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The Truth About Lawsuits and Liability Insurance

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On the Extreme Wisdom radio show, Bruno Behrend and I briefly discussed some implications of a murder at a Burger King in Lake County. It turns out that the murder suspect had a prior criminal record which leaves local residents wondering why background checks weren't done. There is, of course, a lawsuit because Burger King "should pay" for their negligence.

Any murder is a tragedy, and this is no different. However, part of the typical lawyer advice is to go after money in a lawsuit and Burger King has money. Some of their claims, if true, certainly do indicate negligence. However, the idea that Burger King "must pay" is something that needs to be addressed.

No lawsuit will make Burger King pay for this death. Even if they were grossly negligent and could have done something reasonable, Burger King will not pay. Even if a jury awards the victim's family $10 billion dollars, Burger King will not pay. No executive, no store manager, nor middle management bean counter will pay one cent. The people who pay are Burger King's customers and society as a whole.

Every business has liability insurance. What this insurance does is protect you in a lawsuit. It's similar to car insurance. If you get into an accident, as long as you follow the terms of your policy and the settlement isn't above your limits, the insurance company pays and you are inconvenienced a bit to placate paper-pushing lawyers. As long as you have car insurance, you do not pay the price for car accidents. Sure, premiums go up, but they do not go up nearly enough to cover the cost of an accident.

Car insurance companies make money not on individual clients but on the industry as a whole. It isn't likely all of their customers will get into a car accident so they spread the cost over all their customers. While "high-risk" drivers pay a little more for insurance, by and large the entire pool of customers pay for those who cause accidents.

Medical malpractice insurance is even more problematic. Every doctor with the same type of practice pays the same as every other doctor in that same type of practice. The world's best surgeon pays the same price as a night-school butcher surgeon. What this means is that good doctors pay liability into a liability insurance bucket to cover the lawsuits for bad doctors. However, more importantly, businesses pass down costs to consumers when they set their prices. That means you've already paid the price for that settlement when you saw the doctor. Not a red cent comes out of the doctor's salary or estate.

Because businesses know their liability insurance rates in advance, they can set their prices to cover that cost. This means that businesses have access to pre-paid legal settlement money. If this family gets $10 million, that money has already been given by consumers to the insurance company to pay for this exact thing. The people most responsible for negligence will bear no personal cost for their negligence. Because insurance is spread across industry segments, customers who would never eat at Burger King also paid into this pool of money.

Actuarial scientists work some mathematical magic to come to an expected amount of money they will need to pay for future legal actions against their clients. This means, assuming you have a good actuary, that the insurance company can figure out what money is going to be taken out, work in some profit, and then set their rates. They pass this down to the business that passes it down to the consumer.

The idea that suing a company for some injustice (many imaginary and some, sadly, very real) to make them pay is false. It's a creation of trial lawyers who like collecting 40% of those big multimillion dollar settlements. The dirty little secret is that society pays an increased amount for products to sustain that system. No matter what you think about a hack artist doctor or a negligent fast-food restaurant owner, they never pay for these lawsuits, society does.

You get as much as you put up with as a consumer. If you want businesses to behave morally, consumers need to put that into their economics decisions. Until they do, businesses will continue to minimize costs and maximize profits.

Listen to my comments on the Extreme Wisdom podcast.

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About John Bambenek

John Bambenek is a political activist and computer security expert. He has his own company Bambenek Consulting in Champaign, IL that specializes in digital forensics and computer security investigations.
  • RedTard

    Agreed, we need to get away from the big multimillion dollar payout. Pull doctors licenses if they’re incompentent. Hold willfully negligent business people criminally liable for their actions or bar them by court order from holding future management or supervisory positions. Put drug addicted employees who mangle someone in jail and throw away the key.

    I think now we’ve started to see the creation of a society that believes a tragedy or accident earns them a paycheck. It’s was sad commentary, but it does contain a nugget of truth, the whispers you heard about select 9/11 families. Some were seeking vast sums of money for their loss. They believed they we’re owed millions for for having a family member in the wrong place at the wrong time.

    The people who really should feel bitter are the husbands who comes home to a bound, tortured, raped, and murdered wife and kids. The person taken down in gang crossfire. They get nothing because the killer can’t directly be linked back to someone with big pockets yet their loss is at least as great as all these others.

    Here’s an idea if you insist on trial payouts, instead of giving those big punitive checks to one individual with one tragedy, put it into a fund to help all victims of tragedy. Instead of a few getting multimillion payouts with the majority getting nothing, everyone facing a tragedy would get a little bit to help get their lives back in order.

  • Bliffle

    This is just part of the ongoing Insurance Monopolys campaign of misinformation and special pleading about lawsuits. The actual effect of liability and personal injury lawsuits on the economy is miniscule. Far greater is the bainful influence of the monopolies themselves that are allowed to operate in defiance of the laws, sometimes as open oligopolies dividing up markets as they please.

    This BK affair has resulted in NO settlement and no awards have been made. Should an award be made it will probably be a small amount, as is customary in such cases. Then it will be appealed and whittled down by successive appearances before judges. Judges are notoriously pro-institution and pro-business. Only juries have any inclination to settle in favor of individuals, and their decisions are customarily curtailed by judges in appeals.

  • http://jcb.pentex-net.com John Bambenek

    If I’m part of a multi-billion dollar industry’s campaign of misinformation, I’d certainly like to get paid for my services.

    I’ve got no problem with lawsuits in general. I have a problem with the fact that (assuming there is real negligence) the people who pay for the lawsuit are not the people responsible for the liability.

    If a CEO decides to have his company engage in a reckless and negligent manner, his insurance company pays, which helps him, in advance, pass the cost down to his customers and those customers who by products from that industry.

    The CEO never has personal liability, and therefore, no motivation or incentive to behave in a correct manner.

  • Bliffle

    the real scandal in insurance is that state and federal governments allow the ins. cos. to operate rather open monopolies, carving up markets as they please, and charging exorbitant rates. Then they cut your coverage and increase your premium if you ever make a claim.

    Ins. cos. only pay out about half, in claims, of what they take in in premiums. Does that make sense to you? Where does the money go?

    And you can pay into a med ins. policy for 40 years, then when you finally come down with the Heebeejeebies they’ll tell you they don’t cover that!

    They’ve rigged the game with the immense influence of their lobbyists over congressmen. For example, the Plan D drug benefit: you, the client, the sucker, get one chance a year to pick out one of the 50 companies for drug insurance, and you can’t change it without penalty for a year. But the ins. co. can change their pharmacy at any time, thus obviating your coverage!

  • Mohjho

    John
    What exactly are you suggesting be done? Do you think that litigation be more difficult to file or that some arbitrary cap be placed on the payoffs?

    You use Burger King as an example of the Corporation not having to pay for loosing large settlement. This is just not true. If there is an impending large dollar lawsuit against a company, then a financial liability is entered in the financial statements of that year. This liability affects that value of the company and can lower the stock price. Check out some financial statements and see for yourself.

    Seems most of the mega payouts are not for costs of death or hospital bills, but punitive.
    What you are suggesting is that when a large corporation is ordered to pay a huge fine, that in reality, they don’t pay, but simply passes to all the citizens of this country. How would it sound if a person is ordered to pay a large fine for a crime but was so privileged that he could pass the fine off to the rest of us? How would that denture future crime or negligence?

    Maybe the problem is that the legal system favors the large corporations that can afford to lobby our politicians. The absurd size of the payout is a symptom of litigation laws that companies use against each other in order to maximize their competitive effectiveness. But when the common citizen uses it, it is portrayed as somehow unfair or just a tool of the trial attorneys cabal.