The Magnitude of Pain and Suffering Damages from a Law and Economics and Health Economics Point of View

In this paper we investigate the correct magnitude of pain and suffering damages for personal injuries. These damages differ greatly between and within countries, and the law of damages does not provide a framework to assess the correctness of the granted amounts. In our view, Law and Economics in combination with Health Economics is able to provide the required external framework. In the Law and Economics literature, a tension exists between the prevention theory (stating that the injurer should fully compensate non-pecuniary losses) and the insurance theory (stating that the victim should not receive compensation for non-pecuniary losses, because he would not self-insure against these losses). We discuss the scarce literature that suggests a synthesis between these two theories: by basing damages on the amount that victims would spend in order to reduce the expected non-pecuniary accident losses, the injurer receives the correct incentives and the victim is not over-compensated. The Law and Economics literature, however, lacks a framework to connect the magnitude of the damages to the injuries of the victim. The concept of Quality Adjusted Life Years (QALYs) from the domain of Health Economics can fill this gap. A QALY expresses the value of living one year in a certain health condition. By studying Health Economics literature, the impact of different health conditions on the quality of life may be assessed. By subsequently monetizing QALYs, this impact is expressed in monetary terms, thereby providing a non-arbitrary basis for pain and suffering damages. We compare the amounts granted in pain and suffering damages in several European countries with the amounts that would result from a conservative estimation of the monetary value of a QALY for specific types of personal injuries. The conclusion is that the amounts that are currently awarded are (much) too low from a perspective of deterrence, but also from the more traditional legal compensation point of view