Products Liability Law and Insurance Profitability
In the past decade there have been numerous legislative attempts to reform aspects of the common law of products liability. If the underlying regime of liability has even an attenuated effect on insurance markets, these reforms should have had some effect on the performance of products liability insurance. For a variety of reasons, however, evidence of that influence has been difficult to obtain. By far the richest source of data is the records of the Insurance Services Office (ISO), the data collection arm of the property/casualty insurance industry. Few studies based on that data have been performed. That W. Kip Viscusi has gained access to this data and has begun a major project analyzing it is therefore cause for celebration among those interested in the effect of tort law on liability insurance markets. Viscusi's article is a valuable step in the effort to understand how differences in products liability law influence the performance of products liability insurance. In this first of what will be a series of papers, he finds, among other things, that differences in products liability laws across states influence the loss ratios of products liability insurance in these states and that (through multivariate analysis) these statutes have a negative effect on premium levels as well. States that have enacted products liability statutes of various sorts-defining key concepts in products liability, articulating a state-of-the-art defense, imposing a specific products liability statute of limitations, or modifying the collateral source rule have lower products liability insurance loss ratios and (other things being equal) lower premiums than states that have not enacted these statutes.
There are a number of doubts that might be expressed about these findings. For example, Viscusi's analysis aggregates states whose products liability laws and economic conditions are quite varied. By focusing on the presence or absence of statutory provisions alone, he has not controlled for common-law rules that may render the laws of states being compared with each other more similar than he supposes. Also, some may quarrel with the results of his multivariate analysis. Nonetheless, I want to accept Viscusi's findings at face value. Instead of scrutinizing the viability of Viscusi's findings, I shall speculate about the lessons that can and cannot be drawn from these findings. If loss ratios and premiums are lower in states with statutes than in states without them, does this mean that the statutes reduce products liability insurance losses, or are there other explanations? Even if the statutes do reduce such losses, are the savings being returned to policyholders in the form of reduced premiums, or are insurers capturing a part of these savings? Notwithstanding Viscusi's admirable effort, these questions remain unanswered.