(a) Statutes of limitation and repose

One of the key principles of the legal system specifies that any individual who seeks the court’s help to redress a perceived injustice should do so in a timely manner. This principle is traditionally governed by laws known as statutes of limitation. Historically, limitation periods were created to serve three important functions. First, they aim to protect the defendant against any claim brought beyond a reasonable period of time, irrespective of the merits of the claim.Footnote ²¹ This is necessary, otherwise the defendant would be in a perpetually vulnerable position where he could be sued for his errors at any time. The defendant may be providing an essential function for the benefit of society; without protection by statutes of limitation, the defendant may be discouraged from performing such a function, to the detriment of society. Nonetheless, statutes of limitation neither absolve the defendant from his responsibilities nor bar compensation to the victim. The setting of a limitation period thus ensures fairness for both the claimant and defendant while maintaining a balance that is beneficial to society.

The second objective of limitation periods is to ensure that any evidence presented to the court is sufficiently cogent. It has been argued that a claimant who has sustained harm is more likely than the defendant to recall the events leading to that harm.Footnote ²² Such recall bias would put the defendant in an extremely disadvantageous position due to the difficulty in tracing the facts of the event.Footnote ²³ The court’s ability to provide a fair verdict would also be impaired, thus threatening public confidence in judicial outcomes. The societal implications would be unfair, inefficient trials and a waste of limited public resources.Footnote ²⁴

The third objective of limitation periods is to avoid unnecessary delay in dispute resolution. Through statutes of limitation, claimants are required to exercise their rights to sue with due diligence by instituting proceedings ‘as soon as it is reasonably possible for them to do so’.Footnote ²⁵

In the US, initial statutes of limitation for medical malpractice were part of the general civil statutes of limitation. However, in recent decades, many states have implemented reforms to enact special statutes of limitation for medical malpractice actions; these special limitation periods are shorter than those for other lawsuits such as breach of contract or property damage.Footnote ²⁶ The second aspect of reform involves the ‘discovery rule’. This rule provides that an action does not accrue until the damage caused by a negligent act is sustained and capable of ascertainment.Footnote ²⁷ The discovery rule generally allows malpractice action to be filed provided that this is done within the limitation period from the onset of the claimant’s knowledge of the alleged negligence. The discovery rule appears to support rather than discourage litigation, but its application in medical malpractice lawsuits may be restricted. For example, in Missouri and New York, the discovery rule application is restricted to cases of retained foreign objects; this means that for other medical malpractice cases, the limitation period counts from the date of the alleged act of negligence irrespective of when the damage is discovered.Footnote ²⁸

The third aspect of reform involves the statute of repose. This refers to a period of time that has lapsed from the date of the alleged negligent act. Although this is strictly not a reform of the statute of limitation, it affects the limitation period used for barring late claims. A person who brings an action within the allowed limitation period may still be barred if he does so after the period of repose. Some North American states such as Kansas and Illinois have enacted short periods of repose (four years) to effectively weed out any delayed claims.

In the UK, various reforms have taken place with respect to the statute of limitation. The Limitation Act 1939 provided for a limitation period of six years, running from the date when the cause of action accrued. The limitation period was later reduced to three years for personal injury cases, including medical malpractice cases.Footnote ²⁹ The concept of discovery was subsequently introduced with a limitation period of twelve months running from the date of discovery.Footnote ³⁰ Discovery was defined then as the plaintiff having knowledge of the injury and that the defendant caused the injury. The twelve-month period was later extended to three years.Footnote ³¹ This did not work well and the Law Reform Committee was then set up to clarify the position on personal injury claims. The rules on limitation periods were finally consolidated under the Limitation Act 1980 and have remained relevant till this day. Under the updated Act, the limitation period remains at three years, but the definition of discovery was refined to include the claimant’s knowledge of the specific facts of his injury. These include knowledge that the injury is significant and attributable to a possibly negligent act or omission, and the identity of the defendant or any other person who may be responsible for the injury.Footnote ³² The law also empowers the court to exercise its discretion in permitting exceptions to the rule on the limitation period, including those involving disability (s.28) and fraudulent concealment (s.32) by the defendant.

While it is not difficult to understand the fundamental mechanism by which the statutes of limitation and repose control medical litigation, their application by the courts is still subject to debate. One controversial area is the interpretation of the discovery rule and determination of what constitutes ‘knowledge’. Would suspicion of malpractice be considered as having knowledge of a negligent act? If so, then what is the level of suspicion needed? This is important because the applicability of the limitation period depends on how the court interprets the word ‘knowledge’. The English courts had traditionally rejected suspicions and beliefs as constituting knowledge, but this changed with Lord Donaldson’s comment in Halford v. Brookes Footnote ³³ that ‘reasonable belief will normally suffice’ to mean ‘knowledge’. As to what degree a belief is considered ‘reasonable’, Lord Donaldson in Halford and subsequently Purchas LJ in Nash v. Eli Lilley &Co Footnote ³⁴ took a common approach that defined ‘reasonable belief’ as a belief that makes the claimant contemplate preliminary steps in the pursuit of a claim. It would not be fair to require that the ‘knowledge’ obtained by the claimant be actual or true because this can only be known in hindsight. Furthermore, at the point when the claimant suspects negligence, he would not have initiated the legal process of discovering actual evidence of negligence. The later case of Spargo v. North Essex District Health Authority appears to raise the threshold for the test of reasonableness such that the claimant has to take certain actions (e.g. consult his solicitors) in order to demonstrate his belief.Footnote ³⁵

With respect to the specificity of the ‘knowledge’ required before it is sufficient to trigger the running of the limitation period, the two English cases Broadley v. Guy Clapham &Co.Footnote ³⁶ and Dobbie v. Medway Health Authority Footnote ³⁷ suggest that the claimant only needs to know that the injury was attributable to ‘something done or not done by the defendant’.Footnote ³⁸ This makes it more precarious for the claimant, who may either have been informed by his doctor(s) or inadvertently learned from other carers that the treatment had gone wrong. Hence, the ‘knowledge’ attained need not be sought by the claimant but can be provided by others. In certain situations, the negligent nature of the treatment rendered would have been obvious even if the claimant had not been specifically informed (e.g. wrong limb surgery). If the operation fails to achieve its objectives or results in complications which the claimant had not been warned about previously, time may start running even without the latter realising it. In Broadley, the occurrence of foot drop following an operation that should not have resulted in nerve injury was sufficiently regarded as constructive ‘knowledge’ of possible negligence. Similarly in Dobbie, the claimant was considered to have knowledge of ‘significant’ injury after undergoing a mastectomy to treat a histologically normal breast lump. Whether or not the plaintiff had believed that the operation was a usual course of treatment under those clinical circumstances was inconsequential to the commencement of the limitation period.Footnote ³⁹

One shortcoming of the limitation period as a reform to address medical litigation is that it usually does not start for minors until the latter reaches the age of majority.Footnote ⁴⁰ The rationale of this rule is to give minors the opportunity to institute legal action themselves rather than depend on others’ assistance. This means that the minor has a longer limitation period from the time of injury occurrence, even though the minor or his proxy may have acquired ‘knowledge’ of the injury very early during the claimant’s childhood. The implication of this is that doctors in certain medical specialties such as paediatrics and obstetrics may face higher risks of litigation. Often, claims involving birth injuries may be filed late because it takes time for the claimant or his proxy to realise the consequences of possible injuries at birth. However, evidential cogency may pose a problem in such cases, since the doctor may not recall past events clearly or have difficulty tracing evidence. Furthermore, during the long latent period, other aggravating factors may have come into play and may actually be the predominant or actual causes of the poor clinical outcome. Some American states have attempted to address this by precluding the discovery rule application from malpractice claims involving minors. As a result, any limitation period imposed would essentially function like a statute of repose.Footnote ⁴¹ Another strategy is to impose an age threshold for minors beyond which a claim would be barred.Footnote ⁴² These strategies may, however, be rendered unconstitutional by the courts.Footnote ⁴³

Opponents to the shortening of limitation periods have argued that such reforms are unnecessary since most claimants file their claims promptly unless they are genuinely unaware of the gravity of their injury.Footnote ⁴⁴ This suggests that any perceived delay in filing a claim is justified as long as the claimant has not realised the significance of his injury, and that it would be unreasonable to hold the claimant fully accountable for such a delay. Furthermore, it was argued that claimants would not intentionally file late claims to disadvantage defendants.Footnote ⁴⁵Nonetheless, evidential cogency is particularly critical in medical cases because the likelihood of recall bias is especially high in such cases; a doctor who has treated many patients would find it difficult to remember the details of a specific patient even if the alleged injury happened fairly recently. This explains the need for instant event reporting systems in health-care institutions to ensure that details of adverse events captured can provide a valuable means of recall for doctors at a much later date.Footnote ⁴⁶ The shortening of limitation periods has also been said to reduce deterrence against negligence as it reduces the likelihood that a negligent practitioner will be sued for the harm caused.Footnote ⁴⁷ However, there is a contrary argument that long limitation periods would not increase deterrence because insurance providers who refuse to insure liability for latent injuries or who price their premiums higher would be ousted or undercut by their competitors who may be less risk-averse.Footnote ⁴⁸ Hence, if the insured doctors are eventually not made to bear the cost consequences of long limitation periods, there would be no deterrence to speak of.

