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Wednesday, June 4, 2008

Falling Cranes and Sovereign Immunity

In NYC, there have been recent disasters involving construction cranes. There was substantial property damage and injuries/deaths. With all these construction accidents, the USA is looking more and more like a 3rd world country!

The fact that a construction crane fell is, by itself, strong evidence that negligence occurred. When building, you always allocate a safety factor. If 3 cables are the minimum required to secure the crane, then you should actually use 6-10 cables. This way, if one breaks, there isn't a serious accident. Accidents would still occur, but they would be *MUCH MORE RARE* than the current rate.

The State shields the management of construction sites from the negative consequences of their negligence. It's the usual "sovereign immunity" problem. Back when there was a king, the king claimed "soverign immunity". If you're the king, you can do whatever you want, and it's automatically legal! "It's good to be the king!" In the present, soverign immunity extends to all direct and indirect State employees. Policemen, judges, and bureaucrats have nearly absolute immunity for misconduct while on the job. Unless their misconduct is truly egregious, it goes unpuished. Frequently, even egregious misconduct goes unpunished.

Soverign immunity doesn't just apply to direct State employees. It also applies to indirect State employees. The management of a construction corporation are indirect State employees. They are protected by corporate "limited liability" and "tort reform" laws. Even though there is an accident caused by negligence, management of the construction site is not personally responsible for the accident. The owners of the construction corporation may suffer a small loss after the accident, but they get to continue doing business as if nothing bad happened. Insurance pays most/all of the cost of an accident caused by negligence.

What about the employees on the construction site? Can't they say "These conditions are unsafe! We refuse to work!" The State distorts the labor market. The supply of workers is always greater than the supply of jobs. Workers are essentially slaves. A worker can't quit his job and easily find another job, especially in a heavily unionized industry like construction. A worker who quits is forfeiting his seinority.

Suppose that the compenstory damages are $10M, if an accident occurs. This figure include property damage and compensation for injury. Suppose that, due to negligence, there is a 1%/year chance of an accident. Based on the number of recent accidents in NYC, 1%/year may be a low estimate! The market cost of insurance is thus $100k plus the insurance corporation's expenses; let's assume a 50% profit margin for the insurer. Insurance can be purchased for 2% of the cost of an accident.

Compensatory damages only include direct compensation for injury or property damage. If you're unable to enter your apartment for a week due to a construction accident, then the cost is 1 week of rent. The inconvenience is not included as a cost.

The State imposes certain minimum safety guidelines. The State is responsible for enforcing these minimum security guidelines and not the insurer. The management of the construction corporation says "We followed the minimum State safety standards. Therefore, we are not responsible." Who chooses the construction regulations? The management of construction corporations, of course! It's the usual "captured regulators" problem. The average person doesn't care about construction regulations, unless they're the victim of an accident; even if they were outraged, they couldn't profitably lobby for change. The management of construction corporations can profitably lobby for regulations that favor them.

The corporation is only responsible for compensatory damages when there is an accident. Most of the time, management will be lucky, and there will be no accident. When there is an accident, management is protected by their insurance, tort reform, and "limited liability" incorporation. The absence of punitive damages makes negligent behavior profitable. If the damages are greater than their corporation's assets, they will merely declare that corporation bankrupt and start over with a new construction corporation. "Piercing the corporate veil" is practically impossible; management can always claim incompetence rather than intentionally being negligent on safety. Prudent accountants and lawyers will have each constuction site as a separate corporation, further limiting liability. Overall, management profits by cutting corners on safety.

Suppose another construction corporation decided to use sound practices. Their insurer isn't allowed to enforce saftey standards; that's the State's responsibility. The insurer won't give a discount to a soundly managed construction site. From their point of view, accidents are a statistically random occurrence; they can't control safety standards. Further, State violence makes the price of insurance for risky behavior artificially low; there's no punitive damages. "Market forces" will prevent a soundly managed business from being profitable. Therefore, *ALL* the construction corporations will use the bare minimum safety practices demanded by the State. Then, they can validly claim "We're as safe as all our competitors; why blame us?"

In the above calculation, a 1% chance $10M of damage due to negligence could be insured for only $200k. This rewards negligent behavior. What would a free market court say?

Suppose I were judge in a free market court. Suppose I concluded that their negligence had a 1% chance of an accident costing $10M. Suppose that I also concluded their negligence was willful; better safety practices were well-known and not followed. In that case, the fair thing to do is to award $10M in compensatory damages and $990M in punitive damages. If I award punitive damages *LESS* than $990M, then the above calculation indicates that the negligent behavior can be profitably insured.

The important point when calculating punitive damages is that the builder *SHOULD HAVE KNOWN* he was using defective safety standards. If the construction practices were sound, and there was a 0.001% chance of accident, then punitive damages should not be awarded; awarding $990B in punitive damages in that case would be silly.

Who is the legimate recipient of punitive damages? There's no government to collect the proceeds. The police and court can only claim their expenses, charged to the criminal. The only legitimate recipients are the victims.

Excessive punitive damage awards are decried as an unfair windfall profit for the victims. However, punitive damages are the *ONLY* way to ensure responsible behavior. If your behavior is negligent, *AND* there's only a small chance of getting caught, then punitive damages are *NECESSARY* to ensure responsible behavior. Otherwise, the profit equation makes dishonest behavior profitable.

