New Liability Policy May Ease Coverage Crisis

How to obtain liability insurance and stay solvent in the process has become a major problem for business, government and other organizations across the country. Now, insurance companies and those seeking insurance are beginning to find ways to ease the situation. It’s far from a complete answer, but it may at least make such insurance more readily available.

The insurance industry insists that huge damage awards in liability cases have vastly increased the industry’s exposure to loss. Premiums--when policies are available at all--have skyrocketed. One broker tells of a building contractor whose annual premium leaped to $375,000 this year from $70,000 last year. That means 15 cents of every $1 the firm takes in must go for the liability insurance.

Critics of the industry say insurers were eager to write liability coverage when they were making big returns on investments that were financed with premium income. The industry’s change in attitude reflects today’s poor investment returns more than any higher liability costs, the critics say.

Whatever the case, some businesses have insisted that they will discontinue certain types of activities because the risk of damage claims is greater than the profits such commercial enterprises might produce. In a broad sense, the threat is that an imbalance will develop between society’s need to accept some risk in the name of progress and the ability of injured parties to recover damages and to apply the pressure of punitive damages against large, impersonal organizations.

May Reduce Exposure

One partial answer emerging this year is a new insurance product called a “claims made” policy. It is a replacement for the old “occurrence” policy and insurers hope that it will significantly reduce their exposure to future losses.

Basically, a claims made policy pays for losses incurred only on claims filed during the year the policy is in effect, regardless of when the damage was actually suffered. An occurrence policy pays if the damage occurred during the policy year, regardless of when the damage is discovered and a claim filed.

The boon for the industry is that by selling claims made coverage it can avoid a situation like the one in asbestos, observes Jeffrey Masters, an insurance law expert at the law firm Cox, Castle & Nicholson. In that situation, the damaging health effects of exposure to asbestos didn’t show up in victims for many years. The courts handling asbestos cases have dragged in insurance companies that had sold policies to the asbestos industry over many years.

Under a claims made policy, only the carrier with a policy in force when the claims are actually filed would bear the cost. Once the policy year is over, the insurance company can close its books and not live in fear of future claims.

For the company seeking insurance, such policies probably will become more readily available than occurrence policies, which are currently difficult to find. It’s also likely that rates will be lower--perhaps by 20% to 30%. That’s not much considering the rate increases of 300% and more in recent years, but it’s something.

Longer Look at Coverage

Meantime, corporations are taking a longer look at their coverage to try to hold down costs. Berne J. Scalisi, a risk management consultant in San Francisco, points out that companies are shifting risky operations into separate entities, tightening up procedures to limit ill-conceived activities that could lead to damage claims, joining with industry trade organizations to create pools of self-insurance and finding other ways to limit the amount of coverage they purchase.

None of this is yet easing the drive for reforms that would limit the size of damage awards. These efforts currently include an initiative on the California ballot to reduce the exposure of governments and businesses.

The insurance dilemma poses a problem for society. As long as the insurance industry insists that it can’t afford to provide coverage except at exorbitant rates, the taxpaying public faces a risk that cities and other government entities, lacking insurance, will have to pay damage claims out of tax revenues. Higher insurance costs also will put pressure on businesses to raise prices.