The fairness of the discovery rule is doubtful with respect to its differential impact on negligent acts vis-à-vis omissions. Since most conditions do not heal instantaneously with treatment, no patient would entertain the possibility of an omission until a certain period of time has passed without apparent recovery. As James (Reference James1998) put it, ‘knowledge that the original treatment had not worked was not knowledge that some other treatment had been omitted’. In Smith v. West Lancashire Health Authority, it was also said that ‘one cannot know of an omission without knowing what it is that is omitted’.Footnote ⁴⁹ This approach reduces the risk of claims concerning negligent omissions being statute-barred, even though omissions are not necessarily of lesser evil than acts. Nonetheless, in Forbes, it is shown that if an injury sustained as a result of an omission is significant, the courts would expect a reasonable patient to seek a second opinion ‘promptly’ and shortly thereafter acquire the necessary knowledge during the limitation period.Footnote ⁵⁰ The implication of such a judgment is that omission resulting in less significant injury may have less protection by statutes of limitation since a reasonable claimant would not be expected to proactively acquire knowledge of possible negligence under those circumstances.

Overall, statutes of limitation are likely to be less effective in reducing medical litigation rates compared to other tort reforms because of two main reasons: first, the rather uncertain and inconsistent interpretation of the discovery rule by the courts could result in many claims being exempted from the statute of limitation; and second, the propensity for the statute to be tolled for minors resulting in expensive claims related to birth-related injuries, which are not excluded from the tort system. To date, the impact of statutes of limitation/repose has been equivocal; if anything, the main effect of these reforms might be a decrease in claims frequency and consequently liability insurance premiums.Footnote ⁵¹ More research needs to be done to fully evaluate the impact of reforms to limitation periods on medical litigation.

(b) Screening panels and certification of merit

Medical malpractice screening panels have been implemented mainly in the US since the 1960s to address the problem of rising medical litigation. The concept of screening panels arose from the belief that many malpractice lawsuits had no merit. A screening panel comprising medical professionals and possibly lawyers could review all cases and discourage non-meritorious cases from going to trial. By 1996, twenty-five states were using screening panels.Footnote ⁵² This number has reduced to sixteen currently, as more states repeal or invalidate such panels on the grounds of unconstitutionality.Footnote ⁵³

Screening panels may vary in terms of composition, size and enforceability; in some states, such panels are mandatory (e.g. Hawaii, Idaho) while in others they are optional (e.g. Alaska, Delaware).Footnote ⁵⁴ In states such as Alaska and Indiana, panel findings are admissible in court during subsequent trials, while in others such as Maine and New Hampshire, admissibility is allowed only if panel opinion is unanimous.Footnote ⁵⁵ Besides preventing frivolous claims from escalating to litigation, screening panels may provide an affordable avenue for patients to find answers to their medical injuries in lieu of litigation. However, it has been argued that in jurisdictions where panel findings are admissible at trial, extensive discovery may be sought, which increases costs and causes further delay prior to litigation.Footnote ⁵⁶ Some commentators feel otherwise, saying that the perceived ‘delay’ is in fact what most cases would have to wait before the commencement of trial.Footnote ⁵⁷ Another reason for the higher costs incurred by screening panels is that trial lawyers have to pay experts twice – to testify at the panel and at trial. The difficulty in selecting panel members due to conflicts of interests also causes delay. Screening panels may also increase the number of claims,Footnote ⁵⁸ unless fees are priced appropriately to avoid overuse. On the other hand, if the fees are set too high, it may discourage impecunious victims of clinical negligence from filing their claims. Trial lawyers who charge contingency fees may not file smaller cases since the additional costs associated with panel hearings would diminish their returns. In jurisdictions where a screening process precedes mandatory ADR such as arbitration (e.g. Nevada), plaintiff lawyers would no longer be motivated to force a settlement through ADR because the expected returns will be lower after deducting screening panel costs; in fact, the screening panel may even dismiss the claim, thus removing any prospect of settlement.

A variant of the concept of screening panels that has been introduced in seventeen American states is the requirement of a certification-of-merit for medical malpractice claims.Footnote ⁵⁹ Instead of a screening panel making decisions on the merit of claims, the onus is shifted to the claimant’s lawyer to obtain expert certification that the claim is meritorious. One of the potential pitfalls of this concept is the lack of information such as medical records and witnesses’ statements, which will impair the ability of the expert to determine whether the case has merit.Footnote ⁶⁰ Certificates-of-merit, like screening panels, also incur additional pre-trial costs which may deter valid claims. Moreover, experts who provide the evaluation may not wish to disclose their identities and the claimant’s lawyer would then have to pay another expert to testify at trial. Most certificate-of-merit provisions target claimants and not defendants; this means that only one side of a dispute is considered in assessing the merit of a claim. This is somewhat inferior to the screening panel concept, which permits a more balanced assessment of the claim. As lawyers who specialise in medical malpractice routinely obtain expert evaluation before suing, the requirement of certificates-of-merit has no impact on cases represented by such lawyers. For cases represented by non-specialist lawyers, there is no evidence to show that such a requirement pressurises the plaintiff lawyers to give up suing; the certification process merely becomes another step in the preparation for trial.

Evidence on the effectiveness of screening panels in addressing medical litigation woes remains elusive and at best equivocal. Although it was reported that malpractice premiums in Maine (which implemented screening panels in 1987) were 40 percent lower than premiums in New Hampshire, which only started screening panels in 2005,Footnote ⁶¹ this could be due to the lower average cost of settling claims and lower proportion of cases going to trial.Footnote ⁶² A review of impact studies by Mello et al. (Reference Mello, Studdert and Kachalia2006) showed that screening panels did not decrease claim payouts, claim frequency or liability insurance premiums. Interestingly, a 1992 study by the National Center for State Courts suggested that mandatory screening panels might even have contributed to higher rates of litigation.Footnote ⁶³ This could be due to cases where panel decisions were split and were then brought to trial. Furthermore, there has been uncertainty over the admissibility of split panel findings, for example, as seen in Smith v. Hawthorne.Footnote ⁶⁴Smith raises two issues concerning the effectiveness of screening panels. First, the effectiveness of screening panels in reducing litigation depends on whether the panel findings are binding by law: if claimants are allowed to litigate in spite of panel rulings, the purpose of screening panels will be undermined. Second, screening panels should focus on determining whether a case is meritorious rather than who is at fault. In Smith, if the panel had felt that the threshold of causation was insurmountable, then it should have dismissed the claim and discourage it from going to trial. More evidence needs to be gathered to fully evaluate the impact of screening panels on litigation rates and costs.

(c) Alternative dispute resolution

It is well known that medical disputes need not necessarily be resolved through litigation. Rather, such disputes can be resolved through negotiation, mediation or arbitration. Negotiation is commonly carried out in health-care institutions where disputes arise and is likely to remain as the first-line ADR method because of its relatively low cost. Prior to the advent of mediation or arbitration, disputes that fail to be resolved through negotiation would escalate to litigation. The primary aim of ADR is therefore to avoid litigation. Nevertheless, there is still debate over the use of ADR to resolve medical disputes. Empirical research suggests that the pursuit of ADR involving compromise by parties for the sake of early settlement may actually undermine the intended social goals of litigation, i.e. deterrence and justice.Footnote ⁶⁵ Furthermore, the marginal advantage of ADR over litigation depends very much on the context and rules governing its implementation.

(d) Limiting lawyer fees

It is widely known that the system of determining medical negligence is hugely expensive. At least 60 percent of malpractice indemnity premiums are invested into operating such a system, including the payments to lawyers.Footnote ¹¹⁸ The behaviour of plaintiff lawyers plays a critical role in medical litigation and the burden of its cost on health care. Such behaviour is influenced by the way lawyers are paid. In the US, lawyers are paid on a contingency basis, i.e. they are paid only if they win. This is the commonest mode of fee payment in torts.Footnote ¹¹⁹ However, there is increasing belief that the contingency fee system encourages medical litigation. This has triggered reform in the US involving the use of damages-weighted payment scale.Footnote ¹²⁰

It is commonly believed that contingency fees motivate plaintiff lawyers proactively to seek cases that suggest possible medical negligence. Such a practice is said to be both desirable and necessary because it can prevent low-quality claims from advancing to trial and will result in lower litigation rates compared to a time-rated (or hourly-rated) system.Footnote ¹²¹ Advocates of contingency fees also argue that the latter insure claimants against the risk of litigation and ensure that deserving but impecunious claimants are not deprived of their rights to compensation.Footnote ¹²² However, it has been argued that a contingency fee system would incentivise the lawyer to extract a settlement from every case, whether or not the case escalates to litigation and even if the settlement is less than the amount acceptable to the claimant.Footnote ¹²³ It may even be possible for a lawyer to carve a better deal for a case that actually has little merit. This is more likely to happen in a unitary contingent fee contract (i.e. the lawyer gets the same contingency payment whether it is settled out of court or at trial).Footnote ¹²⁴ The contingency fee system may also lead to unethical advertising and ‘ambulance chasing’, which describes trial lawyers or their touts seeking and persuading injured patients to sue their doctors.Footnote ¹²⁵ This would increase litigation rates.