If you consider the $990M punitive damage award excessive, consider this analogy. Suppose I steal $1000 from you, but I only have a 1% chance of getting caught. 99 times out of 100, I make a profit of $1000 for a total of $99000. 1 time out of 100, I get caught. If my damages are only $1000 when I get caught, paying restitution to the victim, then stealing 100 times yielded a net profit of $9900. Without punitive damages, stealing is profitable when there's a low risk of getting caught.

Causing $10M in damages due to your negligence is exactly the same as stealing $10M. The fact that you only actually injure someone 1 time out of 100 does not mitigate the fair cost. Negligence should be treated as if it *ALWAYS* caused damage, if the criminal should have known better.

Am I being too strict? Perhaps it should be a sliding scale. I'm not sure exactly what is correct. In the example I gave, if you have a 1% chance of getting caught, what is the appropriate multiplier for punitive damages? 100x? 10x? 50x? The correct multiplier is obviously somewhere between 1x and 100x. It depends on the egregiousness of the misconduct. In the example of a falling construction crane, sound engineering practices are well-known; I'd award the full 100x in that case.

Suppose you argue "Wait a minute. What if a 1% accident rate is natural. In that case, aren't punitive damages excessive?" Punitive damages only apply to injuries caused by negligence. If construction *ALWAYS* has a 1% chance of accident, then only compensatory damages apply. In that case, the correct cost of insurance is $100,000 plus expenses. My point is that State manipulation of the market and justice system rewards negligent behavior. In a system where people aren't accountable for their misconduct, a 1% accident rate may be considered "normal".

Further, suppose there was a risk of $990M in punitive damages due to negligence. The insurance vendor should offer to only insure damages due to a reasonable accident. Injuries due to negligence should be uninsurable. In the present, insurance corprations treat injuries due to accident and injuries due to negligence as identical. When nobody is responsible for anything, there's no distiction between a genuine accident and negligence! Negligence insurance could be purchased, but only if the insurance vendor has the power to inspect the work site. In that case, insurance and safety inspections would be bundled together. Then, the insurer would have proof that sound practices were followed, if there were a dispute later. If the insurer's safety inspections were only partially deficient, it'd be appropriate to award punitive damages of only 2x-5x.

As another example, suppose a drunk driver has an accident. If a drunk driver has a 1% greater chance of getting in an accident, then the penalty for a drunk driving accident should be 100x the cost of an accident, paid to the victims. If a drunk driver is stopped by police, and the police catch 10% of drunk drivers, then the penalty should be the cost of an accident (paid to the police); this is better (for the drunk driver) than an actual accident, because nobody was injured. Someone who is not drunk and gets in an accident is merely responsible for compensating the victim; this risk is insurable. A drunk driving accident should be uninsurable.

As usual, blame for negligence is always deflected away from the State. When there's a State-caused disaster, people appeal to the State for more regulation! Either management is blamed, or people say that a certain number of accidents are a natural occurrence. The management of the construction corporation is behaving rationally, given the rules of a defective economic and political system. Via sovereign immunity, the State protects people from the consequences of their misconduct.

1 comment:

Thomas Blair said...

If you consider the $990M punitive damage award excessive, consider this analogy. Suppose I steal $1000 from you, but I only have a 1% chance of getting caught. 99 times out of 100, I make a profit of $1000 for a total of $99000. 1 time out of 100, I get caught. If my damages are only $1000 when I get caught, paying restitution to the victim, then stealing 100 times yielded a net profit of $9900. Without punitive damages, stealing is profitable when there's a low risk of getting caught.

The number $9900 ought to be $99,000. Just a small typo.

Frequently, even egregious misconduct goes unpunished.

For a cornucopia of recent examples involving just the police forces, look no further than the Agitator blog, which I see you read.

The market cost of insurance is thus $100k plus the insurance corporation's expenses; let's assume a 50% profit margin for the insurer. Insurance can be purchased for 2% of the cost of an accident.

Perhaps I misunderstand you, but shouldn't the insurance be available at 1.5% of the cost on 50% profit or 2% of the cost on 100%?

Compensatory damages only include direct compensation for injury or property damage. If you're unable to enter your apartment for a week due to a construction accident, then the cost is 1 week of rent. The inconvenience is not included as a cost.

Do you mean to say this is the way things are now, or this is how they should be? I'd argue that the inconvenience is surely compensable. In this case, the construction accident has imposed not only the cost of one week's lost rent (that I've already paid to my landlord), but also the cost of having to secure replacement lodgings for the week. If the purpose of compensatory damages is to make the person whole after imposing a cost, then my need to secure shelter for that week is a cost imposed upon me through no fault of my own. Additional restitution might be due if my inability to access my dwelling due to the accident cost me in other ways, like not having access to my business records or computer, for example.

If a drunk driver is stopped by police, and the police catch 10% of drunk drivers, then the penalty should be the cost of an accident (paid to the police); this is better (for the drunk driver) than an actual accident, because nobody was injured.

Again, I presume this is taking place in an agorist society. By what authority do police officers (or private security officers, depending on your nomenclature preferences) have to pull over any motorist suspected of driving drunk, and by what authority can they extract a payment equal to the cost of a (non-existent) accident as a fee for pulling a drunken motorist over?

Please excuse my comments if I've mistaken descriptions of what 'is' for what 'ought to be'.

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