Slate's Bizbox
jurisprudence: The law, lawyers, and the court.

Gun Victims' Silver Bullet?The new secret weapon in gun litigation.

By Carol Vinzant
Posted Wednesday, Dec. 18, 2002, at 6:51 PM ET
Illustration by Mark Alan Stamaty

Two years ago, a 13-year-old Florida boy shot his sixth-grade teacher Barry Grunow to death on the last day of school. The story had all the makings of a great lawsuit: violence, tragedy, and social ills ranging from cheap guns to bad parenting. But the way this case and dozens of other like it is actually playing out in the courts involves something much more mundane: product liability insurance.

The Grunow case represents a new tactic for gun opponents, a strategy that involves scaring insurance companies away from cheap, dangerous guns. The Grunow case did not end up costing the gun businesses much; it was the insurance companies who got hit. And the insurance industry is too smart to pick up the tab for everyone else's mistakes. They are instead raising rates or refusing to take on or insure some gun businesses. Disreputable gun businesses pay dearly—by paying premiums four or even eight times as high as they paid a few years ago, if they can get insurance at all. Where they can't, they will likely be forced out of business, which is OK, too.

It's taken decades for suits against the gun industry to become this sophisticated and successful. When shooting victims first started suing, they went after the manufacturers. But even when they won, they got no money. Tom McDermott was one of the lawyers who worked on the first big successful case against the industry, Hamilton v. Accu-Tek. In Hamilton, the lawyers managed to prove a novel theory: that the industry tightly controlled all aspects of its product while turning a blind eye on who bought the guns. The jury sorted out, company by company, who had been reckless. Not surprisingly, it was the makers of Saturday Night Specials—poorly made guns selling for $35-$150, which frequently ended up in the hands of criminals—who were most culpable. This Brooklyn federal case (though it was eventually overturned) opened the floodgates for the next wave of gun litigation: negligent distribution claims—suits attacking the way guns are sold and the industry's habit of overselling to areas prone to crime or gun smuggling.

But when McDermott went to actually chase down the jury award related to Hamilton, he encountered what had become a rather typical evasive tactic of the gun industry. The company went bankrupt. So McDermott went after its insurance company. For just about any other product made in America, there would have been an insurance policy to clean up the mess left after a judgment and a bankruptcy. But the gun industry hasn't worked this way. Gun-makers have generally fallen into three categories: uninsured, badly insured, and legitimately insured. The high-end companies—the Colts and Smith & Wessons—are insured either through mainstream insurance carriers or through an industry insurance co-op—with such strict standards, it simply excluded all the makers of Saturday Night Specials.

The low-end companies for the most part simply went uninsured for decades, unable to afford legitimate insurance. But some found great deals on cheap insurance. And eventually they mostly were insured by the same company, ABC Co-op.

Faced with a slew of product liability and negligent distribution suits, ABC collapsed. ABC's MO for years had been the same as many of the gun companies it insured: When the claims built up, it would collapse and then restart as a new company. McDermott's dogged pursuit of ABC finally put an end to that. The FBI and a grand jury in Boston are now investigating the man behind the ABC Co-op, Howard Holladay, who claimed to be just a bureaucrat for ABC but who actually owned and controlled an international network of insurance entities. The insurance he sold turned out to be nearly worthless. Last year Kentucky federal Judge Joseph H. McKinley Jr. called Holladay's company "a fiction of the imagination."

That's how McDermott realized that if he could force cheap gun-makers—who nearly all had either no insurance or Holladay's sleazy insurance—into getting legitimate insurance, he would effectively end their racket of dumping millions of unreliable handguns on the poor. Since these companies made riskier products, their rates would become much higher than the legitimate companies—if any insurer would touch them at all.

If nothing else, forcing gun manufacturers to buy legitimate insurance cut down on their juicy, sometimes 100-plus percent profit margins. The result of all these lawsuits—and one of the main goals of the Florida lawsuit—was to make the companies producing cheap, dangerous guns virtually uninsurable.

