyer or two and Lowe’s could be out millions of dollars.  The revenues aren’t worth the risk so small firms step into the breach.  The key, of course, is that the small firms won’t be sued because they are judgment proof.

Roberta Romano was here yesterday and offered another example.  The big auditing firms won’t do SOX audits for small firms because the revenues are low relative to the risks.  The smaller firms must turn to judgment proof auditors of less reliable reputation. 

In one sense, this is a good workaround for a liability system that seeks out deep pockets.  Consumers are better off than they would be if neither Lowe’s nor the judgment proof firms offered services and they are also better off than if Lowe’s was required to offer services, because the price at which Lowe’s would do so voluntarily would be prohibitive (consumers would be forced to buy insurance they didn’t want at the price). 

But more deeply the resulting system is inefficient.  Consumers don’t get the insurance that the liability law is supposed to provide and they must turn to lower quality, higher cost service providers even when they would prefer larger firms with solid reputations. 

1 save_the_rustbelt March 20, 2008 at 7:36 am

“The smaller firms must turn to judgment proof auditors of less reliable reputation.”

Among those of us who know, the smaller firms have better reputations.

The primary advantage of the “Big 4” is the “Big,” not the quality of the work.

And why the assumption that smaller firms are judgment proof? Evidence?

2 Jim March 20, 2008 at 8:02 am

I, too, am puzzled by your assumption that smaller service providers are “lower quality, higher cost”. No room in your world for the artisan? Personally, the service I’ve been provided by the big box stores has been much, much worse than that provided by independent professionals. The former works on volume, so they don’t have to care if they do a shoddy job. The latter work solely on reputation and word of mouth – right down to your example of big box store employees referring you to them.

You make a bold inference completely unbacked by facts.

3 Ali Choudhury March 20, 2008 at 8:31 am

The Big Four are essentially an oligopoly when it comes to the audit market. They get the work because of the “Nobody ever got fired working for IBM mentality”. That’s not to say professionals there are worse than anywhere else, but the incentives of the partners are skewed towards getting audits done as quickly as possible.

4 Alex Tabarrok March 20, 2008 at 9:10 am

Whatever you think of independent contractors or the big four the key is that to escape liability firms and consumers are making choices that they otherwise would not – thus the goal of liability law isn’t being met and consumers aren’t getting what they want, hence inefficiency and deadweight loss.

5 Bernard Yomtov March 20, 2008 at 9:48 am

Whatever you think of independent contractors or the big four the key is that to escape liability firms and consumers are making choices that they otherwise would not – thus the goal of liability law isn’t being met and consumers aren’t getting what they want, hence inefficiency and deadweight loss.

Maybe. Sometimes. Or maybe consumers are just willing to self-insure, in effect, by paying a lower price. But you are certainly retreating from your claim about tile installation.

Is it possible that installing outside requires more skill than installing inside? There’s weather to worry about, and you may have less control over the surface you’re instaling on. Then it might simply be unprofitable for Lowe’s to have employees around who can do that from time to time.

And of course there’s potential liability for inside work as well – not just floors but electrical and plumbing work. Do HD and Lowe’s do that?

6 Person March 20, 2008 at 10:11 am

Wow, none of you believe that potential liability is significantly greater for large corporations
relative to independents? Or that this has implications for inefficiency?

There are quite a few strongly-held prejudices to overcome before these inefficiencies can be removed.

If only we could see the unseen growth that would happen if this problem with the legal system were removed…

7 john pertz March 20, 2008 at 10:34 am

I think Alex’s point is dead on. Petty, non-empirical conversation about the quality of independent craftsman is not relevant. You are not rebutting Alex’s original claim by trying to argue that the little guys are actually better than the corporate chains. That point is irrelevant.

What is significant is that large firms are avoiding offering goods and services to customers where the potential liability is high. This void is being filled by smaller firms who, in a normal market context, may or may not be chosen by the consumer. That is all that matters. The inefficiency results because firms are surviving in this regulatory context who would of been weeded out with ease under normal market conditions.

8 Bob Montgomery March 20, 2008 at 11:50 am


The big DIY stores in the UK don’t offer installation services either. I think liability’s less of an issue than installation being a non-core service for which the margins aren’t very enticing.

And of course there’s potential liability for inside work as well – not just floors but electrical and plumbing work. Do HD and Lowe’s do that?

The big chain hardware stores indeed do all kinds of installation, as Alex mentioned:
Lowe’s and Home Depot have plenty of tile but although they advertise installation they won’t install it outdoors.

Check out Lowe’s website:
http://www.lowes.com/lowes/lkn?action=topicSelect&topic=weInstall
They will install countertops, appliances, carpet, ceiling fans, doors, decking, roofing, fencing, etc. Actually, now that I look at that website, the fact they won’t install outdoor tile seems kind of odd.

9 Brad March 20, 2008 at 12:26 pm

Alex,
Don’t do it. You’ll end up with a slippery mess. While your small-firm contractor may be judgement proof you are not, which you’ll discover the first time a guest or mail carrier slips and falls. I suspect you are right that the big-box outfits are avoiding liability, but with good reason.

I certainly agree that the current liability system is inefficient, but I fail to see how this case is illustrative.

10 bruce March 20, 2008 at 12:57 pm

If there just happens to be one tiny aspect of the american economy that favors small mom and pop businesses, then I’m quite happy about that.

