In fact, such information tends to be significantly uncertain, ex ante, to any potential individual plaintiff, who might also have to estimate whether or not a defendant has taken proper precaution. This article revisits the case in which the Hand formula was born and examines whether Judge Handâs ruling in that case would provide correct incentives for efficient levels of precaution. Legally, negligence occurs when 1) the defendant has a duty of care to the plaintiff, 2) the defendant breaches this duty, 3) there must be a factual causal connection between the breach and the harm and 4) the harm must not be too remote a consequence of the breach. For simplicity, we assume that the increments of care do not change L, which in this case is highly uncertain regardless of the level of care chosen. Hand is most famous for his rule for determining negligence in the U.S. v. Carroll Towing case. Under that formula, liability does not turn on notions of corrective justice or any other moral basis but on the respective costs of precaution and accidents. Society's net wealth or welfare is maximized by preventing only those accidents where B is less than PL.4 Thus, the Learned Hand formula is designed to maximize a social welfare function. Where the injurer or victim supposedly has this incentive, i.e. What is health economics? See, e.g. Before the fact of an accident, there is no way of knowing where within that range the actual level of harm will fall. Indeed, premia have risen steadily even as claims have fallen. There may well be practical considerations with this strategy. An interesting result of insurance markets is that for social costs to be minimized, both potential victim and injurer should take precautions equal to EVL. Nor do they know the likely harm should an accident occur. Such a man is Learned Hand. If the victim knows that the injurer has invested $60 in precaution, she will have to pay for any injury. This analysis excludes the expected cost of potential fatalities. automotive passive restraint systems, to reduce the accident cost EVL and the corresponding premium I, by increasing the actual cost of B.36. Health insurance solves this problem by pooling risks among the population, but it also increases the role of third-party payers, which reduces financial uncertainty but creates a fourth problem. Answer to Describe the Learned Hand Rule, and discuss the economic logic underlying it. carrots and sticks, to induce potential injurers and victims to reduce the likelihood of harm over time and thus lower social costs. Economy and health are inseparably linked, and life expectancy at birth is a measure of the overall health of a nation. As the table indicates, increasing the level of care would not necessarily lead to a reduction in the expected harm. If the P&C cycle is in the competitive phase,40 the premium may be lower than EVL and so expenditures of that level by a defendant on precaution might be insufficient. Table 2 illustrates the problem of extreme variance in the range of actual values. Consider the case of a government regulation requiring the installation of airbags in automobiles.41 This requirement was generally expected to lead to an overall reduction in the cost of harm, not by reducing the probability of accidents but by reducing the resulting harm.42 Essentially, such government regulation induces others to invest in technology that will reduce the liability component of the Learned Hand formula. If B equals or exceeds PL, then the defendant should not be held liable. the . Indeed, as a normative matter, judicial determinations of liability in accident cases might be improved by setting the burden of precaution using insurance market values as a baseline. The pragmatic formula can be seen from some examples on the Economica Ltd. website. Apparently, policy makers possess a fairly sophisticated understanding of how insurance can provide potentially liable parties with information about PL.46. The original description of the calculus was in United States v. Carroll Towing Co., in which an improperly secured barge had drifted away from a pier and caused â¦ We assume here that the probability of an accident is unchanged by the increase in B. This will raise costs on certain margins in the hope of lowering them on others. In effect, potential injurer and victims cannot make the correct level of investment (except by accident) because they cannot account for all the factors that could affect the liability variable L of the Learned Hand formula.12, Comparison of accident costs with different liability values. Premium rates drop as insurance companies compete vigorously to increase market share. Liberty lies in the hearts of men and women; when it dies there, no constitution, no law, no court can even do much to help it. The opportunity of insured individuals to gain benefits from internalizing a greater share of the cost of precaution may also lead to a further reduction in accident probabilities and/or levels of harm, further reducing social costs as well. The variance is a measure of the spread or dispersion from the expected value. The randomness of the liability component means that its value is difficult to predict. Even if tort plaintiffs and defendants do not know the factors the Learned Hand formula requires them to know and assess, they do know the price they pay, e.g. The $200 000 life value figure might appear to be low but it is the value the National Highway Transportation Safety Administration placed on human life. The variability of deductibles and premium levels also means that insurers will reward those who take on extra burdens of precaution, such as purchasing especially safe automobiles or purchasing alarm systems for their homes, with lower premium payments. Even when insurance is not compulsory, the existence of insurance markets, which create market prices for risk, provides useful information to potential injurers and victims about PL, ‘regardless of whether they actually purchase insurance’. While COVID-19 will affect individuals and communities in various ways, the effects of the pandemic as well as actions taken to address it are likely to be highly relevant for the Health Economics community. 