Non Economic Damages

According to Tillinghast, twenty four cents of every dollar spent in the tort system covers a non-economic loss, such as pain and suffering. Non-economic damages have been a target for reformers for years but concern with capping them has always been that it’s easy to avoid the caps by reclassifying the non-economic damage portion of the award as compensatory. A recent report by RAND indicates that California’s $250,000 cap is effective at reducing awards. It finds that “Defendants’ liabilities were reduced by 30 percent.”

This does not, however, mean a 30% reduction in payouts to plaintiffs. Because of limitations on attorney fees, which result in a reduction of payments to plaintiff’s attorneys of 60 percent, plaintiff’s recoveries fell by only 15%.

My take: California has made a good start but did not go far enough. Since consumers ultimately pay for any damage payments in higher prices for goods and services, damages in the tort system’s coverage should mirror private insurance markets. Private insurance markets reveal the preferences of consumers for insurance and hence certain types of compensation. Consumers find it worthwhile to purchase insurance against economic loses. However, as Paul Rubin explains

No direct insurance policy covers this class of loss, but tort damages commonly do pay them. But the ability to receive payments for nonpecuniary losses is not a benefit to consumers; it is a cost. The reason insurance does not commonly cover them is that consumers are not willing to pay the cost of the coverage, even given the small loads commonly associated with direct insurance. (The theory of rational insurance can explain that reluctance.)

But if consumers are not willing to pay voluntarily for direct insurance against pain and suffering, why should they benefit if they are forced to buy the same insurance as part of their medical payments? The answer is that they would not benefit. By forcing payments for nonpecuniary losses on consumers as part of medical insurance, we would not be creating a net benefit for them.

For Rubin’s theory see John Calfee and Paul H. Rubin. “Some Implications of Damage Payments for Nonpecuniary Losses.” Journal of Legal Studies 21 (1992).


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