Consumers Feel Pinch : Insurance for Liability Skyrockets

Acmat Corp. had a good safety record and a booming business removing cancer-causing asbestos from schools, hospitals and homes. Then last spring disaster hit the East Hartford, Conn., company: Cigna, a giant in liability insurance, canceled all policies connected with asbestos, including Acmat’s.

After a search of 30 other insurers, the company turned up a policy that offered $1 million in coverage for each of its 150 contracts. The cost was an astonishing $4 million in annual premiums.

Acmat grabbed it, even though premiums were twice what it paid last year for coverage that was 10 times as great. It at least keeps the company in business.

Jobs Require Insurance

“We had no choice,” said Acmat President Henry Nozko Sr. “Most of our jobs are for government agencies that require insurance to even make a bid.”

Similarly, lack of insurance almost shut down the Southern California Rapid Transit District on Aug. 1, even though it has one of the best safety records in public transportation. The RTD finally got coverage, but for annual premiums of $3.2 million--a 4,676% jump over last year’s $67,000--and higher deductibles. “We were lucky to get what we did,” said Marc Littman, an RTD spokesman.

The plight of Acmat and RTD is shared by millions of companies, professionals and local governments who in the last year have become victims of the most severe shortage ever of liability insurance.

Doctors, bankers, fishermen, firefighters and car dealers alike find rates soaring while coverage shrinks. Some businesses, especially those in high-risk areas such as pollution control or drug development, can’t find any liability insurance at all. Most must choose to pass price increases on to customers, go without coverage, stay out of certain kinds of business, or close up shop.

Fewer Baby Doctors

Consumers, too, feel the pinch of the insurance crisis. Of every dollar consumers spend, 5.5 cents now goes directly or indirectly for property and casualty insurance, and that may rise. The shortage of liability coverage has already meant fewer baby doctors and day-care centers.

And companies and local government agencies have found it more difficult and more expensive to get certain kinds of work accomplished. The Los Angeles Unified School District, for example, said the number of firms bidding to remove asbestos from its walls has been reduced by half. “Dwindling competition raises prices,” said Ray Huff, district contract coordinator. “This shortage (is) hitting everything.”

Even lawyers, whom many insurers blame for the shortage of liability insurance because they encourage so much litigation, are being affected. First State Insurance Co. of Boston, primary insurer for members of the Los Angeles Bar, recently sent 6,500 lawyers in Los Angeles scrambling when it announced that it will no longer provide malpractice coverage after Oct. 1.

The problem will worsen unless premiums rise and court-awarded damage claims diminish, insurers warn. Insurance Services Office, the industry’s actuarial association, warns that the shortage of liability coverage will total $62 billion by 1990.

Insurance companies blame profits that have been eroded by a decade of price wars and two decades of increasing litigation. Last year, the property and casualty industry posted a $3.9-billion operating loss industrywide, a performance that is expected to be repeated this year. State regulators say they fear that more than 80 of the nation’s 2,500 property and casualty companies could fail within a year, matching the total number of failures during the last two decades.

Industry Hard Hit

The industry was particularly hard hit in New York and California, which hold first and second place, respectively, for the record number of million-dollar damage awards.

The condition of the insurance industry is so severe, some state regulators warn, that bankruptcies could shake the U.S. financial system in the same way that bank failures have done over the last few years. These same regulators, however, side with critics in contending that the insurance industry has overreacted.

Consumer activist Ralph Nader recently called on Congress and the Justice Department to investigate the crisis, including the question of whether insurers are illegally boycotting certain businesses.

“Insurance companies have been acting irresponsibly for eight or nine years and now they are trying to make up for their losses in one year,” said New York’s superintendent of insurance, James P. Corcoran. “They’re asking for sympathy, protection and price hikes. It’s like someone setting fire to their own house and then asking if they can stay with you.”

Unjustified Raises

Robert Hunter, president of the Alexandria, Va.-based National Insurance Consumer Organization and a former insurance administrator for federal government agencies, said insurers are unjustified in raising premiums of entire industries every time a few companies have problems.

Diane Beverly, for example, closed her Orange County preschool this summer after 24 years when child-molestation cases at other schools prompted insurers to hike premiums beyond reach.

Both critics and insurance companies agree that the crisis is the industry’s own creation. When interest rates soared in the late 1970s, insurance companies adopted the risky practice of writing premiums at a loss in a madcap competitive scramble to lure and retain customers. They bet, in effect, that high interest rates would bring them investment income in larger amounts and at a faster clip than needed to pay out claims. They bet wrong.