1987), Posner (1998, pp. plaintiff complained and on attraction, judge Hand defined, The right scope of liability as Discovered, learned, found out. Why would a railroad increase its level of care if it was uncertain about whether or not the new level of care would exonerate it from liability? It calculates the expected value of harm—which we will term EVL to distinguish it from court estimates of PL—then charges a premium based on this information, which it offers to a largely competitive insurance market. Section 3 recasts the model to include valuations available from insurance markets. It is expected that I > EVL, so that the insurance will be purchased by those who are risk averse or who have, for other reasons such as their own reckless behaviour, calculated their expected value of an accident to be higher than the standard measure of EVL. Hart & Honoré (1985, pp.173, 343). First, consider whether the variance was so great that the original estimate of the harm becomes meaningless.21 Ford assumed, in its liability calculation, that the cost of injury from the fire hazard was $67 000. The Learned Hand formula is enshrined in the law-and-economics literature as the centerpiece of the courts´ way of determining negligence. Moreover, the insurance industry, along with the legislative process, creates a system of incentives and fines, i.e. Consider, e.g. Even though this is a strict liability case, it is illustrative of the determination of the liability component of the Learned Hand formula, where the possibility of the accident, even though extremely remote, is still within the range of reasonable foreseeability. The industry uses this information to influence the injurer's or victim's behaviour and establish the appropriate level of care. Health economics evidence may be required for a PMA product in the follow- Thus, even if this presupposes a continuation of $15 that a potential injurer must internalize, the social cost of accidents has fallen; specifically, the marginal benefit has increased by $20—the reduced expected costs of an accident—at a cost of $15, for a net social gain of $5. More specifically, we assume that the goal of the negligence system of tort law is not corrective justice but, as Calabresi (1970, pp. Health Economics: 1 - Principles of Health Economics. Cole & Grossman (2005, p. 215). Reducing the EVL may cause overall long-run social costs to fall, and B will likely fall over time. Therefore, individuals will adopt a minimum level of care instead of maximizing the costs avoidance measures. 1351 (Ex.Ch. In Table 3, the correct level of precaution is 4 units of care with B = I = PL = $65. Clearly, if insurance is offered in a particular case at a given rate, a defendant would have the responsibility to demonstrate that any amount spent on the precaution that was less costly than the premium satisfied the Hand formula nonetheless. 22-year-old single males pay more for automobile liability insurance. 5, Part 571, Standard # 208. Since the potential injurer and victim cannot know the potential liability factor, L, they cannot select the socially efficient level of care, B. This implies, of course, that the reasonable person of tort law would have knowledge of insurance premia. It is not simply that L is uncertain, but the possible values of L are completely random. When the cost of an accident—the monetary cost of harm, L, times its probability of occurring, P—exceeds the costs of prevention, B, then the accident should be prevented. The insurance industry is not concerned with who is at fault, if it insures both parties to the accident.47 It simply prorates the premium between the parties to account for the possibility that one of them will be at fault. Of course, the remaining 50% probability is important as well. Insurance contracts are not fair, however, and so she buys insurance but may have a deductible or a variable premium that will rise in the event she has ‘too many’ accidents. It furthers the University's objective of excellence in research, scholarship, and education by publishing worldwide, This PDF is available to Subscribers Only. This allows the individual injurer or victim to consider first the market-determined expected value of the harm (EVL) when establishing the desired level of care, B, and potential injurers or victims can economically account for all potential liabilities above EVL through additional insurance; i.e. Cole & Grossman (2005, pp. It is doubtful that the tort system, by itself, provides individual drivers with the information they would need to make such choices efficiently. Schwartz (1991, p. 1020). pedestrians). General Accounting Office, 1994, p. 22). Individuals may perceive the probability of the accident to be so low or uncertain that an investment in protective measures, B, will not be justified. In the algebraic terms of the Learned Hand formula, it is better to pay the potential injury, i.e. Therefore, he might have assumed that such potential harms were