Grunow's case in Florida is a good example of what insurers now fear. The boy had taken the unlocked gun from a family friend. He went to jail, and the insurance company for the family friend paid the plaintiff $300,000. The insurance company for the pawn shop that sold the gun also paid $275,000. But the case was novel in that it targeted not just the gun owner or gun seller, but everyone along the supply chain. So last month a jury decided that the gun distributor—that's just the wholesaler, not the maker and not the retailer—should also pay Grunow's widow $1.2 million. But the gun-maker, Raven Arms, was already out of business. There was no insurance; Raven had claimed to be "self-insured" (a euphemism for uninsured unless you have a bank account the size of Philip Morris'). The gun distributor's biggest failing was in not checking the validity of Raven's insurance. That's a mistake that few in the gun distribution business will ever make again.

The big revolution in the gun-insurance market was not the direct result of any courtroom victory. Rather, it was that gun businesses started to look out for themselves. As the lawsuits started piling up, gun distributors started demanding that gun-makers submit a certificate of insurance to show that there was a policy to protect the distributor against lawsuits. Without the certificate of insurance, the gun-maker can't market its product.

As a result of these lawsuits, the distributors' demand for meaningful insurance has helped make the manufacture of junk guns financially untenable. McDermott, who has gone on a crusade of sorts ever since Colin Ferguson shot him and 24 others on a commuter train, is now writing up a class-action complaint to file in Judge McKinley's federal courtroom in Kentucky. He's suing on behalf of everybody ever hurt by any crappy gun that Holladay insured. The list will include perhaps hundreds of dead and maimed, including a Kentucky soldier killed when he bent down to tie his shoe and his gun fell and shot him in the stomach and a Philadelphia gun dealer whose hand was turned into a fleshy claw by an exploding gun. McDermott's list is, sadly, still growing; millions of cheap guns Holladay insured are still out there, even though the companies are long gone.

Holladay's insurance let those companies produce guns at historically low prices. It was his cheap insurance and the sloppy insurance policies of others in the trade that fueled a bonanza in handgun sales that peaked at just over 2 million a year in 1993.

The dozens of lawsuits by individuals and municipalities wending their way through the courts have already had their effect. The gun industry does its damage in dramatic, quick incidents. These lawyers do theirs in slow-motion assaults on the economics of the industry. Even without a dramatic courtroom victory—though one may still be coming—they have helped drive handgun sales to roughly half their early 1990s peak. It's certainly nothing flashy, but product liability insurance is turning out to be an effective weapon against the gun industry.

The author wishes to thank Dave Tinker, founder of Firearms Business.

Print This ArticlePRINTDiscuss this in The FrayDISCUSSEmail to a FriendE-MAIL
Share on FacebookPost to MySpace!Share with MixxDigg ThisShare with RedditShare with del.icio.usShare with FurlShare with Ma.gnolia.comShare with SphereShare with Stumble Upon
Carol Vinzant has covered Wall Street for the Washington Post and Fortune. She is working on Lawyers, Guns & Money, a book about finances and litigation in the gun industry.
Illustration by Mark Alan Stamaty.
Join the Fray: our reader discussion forum
What did you think of this article?
POST A MESSAGE | READ MESSAGES

Notes From The Fray Editor:

First, readers should know that the Jurisprudence Forum is also hosting discussion on the constitutionality of posting the 10 Commandments in response to this article. Second, since the Fray is especially busy, why not take a minute to read before posting? You might find kindred spirits (or better targets). Joe_JP is responding to Thomas-2.


Remarks From The Fray:

We've got public support for people being able to defend themselves, and public support for a right to keep and bear arms, including handguns. But we've got judges and trial lawyers who are committed to working around the stubborn public, and they are doing so. Cause for celebration? Not for those of us who believe in democratic values.

