‘Drought’ in Liability Insurance Has Businesses, Cities at a Loss : Increase in Lawsuits Blamed for Scarcity of Coverage

A tavern in Albany, N.Y., closes its doors. A Miami trucking firm goes out of business after 60 years. The mayor of a small Pennsylvania town orders police off the streets.

The common denominator in each case is a sudden and sweeping “drought” in liability insurance.

Once routinely purchased by business and government as protection against the economic ruin of lawsuits, liability insurance has become scarce and expensive. The growing list of those left out in the cold includes municipalities, professionals such as engineers and architects, day care centers and businesses ranging from large chemical companies to small manufacturers.

This crisis is more pervasive and has occurred more suddenly than the well-publicized rise in medical malpractice insurance rates that has hobbled hospitals and doctors. The drought also has different causes.

Roger Singer, Massachusetts’ deputy insurance commissioner, says his office is flooded with calls from people who can’t get insurance or who face rate increases of 300% and more.

“It’s everybody from some of the biggest companies in the state to an individual chimney sweep who can’t get coverage,” he said.

The crisis touches all society. The New Mexico Retail Liquor Dealers Assn. estimates 75% of its membership can’t get or afford insurance. South Carolina officials are trying to persuade an insurer to continue coverage for hundreds of churches.

Chaos Threatened

“I would expect the churches to be the better risks, and if the company starts canceling the better risks, then other companies would follow, and we would have chaos,” said state Insurance Commissioner John Richards IV.

Businesses large and small are affected. Steve Scammell, risk manager for GAF Corp., a chemical company in New Jersey, expects a 400% increase in insurance costs.

Herbert Smoot, owner of Southern Missouri Towing, is selling his six wreckers and going out of business because of a 300% rate increase.

“I just flat had to shut them down,” he said. “It’s not feasible when it’s a losing proposition.”

The drought’s impact is widespread and affects everyday life.

When Mission Insurance Co., a carrier in California, dropped its specialty day care insurance, the ripples reached across the country. In Michigan, premiums for day care policies increased an average 400%. “Parents are being priced out of the market,” said Bill Hankins, a spokesman for the state Department of Social Services.

Northeast ski operators will raise the price of lift tickets a few dollars to cover the cost of higher insurance. Denver Girl Scouts may have to cancel summer camp for want of coverage.

The Chicago suburb of Mount Prospect leveled its popular toboggan run after its insurer threatened to cancel the town’s policy.

The insurance drought follows the worst year in the liability insurance industry--a loss of $3.8 billion.

Insurance executives blame the red ink on the steady increase in the size and scope of lawsuits. Laws expanding the definition of liability and court interpretations of policies have left insurers with hefty judgments on claims they say they never intended to cover.

The industry points to a $15.8-million judgment in Jackson Township, N.J.

Two insurers were ordered to pay damages for the slow contamination of town wells by chemicals from a landfill, even though its policy excluded pollution coverage except for “sudden and accidental” incidents.

“The courts have interpreted our contracts to such an extent that we no longer know what is covered,,” said Warren Levy, a spokesman for the Insurance Information Institute.

Insurers and their customers also are paying for nearly seven years of “interest rate underwriting”--a time when companies sold policies at bargain basement prices while bolstering profits through investments paying 14% or better.

Some say insurance rates fell below realistic levels as competition raged for the premium dollars. When interest rates dropped abruptly, insurance companies were caught between shrinking investment income and soaring legal judgments.

“The companies are not making the investment return that had helped prop up the bad underwriting,” said James Chastain, a professor of insurance at Howard University’s School of Business and Public Administration in Washington.

The losses have cut into insurance reserves--the money set aside to cover future claims. They also have scared away money invested by reinsurance companies, foreign carriers like Lloyd’s of London that basically insure the insurance companies.

High Risks Avoided

The loss of the funds means less insurance is available. With less insurance to sell, companies are more selective. Many now avoid high-risk customers like liquor establishments and municipalities.

New Jersey Insurance Commissioner Hazel Gluck said the insurance industry is “trying to step back from writing risks.”

Consumer activists charge that insurance companies manufactured the crisis to boost rates and force demands for controls on liability suits.

“This is an industry rather uniquely positioned to use organizational extortion,” said Ralph Nader, the consumer advocate. “They’re holding the consumer and government hostage.”

Businesses are also among the drought’s victims. Some have curtailed growth to pay the higher premiums. Others have simply closed. Leonard Brothers Trucking Co., started 60 years ago in Miami, blamed the lack of insurance when it closed this year.

“Everybody has to cut expansions,” said Tim Lyons, executive director of the Hawaii Pest Control Assn. “Some marginal companies are going out of business because they won’t be able to afford the insurance and some can’t even get it.”

The liquor business has been hard hit. Many courts now hold bars responsible for customers’ actions. An Alabama dinner theater that served alcohol to a minor before a fatal car crash was ordered to pay $10 million in damages.

Alabama Insurance Commissioner Tharpe Forrester said bars across the state could no longer find insurance.

“I’m not talking about honky-tonks and saloons. I’m talking about very fine restaurants,” he said.

‘Orphaned’ by Industry

State and local governments also find it hard to get coverage.

“We find, quite frankly, that we are being orphaned by the insurance industry,” said Bill Dressel of the New Jersey League of Municipalities. Dressel said 30% of the state’s 567 municipalities were searching for coverage.

When insurance is available, it’s expensive. Newport Beach, Calif., saw rates go from $43,595 last year to $390,665 this year. In Scottsdale, Ariz., insurance for the school district climbed from $117,500 for $11 million in coverage to $658,000 for $6 million of coverage over the last two years. The change will mean higher taxes.

A U.S. Conference of Mayors study recently reported that half of 40 communities polled said their insurance premiums doubled over the past two years.

“Cities say they are being squeezed financially in their attempts to insure against liability in countless areas--property damage, police, fire and errors of omissions, among others,” the study said.

Hard Choices Made

The crisis has forced elected officials to make hard choices. Madison, Ind., closed the swimming pool after the city lost its insurance. When Sykesville, Md., with a population of 2,000, lost liability insurance for its officials this summer, the president of the town council resigned. He returned to office when insurance was found.

Mayor Dave Cornish of Collegeville, Pa., ordered police off the streets for two days while the borough tried to find insurance. The community of 3,100 finally got a policy for double its previous premium.

“I don’t think there’s any doubt that it will cause a tax increase,” Cornish said.

Some respond to the crisis by doing without insurance.

Bill Martin of the Texas Municipal League said 100 cities in his state had “gone bare.”

May Go to Taxpayers

“If they are hit with a large claim, they would be forced to go to the taxpayers for relief,” he said.

Others have banded together. Municipal leagues in 11 states now have liability insurance pools. New Hampshire recently created a state insurance pool for municipalities, day care centers and liquor establishments.

Others are pushing for change in civil law. In Nebraska, local officials are lobbying for a $1-million ceiling on awards against municipalities.

Chastain, the Howard University insurance professor, said such tort reform is essential to stabilize prices. But he also said the insurance industry must do better at assessing risks and setting prices.

“No one group is exclusively responsible for what’s happening--not the insurance companies, not the people suing, not the firms in London,” he said. “Everybody has to do something different. If there aren’t basic changes, the rates are going to stay high and go even higher.”