Insurance Firms Put on Defensive in Prop. 51 Debate

The powerful but publicly unpopular insurance industry is finding itself in an embattled position in several ways as the campaign for and against Proposition 51, the “deep pockets” initiative, enters its final weeks.

The initiative before California voters on June 3 would put limits on the share of damages for pain and suffering--but not economic losses--that an individual defendant could be required to pay in personal injury liability cases.

If a party were found 40% at fault, for example, it could not be required to pay more than 40% of the pain and suffering damages, even if no one else who was at fault had the capacity to pay. At present, the party could be required to pay up to 100%.

Campaign Against System

The insurance industry, strongly backing the initiative, has been mounting a campaign against the way the legal system operates in general, blaming lawsuits, big jury awards and court decisions expanding concepts of liability for the insurance price spiral.

But, as the initiative debate goes on, industry critics, who include lawyers and consumer advocates, have been propounding another point of view about the causes of the spiral--and insurance spokesmen under questioning admit it has some validity.

This is that recent sharp liability premium increases are at least partially a function of a recurrent business cycle. In the earlier stage of the cycle, the companies were willing to charge less for coverage in an attempt to build a volume cash flow that would pay for their investments in bonds, for example, at attractive rates of interest. The return from the investments constituted most of their profits.

In the last two years, the argument goes, with interest rates falling and investment income not reaching previous expectations, the companies have been forced to hike their premiums to compensate for their investment disappointments and keep themselves, on balance, profitable.

Some say the companies, trying to remain price competitive with each other, delayed too long in making these adjustments and then had to recoup their position all at once, with very large increases that plunged insurance into a national controversy. Several polls have shown that the public has developed a very low regard for the industry.

The insurance category of commercial liability, where, according to industry executives, premiums have failed most to keep up with costs incurred in claims and expenses, was particularly susceptible to this phenomenon. Not only have premiums been increased, but coverage has been restricted and in some cases denied to insureds altogether.

‘Bit of a Sneer’

John McCann, California spokesmen for the industry’s Insurance Information Institute, said recently that he felt the insurance price spiral was 70% the lawyers’ and judges’ fault. He said he uses the word “justice” these days “with a bit of a sneer; we need to rebalance it.”

But McCann conceded that the price spiral was 30% the insurance industry’s fault. He said he agreed that many companies had contributed to their own problems by failing to appreciate their financial situation until it was too late to make gradual adjustments.

One of the industry’s lobbyists in Sacramento, who declined to speak for attribution, said: “A lot of these problems are our fault. We recognize that. We admit it. But they’re not all our fault, and we think that the underlying problems, the continuing problems, are the ones that are in the tort (legal) system.”

The state’s insurance companies have been pouring hundreds of thousands of dollars of contributions into the “deep pockets” campaign for the passage of Proposition 51, avowedly trying to limit future liability pay-outs and help restore profitability to this line of insurance.

But the admission of their spokesmen that they are at least somewhat responsible for the their professed profitability problems is one of the reasons that they seem in the present campaign to be on the defensive.

Another reason is that industry spokesmen have been steadfast in their refusal to guarantee that the initiative’s passage would result in any decline in the prices that they charge for liability insurance.

There has reportedly been no price decline in other states, such as Kansas and Washington, that have put caps on certain liability awards, and the most that industry spokesmen hold out for California is that the rate of premium increases might be somewhat slowed.

George Watts of the industry’s Western Insurance Information Service, said last week: “You don’t ever know what the changes (in loss costs) will be. . . . I don’t see how we could really make promises.”

Watts said the present round of premium increases is based on the last three years of loss experience. Until new trends pursuant to passage of the initiative were evident, he said, “I don’t see how anybody can expect the insurance companies to reduce premiums.”

Brown Legislation Opposed

The industry’s lobbyists have been opposing legislation offered by Assembly Speaker Willie Brown (D-San Francisco), himself a trial lawyer, that is designed to encourage lower limits on premiums. Brown’s bill would deem all liability insurance rates that are subject to Proposition 51’s influence to be too high and invite the state insurance commissioner to act to bring them down.