A time-rated system, on the other hand, may increase litigation rates as lawyers would attempt to maintain a high volume of cases to ensure reasonable financial returns. The time-rated system may also result in protracted resolution of disputes because there is inadequate incentive for the lawyer to resolve disputes quickly since he would not be entitled to a portion of the damages. Unscrupulous lawyers may even be motivated to pursue nuisance suits and extract settlements from defendants who try to avoid litigation costs.Footnote ¹²⁶ This tends to encourage low-quality suits and generally increases litigation rates and the time to settlement.Footnote ¹²⁷

Whether a lawyer chooses high-volume low-returns or low-volume high-returns types of cases depends not so much on the existing fee system but rather on the preference and perhaps experience of the lawyer. Theoretically, a younger, less experienced lawyer may aim for a high volume of cases since his financial risks would be minimised and he would have the opportunity to build up his experience. Fee structures may also be decided according to the legal category of a case, i.e. whether it is tort or contract, and thereto the specialisation of the lawyer.Footnote ¹²⁸ It should also be noted that in reality, where contingency fees are allowed, the lawyer may exercise his discretion in deciding which fee system to use.Footnote ¹²⁹ A case that is likely to fetch high damages would favour a contingency fee system, while one that has a poorer chance of success would be tagged with a time-rated system. If contingency fees are banned, then cases that are more complex and more likely to be protracted prior to settlement may be favoured over straightforward cases that can be resolved quickly. The question then is which of the two systems – mixed contingency-cum-time-rated versus mandatory time-rated – is more effective in curtailing medical litigation? One can debate this on the grounds of individual rights to compensation vis-à-vis policy grounds. Currently, only a small proportion of true medical negligence cases are litigated. Even then, the impact of litigation costs on health-care costs has been remarkable. The contingency fee system may uncover more negligence cases for claims and litigation and continue to increase the cost burden.Footnote ¹³⁰ While this may be perceived by the injured party as naturally fair and just, it may not be beneficial to society from an economic and policy perspective. Many commentators have considered the moral fairness and reasonableness of various fee systems, but the real question is whether lawyers should be given the right to choose the method of payment according to the nature of cases, given the asymmetry of information between lawyers and their clients. From the policy perspective, if lawyers are free to choose the system of payment, clients may end up paying more than what is reasonable in all situations regardless of the nature of the case: if a case is of high quality, a larger than reasonable proportion of damages would be paid to the lawyer in the form of contingency fees; if a case is of low quality, the client may be asked to pay hourly-rated fees when he ought to drop the case. A single-mode payment system, i.e. either hourly-rated or contingent fee, may be more reasonable from a public policy perspective and ensures that the lawyer ‘wins some and loses some’. Along the lines of this argument, it would then appear that a solitary contingency fee system may be both feasible and reasonable, given the advantages highlighted earlier. Nonetheless, the existing asymmetry of information between lawyers and claimants may result in lawyers exaggerating the risk of non-recovery in high-quality cases and thereby enticing claimants to accept a contingency fee arrangement.Footnote ¹³¹ This will increase the costs of litigation in a way that is disproportionate and unfair to the claimant.

Contingency fees are forbidden in the UK and in Europe, albeit there is increasing interest in adopting an outcome-based fee system for lawyers. It is believed that such a system would increase access to justice for litigants with meritorious suits but inadequate resources,Footnote ¹³² and would also reduce the likelihood of overservicing by lawyers.Footnote ¹³³ With market pressure, countries like the UK, Belgium, Greece and the Netherlands have introduced conditional fees which may be regarded as a variant of the contingency fees;Footnote ¹³⁴ Greece has even accepted the contingency fee system in addition to conditional fees.Footnote ¹³⁵ Spain, France, Italy and Portugal are considering the introduction of conditional fees.Footnote ¹³⁶ Conditional fees are also allowed in New ZealandFootnote ¹³⁷ and some parts of Australia (e.g. New South Wales and Victoria). The concept of conditional fees is similar to contingency fees in that the quantum of fees are outcome-dependent. The only difference is that, in the event of winning the suit, the lawyer collects higher fees per hour. The marginal uplift is calculated as a percentage of the original rate, not as a percentage of damages awarded. In the event that no damages are awarded, the lawyer would charge no fee or a reduced fee. Conditional fees therefore offer less incentive for the lawyer in strong cases where the contingency fees charged would be higher.Footnote ¹³⁸ Conversely, claimants are more likely to choose the contingency fee system if their cases are weak, because the legal costs would be either lower (if little damages are awarded) or waived (if no damages are awarded). One must remember that it is up to the lawyer to determine the mode of payment upon assessing the case. Hence, the lawyer is likely to propose conditional fees for weak cases or contingency fees for strong cases so as to minimise his financial risks.

The key question now is whether conditional fees are likely to encourage litigation compared to a time-rated fee system. One should note that conditional fees were introduced not to minimise litigation but rather to ‘increase access to justice and to reduce the misalignment of incentives between the lawyer and client in relation to the quantum of legal inputs used’.Footnote ¹³⁹ Yet the intention of implementing conditional fees but not contingency fees in the UK and Europe was to avoid the magnitude of the litigation incentive that the latter system entails. How much less incentivising then is the conditional fee system compared to the contingency fee system, assuming that only one system is allowed? Certainly, conditional fees are not as outcome-dependent as contingency fees since the uplift in fees is not proportionate to the quantum of award. A system that is based strictly on conditional fees would incentivise lawyers to settle a claim whether or not the final settlement is perceived as fair. The more cases the lawyer settles, the higher the income gained from the uplifted rates. This may fuel more malpractice claims and is thus not helpful in minimising medical litigation.

(e) Loser-pays principle

The loser-pays rule is a major fee-shifting reform that can influence financial incentives in litigation. Basically, this strategy redistributes the financial risk to both parties of the dispute: the losing party is expected to pay the prevailing party’s legal costs. This would apply equally to the claimant and defendant. Unlike American law, the British rule for litigation mandates the loser-pays principle. This has the potential of deterring frivolous lawsuits and encouraging out-of-court settlements.Footnote ¹⁴⁰ More recent studies also demonstrated the likelihood for the loser-pays rule to result in claims being dropped without settlement.Footnote ¹⁴¹ For cases that still proceeded to litigation, it was shown that there would be an increase in: (a) the win rate of the claimant; (b) judgments awarded to claimant; and (c) the settlement quantum.Footnote ¹⁴² This is logical since claimants who choose to litigate despite a loser-pays rule in force would know that they have a high chance of winning. With a pool of more favourable cases awaiting trial, a higher win rate for claimants would be expected. If these cases entail true medical negligence or more serious injuries, one would expect the average award quantum to be higher as well.

The loser-pays principle is effective in preventing frivolous lawsuits initiated by claimants since it curbs the moral hazard associated with a ubiquitous right to litigate. Such moral hazard is exacerbated under a system of contingency fee payment because the claimant would have the added incentive of not needing to pay his own legal costs if he loses. Furthermore, the ‘double incentive’ to the claimant goes with a ‘double whammy’ for the defendant because the latter has to pay for his own legal costs and compensate the claimant if he succumbs to a frivolous claim that results in an out-of-court settlement. The implication of such moral hazard would be more claims, more payouts, higher health-care costs and defensive medicine. Hence, the losers-pays system appears desirable on grounds of both public policy and fairness. The loser-pays rule already enjoys strong support in the UK and throughout Europe, and has been adopted by a number of American states such as Alaska, Florida, Texas, Oklahoma and Georgia, albeit in a variety of forms, such as in conjunction with an offer-of-judgment (or offer-of-settlement) rule.Footnote ¹⁴³ This means that the losing party only pays the legal costs of the prevailing party if the former declines a settlement that is less than the award given to the prevailing party by the court. Although the loser-pays rule would conceivably reduce the rate of medical litigation, it could potentially increase the proportion of out-of-court settlements and even the number of claims that ‘aim’ to extract out-of-court settlements. The defendant doctor is equally apprehensive of the rule, especially if he is not confident of winning the lawsuit. This could be used to the advantage of the claimant, who would extort an early, out-of-court settlement. The intended disincentive to sue characterised by the risk of paying the legal costs of the prevailing party has also been watered down by the availability of legal expenses insurance, especially if the premiums are modest.Footnote ¹⁴⁴ Furthermore, if the loser-pays rule is not applied even-handedly, i.e. prevailing claimants are more likely to be entitled to the recovery of legal fees by the courts than prevailing defendants, it may promote barratry.Footnote ¹⁴⁵ The loser-pays rule is a ‘double-edged’ sword and may exacerbate any injustice and inefficiency caused by erroneous court rulings.Footnote ¹⁴⁶ Finally, the legal costs recoverable from the losing party should be lower than the damages claimed by the prevailing party, and not more than the ordinarily calculated time-rated legal fees. Otherwise, the loser-pays rule could end up encouraging litigation.

