The Goose and the Gander

For more than 25 years, insurance industry-funded shills have been slowly eroding the US justice system in what they call "tort reform".

Polling shows that Americans equate "tort reform" with putting an end to frivolous law suits. There's not a soul alive that would argue in favor of frivolous lawsuits but that is not at all the definition or purpose of tort reform.

Tort reform is merely a mechanism to limit awards so the perpetrator is not penalized for their bad actions. It has nothing to do with frivolous law suits. In fact, the justice system has a number of measures already in place that preclude a frivolous suit from ever reaching trial.

Tort reform was one of George W. Bush's platforms while Governor of Texas. Under his reign, Texas imposed caps on non-economic damages of twice the actual damage amounts. The promise of tort reform in Texas, as elsewhere, was that insurance premiums would drop. This promise failed miserably as premiums in Texas, since the damage awards were capped, have skyrocketed.

Now he's imposing on the country what he did in Texas.

President Bush and his Congressional cronies trust juries to send a man to his death but don't trust juries to financially penalize their insurance pals (campaign contributors).

Lawmakers from both sides of the aisle think so little of the American public that they refuse to attach an addendum to tort reform Bills introduced that mandate a 60% reduction in premiums, across the board, if and when new tort reform measure become effective. This reduction represents the insurance industry's new liability.

Lawmakers are also unwilling to apply the same standards to government that they want to impose on the public. If penalties for wrong doing are capped at $250,000, so should penalties imposed by the Internal Revenue Service, the institution that can endlessly penalize taxpayers and operate on a "guilty until proven innocent" theory of law.

Let's examine what punitive damages really mean in terms of dollars and cents. Assume a homeowner must sue their insurance company for breach of contract. The case passes all efforts in the part of the defense to have it thrown out, meaning it is NOT a frivolous lawsuit. A jury hears the case and determines that the homeowner is entitled to $500,000 in actual damages, $600,000 in punitive damages, $400,000 in mental anguish (this is also where many out of pocket costs are couched and in this case, let's assume the plaintiff had to pay $300,000 in actual out of pocket expenses to pursue justice), and awarded prejudgment interest of $120,000. From that amount, legal fees of 35% or $567,000 were calculated, for a total judgment of $2,187,000.

Legal and out of pocket costs are deductible as "misc. itemized deductions" on an individual 1040. However, for Alternative Minimum Tax purposes, these amounts are ADDED BACK to determine the taxpayer's Alternative Minimum Tax ("AMT"). This AMT is calculated as follows:

Here's is the dismal picture of REALLY what the homeowner walks away with after all is said and done:

The insurance company on the other hand fully expenses the entire payment so it becomes a write off and the US government does not enjoy any added tax revenues from the hide and seek game played by the insurance company.

Surely the legal system needs to be overhauled but as a society we must look deeper at reforms. Recently, an Ohio judge mandated that a plaintiff give a significant part of his judgment to charity. While there was much criticism about such a mandate, it actually makes sound economic sense: 

• It perpetuates and helps fund the initiatives proposed by the current administration; and
• It provides a hefty charitable tax write off for the plaintiff and redirects tax dollars destined for the IRS to more worthy causes.

Perhaps an overhaul should include banning caps and limitations on punitive damages and allow juries to freely exercise their judgment for the benefit of the public, not the perpetrator. Certainly, the plaintiff does not "hit the jackpot" at the end of the day.

If such reforms are not made, the American public should demand that government impose caps on tax cases and all other cases in which they are the plaintiff. What's good for the goose is good for the gander.

This editorial was written by POA member Melinda Ballard

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