Insurance Crisis Forecast for Most California Cities

More than two-thirds of California’s cities will be forced to go without liability coverage by midyear because insurers no longer are willing to risk losses from a growing number of injury suits, a top executive of the nation’s largest municipal insurance brokerage warned Thursday.

In the latest sign of a deepening insurance crisis, Michael Enfield, managing director of Marsh & McLennan Brokers, which markets most of the nation’s municipal policies, said the few firms that still insure cities will begin pulling out July 1, when most policies expire.

An estimated 43 California cities are already without liability coverage, either because insurance companies refused to renew their policies or premiums soared beyond what they could afford, according to the League of California Cities.

Enfield’s prediction, which came during a hearing of the state Little Hoover Commission, means that at least 250 more cities could be forced to follow the lead of Los Angeles, San Francisco and a handful of others in becoming self-insured. This means they will have to keep enough money in reserve to pay potential court judgments.

“There isn’t enough money in the country to pay the claims that the liability system would allow to be brought,” Enfield told the commission, which has begun an investigation of the California insurance crisis.

“What this tells me and what it tells the majority of the professionals I deal with is that we’ve had an explosion of liability in the last 10 years . . . with rapid increases in complaints, appeals and amounts of judgments.”

Officials of the American Insurance Assn., which represents 171 insurance companies, agreed that few California cities are likely to keep their policies in force through 1986 because most insurers believe that the risk is too great for the potential profit.

“For every $100 we collect, we pay out $152,” said Victor Slavin, the association’s western regional vice president. “It’s impossible for us to predict (the potential losses), so it’s impossible for us to insure.”

Public agencies are not the only ones to be hit with serious insurance problems. The sharp escalation in premiums and widespread policy cancellations already have affected such businesses as day-care centers and foster homes. Insurance industry lobbyists recently predicted that the problems will soon spread to automobile insurance as well.

Skepticism Among Critics

But the timing of the crisis also has raised skepticism among some critics who believe it is being used to build public support for a June 3 ballot initiative seeking to partially overturn the “deep pockets” legal doctrine.

The doctrine allows the courts to hold one party liable for all damages in an injury case even if that party bears only a small share of the fault. Big businesses and public agencies, which back the initiative, complain that they fall victim to unjustified suits because they are believed to have “deep pockets” of wealth.

Enfield and Slavin said reform of the “deep pockets” doctrine would help lower premiums but stressed that reform would not in itself solve the crisis. Other states that do not follow the doctrine are experiencing similar, although less severe, problems with sharp increases in the number of injury suits and large judgments, Enfield said.

Trial lawyers, who oppose the initiative, and consumer groups told the state panel that the crisis for cities is real. But they insisted that investment losses, not court judgments, were the basis of skyrocketing premiums and the rash of policy cancellations.

‘Careless Underwriting’ Blamed

“In order to make up for their careless underwriting and to make up for the reduced interest earnings that are available in today’s market, insurance companies are visiting their own economic problems on their clients, particularly cities and counties,” Peter Hinton, president of the California Trial Lawyers Assn., told the commission in written testimony.

Hinton also said cities and counties often are responsible for the problems by failing to properly design and maintain streets and roads where most serious injuries occur.

Connie Barker of the League of California Cities said that regardless of who is to blame, California cities have found themselves in serious trouble.

In addition to the 43 cities that already are going without insurance, 25 others have total coverage of less than $1 million, she said.

In one extreme example, the Mendocino County town of Point Arena found that the only insurance it could obtain carried a premium several times larger than the city’s annual budget, Barker said.

Southland Problem Acute

According to the league, the escalation in lawsuits and insurance premiums has been particularly acute in Southern California.

Los Angeles, for example, reported in a recent survey that the cost of legal judgments and out-of-court settlements jumped from $1.4 million in 1977-78 to $7.7 million last year. San Diego experienced a similar escalation as the cost of suits climbed from $4.3 million to $7.8 million from 1984 to 1986. In Anaheim, pay-outs for “deep pockets” suits climbed from $27,500 in 1983 to $1.5 million in 1984.