Losses on Premiums

The industry has written liability insurance premiums at a loss in eight of the last 11 years. Since 1982, such practices came home to roost. Interest rates that the insurers counted on for extra income have fallen. Meanwhile, liability claims continued to grow.

Since 1979, individuals have filed 50% more federal and 20% more state civil liability suits, according to a research firm that tracks such filings. Awards are up too: The average product liability award at the trial level in 1984 was $1.07 million, three times the 1974 average. The average medical malpractice award was $955,000, about six times the average 10 years ago.

Now that assumptions underlying so many liability policies have turned out to be erroneous, loss-plagued insurance firms have rushed to raise premiums sharply or get out of certain lines of business entirely.

Fundamental Changes

In addition, insurers are making fundamental changes in the policies they write, according to the Insurance Information Institute, an industry trade group. Insurers next July will make it standard to deduct the legal cost of defending liability claims from the total amount of coverage offered. They also will curb liability coverage for claims made years after a policy expires. This will protect them from having to pay for injuries from substances such as Agent Orange or asbestos, whose effects often take years to surface.

The shortage is putting pressure on Congress to allow banking institutions such as Citicorp to enter the insurance market to help boost supply of coverage. It also is forcing many companies which can afford it to insure themselves by regularly setting aside money to pay possible future claims. Regulators say the trend is depriving insurers of needed revenue.

Waiting Out the Crisis

Most companies, though, must wait out the crisis. Car dealers say premiums are double last year’s. Similarly, a rash of sinkings has doubled the price of fishermen’s coverage for their boats.

Larry Fricker Co., a chemical fertilizer retailer in Anaheim, has been unable to find coverage since May. Now it faces a $100-million suit stemming from a fire in June that destroyed the company’s warehouse. Nearby residents, who temporarily evacuated their homes, are seeking compensation for the costs and inconvenience.

Southwest Tank Liners, an El Centro firm that coats gasoline tanks to prevent leaks that poison ground water, also is considering going out of business. “Last year we paid $17,000 for $1 million in coverage,” said owner Jim Sessions. “Now we can’t get anything for any price.”

Fear of inadequate protection from lawsuits forced the Los Angeles County Fire Department to suspend controlled burning of brushlands, a key tool in the prevention of wildfires; in August its coverage was cut to $500,000 from last year’s $6 million.

Hysterical Reaction

California regulators, flooded with reports like these, have accused the insurance industry of reacting with hysteria even as they acknowledge its problems. Last month, for example, California Insurance Commissioner Bruce Bunner sent a letter to all insurers warning them to either curtail dramatic premium increases and cancellations or risk legislative action. “The insurance companies all started to get scared like a flock of birds,” said Richard Roth, assistant commissioner of insurance for California.

Making insurers particularly jittery are a legion of recent or pending suits that threaten to sharply expand their liability exposure.

Tobacco Firm Sued

The family of a dead Santa Barbara man who was a heavy smoker has sued R.J. Reynolds Tobacco Co. for wrongful death, charging the company inadequately warned of the potentially lethal consequences of smoking. In Redding, a burglar who fell through a skylight and was paralyzed while trying to break into a high school, recovered $260,000 in an out-of-court settlement plus $1,200 a month for 20 years. He argued that the school should have warned that the skylight was unsafe.

Insurers even point to a lawsuit in Salt Lake City in which a prisoner seeks $2 million from the Utah State Prison for allowing him to escape with two other prisoners. He claims the escape put him in a life-threatening situation.

Some of these suits may be thrown out, but insurers say that the legal costs alone are substantial and that there is always a risk that a jury will award damages. Every time a business or professional is sued successfully, they say, chances increase that a similar or even vaguely related suit can be won. They argue that without a limit to damage awards, risks can become just too high.

Law Evolving Slowly

Others, however, say that the increase in liability awards should be no surprise. “Any charges insurance companies make about the current legal climate they could have made five years ago, or 10 or 15,” said Gary R. Schwartz, professor at the UCLA School of Law, who contends that product liability law has evolved steadily since the mid-1960s. “There’s been no sudden ruling of significance recently--nothing that wasn’t expected given what’s been happening for a long time.”

Among the rulings that insurance executives cite to justify higher rates is the 1980 decision by the California Supreme Court in the case brought by Judith Sindell and Maureen Rogers against Abbott Laboratories. The decision created the legal concept of market-share liability, where all companies making a product at the time of an injury can be held liable for damages if a specific manufacturer cannot be identified. Specifically, the court said that makers of DES, a drug to prevent miscarriages, were liable for the plaintiffs’ cancer according to the market share each had when the claimants’ mothers took the drug. Both women had developed cancer of the cervix.