(f) No-fault compensation

The underlying philosophy of no-fault compensation in health care is that clinical injury may not result from the fault of any individual, but rather from system errors. Furthermore, the complexity of medical practice makes it difficult to determine fault when errors occur.Footnote ¹⁴⁷ A no-fault scheme therefore allows prompt investigation and compensation of claims without the need for the claimant to prove negligence.Footnote ¹⁴⁸ It attempts to convert a culture of blame to one of ‘open disclosure’, which is believed to facilitate clinical quality improvement. Essentially, the no-fault scheme tackles the problem of medical litigation upfront by barring the right to sue and precluding any occurrence of a dispute, since it focuses only on compensating the injured party without identifying the alleged ‘perpetrator’. In any evaluation of a no-fault scheme, the focus should therefore be on the effectiveness, fairness and sustainability of the scheme rather than to determine whether the scheme discourages litigation, since this would have been prohibited by statutory law.Footnote ¹⁴⁹

No-fault schemes have been implemented in several countries, notably New Zealand and Scandinavian countries such as Sweden, Denmark and Norway.Footnote ¹⁵⁰ The schemes in these countries are comprehensive and generally cover the whole spectrum of medical injury claims. No-fault schemes may also cover specific medical injuries such as birth-related neurological injuries, vaccine-related injuries and injuries from blood transfusions.Footnote ¹⁵¹ The early concept of no-fault compensation in the 1960s recommended compensation for all patients with untoward and unexpected medical outcomes.Footnote ¹⁵² Two further concepts emerged in the 1970s, one of which was based on relative avoidability.Footnote ¹⁵³ One major difficulty of developing and implementing the concept of no-fault is in defining and designating a compensable event. Although different countries with no-fault systems have developed different criteria for defining compensable events, such criteria are still debatable with respect to their appropriateness and fairness. A US study suggested that a compensable event should involve an outcome that is avoidable in a statistically significant number of medical situations rather than in any one situation.Footnote ¹⁵⁴ It has also been argued that a compensable event ought to include the element of ‘medical intervention’ in addition to the focus on the injury. This is because the nature of the intervention would provide critical information on whether the injury is avoidable, an essential factor in deciding compensability. Furthermore, the ‘intervention’ must comprise affirmative acts as well as acts of omission, even though it is often difficult to establish the causal relationship between omissions and adverse outcomes. Another important factor to be considered for compensability is the resulting disability of the patient, which is dependent on the nature and severity of the injury. It is suggested that injuries that lead to minimal disability should not be compensated.Footnote ¹⁵⁵ The degree of disability may be determined by assessing how quickly the disability can be resolved within the anticipated length of stay for the particular intervention said to have caused the disability.Footnote ¹⁵⁶

The no-fault compensation schemes in Sweden (and other Scandinavian countries) and New Zealand differ mainly in their eligibility criteria for compensation. In Sweden, compensation is paid according to a predetermined schedule only if the injury could have been avoided. This has been the basis for compensation since 1975, when the voluntary Patient Insurance System started. With the introduction of the 1996 Patient Torts Act, every health authority in Sweden is required to provide compensation for clinical injuries regardless of fault. In addition, the claimant is required to show that the health practitioner’s conduct caused the injury. Paradoxically, this injects an element of fault into the scheme. An outcome is considered avoidable if it can be avoided using an alternative course of treatment; such avoidability need not necessarily entail medical negligence. Nevertheless, the injection of fault may make it harder for the claimant to be compensated and renders the scheme more adversarial. In New Zealand, the government also reintroduced fault into the no-fault system in 1992 by redefining ‘medical misadventure’ into ‘medical error’ and ‘medical mishap’.Footnote ¹⁵⁷ ‘Medical error’ was intended to mean the ‘failure of a registered health professional or organisation, to observe a standard of care and skill reasonably to be expected in the circumstances’, which is essentially the common law tort of negligence.Footnote ¹⁵⁸ The concept of ‘medical misadventure’ was amended again in July 2005 to a new category called ‘treatment injury’,Footnote ¹⁵⁹ thereby doing away with the fault-finding aspect of the scheme.Footnote ¹⁶⁰ One of the key objectives of a no-fault system, apart from addressing the cost issue of litigation, is its ability to encourage open disclosure of medical errors and facilitate clinical quality assurance efforts. The inclusion of fault in a no-fault scheme will undermine health-care practitioners’ trust in the scheme and breed scepticism of its objectives. Prior to the recent changes in 2005, the Accident Compensation Corporation (ACC) would report health practitioners to the appropriate professional body and Health and Disability Commissioner for review. Currently the ACC only focuses on injury prevention and compensation, leaving professional matters to be handled under separate complaints processes.Footnote ¹⁶¹

Theoretically, a no-fault scheme may result in more claims and higher expenditure even though the quantum of each no-fault claim may be lower than each litigated claim. Potential claimants may choose to avoid the difficulties and costs associated with litigation in favour of making a no-fault claim, which if successful would give the claimant access to subsidised or free remedial medical care.Footnote ¹⁶² Any increase in compensation costs is supposed to be offset by the lower administrative costs of the no-fault scheme compared to litigation.Footnote ^163, Footnote ¹⁶⁴ The costs of compensation in a no-fault scheme can be controlled through the compensation criteria and level of awards, and therefore need not necessarily lead to greater costs.Footnote ¹⁶⁵ The differences in criteria used by various no-fault schemes in different countries may have different degrees of effectiveness in curtailing the costs of injury compensation. In the Scandinavian no-fault systems, the cover rule of avoidability (or preventability) is useful in excluding expected adverse outcomes that arise from needful procedures. However, what is considered a needful procedure may be applied too liberally: any option to delay the procedure in question (such as for clinical observation), thereby avoiding the adverse outcome, could justify avoiding the procedure and deemed sufficient to warrant compensation. In Sweden and Denmark, the standard of avoidability is measured respectively against what an ‘experienced’ or ‘best’ specialist would have done.Footnote ¹⁶⁶ In the Swedish scheme, the need to demonstrate a causal link between the doctor’s conduct and the injury is another criterion that raises the eligibility threshold for compensation and reduces the number of compensable events.Footnote ¹⁶⁷ In the Taiwanese no-fault scheme for vaccine injuries, where there is less emphasis on establishing a causal link, more compensable events may be captured which would incur higher costs.Footnote ¹⁶⁸ The ACC scheme also requires a causal link for the purpose of compensation, albeit not to the extent of linking the doctor’s professional conduct to the injury following the latest modifications to the scheme. These modifications are, however, likely to result in more compensation claims and higher costs.Footnote ¹⁶⁹

A key feature in most if not all no-fault schemes that help achieve cost-containment is the limit on the coverage of compensable injuries in terms of severity, in particular the ‘medical mishap’ type of claims where the injuries are unavoidable. Under the New Zealand ACC scheme, the duration of disability and hospital stay is used as a proxy to determine severity and for setting the limits. In the Scandinavian countries, the injuries need to be severe and more than what the patient ‘could reasonably be expected to bear’ (aka the ‘endurability rule’).Footnote ¹⁷⁰ In France, a patient is eligible for no-fault compensation if his injury is sufficiently serious and caused by a medical act.Footnote ¹⁷¹ Other schemes also operate along similar principles.Footnote ¹⁷²

The other parameter used for limiting coverage of claims is the rarity of the injury. Again, this is used only for the ‘medical mishap’ type of claims. The ACC scheme uses a threshold of 1 percent likelihood of occurrence of the injury associated with the treatment in question, while Denmark and Norway use thresholds of 2 and 5 percent respectively. The parameters of severity and rarity thus provide a mechanism to reduce the risk of moral hazard among claims that do not involve medical errors. This supports a fundamental principle of medical practice, i.e. a poor clinical outcome does not necessarily imply clinical negligence, and is especially important in claims which may involve incredulously huge damages when litigated (e.g. those involving birth-related injuries).

Another cost-control measure of a no-fault compensation scheme involves the setting of time limits for compensation, usually from the moment the patient discovers the injury. All compensation schemes except the ACC scheme impose time limits for claims.Footnote ¹⁷³ Time limits, like statutes of limitation, allow more accurate forecasting of claims quantum and the estimation of costs by excluding cases where adverse outcomes are slow to develop. Time limits also ensure that the adverse clinical outcomes compensated are valid and result from medical injuries rather than medical co-morbidities and external factors. The longer the delay between treatment and discovery of an injury, the less certain it is that the injury is due to the treatment per se. Hence, time limits allow compensation to be more selective and paid to parties who most deserve it. Other cost-control measures besides time limits include the capping of entitlements and restriction of compensation for pain and suffering. These are characteristics of the Scandinavian schemes and resemble damages cap reforms implemented in the US.Footnote ¹⁷⁴ One characteristic of the Scandinavian schemes is that no-fault payments are made in addition to social insurance payouts.Footnote ¹⁷⁵ This is antithetical to the principle underlying the reforms of collateral source offsets in the US. Nevertheless, the no-fault payouts are still much lower than those awarded by courts under the tort system. This is because existing social insurance subsidies reduce the need for claimants to be awarded large no-fault payouts.Footnote ¹⁷⁶

Research has shown that many patients who have sustained medical injury due to negligence never sued.Footnote ¹⁷⁷ This has been attributed to a number of reasons, including difficulties in finding legal representation and the costs associated with litigation. One would expect that a no-fault system which does not entail such difficulties and legal costs would facilitate claiming. However, it was found in New Zealand that 97 percent of eligible parties did not claim, many of whom were the elderly and poor;Footnote ¹⁷⁸ ironically, these subpopulations probably needed the payouts more than anyone else. Similar experiences were also encountered in Denmark and Florida.Footnote ^179,Footnote ¹⁸⁰ These observations on underclaiming in New Zealand were even comparable with estimates from tort systems in the US.Footnote ¹⁸¹ Such observations disprove comments that a no-fault scheme encourages overclaiming. The findings also suggest that the no-fault scheme may indeed be a financially sustainable redress system in place of litigation. Some postulated reasons for underclaiming include the lack of awareness that a particular injury had resulted from medical care and the limited compensability of non-economic damages. The low acceptance of claims in certain schemes may further deter other prospective claimants, albeit this may not necessarily be a bad thing if the intention is to minimise frivolous claims. A reasonable balance of incentives and checks needs to be instituted to ensure that the scheme is neither abused, overused nor underused. The Canadian Prichard Report proposed a system whereby the patient has a choice of no-fault compensation and tort law claim.Footnote ¹⁸² It is argued that this would allow real negligence cases to be heard in court, thus providing adequate redress for injured patients and enabling court guidance on what doctors ought or ought not to do.Footnote ¹⁸³ Nonetheless, the efficiency of a mixed no-fault system (with tort) depends very much on the rate of court errors (i.e. the court awarding damages that are too high or too low against what the claimant actually deserves); a mixed system is not more efficient than a pure no-fault or tort system if court errors are minimal.Footnote ¹⁸⁴

