Injury Lawsuits Said To Cause Financial Crisis For Many US Companies

`Tort tax' burdens small-plane builders, but litigation advocates claim safety gains

AS he lifts a document from his desk, T. W. Wakefield's voice has a ``here we go again'' tone.

``This case just came in,'' says the vice president and general counsel of Cessna Aircraft Company, an airplane builder in Wichita, Kan. ``Farley v. Cessna, in Pennsylvania. The pilot and a passenger were killed last April when one of our single-engine Model 140s crashed. The plane was built in 1946 - 47 years old. Forty-seven years, and the next-of-kin say Cessna is still liable.''

``In other words,'' Mr. Wakefield says, ``Cessna has the deep pockets.''

It needs those deep pockets. Since 1986, the company ``has spent $20 million to $25 million each year to defend hundreds of product-liability cases,'' Russell Meyer Jr., Cessna chairman and chief executive officer, told a United States Senate subcommittee last fall.

``Crash cases are very expensive to defend,'' says Peter Puciloski, an aviation lawyer in Boston. ``There are no fender-benders in this field.... A manufacturer can spend $1 million to defend a case, even if it wins. That's why the companies often settle, even when their liability is slim.''

The general aviation industry (builders of all planes except commercial airliners and military aircraft) has a unique liability profile, since the longevity of airplanes gives the industry an unusually long ``liability tail.''

Still, executives and lawyers for companies all over America - manufacturers of everything from cars, heavy machinery, and power tools to ladders, sports equipment, and prescription drugs, as well as their suppliers and distributers - sympathize with Wakefield's frustration over a legal system that he contends is ``unfair.''

For many business-people, actual or potential exposure to personal-injury lawsuits imposes a heavy cost. Some companies have been driven out of business or into bankruptcy by litigation costs.

Piper Aircraft Corporation, a Cessna competitor, has been in Chapter 11 since 1991, owing to liability suits, it says. Last month, Keene Corporation became the 18th company to file for bankruptcy as a result of asbestos claims: Keene has paid out $450 million in litigation and settlement costs for an insulation subsidiary it purchased for $8 million in 1968 - more than 20 years after most of the plaintiffs were exposed to asbestos in US shipyards during World War II.

Moreover, some executives and economists contend, the ``tort tax'' - the amount added to a product's price to cover liability costs and insurance - inhibits the competitiveness of American products in international markets. And critics of the legal system argue that fear of lawsuits causes companies to discontinue products or deters product innovation.

The Product Liability Coordinating Committee, an industry group, cites recent effects of ``the litigation climate existing in the United States'':

* Monsanto Company abandoned development of a safe substitute for asbestos.

* Of the 20 makers of football helmets in 1975, only two companies still manufacture the product; one of them, Riddell Inc., says 50 percent of the price of a helmet is attributable to liability-related costs.

* ``Liability concerns have had negative effects'' on research for an AIDS vaccine, Science magazine reported in 1992.

From such reports and the writings of researchers like Peter Huber and Walter Olson of the Manhattan Institute (a conservative think tank in New York), who popularized the notion of a ``litigation explosion,'' one could infer that personal-injury lawsuits and other litigation have reached crisis proportions.

The issue is slippery, however. While tort-reform literature is rife with horror stories about ``bet your company'' lawsuits and entire industries awash in ``frivolous'' claims, hard numbers on the economic effects of litigation are elusive.

In a 1991 speech to the American Bar Association advocating tort reform, then-Vice President Dan Quayle - drawing on the research of Mr. Huber and others - put the total tort bill at $300 billion a year, including direct and indirect costs. Some critics have deemed that number wildly inflated, however.

A 1992 study by Tillinghast, an insurance actuarial firm, estimated direct tort-insurance costs to be $130 billion a year, of which about $90 billion goes for motor-vehicle coverage. Citing these figures in an article last year, law professors Kenneth Abraham, Robert Rabin, and Paul Weiler wrote, ``Only a minor share of the [accident-insurance] money is expended for the product and medical litigation that attracts most of the popular and political attention.''

