This is one in a series of occasional stories examining tort reform in R.I.
A man is badly hurt in a car crash, requiring $10,000 of medical treatment and losing two weeks at his $52,000-a-year job. He sues the responsible driver, and three years after the crash, a jury awards him $12,000, plus $10,000 for pain and suffering.
A doctor botches a woman’s eye surgery, leaving her with permanent damage that can be only partially repaired, for $25,000. Two years later, still unable to see well, she sues the doctor for $300,000. Six years after the surgery, his insurer is ready to settle.
In both cases, insurance companies say, the payouts in Rhode Island are likely to be far higher than in other states because of one controversial provision: a law that adds 12 percent interest to jury awards in civil actions.
In personal injury cases, the interest accrues from the moment of the “cause of action” – say, the car crash. In medical malpractice, the clock starts ticking when notice of the claim is filed, or when the plaintiff sues.
In the car crash, that means the plaintiff would get not $22,000, but nearly $30,000. In the eye surgery case, the insurance company would know that, if it lost (and, to be fair, plaintiffs rarely win medical malpractice suits), it would have to pay not $300,000, but $516,000.
“It’s conceivable that the case can be in court so long that the interest can exceed what the judgment is,” said Terrance S. Martiesian, state director for National Federation of Independent Business, which has lobbied to reduce the interest rate, among other “tort reform” measures.
It’s also, industry insiders argue, a great incentive for plaintiffs to keep cases going for years.
“If you’re anticipating that a claim is worth $100,000 and you can get it today and invest it at 4 percent, or you can wait four or five years and get 12 percent, where are you better off?” said Cristie Hanaway, an insurance agent in Cumberland who has testified at the General Assembly on insurance issues as a member of the Independent Insurance Agents of Rhode Island.
In the medical malpractice insurance sector especially, the 12-percent interest rate is cited as a major factor in skyrocketing premiums. The Rhode Island Medical Society has made cutting it a priority, and this year, it unsuccessfully lobbied for passage of a bill sponsored by state Rep. Peter T. Ginaitt, a Warwick Democrat, that would have, among other things, cut the rate to 5 percent up to a certain point in a malpractice suit, then 8 percent. The bill also sought to eliminate interest if plaintiffs sought to delay cases.
The measure died in the House Judiciary Committee, and a twin in the Senate died in that body’s Judiciary Committee.
Two other bills – an auto-insurance reform bill sponsored by state Rep. Roger A. Picard (D-Woonsocket) that would’ve pegged the interest rate to prime on the date of the judgment, and another by state Sen. Marc A. Cote (D-Woonsocket) that would have set the interest rate at 6 percent – also got nowhere.
Bay State adjusts rate
Until this year, Massachusetts also imposed a 12 percent rate on damages, but a new law signed by Gov. Mitt Romney changed it to the one-year U.S. Treasury Bill rate (2.06 percent as of Sept. 16), plus 4 percent.
Several other states have similar setups, some more generous than others: New Hampshire, Iowa, Louisiana and Nebraska add 2 percent to the U.S Treasury Bill rate. Texas uses the Federal Reserve’s prime rate (currently 4.75 percent), with a floor of 5 percent and a ceiling of 15 percent; Georgia pays prime plus 3 percent. A few have a lower fixed rate, such as Maine’s 6 percent. Vermont’s rate is 12 percent.
Consider the difference: Under New Hampshire’s law, the same $300,000 verdict that in Rhode Island would almost double at 12 percent would cost under $74,000 in interest. In Massachusetts, the interest would be about $109,000 under the new law.
But does that analysis miss the point of Rhode Island’s high interest rate? Plaintiffs’ lawyers argue that it does, in more than one way.
First of all, said John S. Foley, of Decof & Decof, “we’re not trying to duplicate what the injured party would’ve made had they invested the money. We’re trying to induce the company to settle.” Insurance companies invest their holdings and make money, so the interest rate has to be high enough to really cost them, Foley said.
“There are a lot of lawyers who would say 12 percent isn’t enough,” Foley said, “because the insurance companies aren’t settling. They may complain about (the interest) but they don’t act on it. … I have had insurance adjusters say to me that they don’t even think about interest” when considering settlements.
Because plaintiffs’ lawyers are generally paid a share of the jury award or settlement – one-third in personal-injury cases, 40 percent in malpractice cases – critics argue that whatever their clients’ situation, the lawyers have a financial stake in delaying cases. But that too is untrue, said John P. Barylick, a prominent plaintiffs’ lawyer.
“We don’t get paid anything until the matter resolves, and resolves positively,” Barylick said. Foley noted in a separate interview that not only are lawyers not getting their fees, they’re also incurring thousands of dollars’ worth of expenses, from the cost of documents, to huge fees for experts.
‘No incentive’
“We have no incentive to take poor cases, and we have no incentive to delay cases,” Barylick said. “And the vast majority of cases do not go to trial; they get settled at the last minute by the insurance companies, most of which claim not to consider interest at all in the calculus of what they pay.”
The true reason for most delays, Barylick said, is that insurance companies have “a relative handful” of lawyers whom they like to use, and because those lawyers are so overbooked, their unavailability can cause cases to be delayed “sometimes for years.”
As for the clients themselves, Foley said, most “want a case to be over as soon as possible,” because “it’s not fun.” Many also have major expenses they need to cover promptly, Foley and Barylick said, and they may be paying high interest rates on credit cards just to cover basic living expenses.
Rep. Ginaitt, whose malpractice insurance bill was the highest-profile tort reform measure on the table this legislative season, said he hasn’t given up on reducing the prejudgment interest rate, and in fact he may try to do it before he gets to some other, potentially more controversial items.
“It’s tough getting it by the trial lawyers, who just totally disagree on the concept,” Ginaitt said. But he’s also come to see their side, to some extent, which is part of why he wants to implement reforms slowly.
“This is not just a trial lawyers issue – it’s also an insurance issue,” Ginaitt said. “I’m very concerned about doing a major tort reform only to see that the insurance companies come out as the winners, but don’t reduce their rates.”