It is interesting to note that, instead of a no-fault scheme, the UK has proposed a parallel track to litigation known as the ‘NHS Redress’ scheme for resolving small claims with compensation quantums below £20,000.Footnote ¹⁸⁵ As eligibility for compensation under the Redress scheme depends on the establishment of fault and ‘qualifying liability in tort’, the scheme would probably lose out in terms of speed and efficiency as compared to a truly no-fault scheme, albeit the inclusion of fault may help to trim off more undeserving claims and reduce total compensation costs. Since the Redress scheme is restricted to settling only small claims, it would not address the delays and high costs associated with litigation that are caused by large complex claims, unlike the no-fault schemes in Florida and Virginia.Footnote ¹⁸⁶ This begs the question of whether a no-fault scheme ought to apply to small, large or all claims for maximum advantage over a tort system in terms of cost, efficiency and fairness in compensation. To date, no formal study has been done that adequately addresses this question.

Theoretically, litigation deters doctors against providing poor quality or negligent medical care, albeit that there is little actual evidence supporting this.Footnote ¹⁸⁷ While a no-fault scheme may potentially eliminate deterrence and increase the risk of poor care,Footnote ¹⁸⁸ one of its purported objectives is really to facilitate open disclosure and learning from adverse events for clinical quality improvement purposes. However, apart from some evidence of cost savings experienced in New ZealandFootnote ¹⁸⁹ and Florida,Footnote ¹⁹⁰ there is little evidence so far that demonstrates any positive impact of a no-fault scheme on the quality of medical care.Footnote ¹⁹¹ Despite such lack of evidence, there is continuing interest among traditional tort-based jurisdictions to adopt no-fault schemes, including the US,Footnote ¹⁹² the UK,Footnote ¹⁹³ CanadaFootnote ¹⁹⁴ and Australia.Footnote ¹⁹⁵ This suggests that the real incentive to implement the no-fault scheme may be financial rather than the pursuit of higher clinical standards.

Although a no-fault scheme would effectively eliminate any prospect of litigation, it is not the panacea for resolving disputes where the injured patient wishes to seek exemplary damages or some form of ‘retribution’ against the doctor. Hence, the truly negligent doctor should be subject to professional disciplinary tribunals that complement the no-fault scheme.Footnote ¹⁹⁶ It is still possible for one to claim exemplary damagesFootnote ¹⁹⁷ under the no-fault scheme, albeit that the New Zealand courts have restricted such actions to cases where the practitioner’s conduct is outrageous; furthermore, the courts ruled that the punishment of such conduct ‘can be adequately achieved by a relatively modest penalty’,Footnote ¹⁹⁸ thus implying that modest no-fault compensation is sufficient remedy in lieu of litigation. Nevertheless, A v. Bottrill Footnote ¹⁹⁹ clarified that ‘as a matter of principle and authority, intentional wrongdoing or conscious recklessness is not an essential pre-requisite to an order for payment of exemplary damages’. This may lower the threshold for claiming punitive damages and could potentially increase litigation activity alongside the no-fault scheme. It remains to be seen how the no-fault schemes in various jurisdictions undergo further structural and policy modifications to maintain economic sustainability and justice in managing medical malpractice claims.

Reform of joint and several liability rule

The rule of joint and several liability permits an injured claimant to recover damages from multiple defendants collectively or from each of the defendants liable for his injury. Thus, if a particular defendant is 5 percent responsible for the injuries compared to another two defendants who are 95 percent responsible but are also bankrupt, the claimant may recover all his damages from the solvent defendant. If the two defendants are not bankrupt, the defendant who paid the damages can then pursue the other defendants for a contribution to their share of the liability.

To date, approximately thirty-nineFootnote ²⁰⁰ American states have introduced and retained reforms to the joint and several liability rule (henceforth described as ‘the joint liability reform’ in this paper). This makes it one of the most common types of tort reforms in the US. Reforms to the rule may take one or more of the following forms: (1) replacing the rule with a proportionate liability rule which requires a defendant to pay a quantum of damages that is commensurate with his share of responsibility (or degree of culpability) for the injury (e.g. Alaska, Arizona, Vermont); (2) barring the application of the rule limited to certain damages such as non-economic damages (e.g. Iowa, California, Nevada); (3) barring the application of the rule to recover full damages from a defendant whose share of responsibility for the injury falls below a specified threshold proportion in relation to other defendants (e.g. Arkansas, Florida, Missouri).Footnote ²⁰¹

Other jurisdictions have different applications for the joint and several liability rule. In Australia, the common law of joint and several liability has been replaced with proportionate liability by all levels of the government.Footnote ²⁰² However, in alignment with the recommendations in the Ipp Report,Footnote ²⁰³ such reform has not extended to personal injury claims (including those for medical negligence). It was articulated in the report that proportionate liability would make the claimant risk inadequate compensation if one of the defendants is impecunious; this may make the claimant worse off than another victim who is harmed by only one defendant. Conversely, a negligent perpetrator becomes better off if someone else also caused the harm.Footnote ²⁰⁴ Nevertheless, it was proposed that even under a regime of solidary liability, the law of contribution ought to be reviewed, since the defendant who is found liable would still attempt to recover damages from other defendants proportionate to their responsibility for the claimant’s harm.Footnote ²⁰⁵ In Canada, the preference is to keep the joint and several liability rule. For example, the Ontario Law Reform Commission was convinced neither that reform of the rule would bring about economic benefits nor that the rule would cripple liability insurance. Instead, the Commission felt that the rule would ‘help to assure the goal of full compensation to an injured person for losses attributable to the fault of others’, which was ‘fundamentally just’.Footnote ²⁰⁶ Similar views prevail in other provinces.Footnote ^207, Footnote ²⁰⁸

The debate over the merits and pitfalls of the joint and several liability reform have centred around issues of moral justice vis-à-vis public policy. The original rule aims to fully compensate the claimant. However, in terms of moral justice, it would not be fair for a court to award full damages against a defendant with relatively lower culpability for the claimant’s injury as compared to other defendants. Furthermore, such a rule penalises a defendant based on his ability to pay rather than the extent of his contribution to the claimant’s injury. The rule also encourages plaintiff lawyers to search for ‘deep pockets’ to sue, which keeps litigation rates and costs high.Footnote ²⁰⁹ Many parties are likely to be roped into a lawsuit because the plaintiff lawyer would attempt to maximise his chances of establishing fault in one party in order to recover full damages. This apparent flaw in the rule could also implicate the government and health authorities in cases involving medical errors, as the public would ultimately hold the health authorities overall responsible for patient safety. Even if the government is only a purchaser of health-care services, the plaintiff lawyer could take the government to task for selecting an unsafe provider or not instituting sufficient or appropriate service review measures. It is commonly known that litigation is inefficient as it compensates only a small proportion of patients injured through medical malpractice.Footnote ²¹⁰ The joint and several liability rule further compounds such inefficiency by extracting damages from defendants whose involvement may be only tangential. Advocates of reform further argue that the rule would result in more lawsuits being filed, particularly by the single defendant who would attempt to recover damages from the other culpable health-care providers.Footnote ²¹¹ This will increase overall litigation costs for settling medical claims involving multiple defendants.

Opponents of tort reform contend that joint liability reform may threaten to undercompensate a claimant if one or more defendants do not have the financial means to pay. In such a situation, the court can only be fair to one side, i.e. either the claimant or the defendant. It can then be argued that, as a matter of justice, the claimant ought to have priority over any defendant where fair treatment is concerned.Footnote ²¹² The replacement of joint liability with proportionate liability may theoretically encourage multi-specialty care so that, in the event of any medical mishap, culpability and responsibility may be shared. Such a practice, however, would increase the fragmentation of medical care, which may lead to a higher risk of medical errors.Footnote ²¹³ The reform may also lead to an increase in litigation rate rather than a decrease, as claimants are forced to bring separate legal actions against each tortfeasor in order to receive adequate compensation for the injury.Footnote ²¹⁴ This may reduce the number of doctors in jurisdictions affected by the reform since plaintiff lawyers may target individual doctors’ assets in addition to hospitals.Footnote ²¹⁵ With the reform, litigation costs are expected to rise as the claimant needs to prove relative fault of each of the defendants, which essentially involves more work and longer time to settlement.Footnote ²¹⁶ Another argument against reform is that under the joint and several liability rule, the defendants would have the incentive to settle claims out of court, probably through ADR.Footnote ²¹⁷ However, this could be easily refuted since litigation rates have been high under the existence of such a rule. Hence, by itself, the rule does not make defendants avoid litigation as there could be other influencing factors involved.

