Social Insurance and the Autonomy of Private Law
posted by Nate Oman
Grading my secured transaction’s exam has got me thinking about the politics of private law. In particular, I think that debates about the proper level of government provided social insurance have a way of distorting our thinking about private law. Consider the much debated subordination of tort victims to secured creditors in bankruptcy. In law school I was taught that the debtor-friendly American bankruptcy system (and yes, even after the supposedly draconian 2005 amendments, it is still among the most debtor friendly bankruptcy laws around) was a substitute for our lamentable lack of a greater government funding for social insurance. Implicit in this line of argument, however, is that tort judgments are supposed to function as a kind of insurance mechanism.
Tort as insurance, however, doesn’t really make that much sense. From an economic point of view there is no a priori reason to suppose that tortfeasors can provide insurance at a lower cost than tort victims. Furthermore, the dominant philosophical theories of tort – corrective justice and civil recourse – don’t view damages as providing insurance to victims. Rather, damages are supposed to vindicate a moral claim by the plaintiff against the defendant, either to compensation or to the right of legitimate retaliation against the tortfeasor. Indeed, for a civil recourse theory in particular, the important thing about a tort system is that it allows a tort victim to act against the person who has wrong him. Driving the tortfeasor into bankruptcy may serve this purpose just as well as money damages, even if the victim ultimately receives pennies on the dollar in bankruptcy.
Indeed, if we take moral theories of private law seriously, then the traditional ideological positions in some of our legal debates get moved around in rather interesting ways. For example, a corrective justice theorist would be quite troubled by a tortfeasors ability to avoid paying compensation in bankruptcy (a “progressive” position) while at the same time being quite hostile to punitive damages (a “conservative” position). A civil recourse theory, on the other hand, would be less concerned about the subordination of tort victims to secured creditors in bankruptcy (a “conservative” position), while being quite a bit friendlier to claims for punitive damages (a “progressive” position). Even more interesting that this diversion from traditional ideological groupings, however, is the way that these theories are both more or less indifferent to the questions of social insurance that so dominated my own introduction to bankruptcy and commercial law.
December 16, 2009 at 5:51 pm
Posted in: Bankruptcy, Tort Law
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Responses (7)
A.J. Sutter - December 16, 2009 at 6:13 pm
“Tort as insurance, however, doesn’t really make that much sense. From an economic point of view there is no a priori reason to suppose that tortfeasors can provide insurance at a lower cost than tort victims.” — I had thought that the economic point of view was the more global one advocated by Milton Friedman, i.e., tort lawsuits were preferable to government regulations, including insurance systems that rely on taxes. Or is that passé?
Nate Oman - December 16, 2009 at 6:32 pm
There is a separate argument about the way in which tort law forces tortfeasors to internalize the costs of their behavior. This, however, is independent of the question of whether or not tort victims actually get paid anything. For example, I could create a system of fines that provided an optimal set of incentives for tortfeasors without there being any requirement that the fines be paid to tort victims. Indeed, the payment to the tort victims may actually create inefficient incentives by acting as a moral hazard.
My point is more limited, namely that tort law is an ineffective and inefficient way providing social insurance. Indeed, I think that tort is such a lousy potential insurance mechanism that thinking of it as insurance represents an interpretive mistake.
keepitprivate - December 16, 2009 at 9:50 pm
Nate, you are confused. The bankruptcy-as-social insurance argument is based on treating bankruptcy as a form of social insurance, not treating the tort system as a form of social insurance. Here is how it works: it is often socially valuable to give fresh start to a failed entrepreneur or an individual — it is socially valuable in cases when one\’s debts outweigh expected lifetime earnings, so that forcing a person to repay the entire debt would leave him no incentive to work at all, thereby removing him from the labor force, which is socially wasteful. We could have given such person a fresh start via a social insurance system — for example, by having the government repay bad debts. Instead, we can do it via the bankruptcy system, where bad debts are absorbed by creditors. In this way, creditors function as social insurers.
This stuff has nothing to do with torts.
john chung - December 17, 2009 at 8:18 am
keepitprivate: I believe Nate Oman’s summary of the reasoning is correct. Compare the availability of tort remedies and social insurance in European countries versus the U.S. The comparison shows there is a strong foundation for the view that it has everything to do with torts (as well as BK).
keepitprivate - December 17, 2009 at 12:40 pm
John Chung: the fact that the tort system can be thought of as a form of social insurance has nothing to do with the issue that Nate raised (and I quoted above) — why we treat the bankruptcy system as a form of social insurance. Bankruptcy can be treated as social insurance even if the bankrupt entity does not have a single tort creditor. The tort system can be treated as social insurance even if not a single involved party is bankrupt. Those are just apples and oranges.
Nate Oman - December 17, 2009 at 6:53 pm
keepitprivate: Your point is well taken. I agree with you that it is possible to consider tort as social insurance in isolation from bankruptcy as social insurance and vice-versa. Where the two strands of private-law-as-social-insurance intersect, in my opinion, is in debates over priorities under Article 9. I think that folks like Lynn LoPucki or Liz Warren would say something like “Bankruptcy ought to be debtor-friendly because the fresh start serves as social insurance, pushing the cost of unfortunate events on to creditors. On the other hand, we don’t want to let this private-law social insurance system undermine the role of tort as social insurance, which is what our current system of priorities does.”
My point is that if we view tort as doing something other than social insurance, then our attitude toward the subordination of tort victims may change and change in ways that don’t quite fit the boundaries of the traditional ideological camps.
keepitprivate - December 19, 2009 at 10:29 am
Nate: the issue of priority in bankruptcy strikes me as yet a third largely separate issue — separate from whether bankruptcy itself is a form of social insurance and whether tort is a form of social insurance. We can re-arrange priorities to help a debtor, to help a tort victim, to help other sympathetic creditors (e.g., child support), or to help the treasury. We can re-arrange priorities without permitting any bankruptcies whatsoever — say, by requiring that certain creditors are paid first while no debt is ever discharged. Or we can abolish any re-arrangements of priorities without changing the current rules re debt discharge. We can abolish the tort system without touching anything in the bankruptcy system, etc. Those are really all separate things.
People like Warren find these issues “complicated” because they want to engage in massive social engineering by using bodies of law that fit very poorly for it. Sure, if we refuse to enforce certain contracts to help the poor, and also refuse to enforce certain rules of corporate law to help employees, and also refuse to enforce banking regulations to help underprivileged communities, and so on, we will soon find everything very interrelated and very complex. But it’s not conceptually so, need not be so, and should not be so.
As a side note, I agree with you that the tort system is not a form of social insurance, and neither is bankruptcy.
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