As noted above with respect to investment that is shifted by insurers to the insured, it is not immediately clear that such redirection of resources lowers social costs. But in a negligence regime governed by the Hand formula, no precautionary measures should be taken unless the expected value of the injury PL is greater than the burden B. If liability, L, is substantially uncertain, parties are likely to either over-invest or under-invest in precaution, B. Should defense lawyers and prosecutors be appointed as judges? As the market softens to the point that profits diminish or vanish completely, the capital needed to underwrite new business is depleted’.39 In other phases of the cycle, premium rates rise to such an extent that the market may become highly constricted as insurers try to rebuild profits by raising premium rates. The Learned Hand formula is an algebraic function that will result in accident cost minimization when the variables are known by the various actors engaged in risk-creating behaviour. It is not the ruthless, the unbridled will; it is not freedom to do as one likes. It might be the case that insurers will try to induce additional expenditures on precaution outside of the insurance premium, raising B by at least as much as I falls. The insurance industry internalizes the problem of extreme liability situations and spreads it among the insured. The model of insurance markets and their effects described above gives an idea of how insurance markets can provide at least a starting point for a solution to the informational constraints of the Learned Hand formula. Moreover, there is no mechanism to ensure the correct level of investment in harm prevention. Furthermore, since the courts would observe the premium and understand that it represents the cost of harm, it would also represent the value of B. So, as P or L changes in an insurer's calculation because of new information, I changes and so should B. The problem is that the tort system, by itself, often fails to provide the potential victims or injurers with the information they need to make rational decisions about the levels of precaution. Health behavior. United States v. Carroll Towing Co., 159 F.2d 169 (2d Cir. If an insurer attempts to maintain premia at $60, a competitive market will lead to entry and a decline in the price to $40. Law and economics scholars have written extensively about how insurance markets affect the tort system. Thus, the plaintiff's injury, L, in Vaughan was just one point on a continuum of potential injuries and not sufficient to provide the knowledge necessary for him to make efficient investment decisions in care, B. Search for other works by this author on: Principal, Cearley & Thompson, Attorneys at Law, 220 W. Washington Street, Suite D, Lebanon, IN 46052, USA, R. Bruce Townsend Professor of Law, Indiana University School of Law at Indianapolis, 530 West New York Street, Indianapolis, IN 46202-3225, USA. The variance is a measure of the spread or dispersion from the expected value. All rights reserved. In the United States, the calculus of negligence, also known as the Hand rule, Hand formula, or BPL formula, is a term coined by Judge Learned Hand and describes a process for determining whether a legal duty of care has been breached. In three other cases, $1 would have been insufficient but $11 would have sufficed. The insurance industry is an efficient means of gathering information on the nature and costs of accidents. Health economics evidence may be required for a PMA product in the follow- That is, increasing the burden of precaution, B, may not reduce the expected liability, PL. He notes the ‘accident-prevention effect of liability insurance’. 26–29) has put it, to minimize the sum of the costs of accidents, accident avoidance and judicial administration. The Learned Hand formula is an algebraic formula (B = PL), according to which liability turns on the relation between investment in precaution (B) and the product of the probability (P) and magnitude (L) of harm resulting from the accident. Therefore, it was better to run the risk of not accounting for the true liability than to risk paying too much to avoid it. 180–181). However, regulatory action can work both ways. But this is really the wrong question. This lecture is aiming to illustrate the role of economics in health care from a public health prospective and address the efficient use of economics in both health and health care. But while government can induce change, it cannot ensure that those changes will be efficiency enhancing.43. As a result, the company decides the actual value of L is $675 000 (an increase in the cost of harm by more than a factor of 10). A list of Web sites and a Bibliography for improving access to health economics information is also linked for viewing. Foreseeability in torts is crucial to the calculation of the defendant's burden, but without considering the function of insurance, the court's situation is highly problematic because the courts often fail to account for the individual injurer's and victim's inability to foresee the consequences of their actions when establishing liability. As economists have shown,37 if one insures and knows that insurance constitutes a sufficient measure of precaution, the individual will be less cautious in her behaviour actually raising the probability (and so the EVL) of accidents. Nor do they know the likely harm should an accident occur. The Learned Hand Rule, and discuss the economic logic . Hart & Honoré (1985, pp.173, 343). The reasons given are (a) underestimation of the probability of the disaster and (b) high consumer discount rates. This freedom from negligence allows the industry to account for the unique characteristics of the insured. Because insurance firms invest in acquiring precisely the information that establishes the probabilities and costs of accidents—information that is too costly for individuals to acquire on their own, for reasons having to do with economies of scale and cost spreading—insurance markets partially solve the problems connected with the tort system's inability on its own to gather and process that kind of information. Insurance markets (along with regulatory measures and precedent) provide data that can guide the courts in understanding the appropriate level of investment in care and thus the determination of B. pedestrians). As the Insurance Information Institute explains, ‘A dominant factor in the property/casualty insurance cycle is intense competition within the industry. “Health economics” as a course is meant to give medical, health officer and other paramedical students basic principles regarding economics and its application to the health sector. and . This illustrates the case where, given the assumption that EVL = I = B, the static equilibrium will be stable at $65, and B can be determined at negligible administrative cost by the court. However, the direction of the effect is unclear in this instance. Health Economics I: Basic Economic Princi~les ic illustration of the data in Table 2 shows inverse relationship between the price of pizzas and the quantity demanded. Section 2 explains why the formula fails to achieve efficient outcomes when the values of any of its elements are substantially uncertain. Health economics is a sub-discipline of economics, which is the study of how society uses scarce resources to meet its wants and needs. I cannot define it; I can only tell you my own faith. Since Judge Learned Hand first penned the famous algebraic expression, B = PL, that came to bear his name,1 judges, lawyers, legal scholars and economists have debated its meaning, significance and limitations.2 The formula instructs potential tort parties to base their levels of precaution on three variables: (1) the probability, P, that an accident will occur; (2) the magnitude, L, of resulting harm, if any accident occurs, and (3) the cost of precautions, B, that would reduce the expected harm.3 Parties are supposed to factor these variables into a comparative benefit-cost analysis, prior to engaging in activities that might result in costly accidents, to determine efficient levels of care. Health economics seeks to facilitate decision making by offering an explicit decision making framework based on the principle of efficiency. But as already noted, an increase in B will have an impact on P and L. Thus, the probability of an accident decreases over time by one-third, from 6% to 4%. "A change in quantity demanded refers to movement along a given demand Before the fact of an accident, there is no way of knowing where within that range the actual level of harm will fall. Judge Hand was explicit that the potential injurer needed to consider the particular circumstances that raised or lowered his liability: “[T]he likelihood that a barge will break from her fasts and the damage she will do, vary with the place and time; for example, if a storm threatens, the danger is greater; so it is, if she is in a crowded harbour where moored barges must be constantly shifted about.”32 Under these strictures, a level of care set at the market rate for insurance, which is greater than the EVL, might nevertheless be too low for the circumstances. The court would need to come up with an amortization schedule, which courts certainly can do, to match the one-time cost of precaution with the longer-term cost of insurance coverage. All insurance markets are subject to a significant amount of regulatory oversight and direction. 679, 157 Eng.Rep. 1987). In Table 3, the correct level of precaution is 4 units of care with B = I = PL = $65. of . In theory, the lowest cost solution for the potential victim and the injurer would be to contract and jointly pay one premium I. a year. Therefore, based on the court's determination of how much care ‘should’ have been taken, the court will assess liability for the accident. The insurance cycle does not negate the value of insurance information in the effort to calculate B. Law and economics scholars generally agree, however, that Judge Hand's original version of the formula was deficient because it was premised on total, rather than marginal, costs, see, e.g. Hand was also famous for his ‘Spirit of Liberty‘ address in New York’s Central Park in 1944. Abstract. It will never be perfect—all estimates are less than perfect. This segment of the industry, so far from facing competitive pressures along the lines of P&C, has been according to some arguably cartel-like, since the McCarran–Ferguson Act exempted insurance companies from most Federal antitrust laws (see King, 2003). Each of these decisions can bear on the probability of accidents, P, and the magnitude of harm, L, resulting from an accident. 