Indiana Governor Mike Pence will be including “Tort Reform” (actually lawsuit reform as “Loser Pays” includes all claims litigated) as part of his Agenda in this year’s legislative session. Litigation reform was not one of Governor Pence’s platforms during his 2012 campaign for Indiana Governor but has long been a part of his agenda as a US Representative. Specifically, Governor Pence wishes to introduce “Loser Pay” Legislation that will require the “loser” to pay all the fees in civil suits.
The Bill states that “in all civil actions, the court shall award attorney’s fees as part of the cost to the prevailing party.” It is important to note that this proposed law REQUIRES the losing party to pay attorney’s fees in ALL civil actions. This bill has, of course, drawn a lot of fire and criticism from groups such as the Indiana Trial Lawyers Association who take the position that the law limits equal access to Courts.
Attorney’s fees in a legal case are typically paid out via two methods, depending on where you are. The English legal system uses what is called the “Loser Pays” rule while America uses what is sometimes referred to as the “Every Man For Himself” rule. The English rule provides that the party who loses in court pays the other party’s attorney’s fees. Under the American rule, on the other hand, each party is generally responsible to pay its own attorney’s fees unless one of the exceptions to the rule are met (contract, bad faith, common fund, substantial benefit, contempt, or a fee shifting statute). Nearly every Western democracy, other than the United States, follows the English rule.
The rationale for the English rule is premised on two ideas: 1) defeat provides adequate basis for imposing legal fees on the losing party; and 2) the winner deserves to be fully compensated for all legal costs, including attorney’s fees and incidental expenses. There is much argument over the pros and cons of the Loser Pays system, the arguments become ever more heated when the discussion turns to bringing the English system to America.
There are three primary benefits to the Loser Pays system that are typically pointed to as making that system superior: 1) the deterrence of frivolous claims; 2) a fuller compensation of winners (including unjustly accused defendants); and 3) higher frequency of settlements.
To begin, the Loser Pays rule supposedly deters frivolous claims because the threat of paying a victories defendant’s legal costs raises the stakes for the plaintiff, forcing him (and his lawyer) to more thoroughly and carefully assess the case and its chance of success. The next benefit is based upon the premises that a winning party does not experience total victory if costs or expenses are left unpaid by the defeated party. The core belief is that the party found to be “in the wrong” should be shouldered with the entire fee burden. This concept is more muddled when dealing with a case that has no clear winner or loser, i.e. a contract case or divorce case. Lastly, many advocates of the Loser Pays system claim that the rule results in an increased incentive for the parties to settle. The argument is that because of the added risk of paying attorney’s fees and costs, both parties will be more inclined to reach a settlement rather than risk a trial that they might lose. Added to their worries is the knowledge that no lawyer can perfectly predict the disposition of a jury, anything could potentially happen.
On the other side of the issue, many advocates point to the weaknesses of a Loser Pays system: 1) it deters reasonable and meritorious claims that are not clearly “winning” cases due to the threat of paying the defendant’s costs; 2) the system decreases the number of settlements based on higher stakes and positive outlooks on the case.
Critics of the Loser Pays system may very well admit that the system deters litigation, but they believe that it deters not only frivolous but also meritorious claims. This is especially true, they claim, for plaintiffs with limited financial resources (i.e the middle class and the poor). To those people, the risk of paying a successful defendant’s legal costs might not be a risk worth taking. The overall effect is to leave many justified plaintiffs without a legal remedy. According to an American Law Institute study, this fear has come to pass in England where approximately eighty-five percent of accident victims do not file a claim for compensation, mainly due to fear of paying their opponents legal costs if unsuccessful. Also of note, most auto insurance policies now exclude attorney fees from coverage, leaving the defendant driver faced with an uninsured exposure. The second weakness pointed out is a different take on one of the strengths that the Loser Pays rule advocates tout. The critics claim that if each party believes that their chances of winning are high, in order to incur no costs whatsoever, they must go to trial. Settlement of a case costs time and money and can only be fully recouped through trial. Looked at another way, if either party thinks they can win, they are less likely to make concessions during settlement. If both parties think they can win, neither party is really encouraged by the Loser Pays system to settle rather than go to trial, why settle for half a loaf when you can win the entire thing?
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