Liability for Exposure to Risk without Actual Harm

Abstract

Law and economics are both hostile to liability for exposure to risk without actual harm. Harm is the foundation of civil remedies. Economics teaches that adequate compensation in the event of harm eliminates risk, obviating the need for compensation for exposure. I show that if there is risk that compensation will fail to equal the value of the harm, as must always be the case, then, under plausible assumptions about the probability distribution of compensation, compensation for exposure to risk in both the absence and presence of harm is required to make a risk-averse victim whole. In particular, I show that providing compensation in both the absence and presence of harm is superior to providing full, though risky, compensation only in the event of harm. The result applies to all measurable harms.

Keywords: risk exposure, legal error, ex ante rightful position, incomplete insurance, compensation risk, compensation distribution, state-dependent utility, strict liability, risk aversion, tort, product liability, measurable harm

JEL Classification: D81, K13