So far, research on the impact of the joint and several liability reform on litigation rates has not yield conclusive or consistent findings. Lee, Browne and Schmit (1994) found only weak evidence that showed reduction in tort filing rates, albeit a surge in filings was seen within the year prior to the reform.Footnote ²¹⁸ Browne and Puelz (Reference Browne and Puelz1999)Footnote ²¹⁹ showed a 34 percent increase in claims for non-economic damages but had focused only on injuries caused by motor vehicle accidents, which might not be representative of claimants’ response in medical malpractice torts. Among the studies that evaluated the impact of tort reforms on insurers’ losses, premiums and loss ratios, Viscusi et al. (Reference Viscusi, Zeckhauser and Born1993)Footnote ²²⁰ found that the joint and several liability reform had substantially reduced insurance losses between 1985 and 1988. Together with limits on punitive damages and limits on liability, the joint liability reform also reduced malpractice premiums. Subsequent studies in 1998 and 2006 further demonstrated reduced insurance costs, premiums and reported losses contributed by joint liability and other tort reforms.Footnote ²²¹ Thorpe (Reference Thorpe2004),Footnote ²²² however, did not discover any effect of the joint liability reform, unlike that of the non-economic damages cap and collateral source offsets.

Interestingly, the joint liability reform has been shown to impact on professional regulation. Lavenant, Hayward and Jesilow (Reference Lavenant, Hayward and Jesilow2002) showed that American states which implemented the reform had experienced higher levels of medical board sanctions. The authors postulated that, since the reform would have reduced the potential for monetary remuneration under joint liability, such observation might be attributed to plaintiff lawyers shifting their target from ‘deep pocket’ health-care institutions to individual doctors when pressing cases. The ensuing findings of malpractice were then passed to the medical licensing boards for investigation and hence a higher rate of sanctions was seen. This observation suggests that the joint liability reform could have the additional benefit of deterrence against medical negligence.

(a) Caps on damages

Damages cap reforms have been introduced, notably in the US, to impose limits on compensation in medical malpractice lawsuits. These reforms may work either by informing the jury at trial of the maximum limit of damages recovery or by requiring the judge as a matter of law to reduce any jury award in accordance with any limit set in the statutes.Footnote ²²³ Most of the damages cap reforms in the US were introduced during malpractice litigation crises in the mid-1970s, 1980s and early 2000s.Footnote ^224, Footnote ²²⁵ One of the earliest damages cap reforms originated from California’s Medical Injury Compensation Reform Act (MICRA) of 1975.Footnote ²²⁶ This inspired subsequent reform proposals in the 1980s and early 2000s.Footnote ²²⁷

In the US, a damages cap has emerged as one of the more successful reforms amidst many tort reform proposals which either proved politically unfeasible (e.g. legal fee shifting) or largely ineffective (e.g. offer-of-settlement rules). Nonetheless, some states such as Alabama, Oregon and Washington had considered a damages cap as unconstitutional and nullified the reforms. In Alabama, caps on non-economic damages drew much criticism from legal scholars and claimants.Footnote ²²⁸ Following three landmark cases,Footnote ²²⁹ the Alabama Supreme Court struck down the statutory provisions for a damages cap, and since August 1995 all civil litigation, including medical cases, were no longer subject to damages caps. As of July 2007, twenty-three states had instituted caps for non-economic damages.Footnote ²³⁰ Damages cap reforms are not just an American affair. In Australia, New South Wales has taken the lead in introducing damages reforms.Footnote ²³¹ In the event that non-economic damages are warranted, a cap of A$350,000 is imposed.

As mentioned above, a damages cap serves to reduce financial incentives in litigation. Such incentives are fuelled by huge damages awarded by juries. In fact, much criticism has been levelled at the competence of juries in evaluating the expert evidence necessary to provide a fair and unbiased judgment.Footnote ²³² Indeed, the jury can easily sympathise with the claimant during court proceedings and any damages awarded may be pegged to such sympathy rather than the actual severity of the claimant’s injury. Awards for non-economic damages are particularly susceptible to sentiment-based judgment since there is no objective standard or scale to assess the magnitude of ‘pain and suffering’. For example, in California, jurors are simply instructed to ‘exercise calm and reasonable judgment in the light of the evidence’.Footnote ²³³ Nevertheless, some commentators have defended the jury system and claimed that juries can understand complex issues as well as judges.Footnote ²³⁴

The interest in damages cap reforms followed concerns over the lack of fairness of the tort system, perhaps not so much on whether bona fide victims receive adequate compensation but rather on the excessive and disproportionate nature of runaway jury awards.Footnote ²³⁵ Ideally, fairness in compensation can be perceived in absolute and relative terms – ‘absolute’ in terms of the actual titration of award quantum to the magnitude of injury, and ‘relative’ in terms of how each award quantum compares with another, taking into account the differences in the severity of injury.Footnote ²³⁶ The tort system of awarding damages is unable to satisfy both elements of fairness since different judges or juries preside over different cases, and there has been no attempt to develop a standard compensation-injury matrix for consistent reference. While it has been observed in some studies that more severe injuries were indeed awarded higher damages, similar injuries had not been awarded similar damages.Footnote ²³⁷

Damages cap reforms have been portrayed as a double-edged sword. Advocates think such reforms are fair because they prevent enormous damages from being awarded to undeserving claimants. However, juries are not always biased against defendants but could also exculpate defendants who are liable.Footnote ²³⁸ If a claimant had truly deserved compensation, then a damages cap may do justice to the claimant. Evidence has shown that claimants with the most severe injuries were at the highest risk for inadequate compensation.Footnote ²³⁹ A review of jury verdicts from the California Jury Verdicts Weekly (CJVW) also suggested that the more severe the injury, the greater the reduction of damages imposed by the MICRA cap.Footnote ²⁴⁰ Nonetheless, it is not reasonable to use estimated reduction of damages as a gauge of fairness, simply because the determination of non-economic damages has always been highly arbitrary and non-scientific. A person with injury ‘X’ may be deemed clinically more serious and therefore receive higher compensation than another person with injury ‘Y’, such that an equivalent cap imposed on both damages would make the person with injury ‘X’ suffer a greater reduction in damages. However, in reality, the person with injury ‘Y’ might have had greater ‘pain and suffering’ and therefore deserved greater compensation. This simple analogy highlights the fact that the tort system of awarding damages is neither fair nor precise to begin with, so any damages cap cannot be said to make the system more unfair.

Opponents of the damages cap have further argued that a damages cap would impact heavily on lower-wage claimants such as women and the elderly because compensation based on economic damages may not be adequate.Footnote ²⁴¹ It is presumed that such claimants tend to rely on claims of ‘pain and suffering’ to obtain greater compensation. However, a recent study in California did not support such an argument.Footnote ²⁴² One could argue that if female and elderly claimants are the actual cause of large non-economic claims, then such social malady would justify even more convincingly the use of damages caps.

Danzon (Reference Danzon1994) argued that the ‘unequal payment for similar injuries’ inherent in the tort system should not be perceived purely as evidence of unfair compensation, but could also reflect differential deterrence in accordance with varying degrees of negligence.Footnote ²⁴³ It would imply, then, that a damages cap negates the deterrent effect of such ‘unequal’ damages. There is, however, no evidence to suggest that damages in tort have been precisely calibrated against the degree of negligence and that seemingly unequal damages are actually designed for the purpose of deterrence. The variable nature of damages simply reflects the unscientific and unpredictable nature of the awarding of damages by the courts. In fact, it has been proposed in the US that a schedule, table or sliding scale be used for non-economic damages.Footnote ²⁴⁴

Some commentators have raised concerns about a damages cap increasing the size and variability of jury awards due to their potential anchoring effect. A study revealed that mock jurors told of the existence of a damages cap gave higher and more variable awards.Footnote ²⁴⁵ Claimants with less severe injuries may therefore end up getting more damages than they deserve because of the tendency of damages quantum regressing to the capped level. This potential pitfall of a damages cap may be avoided if the courts strictly abide by an objective scale of assessing damages.

