Give the Fed Input on Lawsuit Interest Rates

For seven years, the Federal Reserve has kept interest rates at zero to help encourage a fledgling economy to pick up steam. During this time, interest rates for lawsuit award winners in up to 20 states have been as high as 12 percent.

When lawsuit awards are paid out over time, interest payments are typically tacked onto the judgment to compensate for the lost time value of money. However, in many states the interest rate paid does not necessarily reflect the current economy. Twenty states have immobile, flat interest rates, ranging anywhere from six percent to 12 percent. In bull markets, this means plaintiffs can be undercompensated for the money the defendant owes them. In bearish times, plaintiffs can be overcompensated and defendants can be required to pay inflated verdicts.

The fix is simple and undeniable. The ALEC model Prejudgment and Post-Judgment Interest Act aligns lawsuit interest rates with current market conditions. It ties the interest rate paid to a fluctuating published interest rate, like the prime rate developed by the Federal Reserve. States have the discretion to add additional percentage points to the fluctuating rate. The important point is to have a rate that ebbs and flows with the economy.

While the Fed is likely on the verge of increasing interest rates to keep them in line with economic conditions, state legislators should consider updating their laws to normalize lawsuit interest rates and bring reasonability to state lawsuit systems.

Consider the examples of Washington and Michigan.