(FORTUNE Magazine) – The liability problems are no longer the news they were several years ago when insurance premiums exploded and coverage often vanished. But the effects are still with us. The playground equipment and diving boards removed by cities + and schools remain removed. Product development remains constrained. This might suggest that the number of lawsuits against manufacturers and municipalities would have begun to decline. Not so. It continues to rise. The problems of expanded liability will affect us deep into the future. A survey covering 1986, published last year by the Conference Board, shows that 47% of U.S. manufacturers withdrew products from markets for liability reasons. In addition, 39% decided against introducing some new products and 25% discontinued some form of new product research. A central objective of the legal system is to compel the withdrawal of excessively risky products and prevent the introduction of new ones. But is it plausible that 47% of our manufacturers suddenly discovered in 1986 that their products were too dangerous for modern society? The three charts below show how the legal system has created largely similar liability problems for different activities. While accidents have been declining, legal claims and the amounts awarded have been climbing fast. The cause of these disparities lies not within factories, hospitals, and city parks, but in the courts, which have expanded liability to new and unexpected situations. The most common judicial justification is that expanded liability provides a form of compensation insurance to victims, especially to those like the poor who might not buy insurance themselves. The expectation is that corporate defendants will pass along part of the compensation cost to consumers in the product price. This form of insurance, however, is enormously expensive -- perhaps five to ten times as costly as standard first-party insurance. That is because going to court entails greater legal expenses and often the payment of enormous amounts to cover pain and suffering, which no consumer is compensated for in first-party insurance coverage. EVEN THOSE compensation systems admired as the most generous in the world are less costly. The government-operated programs of New Zealand and Europe provide trivial payments for pain and suffering and far less for lost income and medical expenses than the U.S. legal system. And still, at these lower benefit levels, the compensation programs of many of these countries have approached bankruptcy. A commission recently convened to rescue the New Zealand plan recommended eliminating pain and suffering awards entirely. Today, the compensation system provided by the U.S. courts is largely redundant. Workers file 60% of large product liability claims, but they are already covered for medical and disability losses by workers' compensation. Those who do not have medical or disability coverage, congressional studies show, are most commonly occasional workers, transients, and the homeless. These individuals surely deserve medical support, but it is highly questionable whether the U.S. should drastically expand tort liability to insure this relatively small group. The expansion of liability affects the recoveries of everyone. The increase in multimillion-dollar judgments has not derived from claims paid to transients or the homeless. However well meaning, our legal system cannot survive as a compensation insurance system. There are two basic ways to solve the problem. If courts insist on using the legal system as a compensation system, they must reduce tort damages and approve other tort reform measures to make the compensation system more coherent. The New York State Court of Appeals recently moved in this direction by restricting recovery for ''loss of enjoyment of life,'' which again is uninsurable in a first-party policy. Much of modern tort reform also seeks this end by such steps as limiting awards for pain and suffering. But even those states that have capped awards left the amounts so high that continued problems are inevitable. THE ALTERNATIVE COURSE is for the courts to retain current damage levels but to roll back liability, holding manufacturers, doctors, and municipalities liable only where it is clear that they could have done something to prevent the injury. This more limited definition of liability is all that's required to encourage them to maintain optimal safety standards. The California Supreme Court took this course last year when it ruled that pharmaceutical manufacturers are subject to liability only for negligent manufacture. It is also the direction of legislation in many states reducing the liability of municipalities and nonprofit organizations, and of the New Jersey legislature, which in 1987 restricted punitive damages and made manufacturers liable for design defects only where they ignored some feasible alternative design. The recent U.S. liability problems and the bankruptcy of the foreign compensation systems demonstrate graphically that the U.S. cannot live with both high compensation and broad definitions of liability. No other country in the world uses its liability system to provide widespread compensation. While ) some U.S. courts are headed in the right direction, the overall trend of continuing to expand liability and provide unrealistically high compensation can only magnify our present predicament.

CHART: NOT AVAILABLE CREDIT: SOURCE: CONSUMER PRODUCT SAFETY COMMISSION CAPTION: PRODUCT LIABILITY THE WORRISOME UPWARD MARCH OF CLAIMS Although injuries resulting from the use of products, accidents involving private aircraft, and deaths caused by medical malpractice have declined or remained level, the number of claims filed and the cost of claims paid have continued to rise rapidly.

CHART: NOT AVAILABLE CREDIT: SOURCE: BEST'S AGGREGATES & AVERAGES CAPTION: MEDICAL MALPRACTICE See above.

CHART: NOT AVAILABLE CREDIT: SOURCE: GENERAL AVIATION MANUFACTURERS ASSOCIATION CAPTION: GENERAL AVIATION See above.