September 23, 2009

"Saving Lives Through Punitive Damages"

Professors Joni Hersch and W. Kip Viscusi have posted a paper on SSRN entitled "Saving Lives Through Punitive Damages." From the title, you might expect this paper to assert one of the traditional arguments in favor of punitive damages: that the threat of unpredictably large punitive damages awards is necessary to deter corporate misconduct and protect consumer safety. In fact, the article takes a different approach. Here's an excerpt from the abstract:

This article proposes that the value of statistical life be used to set the total damages amount needed for deterrence when punitive damages are warranted in wrongful death cases. The appropriate level of damages should be achieved by adjusting the value of punitive damages. . . . The U.S. Supreme Court’s focus on punitive damages ratios is misplaced, as it is the total damages amount, not the ratio, that is instrumental. The criteria for evaluating punitive damages in bodily injury cases should be different than for property damages cases.

You may be wondering, as I was, exactly how "the value of statistical life" is calculated. In a nutshell, the value of statistical life is somewhere between $5 million and $9 million. Here's an explanation from the article:

To illustrate the VSL concept, consider the following example. Suppose a worker is willing to accept a fatality risk of 1/10,000 in return for annual wage compensation of $900. The value of statistical life, or the value per unit risk, is $900 divided by 1/10,000, or $9 million. Viewed somewhat differently, if 10,000 workers were each exposed to a 1/10,000 risk of death and each required $900 in compensation to face this risk, there would be a total of $9 million in compensation paid for the 1 expected, or statistical, death. By the same token, these workers would be willing to pay $900 for a fatality risk reduction of 1/10,000. Thus, the buying price and selling price for changes in risk are the same for very small changes in risk.

The VSL approach is accepted methodology within the economics literature and government agencies. Dozens of peer reviewed studies that estimate the VSL have been published in major economics journals, and the methodology has been recommended for use by government agencies by the U.S. Office of Management and Budget. While the values used by government agencies differ and have changed over time, most agencies now use figures in the range of $5 million to $9 million. Here we will focus on the $9 million figure for concreteness.

As the authors point out, this approach would sometimes yield ratios of punitive damages to compensatory damages exceeding 1-to-1, and possibly exceeding single digits. On the other hand, this approach would not allow 8 or 9-figure awards to a single plaintiff, like the $50 million punitive damages award affirmed by the California Court of Appeal in Boeken v. Philip v. Morris.

This is an entirely academic exercise, because the states are not likely to abandon their traditional methods for awarding punitive damages. I can just hear the howls that would be generated by this approach. Critics would say it reduces the value of human life to a cold statistical computation. No state legislator is going to get behind that one. But this proposal is nonetheless a very thought-provoking and innovative solution to a problem (the lack of any concrete standards for imposing punitive damages in personal injury cases) that has long plagued American tort law.

Hat tip: Torts Prof Blog.