much greater than his own, and that the railroad properly accounted for them when operating its trains. Unbiased Analysis of Today's Healthcare Issues. You realize that there is a problem with the brakes. A decision to adopt accident-avoidance measures involves a comparison of up-front investment in care costs, B, to the reduction of potential liability costs, PL. We can, of course, assume that a potential tort defendant will learn from experience. For example, hazardous waste facilities, which are required by federal law to obtain insurance,45 find that the cost of coverage includes environmental assessments, site inspections and improved safety and security measures (see, e.g. This issue is discussed in Kunreuther (1996, pp. After relaxing the assumption that the level of liability is known, the Learned Hand formula no longer appears as a socially maximizing function with a stable equilibrium solution. Throughout this article, references to the ‘Learned Hand formula’ should be read as references to the economically refined version of that formula known as the ‘marginal Learned Hand formula’. Consequently, premium prices, though they provide information to potential victims and injurers at low cost, cannot be used as perfect substitutes for the cost of harm and thus do not tell a court the exact value of B. But in many (if not most) cases, insurance provides the best information available. However, individuals may perceive the potential liability of an accident to be so uncertain that the investment in protective measures will not be justified.14 Alternatively, high discount rates may result in the extreme, but highly remote, potential liabilities reduced in subjective value to near zero.15 Indeed, accidents where the risk is considered unknowable produce a low willingness to pay to avoid them.16 Individuals, when faced with uncertain liability, may not adopt cost-preventive measures in spite of known court-imposed liability. Pursuant to this statutory requirement, the Environmental Protection Agency promulgated regulations requiring TSDFs to possess adequate insurance coverage for any injuries caused to third parties or their properties. This formulation of the negligence rule has come to be known as the Hand Formula. This information, while clearly of great value, does not identify the specific range of harms or the factors that might make one sub-group of insured, e.g. The problem with viewing foreseeability as a functional relationship is that high transaction costs impede a party's ability to foresee the array of potential harms. Other costs of insurance are not represented for the sake of simplicity. Assuming that the premium I does reflect the EVL and the premium is used as a proxy for B, the result may be sufficient, but does it result in an ‘efficient’ level of investment in care? As noted above with respect to investment that is shifted by insurers to the insured, it is not immediately clear that such redirection of resources lowers social costs. 1860). Insurance Information Institute, ‘Facts and Statistics’. Assume that, e.g. Section 4 recognizes some limitations on the abilities of insurance markets to solve the information constraints of the Learned Hand formula, but notes that market signals and regulatory action might provide actors with information about EVL and create incentives to lower social costs in the long run. Judicial precedents may raise or lower the burden, though the baseline for judging sufficiency of care should be the market premium. Note that we emphasize the Hand rule for negligence of the defendant, which is the standard usage in the law and economics literature on torts. The article concludes with some implications from the analysis. The court can stand on the premium as a baseline datum that, absent defenses for insufficiency, constitutes a reason to impose liability on him. The liability column in Table 1 can be viewed as an after-the-fact determination of the realized level of harm. These values are presumed to be expected values because they were the potential liability for each of 180 possible deaths and 180 potential burns, i.e. Posner (1998, pp. Therefore, it was better to run the risk of not accounting for the true liability than to risk paying too much to avoid it. Health economics is a sub-discipline of economics, which is the study of how society uses scarce resources to meet its wants and needs. benefit analysis says should have been prevented. But to impose liability, under these circumstances, has the effect of reducing the investment in care because neither the injurer nor the victim has the power to control the various elements that affect liability. Ruderman et al. both within the health field and beyond. Hand claimed that negligence was to be found only if the burden (cost) of precautions was less than the probability of the accident multiplied by the gravity (cost) of the accident. in hurricane-prone areas, 22% of the population adopted disaster costs avoidance measures. 1947). Plaintiff and defendant are self-interested and their data inevitably are biased. If the investment will not prevent all types of injuries, then the original problem of insufficient allocation of resources associated with the Learned Hand formula remains. Consider the following hypothetical case from Table 3: Insurer A forces potential injurers to internalize an additional $15 in precaution, so that B rises to $75. One key benefit of insurance is that neither the injurer nor the victim is shackled with the burden of ‘take your victim as you find him’. 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