At this stage, it is useful to consider why the argument on a damages cap has focused primarily on the agenda of fairness. Would it not be right to introduce a damages cap for policy reasons, even if they do not seem fair to some? Many judicial decisions had been made on policy grounds even though such decisions might not have been considered fair by some commentators. Should not the policy benefits of a damages cap be an overriding factor when addressing the problem of rising medical litigation? Early studies had shown that a damages cap did effectively reduce litigation payoutsFootnote ²⁴⁶ and malpractice insurance premiums.Footnote ²⁴⁷ Yoon (Reference Yoon2001) categorically showed that average claims payouts decreased when a damages cap in Alabama was introduced, but rose again when the reform was nullified. The fall and subsequent rise in payouts were deemed significant when compared to secular trends observed in control states. Two recent studies also showed that a damages cap led to lower malpractice premiums.Footnote ²⁴⁸ Apart from reducing the rate of case filings,Footnote ²⁴⁹ a damages cap reduces the unpredictability of damages awards and has the effect of reducing outliers among insurance losses.Footnote ²⁵⁰ From a policy perspective, the reduction of malpractice indemnity premiums will keep overall health-care costs in check and minimise the practice of defensive medicine. In addition, it will reduce the risk of doctors walking out of their practices, which would certainly not benefit the public.Footnote ²⁵¹

(b) Collateral source offsets

Under the collateral source rule in various American states, a defendant is prohibited from introducing evidence that the claimant is receiving benefits from independent sources outside the dispute, such as insurance policies, benefits in the form of wages or medical services, and governmental benefits such as workers’ compensation and social security.Footnote ²⁵² The quantum of the claimant’s compensatory damages is therefore not influenced by the amount of compensation (or collateral benefits) he receives from these independent sources. Reform of the collateral source rule involves abolishing such a rule or setting various restrictions to the rule application. The need for the reform arises because the collateral source rule generates concerns of overcompensation for claimants, which may have the effect of inducing a ‘lottery mentality’ among other claimants. From an economic perspective, collateral source rule reform addresses the inequitable effects of the rule and allows greater efficiency in the allocation of resources. Reforms to the rule have been implemented in most American states.Footnote ²⁵³ The simplest reform is to permit admissibility of evidence of collateral source payments with broad exclusions (e.g. Alaska, Colorado). Some states, such as New York and Michigan, have legislative provisions for offsetting collateral source payments from damages. In Hawaii, subrogation by insurance companies is allowed, i.e. the claimant’s insurance company takes over the claim against the defendant. The insurance company can also collect part of the damages paid to the claimant, which is the amount that the company would have paid the claimant if collateral sources were allowed. The reform does not affect the amount of damages paid by the defendant. In many states, the offsetting of damages is permitted except where contractual or statutory subrogation rights exist or where the source of collateral benefit is private insurance (with premiums paid).Footnote ²⁵⁴

Opponents to reform of the collateral source rule argue that an injured claimant deserves to be awarded full damages that match the ‘value’ of the injury. This would be prevented by the reform, which will allow parties responsible for causing the injury to avoid paying for their actions.Footnote ²⁵⁵ Furthermore, the damages awarded to a claimant should not be influenced by the collateral benefits that the claimant is entitled to, because such benefits were prudently acquired by the claimant in anticipation of any injury that may occur to him.Footnote ²⁵⁶ By offsetting these collateral benefits from the damages, such prudence in the distribution of risks is discouraged. Collateral sources may also have been acquired through the claimant’s own disposable income; again, depriving the claimant from collateral benefits would appear to prejudice his right to be compensated based on his prevailing wealth and assets. This may be one of the reasons why many US reforms exempt collateral sources such as self-purchased life-insurance schemes. Even if the collateral source was not acquired by the claimant’s own income (e.g. employer-provided insurance), it could have been an entitlement in return for his work contribution or lower wages.Footnote ²⁵⁷ The offsetting of such benefits would penalise the claimant who contributes economically to society, while paradoxically an unemployed claimant would receive greater compensation. In many cases, insurance policies are also a form of investment and savings. As the purpose served by such collateral sources is different from that served by the awarded damages, it is not reasonable to offset the former against the latter. This is another reason for the exemption of private insurance payouts from the offsetting provisions in various American states; it also explains the proposal by the Pearson Commission in the UK to classify social security benefits into three distinct categories of lost income, expenses and non-pecuniary losses, and to disallow cross-category offsetting of damages.Footnote ²⁵⁸

Another line of argument against reform of the collateral source rule is that collateral source payments arranged by a claimant or donor who is the injured next of kin are often meant to confer a benefit to the claimant regardless of whether the claimant lodges a lawsuit against the tortfeasor, let alone win the lawsuit. As Lord Reid puts it in Parry v. Cleaver,Footnote ²⁵⁹ offsetting these collateral benefits from the damages would be ‘revolting to the ordinary man’s sense of justice, and therefore contrary to public policy’ and such an action meant that the claimant ‘would gain nothing from the benevolence of his friends or relations or of the public at large, and that the only gainer would be the wrongdoer’. Furthermore, the collateral benefits may be needed to supplement the compensation received, which may be inadequate for the claimant (e.g. to cover loss of earnings or medical expenses). In fact, two in five recipients of damages in the UK felt they were undercompensated.Footnote ²⁶⁰ One may also argue that the reform would further erode any deterrence of tort law against negligent doctors, not forgetting that malpractice insurance has already partly diminished such deterrence.Footnote ²⁶¹ With the reform, malpractice insurers may end up paying less damages, possibly resulting in lower premiums for practitioners.Footnote ²⁶²

It is obvious that the above arguments are generally based on the need to ensure proper justice. The arguments, however, have not taken into account the need to maintain reasonable public policy; the aim of collateral source rule reform is not to institute a system that serves better justice. Rather, the indication is socioeconomic. Essentially, litigation channels substantial resources to a few persons at the expense of the majority in society. Even if injured claimants rightfully deserve the collateral benefits, laws that support such collateral benefits will result in poor allocative efficiency due to the inequitable distribution of limited resources, which in the long term would have adverse socioeconomic consequences. The reform of the collateral source rule should be regarded as one of many deliberate ongoing changes to the policies and laws of a society necessary to ensure its economic efficiency and sustainability. Several advocates for the abolition of the collateral source rule have also made similar arguments.Footnote ²⁶³

Reform of the collateral source rule in the US has focused mainly on preventing claimants from receiving ‘double recovery’, rather than discounting the damages to be paid by the defendant. This principle underlies the concept of ‘recoupment’ described by Lewis (Reference Lewis1998). Subrogation by insurance companies is a recoupment strategy, but is seldom used because of the potential costs involved. There is also little evidence on the impact of such reform on medical litigation, albeit that this has been used in cases of property damage involving motor insurance and marine insurance.Footnote ²⁶⁴ The concept of ‘reduction’, which means the defendant pays damages directly reduced by an amount equivalent to collateral benefits, is less popular than ‘recoupment’ among advocates of the collateral source rule as it allows the defendant to pay less and undermines the deterrent aspect of tort law. If the offsetting of damages is deemed as ‘revolting’ to the idea of justice, then letting the defendant pay less would be even more unjust. Nevertheless, ‘reduction’ may be a simpler and less wasteful strategy in a highly litigious society where other tort and legal system reforms are weak or non-existent.

In the UK, the legal position on collateral benefits is still uncertain. The case law in Parry pointed out that the principle of compensation ought to consider the shortfall between the claimant’s losses and gains (not counting the damages to be awarded) due to the accident. If the damages awarded plus collateral gains exceed the losses, should the excess be deducted from the damages such that the claimant is only wholly compensated? The universal rule propounded in British Transport Commission v. Gourley Footnote ²⁶⁵ was that the plaintiff cannot recover more than what he has lost. Furthermore, in Hussain v. New Taplow Paper Mills Ltd Footnote ²⁶⁶ it was felt that ‘prima facie the only recoverable loss is the net loss’, and therefore the principled starting point should be a deduction of collateral benefits. A public consultation by the Law Commission showed that the majority of respondents had favoured one or more options of collateral benefit deduction.Footnote ²⁶⁷ The proposition by the Commission was that there should be consistency in the law on collateral benefits in personal injury and that prima facie collateral benefits which meet the same loss as tort damages should be deducted unless the provider of collateral benefit is able to recover the value of the benefit from the plaintiff by contract or from the tortfeasor through subrogation.Footnote ²⁶⁸ The consistency expected of the law is in specifying the type of collateral benefits that ought or ought not to be offset. English case-law appears to support the fact that charitable payment,Footnote ²⁶⁹ private insuranceFootnote ²⁷⁰ (especially where premiums are paid by the plaintiff), disablement pensionsFootnote ²⁷¹ and retirement pensionsFootnote ²⁷² are not deductible collateral benefits, as opposed to sick payFootnote ²⁷³ and redundancy payments.Footnote ²⁷⁴ A criterion for deductibility is when collateral benefits are not paid for by the claimant, i.e. neither in cash (e.g. premiums) nor in kind (e.g. work). This is particular so if the tortfeasor is the provider of collateral benefits. With respect to medical litigation, this is unlikely to happen, since the tortfeasor (usually the doctor) is normally not the insurer or provider of disability benefits. In response to the Law Commission’s report, the UK government opines that ‘double recovery’ should be avoided when collateral benefits exist; even if such recovery is necessary, it should be at the expense of the tortfeasor rather than a collateral benefit payer. The UK government appears to be not in favour of instituting rights of recoupment to avoid additional proceedings between the tortfeasor and collateral benefits provider. Instead, it recommends that recoverable benefits be obtained from the claimant.Footnote ²⁷⁵

Section 2(4) of the Law Reform (Personal Injuries) Act 1948 allows injured claimants to sue the NHS for damages for private treatment. It is known that some claimants who claim damages for the cost of private care subsequently use NHS treatment. The effect of section 2(4) therefore duplicates the provision of care, incurs additional costs and causes allocative inefficiency. This mirrors the existence of the collateral source rule in many US states, albeit that, unlike in the US, reform has not been forthcoming, despite recommendations by the Chief Medical Officer, to exempt clinical negligence cases arising from NHS treatment from the provisions of section 2(4).Footnote ²⁷⁶

Current available research has yielded equivocal results concerning the impact of collateral source offsets on medical litigation rates, quantum of claims and the liability insurance market. Browne and Puelz (Reference Browne and Puelz1999) demonstrated that the collateral source rule was associated with a decrease in the value of both non-economic and economic claims. Out of six empirical US studies on the impact of various tort reforms in the 1970s–1980s, only two studies showed a reduction in claim frequency and payment per paid claim.Footnote ²⁷⁷ Other studies showed that the reform had no impact on malpractice insurance premiums or loss ratios. More recently, however, Thorpe (Reference Thorpe2004) found that US states which allowed ‘discretionary’ collateral source offsets experienced about a 13 percent lower loss ratio compared to other states. Further research is needed to confirm the effectiveness of collateral source rule reform in addressing the medical litigation problem.

