Day-Care Premiums : Insurance a Victim of Child Abuse

As the tears and hugs made painfully clear, it was no ordinary, end-of-the-day parting one recent Friday at Beverly’s Morning Pre-School in Orange County. It was the final goodby.

After 24 years of teaching toddlers, Diane Beverly was notified in mid-March that her preschool’s $785-a-year liability insurance policy was being canceled because it no longer met unspecified “underwriting guidelines.” A six-week search for replacement coverage produced just one possibility, and there was a catch to it: a $2,000 annual premium.

“We couldn’t absorb that kind of cost, and we didn’t feel we could pass it on to our families,” Beverly said as she prepared to shut down. “Closing was the only real choice.”

New Coverage Denied

In Greensboro, N. C., Madge Schwarz was set to open an infant-care center this week next to the toddler center she has operated for the last two years. However, Schwarz’s insurance company not only denied the new coverage but announced as well that her existing policy would not be renewed in August. “I wonder how we would have found out if we hadn’t been shopping around for additional insurance,” Schwarz fumed.

Child-care liability insurance, once considered so inconsequential that it could be tacked on to a homeowner’s policy or sold at bargain rates, is now emerging as the latest victim of the sex-abuse scandals that have rocked the country’s nursery schools and day-care centers.

Only 1% of all reported child abuse occurs at child-care and nursery schools. But, since the beginning of the year, virtually every insurance company in the country has cited child molestation as a reason to either raise rates, tighten eligibility qualifications, or abandon the day-care and nursery school liability market.

“The molestation issue was the straw that broke the camel’s back for us,” admitted James Smith, vice president for general liability at Fireman’s Fund Insurance Co., which has refused to renew or accept new day-care insurance for the last six months. “It’s too difficult to determine potential losses. You can’t examine the premises for potential molestation the way you can for playground equipment safety.”

Massive Closings Predicted

The insurance crunch has fueled predictions within child-care circles of massive day-care center closings and raised the specter that school and child center operators will simply do without liability, the so-called professional responsibility, insurance.

However, experts say the most likely outcome is higher rates for the estimated 6 million children, including 550,000 in California, enrolled in day-care programs.

The impact is hardly reassuring. For an increasing number of the nation’s families, commercial day care, whether provided by a franchised chain or a young mother looking to earn extra money, is already among the most expensive items in the monthly budget. And escalating rates are often the reason why a child drops out of day care and becomes an unsupervised “latch-key kid.”

“What’s scary is that this problem is most critical for the families who need child care the most and can least afford it: single parents and parents with several kids,” said Carol Stevenson, director of the Child Care Law Center in San Francisco.

Terry Nowatarski is already worried about some potential victims. Nowatarski, director of the after-school child-care program at the YWCA in the city of Orange, said 18 children dropped out of the program earlier this year when monthly rates increased $10 to a maximum of $105 to cover the doubling of the Y’s insurance premium.

From Low-Income Families

Most of the dropouts, she said, came from single-parent, low-income families who couldn’t afford the increase. “The parents decided they could stay at home alone after school. They’re 8, 9 and 10 years old. Borderline able to take care of themselves, I guess.”

Although sex-abuse scandals, particularly the 208-count McMartin Pre-School case now being heard in Los Angeles Superior Court, are the most apparent reasons for the insurance bind, they are not the only cause.

Over the last several years, the insurance industry has paid out billions more for all types of claims than it has collected in premiums. And in 1984, for the first time since the devasting 1906 earthquake and fire in San Francisco, the industry lost money--a whopping $4 billion.

As a result, insurance companies say they are increasing premiums for most types of liability insurance at least 50% and are dropping some of their more hazardous lines. “Companies are just getting more conservative about how much risk they can assume,” says a spokesman for the Hartford Group.

And for most companies, child-care liability insurance, which has traditionally covered a wide range of playground accidents and assorted injuries, has become particularly risky in recent years.

Claims Outstrip Premiums

Fireman’s Fund, for example, collected about $200,000 in child-care insurance premiums last year and paid out $250,000 in claims. St. Paul Fire & Marine Insurance Co. took in $308,000 in premiums and settled claims for $4.8 million, a far cry from 1982 when the company collected more than twice the amount it paid out.

Industrywide figures are slow to come in. In 1981, the last year for which the Insurance Service Office in New York has data, child-care liability premiums totaled $1.8 million and settlements were $912,864. Industry executives are sure that more recent figures would be reversed, with claims leading premiums by a wide margin.

However, it was not until this year that day-care insurance rates started rising as steeply as the claims. Annual premiums, which averaged $20 per child last year, can now cost $40 and even as much as $70 in some situations, estimated Joseph Silverman, a Sherman Oaks broker specializing in child-care policies.

The terms of the policies are tougher, too. St. Paul, for one, is only writing policies with a “no-touch exclusion” that specifically denies coverage for physical and sexual abuse. Other companies are refusing to allow in-home child-care providers to tack their liability insurance onto their homeowners’ policies. And still others are lowering the coverage limit from the once-standard $1 million per accident to $500,000 or less.

Even these steps, insurance executives acknowledged, offer no guarantees. In many states, including California, suits on behalf of children may be filed until the child becomes an adult, a fact that leaves the insurance companies exposed to potential claims for years. Furthermore, juries have a way of opening the pocketbooks of insurance companies when a child is a victim of abuse or neglect.

‘The Most Sympathetic’

“A child with some sort of permanent injury is the most sympathetic kind of plaintiff you can have,” Stevenson, the child advocate attorney, said.

But even getting out of the day-care insurance business can offer precious little protection, as Fremont Indemnity Co. in Los Angeles has discovered.

The company, which underwrote the McMartin Pre-School’s liability insurance for several years, abandoned the market in 1983 “because of our lousy claims experience,” according to general counsel Edward Lieber.

However, when Virginia McMartin, her daughter, two grandchildren and three former teachers were indicted on 208 charges of child molestation and conspiracy in March, 1984, the insurance company discovered it was still very much involved with preschool liability insurance. Lieber said the company has not tallied the number of claims pending or the amount of damages sought on behalf of McMartin school students.

Although the day-care insurance crunch still is in its early stages, it already has been compared with the state’s physician malpractice insurance crisis of a decade ago. However, state officials are not sure the comparison is accurate or what to do if day-care insurance does become as scarce and expensive as medical malpractice insurance was in the mid-1970s.

Some officials in Sacramento argue that if California’s 34,000 in-home day-care providers and 7,000 commercial centers face widespread insurance cancellations or prohibitive premium increases, the state should step in.

Potential Solutions Discussed

Potential solutions already under discussion, explained Elisabeth Kersten, director of the state Senate Office of Research, include a state-operated insurance fund similar to that now available for workers’ compensation and an assigned-risk pool like that available to high-risk, repeat-offender drivers.

“The doctors solved a lot of their problem by forming their own insurance company,” Kersten noted. “But day-care providers aren’t as entrepreneurial, as sophisticated or as rich.”

Furthermore, some state and day-care officials argue that the state owes the child-care industry some protection because it has told most providers to carry insurance or face the consequences.

Since January, in-home providers have been required either to carry $300,000 worth of liability insurance or get parents to sign affidavits acknowledging that they know the provider does not carry insurance. Although commercial centers are not required by law to carry insurance, industry officials believe that most do as a matter of sound business practice and self-protection.

Still others argue that governments should view child care as a child protection issue, not strictly a business matter.

“Virtually everyone suffers if there isn’t adequate child care available,” said Deborah Phillips, of the National Assn. for Education of Young Children in Washington. “Parents, society and the children are all potential victims.”