22-year-old single males pay more for automobile liability insurance. Another characteristic of insurance markets makes a market premium a less than perfect proxy for the level of B. The industry uses this information to influence the injurer's or victim's behaviour and establish the appropriate level of care. But see Grayston (1973) (finding empirically that liability insurance actually added to the tort system's deterrent effect with respect to automobile accidents). Though there may be dynamic efficiency gains from insurance markets, the fact that insurance markets may achieve them by forcing costly changes in the behaviour of the insured complicates the value of insurance market prices as a solution to the information problem of the Learned Hand formula. where it is always known to be precisely equal to the expected value of harm (EVL), and the market is perfectly competitive so that the premium will converge on a price and quantity based on the forces of supply and demand. Consider, e.g. In these cases, expenditure of $1 in precaution would have more than satisfied the Learned Hand formula and exonerated Ford from liability. We assume here that the probability of an accident is unchanged by the increase in B. Premium rates drop as insurance companies compete vigorously to increase market share. Such a man is Learned Hand. The spirit of liberty is the spirit which is not too sure that it is right; the spirit of liberty is the spirit which seeks to understand the mind of other men and women; the spirit of liberty is the spirit which weighs their interests alongside its own without bias; the spirit of liberty remembers that not even a sparrow falls to earth unheeded; the spirit of liberty is the spirit of Him who, near two thousand years ago, taught mankind that lesson it has never learned but never quite forgotten; that there may be a kingdom where the least shall be heard and considered side by side with the greatest. Consequently, while insurance can provide a measure of EVL, the degree to which that measure diverges from B still must be determined by the court. These data do not solve the dilemma of the Learned Hand formula, but they can provide a starting point, a partial solution to a problem that would otherwise remain unsolved. Learned Hand, American jurist whose tough and sometimes profound mind, philosophical skepticism, and faith in the United States were employed throughout a record tenure as a federal judge (52 years, from April 10, 1909, until his death). The Resource Conservation and Recovery Act Amendments of 1984, 49 U.S.C. This paper assumes a law and economics perspective on negligence. For simplicity, we assume that the increments of care do not change L, which in this case is highly uncertain regardless of the level of care chosen. However, the burden, B, is just one component of the formula and the other factors are outside the party's control. The Hand Formula basically says that if it would be cheaper for you to prevent the injury than the expected losses, you breached a duty of care. It is not simply that L is uncertain, but the possible values of L are completely random. Apparently, policy makers possess a fairly sophisticated understanding of how insurance can provide potentially liable parties with information about PL.46. Though we refer to P&C as competitive, it should be noted that it is far from the ‘perfect’ competition model of economics textbooks. The fact that she can buy insurance from the market at a discount means that she will be more likely to indulge in risky behaviour, since the market is bearing a disproportionate amount of her risk. For example, automobile accidents may have a minimum expected liability of $2000 property damage and $4000 personal injury. Consider the classic strict liability case of Grimshaw v. Ford Motor Co.,17 where Ford decided not to invest in a device to prevent the gas tank of a Ford Pinto from rupturing and exploding after a rear-end collision. This quarter I am a Teacher’s Assistant in a Law and Economics class at UCSD. Surprisingly, however, scholars have overlooked one of the most important salutary functions that insurance serves for the tort system: it provides much of the information that courts need to apply the marginal Learned Hand formula in negligence cases. Answer to Describe the Learned Hand Rule, and discuss the economic logic underlying it. Health economics views health and health care as an economic good (as in goods and services) and is predominately concerned with how society While COVID-19 will affect individuals and communities in various ways, the effects of the pandemic as well as actions taken to address it are likely to be highly relevant for the Health Economics community. both within the health field and beyond. In this instance, a potential injurer has an informational advantage over the insurance company, which can only know the average EVL and not the specific mindset of any individual. Incorporating implicit knowledge into the Bayesian model of prior conviction evidence: some reality checks for the theory of comparative propensity, An epistemic interpretation of the posterior likelihood ratio distribution. Further, it is unlikely that an individual will comprehend the expected liability of any potential accident. It is a measure of the tendency for observations to depart from a central value. (1947) is canonized in the law-and-economics literatu re as the first use of cost-benefit analysis for determining negligence and assigning liability. The original description of the calculus was in United States v. Carroll Towing Co., in which an improperly secured barge had drifted away from a pier and caused … McCarty v. Pheasant Run, Inc., 826 F.2d 1554, 1557 (7th Cir. 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