(c) Periodic payments

Under common tort law, the courts would normally award damages in a lump sum. With tort reform, defendants are able to make periodic payments to claimants instead of paying a lump sum. Periodic payments, in the form of structured settlements, are usually implemented for the purpose of paying future economic damages.Footnote ²⁷⁸ One major advantage of periodic payments with respect to minimising the costs of medical litigation is that it precludes the need for long-range estimation of economic damages, which may be imprecise. If the claimant dies earlier than expected, the damages would turn out to be excessive, resulting in a windfall for the claimant’s family at the defendant’s expense.Footnote ²⁷⁹ This would not be consistent with the principle of restitutio in integrum, that is, the claimant should be restored as far as possible to the position that they were in prior to the injury. Overcompensating the claimant would not be seen as fair to the defendant. Periodic payments also benefit claimants as they are capable of being adjusted in the event of changed circumstances and thereby prevent the claimant from inadvertently exhausting an otherwise lump-sum compensation.

Dissatisfaction with the lump-sum compensation has been encountered in many jurisdictions since the 1920s.Footnote ²⁸⁰ In regions like Western and South Australia and the former USSR, laws have been implemented to permit departures from lump-sum compensation. The actual present-day concept of structured settlements originated in CanadaFootnote ²⁸¹ in the early 1970s amidst growing dissatisfaction with the lump-sum award, as evident from the tone set in Andrews v. Grand &Toy Alberta Ltd.Footnote ²⁸² Laws allowing such structured settlements took effect from 1979.Footnote ²⁸³ The concept of structured settlements subsequently spread to the US, Australia and many European countries.Footnote ²⁸⁴ As in the UK, structured settlements in Canada allow the plaintiff to be conferred a tax advantage if he chooses to receive his damages in periodic payments; otherwise, he would be taxed on the returns of his invested lump sum of damages. Under a personal injury annuity contract, the defendant (or his liability insurer) pays a single lump sum (capital premium) to a life insurer (‘the issuer’) in return for which the issuer makes periodic payments to the claimant. The Canadian courts have the power to impose structured payments in Ontario, Manitoba, Saskatchewan, Quebec (minors only) and British Columbia (motor accident cases),Footnote ²⁸⁵ albeit that the scope of such power varies between different states. For example, in Ontario the courts are empowered to order for structured settlements if the claimant requests for marked-up damages to compensate for income tax payable on the award, and provided that both parties agree.Footnote ²⁸⁶ In Manitoba, the decision of whether to impose periodic payments is subject entirely to the court’s discretion regardless of the parties’ preference.Footnote ²⁸⁷ Legislation providing for periodic payments has also been enacted in three Australian states, albeit only in South Australia are such payments not restricted to motor vehicle accidents.Footnote ²⁸⁸ In the US, the Periodic Payment Settlement Act (Public Law 97-473) was introduced in 1982, following which many states implemented reforms allowing mandatory (e.g. Washington, Utah, California) or discretionary (e.g. Connecticut, Illinois, Maryland) periodic payment of damages.Footnote ²⁸⁹ Several states have imposed various threshold limits of damages beyond which periodic payments may be applied (e.g. California, Alabama, Minnesota). Nevertheless, the courts in some states, such as New Hampshire and Kansas, have struck down periodic payments as unconstitutional.Footnote ²⁹⁰ In the UK, the 1996 Damages Act gave the court the power to order a periodic payment only with the consent of both parties. With the introduction of the Courts Act 2003,Footnote ²⁹¹ the court may order periodic payments without the consent of any party so long as it considers such a method of payment to be in the claimant’s best interests.Footnote ²⁹²

Unlike damages caps, the use of periodic payments (or structured settlements) does not evidently control the costs of medical litigation. At best, it may avoid waste by diverting lump-sum compensation from claimants to insurers in order to generate investment income while at the same time preventing potential misuse of compensation funds by the claimant.Footnote ²⁹³ This is particularly important in countries such as the UK, where medical care is state funded, as it may reduce the likelihood of the claimant squandering away his lump-sum compensation and falling back on the state for support.Footnote ²⁹⁴ While the prospect of striking a litigation ‘windfall’ is lost with periodic payments, this alone would probably have little deterrent effect against frivolous claims since the claimant is aware that ultimately the periodic payments would add up to a substantial award. Compared with other tort reforms, periodic payments appear to benefit the claimant more than to satisfy the policy of discouraging litigation. For example, periodic payments in the form of structured settlements transfer investment and inflation risks from the claimant to the insurer. Furthermore, they provide a greater sense of security to the claimant as they avoid an underestimated actuarial calculation of life expectancy. Such security is illustrated through projections by forensic accountants in previous court cases. For example, in Kelly v. Dawes Footnote ²⁹⁵ it was shown that, based on certain assumptions, a lump-sum compensation would have been exhausted within eleven years even though the claimant was expected to live for about twenty years, and perhaps longer. Much uncertainty exists as to how long the claimant may live, especially when he has pre-existing illnesses. In claims that involve minors or mentally impaired persons who are unable to manage their funds, the financial security accorded by structured settlements is even more critical and prevents premature dissipation of the funds. The mismanagement of funds leading to premature dissipation is not uncommon, and many tort lawyers have encountered these cases.Footnote ²⁹⁶ A US survey suggested that up to 90 percent of all lump-sum awards were squandered within five years of receipt.Footnote ²⁹⁷ In addition to security benefits, structured settlements can shield claimants against taxation of their awards. As much as 40 percent of periodic payments may not be subject to income tax, unlike lump-sum payments.Footnote ²⁹⁸ In this way, periodic payments function like pension or annuity schemes and do not significantly (if at all) reduce the total damages awarded to the claimant.

Despite the above-claimed benefits, periodic payments are still considered unconstitutional or unfair in certain jurisdictions. Why? The question of fairness probably stems from the fear that periodic payments may not be sufficient to cater for the rising costs of health careFootnote ²⁹⁹ and may lead to unnecessary financial hardship for the injured party. This is because structured payments linked to rises in the Retail Prices Index (RPI) may be outpaced by rises in health-care costs.Footnote ³⁰⁰ With rapid advances in medical science and the emergence of new but expensive treatments, claimants may find themselves unable to afford such treatments using periodic payments. This is made worse if the claimant’s medical condition deteriorates soon after settlement. There appears to be hope for claimants that the English courts have begun to accept alternative indices for quantifying periodic payments. Flora v. Wakom Footnote ³⁰¹ had set the tone while Thompstone v. Tameside Footnote ³⁰² demonstrated the court’s acceptance of an alternative index. Nevertheless, the courts would need to exercise its discretion on a case-by-case basis, as some indices may not be appropriate. For example, it has been commented that the NHS wage index, though proposed by the plaintiff in Flora as a better index than RPI, may be skewed by high pay-scale earners.Footnote ³⁰³

Besides the prospect of lack of funds for medical care, periodic payments may result in the defendant paying less than what he ‘deserves’ to pay if the claimant dies before his life expectancy, which may be deemed unfair by the claimant. However, claimants should be aware that defendants also have an equal risk of paying more than what they deserve to pay if claimants live beyond their life expectancies. Periodic payments also deprive the claimant of his right to decide on the disposition of his awards; the claimant may wish to invest the lump sum in a business to generate future income. Periodical payments are less likely to benefit the claimant’s dependants who may genuinely need financial support in the event of the claimant’s demise.

With the introduction of periodic payments, claimants who wish to be paid lump-sum awards may favour settling claims in a pre-court setting. This may lead to greater use of ADR methods and would benefit the defendant if the claimant is willing to settle for a lower lump-sum award. While there are no formal studies showing the cost impact of periodic payments vis-à-vis litigation, it is believed that periodic payments may increase the cost of claims due to inflation.Footnote ³⁰⁴ As a result, periodic payments may conversely be used as a negotiating ploy by plaintiff lawyers to increase lump-sum payments. Furthermore, implementing periodic payments would also incur additional administrative costs to the tort system unless the payments are outsourced. The use of periodic payments may also potentially complicate the implementation of other reforms. For example, the use of early offer-of-judgment or settlements (known as Part 36 offers in the UK) to discourage litigation may no longer be straightforward if a combination of lump-sum and periodic payments are allowed. This is due to difficulty in determining whether a subsequent settlement at trial is better or worse than an early offer in order to determine fee-shifting penalties.Footnote ³⁰⁵

It appears that periodic payments have not been used much in the UK since their inception. A UK survey in 2005 found that only two out of nine insurers surveyed had settled one periodic payment each, while the rest had none.Footnote ³⁰⁶ During the period 2001–2002, the NHSLA paid only fifty-one structured settlements as compared to 2,211 lump sums.Footnote ³⁰⁷ Among the disadvantages discussed above, the concern of inadequate compensation is probably the major reason for the low utilisation of periodic payments. It is unlikely for periodic payments to achieve the same effect as damages caps in reducing medical litigation. What this legal reform can achieve is merely to moderate the overall costs of the tort system.