It was a runaway record for punitive damages. In 1978, a California jury awarded $125 million to a boy injured when his Ford Pinto was rear-ended and its gas tank exploded. Using internal Ford memos, plaintiffs' attorneys convinced the panel that the automaker saved less than $15 per car by going with a hazardous fuel-tank design.
How things have changed. Last July, Los Angeles jurors slapped General Motors Corp. with a new record punitive award, again on behalf of victims of a fiery rear-end crash. Internal GM memos helped those plaintiffs make the case that the location of the Chevy Malibu's fuel tank was unsafe. The penalty this time: $4.8 billion in punitive damages.
If the number of digits on the checks has grown significantly over the past 21 years, the job for companies has remained constant: to seek ways to protect themselves against those ever-larger judgments. True, a host of judicial rulings aimed at reforming courtroom procedures have clamped down on flimsy science and curtailed the use of class-action suits for blackmail. And judges continue to pare awards they consider the most outrageous. (Ford's 1978 punitive penalty eventually was cut to $3.5 million; GM is planning to appeal the Malibu verdict.)
"Nevertheless," says broker Dennis Connolly of Marsh USA Inc., in New York, "the picture is definitely not one in which [executives] should relax."
Indeed. One has only to look at the daily diet of jury verdicts, settlements, or potential lawsuits in the news to see that more Malibu cases are on the way. Within days of the gargantuan verdict against GM, in fact, yet another California panel gave $295 million to the survivors of a Ford Bronco rollover, for example.
"Management, including CFOs and CEOs, really needs to understand that the playing field is not level right now. It's tilted against them," says corporate defense attorney John Winter of New York based Patterson, Belknap, Webb & Tyler. Companies continue to settle the great majority of cases out of court. "If a product causes harm for which a manufacturer is liable, people should be compensated," Winter allows. But when a trial is forced on them, he argues, corporate defendants these days face increasingly well-armed plaintiffs' attorneys and a court system sympathetic to victims.
And companies are starting to prepare for more product-liability suits, an ironic result of the Supreme Court's effort to limit class-action litigation, says economist Robert Hartwig of the Insurance Information Institute, which conducts research and lobbies on behalf of insurers. The limits may lead to hundreds of individual suits clogging the court system, he says, and "it's not within the court's capacity to deal with these cases."
Hot Dogs and Soda Pop
To varying degrees, every manufacturer or distributor of goods and services fears severe repercussions if plaintiffs can demonstrate that the company deserves blame for personal injury. Last December, Sara Lee Corp.'s BilMar unit recalled tainted hot dogs and packaged meats, which were responsible for the deaths of 15 people. (The food poisonings took a toll on the company's earnings-- Sara Lee reported the recall was a factor in its 5.9 percent decline in the fiscal fourth quarter, ended July 3.) And Coca-Cola is holding its breath over what suits might arise out of the illness suffered in June by scores of people in Brussels, allegedly from tainted soda pop.
"Product liability is far and away the most important aspect of property and casualty," says CFO Joseph Apuzzo of Terex Corp., in Westport, Connecticut, which supplies hoisting equipment to the construction industry. Worries about liability, he says, affect nearly every component of his company's business, which includes building and marketing aerial platforms for construction, and training personnel in their use.
The worries are especially acute among the ranks of companies relying on self-insurance. This group has been growing in recent decades, as many companies have chosen that course to reduce premiums. More and more, though, this has exposed corporate treasuries to the vicissitudes of the court system.
While the cost of losing product-liability cases has skyrocketed, other developments on the legal front have forced companies to be inventive. Five states, including the two largest in terms of population, California and New York, prohibit companies from insuring themselves against punitive damages. The idea is to prevent companies from receiving compensation for wrongdoing. But insurers and companies have routinely arranged such coverage, using offshore connections. They believe these arrangements will hold up in court, although the legality of the approach has yet to be tested in a case, and Internal Revenue Service treatment of resulting insurance proceeds is unknown. (Of course, normal insurance limits would fall far short of covering the most enormous penalties.)
A Way to Cut Premiums
With product recalls becoming an everyday event, companies now can avail themselves of "third-party" recall insurance. This insurance protects companies that supply their products to another company, when a defect in these products requires the customer to recall the end product. While general liability policies often cover component products that are inseparable from end products - such as artificial sweeteners in a can of soda - they may not cover defective parts that can be removed. "If your bolts go into a combine and injure the farmer's leg, recall expenses are not covered," says Geoff Gregory, senior vice president, excess casualty, at American International Group (AIG). But recall insurance is limited, too; it principally covers costs allocated to the recall, not overarching liability claims.
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