Lawsuit Reform

States Eliminate ‘Phantom Damages’ to Curtail Excessive Lawsuit Judgments

Medical care services, like automobiles or goods in a flea market, possess a list price that can often vary greatly from the price ultimately paid by the customer for the item. This ‘sticker’ price represents not the value of the item, but a starting point or guideline, beneath which the customer is expected to pay.

Nonetheless, it is the sticker price, not the price actually paid, that is often used to determine economic damages for medical expenses in personal injury litigation. The plaintiff in such a case thus profits from an inflated reimbursement; rather than making the plaintiff whole by covering the victim’s expenses, the defendant pays damages in excess of what the injury cost the plaintiff and/or his insurer, in addition to any noneconomic or punitive damages. These damages represent so-called ‘phantom damages’, since no party ever bore the cost these damages aim to reimburse.

ALEC has developed a common-sense model bill to address this transparent—and easily correctable—inconsistency in the purpose of personal injury litigation, which is to fairly reimburse victims for injuries resulting from the fault of another. The Phantom Damages Elimination Act limits economic damages, or damages as reimbursement for economic loss, to the amount actually paid by the plaintiff or his insurer.

The bill does not directly limit noneconomic damages or punitive damages, though since courts often determine noneconomic damages as a multiplier of the economic, it can be an effective tool for reining in excessive lawsuit judgments.

The bill has proved difficult to rebut by those who oppose civil justice reform. Eliminating phantom damages in no way impedes a victim’s access to justice, but it provides real benefits by lowering the cost of litigation.

In the 2012 legislative session, the bill has been introduced in five states: Arizona, Florida, Indiana, New Hampshire and South Dakota. The bill is not without its detractors among the organized personal injury bar, and in California there is a bill by Senate President Pro Tempore Darrell Steinberg to undo a California Supreme Court ruling that eliminated phantom damages. Wrote the court in a decision that earned California an unusual spot in the American Tort Reform Association’s (ATRA) annual “Points of Light” feature, “no such recovery is allowed, for the simple reason that the injured plaintiff did not suffer any economic loss in that amount.”

Elimination of phantom damages does not deprive the plaintiff of any legitimate reimbursement, but it deprives plaintiffs’ attorneys of a key tool for producing inflated verdicts and thus higher attorneys’ fees. A blog post on ATRA’s Judicial Hellholes website does not mince words in calling Senator Stenberg’s bill a shameless favor for the personal injury bar at the expense of common sense.

There is an economic fallacy to Steinberg’s argument in addition to overturning a just legal precedent. In attempting to justify the unjustifiable, his bill proposes that “To ensure the public policy of all injured persons being compensated equally, an injured person shall be entitled to recover the reasonable value of medical services provided without regard to the amount actually paid.” The practical result of this public policy goal, however, is merely that some plaintiff’s will profit more than others from their injuries.

Moreover, defining the ‘reasonable value’ of medical services ‘without regard to the amount actually paid’ is a ludicrous endeavor. Even in a market as heavily regulated as health care, prices represent a complex exchange of information involving, among other factors, the subjective value placed on a service by the purchaser. To speak of an objective reasonable value for medical services apart from price is merely an arbitrary inflation of the cost, a transparent attempt to inflate damages, and thus a transfer of wealth to the personal injury bar.

In Depth: Lawsuit Reform

State legal systems and the liability they exert on businesses and individuals are a disincentive to bad behavior and allow fair players to succeed in the marketplace. When lawsuits inappropriately punish good actors, resources are sucked out of the business economy, away from research & development and job creation. Lawsuit…

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