Federal Report Disputed : Study Blames Insurers for Insurance ‘Crisis’

Sharp increases in liability insurance premiums for doctors, governments, businesses and other groups are caused by the insurance industry’s own decisions and not excessive lawsuits, according to a new study prepared for the nation’s attorneys general.

Despite alarming reports of a liability crisis, the industry is profitable and is not suffering from an explosion of litigation in state courts, the authors said.

The study, which blames the industry for underpricing insurance in the 1970s to attract revenues for investment, says: “The emphasis on a need for change in the civil justice system to rescue the insurance industry from financial problems is therefore entirely misplaced.”

Similar conclusions were drawn in a study released Friday by the Consumer Federation of America. In the past decade, jury awards in damage cases have increased at the same pace as inflation, and economic conditions have raised costs, the national consumer group found.

The 45-page report to the nation’s top legal officers, obtained by the Associated Press, was prepared for discussion at the National Assn. of Attorneys General convention in Seattle later this next month.

It was written by two aides to Massachusetts Attorney General Francis X. Bellotti, who sits on an NAAG insurance panel with his colleagues John Van de Camp of California, Lacy H. Thornburg of North Carolina, Jim Mattox of Texas, Charlie Brown of West Virginia and Bronson LaFollette of Wisconsin.

Rejects Industry Claim

The report notes the recent skyrocketing cost and restricted coverage of liability insurance for organizations, municipalities and professionals, but it rejects the industry claim that premiums are rising in response to growing jury awards, and criticizes a February federal report that agreed with the industry.

“The facts do not bear out the allegations of an ‘explosion’ in litigation or in claim size, nor do they bear out the allegations of a financial disaster suffered by property-casualty insurers today,” the report said.

The authors acknowledge that in 1984 and 1985 the industry paid out more in claims than it took in through premiums, but argue that when the industry’s investment income is combined with capital gains and tax credits, insurers registered a net gain of $1.7 billion last year.

They cite recent rises in insurance stock prices as evidence of profitability.

While the federal report noted a 758% increase in the number of product liability cases filed in U.S. courts between 1974 and 1985, the attorneys general state that tort claims in state courts rose only 9% in the past six years while population rose 8%.

The federal study also reported a dramatic increase in the average size of jury awards to injury victims.

Mirrors Inflation Rate

“In fact,” the attorneys general group says, “although evidence shows the average award has been increasing, the median jury award has not increased more than the rate of inflation, which shows that at least half of all jury awards still involve very small amounts.”

And while the average product liability award increased by 150% between 1975 and 1984, the Consumer Federation report contends that virtually all of it is accounted for by economic factors rather than a growing willingness of juries to increase awards.

For example, the study says inflation raised costs in general by 83% in that time, and medical costs rose between 23% and 56% more than inflation. In addition, real income rose 17%, life expectancy rose 3% and the income of elderly persons grew by 10%, it found.

The attorneys general study says the industry’s pricing and investment strategies are to blame, not the courts.