11 Dave March 20, 2008 at 1:38 pm

Hey, Alex, when can we get more from you on how access to credit should be unregulated?

12 Allison March 20, 2008 at 1:49 pm

Anyone that cares to investigate knows that HD and Lowe’s (as one poster alluded to above) farm out ALL of their “installation services” to the lowest bidding independent contractors and then take a cut off the top. And many people will attest to the fact that going through one of the superstores does not in any way guarantee a superior level of quality. In fact, it makes sense that the contractor is more likely to cut corners in order to maximize his profit, and to compensate for the cut that is going to the superstore. Regardless, the work is always being done by the “small guy”, so you can’t draw conclusions about small contractor quality vs. big contractor quality here. To my knowledge, the superstores don’t have any sort of rigorous qualification/standards that must be adhered to by their contractors, so I really doubt that there is any sort of quality control going on that would justify the added cost of going through a superstore as opposed to doing some legwork and getting reccommendations.

Also, I am fairly condfident that when the customer signs up for these services they sign some acknowledgement that HD/Lowe’s are not the ones providing the services — they’re just the middleman and have no liability for workmanship problems done by the indepdendent contractors who are (likely) judgment proof.

13 Alan Gunn March 20, 2008 at 2:17 pm

“But more deeply the resulting system is inefficient. Consumers don’t get the insurance that the liability law is supposed to provide …”

From the point of efficiency, this is a good thing. This kind of “insurance” is insurance that few if any people would buy voluntarily. That’s why “the liability law” calls for it–left to their own devices, buyers and sellers never agreed to this sort of thing. It’s only judges who thought this sort of thing worthwhile. What buyer would want “insurance” that pays off only after years of litigation if at all, that “compensates” you for pain and suffering, and that gives a third of the recovery to your lawyer?

When liability for small-plane crashes drove the manufacturers out of the small-plane business back in the 1970s, the cost of the tort law’s “insurance” was about $70,000 per plane. You could have bought a huge amount of real life insurance, which would cover you no matter what you died of or whether your plane was “defective,” a lot cheaper than that.

14 Cliff March 20, 2008 at 3:50 pm

Tort law has nothing to do with insurance. I have rights in my property and if someone violates my rights by wrongfully damaging my property, they must compensate me for the loss they caused. End of story.

15 Bob Montgomery March 20, 2008 at 5:25 pm

Alex has just invented, out of whole cloth, the idea that Home Depot won’t do outdoor tile installation for liability reasons.

The real reason: installing tile outdoors is a pain in the ass. If it rains/snows/sleets anytime up to a week after installation, it’s ruined and you have to do it over. How many do-overs are budgeted for in the Home Depot installation price? Zero, that’s how many. Plus you have to use frostproof porcelain impervious tiles, which Home Depot probably doesn’t even sell. Most ceramic tiles canNOT be used outdoors.
Pot, meet kettle.

How does that not apply to all kinds of other outdoor installations? And how does that logic not apply to Jose?

16 Anon March 20, 2008 at 11:00 pm

a) It’s not my job to disprove a theory presented with no evidence whatsoever. It’s the blogger’s duty to prove his case; he has zero evidence for his theory and substantial evidence against. Any licensed contractor has liability insurance, by law, so the whole “Home Depot has deep pockets but Acme Contracting does not” is simply false, you can get a million bucks out of any licensed contractor, with a valid suit of course. The “small family contractors” recommended by Home Depot are not illegal immigrants, they’re the same contractors Home Depot usually employs.

b) There are plenty of jobs that aren’t cost-effective for larger firms to undertake. Sears will install a washing machine in your basement but they won’t install it on your roof. Not for any price. Why? Because it’s a pain in the ass to get a washing machine up onto your roof, that’s why. Any random contractor would be happy to take a crack at it, maybe they have a crane, maybe just a block and tackle, maybe just some rope and a ladder…. pay their hourly rate with a large deposit in advance….. but Sears won’t do it. Because they’re afraid you’ll fall off the roof when you’re washing clothes and sue them? No! Because the job can’t be costed accurately enough in order to set a standard price. Installing a washing machine in the basement costs $59.95. Installing a washing machine on the roof… costs what it costs. Sears can’t set a price that they know will make them money, so they don’t offer the service. Simple.

(And installing outdoor tile is the same way. It costs what it costs, and the costs are too variable to predict. What happens when the Home Depot installer arrives and finds you’ve purchased 200 unsuitable porous ceramic tiles, you want them installed on an uneven wooden deck, and there’s rain in the forecast for this evening? Now the installation cost – a standard rate which you’ve already PAID – has to include the cost of completely rebuilding your deck to be level, a whole new set of tile, and waiting until it isn’t raining.)

You people are ignoring Occam’s Razor. You’ve got a belief – “Government regulation is always the cause of everything bad” – and it doesn’t matter what the situation is, somehow you manage to reach the same conclusion.

17 David Sucher March 21, 2008 at 6:31 pm

This post appears to have an ideological agenda and is based solely on conjecture.

Alex wonders “Why won’t the big firms install outdoor tile?”

My question for Alex: Did you ask them?

Your answer starts with “As best as I can figure the answer is liability.” Did you even bother to ask Home Depot? How can you offer a post without haveing done even the most basic attempt at research to gather some factual basis? (Which I assume you haven’t as you surely would have mentioned it.)

I bet you’d fail a student who started a report with””As best as I can figure the answer is…”

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