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Damages Caps in Medical Malpractice and Other Areas

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Caps “fix” high jury verdicts by cutting down the ones where the jury finds that the reasonable amount of the damages is a number larger than the cap. Caps do not fix high premiums. States with caps have premiums that are similar to those without caps.

High malpractice premiums have to do with how insurance companies work. Long ago, I thought the formula was premiums less claims and administrative expenses = profit. That naive analysis overlooks the biggest part of the
insurer’s profit engine: the time value of money.

Between the time of an injury and the time of payout on the claim, the insurer gets a windfall profit by having that money invested. How much return on investment is there for a $100,000.00 claim over 3 years, as we commonly see in Oregon (2 year limitations period + 1 year from filing to trial)? What about in states where it takes 5 years or more to get to trial? When the economy contracts, the
investments do not return as much, the premiums have to go up to keep the insurer in a similar financial shape. That’s why all premiums went up when the economy sagged over the last several years. It was not a medical
malpractice crisis, it was an insurer crisis. Same thing with the economy in the 70’s and the cries of medical malpractice crisis.