Ruling Not Popular

UCLA’s Schwartz, however, said the ruling has not been popular in other courts, and this year was severely restricted by a Court of Appeals decision in Los Angeles, which said that market-share liability can apply only to out-of-pocket damages, not punitive ones.

Lawyers too have found themselves subject to mammoth liability claims. Among them is 77-year-old Melvin Belli, the personal-injury lawyer from San Francisco nicknamed the “king of torts” for helping spawn an era of increasing liability lawsuits. In August, a quadriplegic won a $5.8-million malpractice award against Belli’s law firm. The plaintiff argued that Belli’s firm bungled a products liability case. Belli is appealing the decision and is suing the former associate who handled the case for his firm.

Many regulators and lawmakers say that revising the system of liability law to limit damages is the only long-term solution. Congress is considering a bill that would establish a uniform liability code, making it easier for consumers to know their rights, for product sellers to know their obligations and for courts to rule consistently.

Insurers Support Law

Insurers back the law because it would limit liability awards. Consumers and lawyers often oppose it for that reason.

California lawmakers this year also considered putting a cap on awards, but two measures were shelved. A bill introduced by Sen. John F. Foran (D-San Francisco) would have allowed claims for all out-of-pocket expenses like medical care or lost wages, but would have limited liability for pain and suffering.

The proposed law was modeled on the Keene Act, which the state passed in 1975 to curb rising medical malpractice rates by limiting pain-and-suffering awards. The Keene Act, considered successful in keeping doctors’ premiums down, allows an injured person to recover 100% of out-of-pocket awards from any entity contributing to an injury. But it allows pain-and-suffering awards only in proportion to fault. The proposed law, which would cover non-medical liability claims, would impose similar limitations.

‘Deep Pockets’ Theory

In essence, Foran’s bill would have addressed court decisions since the mid-1960s in California and other states that have steadily expanded the definition of who can be sued under the 100-year-old doctrine of joint-and-several liability. The doctrine, known as the “deep pockets” theory of recovery, permits all damages to be recovered from any party that contributes to an injury, regardless of degree of fault.

Last year, the California Supreme Court expanded the doctrine by ruling that state universities can be liable for damages in rapes and assaults committed on their grounds if they fail to provide adequate security.

Insurers blame such rulings for the average 650% rise in premiums nationwide to insure cities and officials against lawsuits.

Effective Regulators

Even the lawyers and state insurance regulators who favor changes in the legal system generally oppose doing away with liability lawsuits altogether. Court battles can get out of hand, they say, but they can also turn consumers into effective regulators against unethical or negligent corporate behavior. Some observers contend that workers’ compensation--a federally chartered, state-run insurance program--permits companies to be less attentive to worker safety because it prohibits victims from filing liability suits.

New York officials, who watch California’s actions carefully, side with consumers in their belief that limiting claims may be a mistake. Instead of capping such awards, New York this year adopted a medical malpractice law that allows lawyers who bring frivolous lawsuits to be fined.

On Aug. 15, Illinois adopted a similar law, which sets up more stringent screening procedures to weed out suits without merit and makes it easier for doctors to sue lawyers filing such actions. The day before the bill took effect, hundreds of lawyers crowded Chicago courts to file 1,000 malpractice suits. On a normal day, 10 or 12 would be filed.

Tighter Regulation

Traditionally, legislators have placed their primary emphasis on regulation of insurance rates. The crisis has renewed calls for tighter federal and state regulation, including rules against pulling out of certain lines of insurance altogether.

In 1945 Congress passed the McCarran-Ferguson Act that gives regulation of the insurance industry to states. State laws vary, but the National Assn. of Insurance Commissioners, a nonprofit group, has developed a series of financial benchmarks that are used nationwide to gauge the financial health of insurers.

Among the most important of these measures is the amount of money insurers keep on reserve as a cushion against the premiums they write. Insurance commissioners say the optimum ratio is $1 in reserve for every $3 in premiums. The reserve, similar to the one that federal regulators require banks to have on the deposits they take, has been depleted in recent years by growing claims and shrinking profits.

Cyclical Nature

Despite warnings that the shortage of liability coverage could get worse by 1990, the insurance business is noted for its cyclical nature. This down-cycle is the worst ever for the entire industry, but Roth, California’s assistant commissioner of insurance, predicts that the liability market could return to normal as early as next year as higher rates now in place replenish the industry’s reserves.

“Insurers may have gotten themselves into this mess but it’s still a bad financial experience,” said Ann Lavie at the Insurance Services Office. “Companies are being very conservative. They don’t want to hurt their cash reserves.”