‘Deep Pockets’--2 States With Law See Insurance Soar

Last fall, as a mounting insurance crisis began stripping local governments, businesses and professionals of their liability coverage, backers of a proposed California ballot initiative argued that a way to help lick the crisis was to set limits on jury awards in personal injury lawsuits.

Insurance relief was not the only issue the initiative drive addressed, but it was a major attraction, and eventually hundreds of thousands of Californians signed petitions to qualify the “deep pockets” measure, now known as Proposition 51, for the June 3 ballot.

But experience in states like Kansas and Iowa--which have stricter damage award limits than called for in Proposition 51--shows that making adjustments in the legal system to protect the “deep pockets” of wealthy or insured defendants does not necessarily apply the brakes to skyrocketing insurance premiums.

Insurance industry spokesmen agree, saying that it will take adjustments of this kind nationwide, as well as other more favorable economic conditions, for the crisis to abate.

Dent in Doctrine

Passage of Proposition 51 would put a dent in the traditional legal doctrine of “joint and several liability,” under which damage awards in multiple-defendant cases are payable based on a defendant’s ability to pay, irrespective of his degree of blame. In cases where some defendants are unable to pay, others with “deep pockets” could still be made to pay all medical bills and lost wages. But in the non-economic category of damages--awarded for the lasting “pain and suffering” resulting from a permanent injury, for example--a defendant’s obligation would be limited to his degree of fault.

The cases of Kansas and Iowa are interesting because those two Midwestern states went much further in dismantling the joint and several liability doctrine than Proposition 51 would go.

A 1976 Kansas Supreme Court decision deleted it from law altogether, making the state one of five to do away completely with the “deep pockets” doctrine. The other four are New Hampshire, New Mexico, Ohio and Vermont. In Iowa, the Legislature in 1983 effectively eliminated the same kind of liability exposure.

Despite these protections, cities and counties, day-care centers and doctors in Kansas and Iowa are reporting record hikes in insurance premiums. Unlike California--where dozens of cities cannot buy liability coverage at any price--local governments in Kansas and Iowa can still find insurance. But as in California, premiums are sometimes 600% higher than a year ago, and for less coverage.

Opponents of the hotly debated California ballot issue--primarily plaintiffs’ lawyers and consumer groups--have specifically pointed to experiences in Iowa and Kansas as proof that Proposition 51-type legislation will not result in lower insurance premiums, as backers of the measure are claiming.

Indeed, officials in those two states said that despite the push for even more liability reforms, the insurance industry has been unwilling to lower rates.

Insurance company officials responded that rates remain high there because in setting them the industry not only considers its risks in individual states but in the nation at large.

“Kansas doesn’t exist in a vacuum,” said David Chartrand of the Insurance Information Institute, a national industry trade organization. Nationwide factors, such as inflation and losses in other states that don’t impose jury award limits influence insurance rates, which he said will continue to be determined by these and other economic factors.

Likewise, insurance company officials in California also have made no assurances that Proposition 51 would significantly help to ease the liability crunch, though the industry strongly backs the measure because it would reduce its exposure in some lawsuits. Opponents have argued that the insurance industry’s real purpose in upping its rates and withholding its coverage is to force states to enact jury award limits, which, those opponents say, are unfair to injured parties.

Meanwhile, the crisis in California builds. For the last year, insurance companies have been denying liability coverage to local governments at any price. A month ago, according to the League of California Cities, 34 cities in the state were “going bare.” Last week, the league reported, the number of uninsured cities had risen to 57, while 150 other cities had formed self-insurance pools.

Other Arguments

Proposition 51 backers have other arguments for its passage. They say it is inherently unfair for a “deep pockets” defendant found only marginally at fault to pay all damages in a lawsuit just because a co-defendant--an uninsured driver in an injury accident, for example--is without funds.

But spokesmen for the statewide coalition of local governments, businesses and professionals backing the measure concede that it was the pressure to solve the insurance crisis that was the driving force behind the initiative. Many Proposition 51 supporters still claim it would be a step toward insurance relief; other proponents admit they are not so sure.

In Kansas and Iowa, the doubts are etched in bolder relief. Evidence that the elimination of joint and several liability failed to stem the sharp rise in insurance costs did not avert strong public pressure to enact even further damage award limits as a response to the crisis. Even skeptical public officials said the demand for action was so strong that they were forced to adopt measures that they suspected would not work.

In rural Kansas this year, many obstetricians--including some who were the only doctors around for hundreds of miles--threatened to abandon their practices unless the Legislature acted to help bring down the cost of medical malpractice insurance. The crisis quickly spread from the waiting room to the state Capitol.

Call to Action

But Kansas Gov. John Carlin, who was among those doubtful of a legislative solution, at first threatened to veto any attempt to revamp the law without proof that his suspicions were wrong. Fellow Democrats in the Legislature warned him that some action was necessary and he eventually signed legislation placing caps on medical malpractice jury awards.

“I had legislators coming in and saying, ‘Look, we recognize that we’re overreacting, but God, what are we going to do? Everyone’s convinced that the doctor is the good guy and the lawyer is the bad guy and what we need to do is (reform the legal system),’ ” Carlin said in an interview. The Kansas governor, like Proposition 51 opponents, blames the insurance crisis on poor investment practices by the industry during the last five years.

Kansas state Sen. Robert Talkington, a Republican who fought for sweeping liability reforms, said that while insurance company officials failed to promise that reduced premiums would accompany reforms, “We came to the conclusion that the best approach we could take is to give the insurance industry some ways to give them predictability.” He went along with the compromise bill the governor later signed.

In Iowa, the “deep pockets” doctrine was all but swept away in 1983 after lawmakers became convinced that it was the high exposure to large judgments by the major insurance clients that was driving up premiums. A defendant there who is found to be less than 50% to blame for a personal injury is required to pay only his share of damages. Iowa law also states that a plaintiff cannot collect damages if his own fault is more than 50%.

But, like the court decision in Kansas, the Legislature’s 1983 action did not spare Iowa the consequences of difficult-to-obtain, high-priced insurance protection.

Des Moines, for instance, saw its bus system go bare for four days last year before it found a company willing to cover its operations. And, although the state’s 956 cities have all found insurance, premium hikes of up to 600% have been imposed, according to Bob Harpster, executive director of the League of Iowa Municipalities.

Legislators Yield

In Iowa, too, legislators yielded to public pressure to do something about the insurance crisis, while at the same time they were doubtful of success. Iowa lawmakers voted to support an interim legislative study to determine the impact of proposed legal reforms on insurance availability.

“If it were not an election year, we probably would not have done anything,” said state Sen. Thomas Mann (D-Des Moines), also a plaintiffs’ attorney, who said he sees no relationship between the insurance crisis and liability restrictions. “(But) if I take a strong position . . . and there is no tort reform and the result of that is we lose control of the Legislature, well, the Republicans can come in next year and do whatever tort reform they want anyway. So it would be a Pyrrhic victory.”

Iowa Gov. Terry Branstad said he endorsed “reasonable reforms,” such as placing limits on lawyer contingency fees and on certain types of awards, explaining that, “Nationwide, judgments are going up dramatically and there is a major crisis both in availability and in costs.” But the Republican governor said that, because the crisis “came up too fast,” the Legislature will probably wait until next year before strongly tackling the issue.

Don Hauser, spokesman for Project Civil Justice Reform, an Iowa coalition of more than 135 businesses, nearly half of which are insurance companies, was unsure when asked whether further liability reforms would help insurance availability.

“I don’t know,” Hauser said. “I don’t know. We don’t have the statistics that will prove it solid. I think (more) information is needed.”