Robert Thompson, president of Southern California-based Twentieth Century Insurance, insisted recently that even if the initiative does pass, “It isn’t going to inure to our (the companies’) benefit in any great shape or form.” The initiative, he contended, is just “a smidge” of what is needed in tort reform.

The bottom line, as far as the companies are concerned, was expressed by a lobbyist who asked: “How can you talk about reducing premiums when you’re already losing money?”

But the industry’s financial status is another area where its position is under challenge.

The Insurance Information Institute originally claimed that the property casualty companies as a group lost about $5.5 billion in all lines of insurance in 1985. But the institute later acknowledged that when capital gains and tax credits were added in, they had actually made $1.7 billion.

This was still a scanty return of only about 2%, far below the profit margin of other major industries. But the statement of profits may have been too low. In a report last week, for instance, the General Accounting Agency, an investigative body for the U.S. Congress, estimated that the 1985 property casualty profit at $3.5 billion and forecast an increase every year through 1989. Insurance industry stocks have risen far more than the stocks of other industries.

Counted in the insurance industry’s statistics in the expense column are $153.9 billion in loss reserves, funds set aside over a period of years to pay claims anticipated to be found valid in the future.

But in its April 7 issue, Best’s Insurance Management Reports, the standard independent evaluator of industry trends, estimated that as of the end of 1984, the loss reserves were 21% higher than they needed to be to assure that the industry’s obligations would be paid.

$30-Billion Cushion

This could mean that more than $30 billion that has been listed as costs in recent years ought instead to have been listed as profits, although some cushion is obviously necessary lest the estimates of claims that will have to be paid be too low.

Consumer critics of the industry, such as Ralph Nader and J. Robert Hunter, head of the National Insurance Consumer Organization, have gone so far as to suggest that the companies have been colluding in imposing unmerited premium price hikes and denying liability insurance altogether to some popular activities. The motive, say these critics, is to establish a crisis environment where tort reform will sail through legislative bodies. Industry spokesmen deny such charges.

With the business cycle debate, along with refusal to guarantee that passage of the initiative will lower premiums and the questions about their pleas of financial hardship and charges of collusion, the insurance industry may appear hard put to defend itself in the Proposition 51 campaign.

But public opinion surveys have shown that strong antipathy exists among the voters to the trial lawyers opposing the initiative as well as to the insurance companies supporting it, and in the present campaign both sides are using surrogates to do much of their advertising.

Ads for the initiative are often paid for by the industry, without the industry doing the direct talking on the screen, while, on the other side, ads against it are usually paid by the trial lawyers, with consumer advocates or Atty. Gen. John Van de Kamp being the speakers.

Meanwhile, industry spokesmen, when they are on the offensive, assail the lawyers, suggesting that they oppose the initiative primarily because they fear it would cost them some of their allegedly high fees.

System Called Unfair

Insurance people also argue that the present system that the initiative is designed to correct is unfair. McCann said: “The word justice really has to be stricken when you realize that as a result of joint and several liability (whereby the defendant with the “deep pockets” can be made to pay an entire lawsuit award), we have a pure comparative negligence concept that says, ‘Well, if you’re 1% negligent and nobody else can pay, then you pay 100% of the judgment.’ As long as you have rules like that, then what sense does it make to say this is a justice system?”

The industry representatives say there had to be an initiative to bring about any reform at all since they could not count on normal processes in Sacramento.

“We really don’t think that our Legislature will do anything,” said Twentieth Century’s Thompson. “It’s controlled by the California Trial Lawyers Assn., and this is very much something where they want to maintain the status quo.”

Asked then whether the issues being debated in the “deep pockets” initiative campaign come down in some respects to a professional rivalry, with the insurance industry being pitted against the trial lawyers, Don Stewart, executive director of the American Agents Alliance, responded:

“Unfortunately, it’s being looked at that way. I don’t like to see it as that, but that’s what we’re up against in the Legislature, too. They (the trial lawyers) dominate the judiciary committees, and they tie them up tight, so you can’t get anything through up there.”