And not even particularly impressive: you've got judges who, coming from a particular social strata, are likely to favor the underlying cause, and you've got an undereducated jury and sympathetic plaintiffs. Tell the jury that the real purpose is to undermine the ability of anyone anywhere to own a weapon and see what happens. (Even then it wouldn't matter--the point isn't to win all of the cases, but just some. It's not that every group of 12 must agree, just that some group of 12 does, or, in the case of class action litigation, might.)


-- Thomas-2

(To reply, click here.)


I don't like these lawsuits ... they penalize the gun industry for what is really legal activity. The gun industry apparently is the reason our country has such a violent history and culture. Sure.

But come on now. Calling jurors "undereducated" is rather harsh ... jurors are not stupid. They know what they are doing, more or less. And what they are doing is not depriving themselves from owning firearms. They are using the courts to regulate the industry ... emphasis on "they." The people (or certain interest groups of them) are the ones who bringing these lawsuits, juries who hear them, and large segments of the community at large who cheer them on. Blaming "lawyers" is a bit much. It is not quite what the legal system is for, but put the blame where it belongs.

And, there is limits to the malfeasance of judges in this area ... after all, a NY court decision struck down (admittedly on somewhat limited grounds) the case that the article says opened the floodgates. [The case originated in Brooklyn ... NYC is famous for strict gun laws, passed by democratically elected lawmakers]

What these cases truly show us is that society doesn't really want a total democracy. Did the people wait until legislatures installed worker comp and industrial liability rules? No ... they used the courts largely to revolutionize the area. The people want liberty, but are suspicious and scared of certain groups, especially groups that can be scapegoated. They at times are afraid of or don't fully trust democratic institutions, and since we aren't a complete democracy, this is not always bad. Nor is it at all new.

-- Joe_JP

(To reply, click here.)


Somehow Vinzant managed to write an entire article about vicarious liability, without actually mentioning the term "vicarious liability".

The idea is the ultimate in slippery slopes... more on that in a bit. First, how its supposed to work:

A gun manufacturer makes a defective gun, sells it to a distributor who has no quality control checks, who sells it to a retailer who knows he's had a lot of unsatisfied customers with this gun but sells it anyway. Unknowing customer buys gun, takes it hunting or to a shooting range for some legal use, and during such time the defect presents itself, perhaps exploding in his hand and popping off a few fingers or worse. Customer gets his lawyers, who sue the retailer, the distributor, and the manufacturer, since they all have some liability, even just vicariously because they had no actual role in the creation of the defect. A reasonable jury provides for the victim's medical expenses, legal expenses, time lost from work, and maybe a token amount for pain and suffering.

Ok, fair enough. But now, here's how people who have an anti-gun agenda have twisted it:

Manufacturer makes a perfectly functioning firearm, sells it to a distributor who has a through quality control process, who sells it to a retailer who diligently completes all background checks on his customers. Customer uses the gun once or twice, sells it to a friend, who sells it to another friend, who uses it in a crime. Now the crime victim's family sues not only the criminal, but the criminal's friend, and the friend's friend, and the retailer, and the distributor, and the manufacturer. They claim that somehow the businesses are supposed to have control over this sort of situation, but of course have no suggestions on how to make that possible without going out of business altogether (which is their real goal.)

Look at the slippery slope... Vinzant's article could have had the word "automobiles" inserted everywhere that "gun" was, and you could see that this sort of trial lawyer tactic could bring down any industry.

Is being held hostage by legal torts really the sort of freedom the writers of the Second Amendment had in mind?

-- mfbenson

(To reply, click here.)

(12/19)

Washington Post
The Washington Post
OPINIONS
Topic A: Obama's Speech
| Pundits and diplomats respond.
Robinson: Sunshine in BerlinToles: Obama the UniterTelnaes: Meanwhile, McCain
PLUS » Stumped: Bring Back Bill Clinton