Torts - Cases, Principles, and Institutions Fifth Edition, 2016a

Witt & Tani, TCPI 9. Liability without Fault?
do so. That insurance policy covers her injuries, or the injuries of other users or third parties, in
the event of injury arising out of the use of the product.
But note that this is not like the insurance our consumer would purchase from her friendly
neighborhood insurance broker. For example, unlike health or accident insurance, this insurance
does not set the premium on the basis of the consumer’s own risk profile. Sellers rarely possess
information about the purchaser’s risk when they sell a product. They cannot price discriminate
on that basis. And even if they could, their exposure to non-purchaser users and third parties
would make such knowledge inadequate.
Moreover, unlike a life insurer, a seller of products (and thus of products liability
insurance) cannot price the product according to the value of damages to be paid out should the
insured-against event come to pass. Life insurance premiums vary depending on the amount of
insurance purchased. But once again product sellers cannot know the damages to which they will
be exposed by any one purchaser or subsequent user.
The result is that sellers of products have to charge all purchasers the same premium in the
purchase price—even though certain consumers will find the implicit insurance policy far more
valuable (because they are risky users or may have high damages) than other consumers for whom
the same implicit insurance policy is worth far less (because they are safe users or because they
are likely to have lower damages). Products liability and its compulsory insurance, in other
words, creates cross-subsidies among classes of consumers.
Cross-subsidies alone might not be bad. They can be useful policy devices, as in health
insurance regimes, for example, where absent compulsory insurance mandates and crosssubsidies,
adverse selection problems will make insurance unavailable for certain classes of
unfortunate would-be buyers. But the products liability cross-subsidy is potentially perverse.
Why should low-risk users be required to subsidize high-risk users? Shouldn’t public policy aim
to reward low-risk users over high-risk users? Most of all, why should low-expected-damage
purchasers subsidize high-expected-damage purchasers? This second cross-subsidy is especially
galling given that those who can expect low damages are those with relatively modest wages.
Their damages from lost income, for example, will be lower. Those who can expect high
damages, by contrast, are those with high wages whose lost income will be higher. The result of
this cross-subsidy, in other words, is that the low incomes are subsidizing purchases of the same
product by those with high incomes. See generally George L. Priest, The Current Insurance
Crisis and Modern Tort Law, 96 YALE L.J. 1521 (1987).
Of course, any such problem is lessened to the extent that the product in question has a
relatively homogenous class of purchasers: homogenous with respect to risk and income. And
there is good reason to think that many consumer product markets sort themselves along these
axes. High-income car purchasers buy BMWs, while low-income car purchasers buy Kias. Highrisk
car purchasers buy sports cars, while low-risk car purchasers buy station wagons. But there
are lots of product markets that have highly heterogeneous consumers. Who buys Ford sport
utility vehicles? Well-heeled hunters and middle class soccer moms. Who buys riding lawn
mowers? Working class garden laborers and the owners of mansions with sweeping lawns. Both
pay the same for the product liability insurance that comes—by law—with their product.
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