Liability Regimes, Reputation Loss and Defensive Medicine

Abstract

This article explores the effects of litigation under negligence and strict liability regimes on physicians' reputations, and consequently, on physicians' incentives to practice defensive medicine and to settle claims. That no-fault liability will reduce physicians' reputation loss and therefore is likely to reduce the problem of defensive medicine is a common theme in the literature. The article refines this insight by calling into attention the pooling of negligent and non-negligent physicians found liable under strict liability: physicians found liable under strict liability might be either negligent or not and often this indeterminacy would not be solved at the end of the litigation. This suggests that almost all physicians found liable are likely to suffer equally some reputation loss, which will be almost always smaller than the one produced following a finding of liability under a negligence regime. Such a result is seemingly problematic based on both efficiency and distributive grounds since cautious physicians suffer part of the reputation loss which is due to the negligence of negligent physicians. However, given courts' fallibility, cautious physicians might prefer strict liability since it serves as an insurance against the otherwise significant uninsurable reputation loss which follows a finding of liability under negligence.

Keywords: Professional Liability, Strict Liability, Negligence, Reputation, Defensive Medicine, Incentive to Settle

JEL Classification: K13