An Insurance-Based Compensation System for Product-Related Injuries

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In recent years, an increasing number of commentators have begun to express doubts about the effectiveness of the tort system. According to these critics, tort law does not deter accidents, nor does it spread accident costs efficiently. Worst of all, the tort system is extremely expensive to operate. Some of this criticism has spilled over into the products liability area. Products liability law has been condemned as expensive, ineffective, and regressive; in addition, it has been blamed for higher product prices, foreign competition, problems within the liability insurance industry, corporate bankruptcies, lack of product development, and the removal of useful products from the market.

Much of the problem appears to lie with the concept of enterprise liability, which has provided the intellectual foundation for strict products liability for more than thirty years. The theory of enterprise liability assumes that product sellers are always in the best position to prevent injuries and to spread accident costs. However, not only is this proposition often untrue, but it has encouraged courts to invent new remedies for consumers and to impose new duties on producers whenever a new liability issue has arisen. Although the courts have not yet imposed absolute liability on product sellers, this steady expansion of liability has now reached the point where the entire system of products liability is in danger of collapsing under the weight of excessive producer liability.

This has led some reformers to recommend that the existing products liability regime be modified or replaced by a different system. Proposals have ranged from ingenious neo-contractual arrangements to comprehensive social insurance programs. One such alternative, which will be examined in greater detail below, is to replace the existing system of products liability with a statutory compensation scheme based on insurance principles. This approach assumes that consumers who buy a product also purchase protection against product-related injuries. In return for a "premium," which is reflected in the price of the product, the product seller agrees to compensate the consumer on a no-fault basis for certain types of product-related losses. Under such an arrangement, therefore, payments made by product sellers to accident victims are considered indemnification payments rather than damage awards. This perspective opens up many avenues that are foreclosed under the traditional enterprise liability rationale of products liability. For example, by rejecting enterprise liability, it is no longer necessary to design a products liability regime which must balance product safety and compensation goals; instead, the system can focus solely on providing compensation to accident victims at the cheapest cost.

In this article, I examine an approach under which product sellers would be obligated to reimburse injured consumers on a no-fault basis for economic losses and nothing more. This arrangement promises to be less complicated and cheaper to administer than the present products liability system. The article is divided into four parts. Part II analyzes the concept of enterprise liability and the assumptions that underlie it: (1) that consumers need protection against the superior knowledge and economic power of product manufacturers; (2) that strict liability will encourage manufacturers to optimize product safety; and (3) that manufacturers are better able than consumers to spread product-related losses. However, I find that all of these assumptions are suspect and, therefore, conclude that enterprise liability does not really provide a credible foundation for products liability.

Part III considers whether products liability can be conceptualized as a form of insurance. First, I examine the traditional theory which some commentators rely upon as a rationale for the existing system of products liability. I conclude that it is impossible to reconcile first-party insurance principles with the system of open-ended liability that prevails under products liability law. However, I also find that the insurance rationale will support a more modest compensation scheme under which producer liability is limited to net economic losses.

Part IV identifies a number of characteristics that one would expect to find in a coherent insurance-based compensation scheme for product-related injuries. These features include: (1) a strong regulatory compliance defense in design defect and failure to warn cases; (2) elimination of awards for nonpecuniary damages; (3) exclusion of punitive damage awards; (4) limitations on the doctrine of joint and several liability; (5) prohibition of suits against product sellers by employees who have already received workers compensation awards; and (6) abolition of the collateral source rule in products liability cases.

Finally, Part V addresses some additional issues that are relevant to the adoption of an insurance-based compensation scheme. One such issue is whether the implementation of an insurance-based compensation mechanism would adversely affect product safety. A second consideration is whether switching from the present products liability regime to one based on insurance principles would have undesirable distributional effects. Another concern is how attorneys' fees will be paid if damage awards are drastically reduced. A fourth issue is whether principles of comparative fault should be applied in products liability litigation. Yet another topic for discussion is whether product sellers should be allowed to increase or decrease their liability through the use of warranties and disclaimers. Finally, there is the question of whether an insurance-based scheme should be implemented at the state or the federal level.

Original languageAmerican English
Pages (from-to)185-273
JournalUniversity of Pittsburgh Law Review
Issue number3
StatePublished - Jan 1 1997


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