Also, amid the sound and fury over tort reform and all the lawyer jokes, one should not lose sight of the fact that thousands of people each year are killed, maimed, or injured by products that are, in legal terms, ``defective,'' say consumer activists and plaintiffs' lawyers.

Moreover, many product-related deaths and injuries are not compensated through the legal system. According to Professors Abraham, Rabin, and Weiler, ``the parties seeking cutbacks in tort litigation do not highlight the scholarly evidence that, relative to the number of potential `high stakes' tort claims, only a minority of suits are actually filed.''

``The only `litigation explosion' is in lawsuits by businesses against other businesses,'' says Barry Nace, president of the Association of Trial Lawyers of America. ``The number of product-liability and medical-malpractice suits has actually declined in recent years. The so-called litigation explosion is a figment either of poor research or of intentionally misleading reports by groups like the Manhattan Institute, which is funded and controlled by big business.''

Whether or not the ``litigation explosion'' has been the subject of some hype and scare-mongering by business groups, academics, and politicians, a consensus is growing among legal scholars that the tort system needs an overhaul to make it more efficient, predictable in its outcomes, and equitable in its allotment of risks and compensation. A number of reform proposals are under consideration in Congress and state legislatures (see following story).

But such bills do not redress firms' main liability problems, says James Seifert, senior attorney for Toro Company, a Minneapolis maker of lawn mowers, snow blowers, and other equipment.

First, he says, a manufacturer ``can't be certain it's complying with the law at the design stage. You can hire the best engineers, have a very disciplined design process, try to foresee every possible use and misuse of the product, and you still don't know if a future jury may conclude that the product was defective.''

To minimize the problem, Mr. Seifert says, he has ``tried to create a liability-prevention culture in the company. We map out how a product could be misused, then design around it or determine what warnings we must give to users.''

The second major problem Seifert identifies is that ``you never have issue finality. Even if a court in one state says a product is defect-free, another plaintiff in exactly the same circumstances can sue you in a different state and win a big judgment.''

``Issue finality'' is the legal reform the general aviation industry values most. It is lobbying for a bill in Congress that would create a ``statute of repose,'' barring product-liability suits against the manufacturer of an airplane that has been in service more than 15 years.

Even though the industry's safety record has improved steadily for four decades (see chart for accident rates since 1972), and even though aircraft must meet the certification standards of the Federal Aviation Administration, product-liability costs for airplane builders have soared in recent years. They jumped from $24 million in 1977 to $210 million in 1985; per fatality, the costs rose from $17,000 to $223,600.

Litigation costs and the companies' related inability to obtain adequate insurance coverage are the main reasons that Piper is in bankruptcy and that Cessna stopped making single-engine piston aircraft in 1986, industry executives say.

Moreover, they say, the price increases necessary to cover litigation costs caused a 95 percent drop in factory shipments of general aviation aircraft between 1978 and 1992 (see chart). The tort tax represents 30 to 40 percent of the price of many US small planes today, according to the General Aviation Manufacturers Association.

But Lee Kreindler, a New York lawyer who represents plaintiffs in crash cases, says: ``If litigation is the major cause of general aviation's problems - and I'm not sure that's true - that just shows the tort system is working. The system is weeding out marginal products. There are a lot of unsafe planes and components out there, and they're failing.''

The proposed federal statute of repose strikes a fair balance between airplane users and the manufacturers, says E. Glenn Parr, Piper Aircraft's general counsel. ``Most genuine design defects become evident within 15 years,'' he says. ``And cutting off the liability tail for planes that have been in service longer than that will restore litigation predictability ... so we can be an insurable risk again.''

Wakefield, the Cessna lawyer, says the statute of repose also would reduce juries' ability to second-guess aviation designers. ``Jurors listen to the plaintiffs' safety experts, and they retrospectively apply today's state of the art to design decisions made 30 or 40 years ago,'' he says.

But Mr. Kreindler says the statute strikes the wrong balance between manufacturers and the ``innocent victims - especially surviving family members - of defective aircraft, whenever they were built.''

With or without a statute of repose, aviation defense lawyers know they will always face uphill battles in courts of law. ``Even when our planes aren't the cause of accidents,'' Wakefield says, ``juries look at burn victims or grieving families, and a big sympathy factor comes into play.''

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