Federal Tax Considerations of de Facto “No Fault” Insurance

[Martin Hash]

1 Introduction
Law is the secular codification for controlling human behavior. Government has divided penalties for violating the law into two categories: criminal and civil. Roughly, incarceration is the penalty of violating the first, and the second is a matter of deprivation of wealth via liability. Mostly, liability is associated with products and torts, but money judgments are also used to enforce contracts, civil rights, labor, environment, taxes, and property rights. Unfortunately, only responsible people who have accumulated the wealth to surrender can be held responsible: essentially, only responsible people are held responsible. “Acts of god” also have no associated liability. This brings up the question, “what is liability for?” Is it to assign responsibility? Money in lieu of irreplaceable items? Is it to provide for those who need medical attention? Is it retribution for mental anguish? If those are the reasons, then the strategy is failing, because assigning liability is subjective at best. Every year more and more people cannot receive the medical attention they need, and it is safe to say that the vast majority of people’s “mental anguish” receives no soothing in the way of financial reparations.
To protect themselves against tort claims, persons and businesses pay for insurance policies. But our adversarial adjudication system focuses time and money on the search for blame rather than correcting or mollifying the harm caused. Unfortunately, data indicates that tort judgments are increasing rapidly which only reinforces the spiral of misplaced expertise and energy. Erik Moller, Nicholas M. Pace, and Stephen J. Carroll, Punitive Damages in Financial Injury Jury Verdicts, RAND Institute for Civil Justice, Document No. MR-888-ICJ (1997). If liability could be removed from the equation, the time and money spent protecting against it would instead be channeled into growth and the creation of wealth. So-called, “no fault” insurance simply means that an individual’s insurance policy is not concerned with liability, but instead covers the harm the individual has received without regard to fault, and the money saved by not attempting to establish liability would lower premiums. Mark Geistfeld, The Political Economy of Neocontractual Proposals for Products Liability Reform, 72 Tex. L. Rev. 803, 811 (1994).
The very concept of “liability” is now so engrained in the American psyche that there seems no political hope of making such a dramatic change through political channels for a “no fault” approach. The legal profession alone would pose a substantial enemy to such legislation, and the whole subculture of tort action for monetary gain or social change also has a large constituency. However, other legal fictions such as trusts, bonds, and legal separability may be able to establish a de facto barrier against tort liability. Indeed, an individual may still be found at “fault,” but be uncollectible – colloquially termed “judgment proof” among legal practitioners, (a debtor is judgment proof when the debtor has no wealth or holds its wealth in forms not subject to legal process for collection). The compensation aspect of liability, as already pointed out, is so problematic as to make it useless as a dependable mechanism to help those who have been injured. A person’s own insurance is a much more suitable method of assuring redress for an injury sustained. Gary T. Schwartz, The Ethics and the Economics of Tort Liability Insurance, 75 Cornell L. Rev. 313, 347 (1990).

1.1 Arguments Against “No Fault” Insurance

Federal Tax Considerations.doc