One of the major debates going on in the U.S. legal system today is over how much inflation and high interest rates are affecting justice -- and how the system should change to reflect those economic realities. Even though interest rates are stepping downward and grocery store prices in March have some resemblance to what they were in February, the basic issue remains a hot one.
The controversy is, simply, over whether defendants in damage suits intentionally stall so that they will be able to pay the claim in cheaper dollars.
"The economic incentive to delay adjustment, settlement and trial of disputed claims is enormous," lawyer Thomas F. Londrigan of Springfield, Ill., insisted in a recent debate on the issue in the pages of an American Bar Association magazine for judges. "A claim occurring in 1977 but not paid until 1984 generates investment income in excess of the value of the claim," he wrote.
That's why courts are beginning to abandon an old legal tradition that a $100 loss calls for a $100 repayment, with the time elapsed between the two events of no significance.
Twenty years ago, only five states allowed any exceptions at all to that rule. Now, about half do, and there is pressure to make "prejudgment interest" the nationwide norm. ("Postjudgment interest" that accumulates after a court decision during any appeal process initiated by a losing defendant is a much more established concept.)
Not every winning plaintiff gets prejudgment interest automatically. For instance, a plaintiff who turns down a settlement offer and insists on taking the case to trial always will lose the interest if the jury returns a damage award that is less than the pretrial offer. But in states such as California, Michigan, Pennsylvania and New York that provide for the interest, the judges have more leeway to fashion an award that "makes a plaintiff whole" -- in other words, puts him or her back in the financial situation he or she would have been in had it not been for the action that is at the heart of the suit.
Prejudgment interest, however, is far from a panacea. It can be imposed only in litigated cases, and, in fact, most cases are settled. And it is in society's benefit to have most cases settled, rather than using the resources of a court to calm a dispute. But if prejudgment interest is paid only in cases that actually go to trial, that will reduce the incentive for plaintiffs to settle. They know that if they can win an award even a little bit bigger than the settlement offer, adding on interest might double that amount.
That means that the plaintiff's lawyer will up the ante from the start. "From a negotiating standpoint, there is no question that as soon as prejudgment interest becomes a component of the plaintiff's damages, whether it be for true out-of-pocket items or noneconomic items, plaintiffs' attorneys will be asking for an add-on in the form of interest when it comes to negotiating the file with the defendant's insurance representative," argued Lawrence R. Smith of Chicago, Londrigan's opponent in the magazine debate. And, Smith points out, because the add-on is not taxable income for the plaintiff while interest earned on a settlement payment made earlier would be, wider use of prejudgment interest might lead plaintiffs to drag their feet.
In fact, plaintiffs in states with no provision for prejudgment interest might be getting it. When the Institute for Civil Justice hired the Rand Corp. to look at what juries were actually doing in tort cases, the study concluded that jurors were building an interest factor into their awards, even if they didn't think of it quite that way. In Cook County, Ill., in the 1960s and 1970s, the Rand researchers found that jury verdicts were going up at 3.7 percent a year more than the inflation rate.
There is little problem of lost interest on an award due a victim if the delay is weeks or even months. The serious issue comes up, of course, when many years elapse between the injury and the payment. It is common for cases to be settled only moments before a trial is set to begin -- and years after the occurrence.
To the layman, it seems unreasonable that with the same set of facts and the same injuries detailed years before, the two sides could not have reached agreement sooner. Bernard H. Genest, the former chief of a claims department of a doctor-owned insurance company, says that the defendants are at fault. He told a hearing of the Florida Department of Insurance that even in states with prejudgment interest, "many of the insurance companies will hold onto their money up until the point of trial and then settle on the courthouse steps, thereby waiving the prejudgment interest."
But Londrigan admits that "plaintiff's attorneys have been partially responsible for this problem." They start out asking for unrealistically high damages -- which discourages serious settlement talks -- and often do not focus on the details of a case until the trial date is at hand. Solving that problem may be as hard as getting journalists to write stories before deadline looms.