Require Legal Liability Insurance

The point of liability law is mainly to induce good behavior by having courts threaten to make related people pay cash later if a bad thing happens. The law tries to set who would pay how much to whom after what events in order to induce such people to take good care, so as to minimize the sum of the costs of bad things happening, care taken to avoid them, and the legal process itself.

One thing that limits the ability of law to make these choices well is the fact that most people have limited amounts of the kinds of assets that the legal system is willing to grab to settle a lawsuit. Like cash, stocks, and on. Some people are “judgement proof”, meaning they have none of these things. Most others have some assets, but substantially less than the law might want to make them pay in some situations.

Because most people have limited assets in this sense, those who bring lawsuits typically focus their attention on related parties with “deep pockets”, i.e., those who have far more assets. If such parties have any involvement at all in some bad event, lawsuits focus on blaming them and trying to make them pay.

This focus on deep pockets seems a clear failure of the system. Liability should instead be chosen based on the usual legal criteria of who could have most cheaply prevented the bad event, who could have reasonably foreseen the event in order to target their prevention efforts, and who did or did not take sufficient levels of care given such things.

If people had more assets that they could pay in the event they were held liable for a bad event, the law would have more options. It wouldn’t have to make them pay more, but it could do so if the situation seemed to warrant it.

One kind of solution is to allow the legal system to touch more kinds of assets. For example, in many ancient societies you could be sold into slavery to pay legal debts. Or your larger family clan might be held liable for your actions. While many places today have a homestead exemption that prevents some kinds of creditors from taking a primary home to cover debts, the law could have fewer such exceptions. However, many people feel uncomfortable with such approaches.

A different solution, one that should induce less of this discomfort, is to require people to buy general legal liability insurance. In many places today all drivers are required to buy insurance for auto accident liability up to stated amounts. The idea here is to just generalize that to all legal liability. We’d pick some minimum amount everyone should be ready to pay, say one million dollars. Then everyone would have to find an insurance company willing to cover them for that amount. If they were held liable by a court, they’d personally pay what they could out of their personal assets, and then the insurance firm would pay the rest.

Insurance firms would of course charge you different premiums, based on their estimates of how many assets you have and your likelihood of being held liable for bad events. To convince them you are a low risk, you could show them many things about yourself, and even let them continually monitor you in many ways.

Of course there is a cost to the insurance process, and there would remain some hidden info and actions which would produce some transfers between people who look alike to insurance firms, and make most people not quite as careful as they ideally would. But surely this should move care in the right direction, compared to a system where people get sued less because they don’t have enough money to pay.

Well yes, it is possible that the whole legal system is just making everyone pay too much across the board for all bad events. In which case making people able to pay more just makes things worse. But if we think this is the situation we should just cut back on the legal system, starting by making it harder to sue parties with deep pockets. Maybe we should limit all parties to a max liability of a few tens of thousands of dollars.

But if you don’t want to cut back on the liability of those with deep pockets, and if you accept that deep pocket folks aren’t actually as more responsible for bad events, surely not enough to explain how much more often they are sued, then you gotta think it would be good if other people could be held more liable than they are today.

So you should want to require general legal liability insurance. And then we’d all have to pay a bit more, but we’d all have fewer bad events. Which should be worth the trade, if the legal system is close to doing the right thing now with our limited abilities to pay.

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