Insurers Feel Push for Reform as Cries of ‘Crisis’ Start to Backfire

Times Staff Writer

The insurance industry is learning that the sword of reform is two-edged--that it can provide benefits such as California’s Proposition 51, which limited liability, but can also inflict painful wounds in the form of tighter state regulation.

As a result, the industry’s public relations efforts appear to be changing direction. At last week’s meeting here of the National Assn. of Insurance Commissioners, three insurance trade associations went out of their way to play down the magnitude of the liability insurance crisis and urged the incredulous regulators to let market forces overcome current high rates and scarcity of coverage in certain areas.

The liability crisis, the groups told reporters in previewing a study of the problem commissioned by the NAIC, is “somewhat exaggerated.”

The episode is noteworthy because, until now, the industry has been able to capitalize on the crisis to obtain some of the changes in civil law that it favors.


Restricted Exposure

Proposition 51, for example, limits a public agency’s exposure to liability for non-economic (such as “pain and suffering”) damages to its share of responsibility for the injury. Under the legal doctrine of joint-and-several liability, which has pertained in all cases in California until now, a defendant with “deep pockets” can be called upon to pay more than its share of a damage award if other responsible parties lack the resources.

While welcoming the public’s overwhelming approval of the California initiative, Frank Nutter, president of the Alliance of American Insurers, expressed concern in an interview about other proposals pending in the California Legislature that could impose review of insurance prices in a state that traditionally has left insurers free to charge whatever the market will bear.

Moreover, he noted, while the Florida Legislature’s final act before adjourning this month was to place a $450,000 limit on awards for non-economic damages, it also ordered a temporary rollback in liability insurance rates. And, starting Jan. 1, 1987, insurers in Florida will have to justify any rate changes, using as a standard the rates in force on Jan. 1, 1984.

Sought a Limit

Insurers sought the limit on liability but won it at a price so great that eight companies have reportedly suspended writing new commercial insurance in Florida, the nation’s sixth-largest market, even before Gov. Bob Graham could sign the legislation, as is expected, into law. (Graham is running for the U.S. Senate in November’s election.)

While Florida’s insurance commissioner, Bill Gunter, said he doubts that major insurers will abandon the state’s big insurance market for long, he acknowledged that a smaller, more isolated state might be more intimidated by threats of walkouts if it sought to tighten its regulation of the insurance business.

The effect of such industry pressure on regulatory efforts evoked a number of expressions of concern during the state insurance commissioners’ national meeting.


“It is necessary for us to pool our experience before we see national solutions,” Peter Hiam, Massachusetts insurance commissioner, told his colleagues. “We are individual states, but it’s a national industry.”

Hiam’s boss, Paula Gold, Massachusetts secretary of consumer affairs and business regulation, added: “Few states standing alone have the economic clout to withstand industry withdrawal en masse.” Thus, she said, some federal regulation may be necessary to restore “the balance of power.”

“What worked yesterday is not necessarily the solution for today, or the answer for tomorrow,” Gold said. “It is of crucial importance for us to reassess our system of insurance and financial services regulation.”

Congress long ago delegated regulation of the insurance industry to the states, but the unwillingness or inability of the industry to provide adequate amounts of commercial liability insurance at affordable rates has angered some influential lawmakers both in state legislatures and in Congress, which is considering setting some national standards in such insurance-related areas as product liability. Pressure is growing, too, for Congress to rescind the industry’s present exemption from federal antitrust laws governing the sharing of information, placing them on the same footing as other financial institutions.


Put Lid on Awards

About half of the states have tort-reform proposals pending, according to Maryland’s commissioner, Edward Muhl, who also is NAIC’s vice president. Others have already taken action. “There is a lot of activity,” Muhl said.

Generally, the changes involve placing limits on non-economic damages, requiring settlements to be paid out over the life of the beneficiary and eliminating or restricting the concept of joint-and-several liability, he said.

Massachusetts, for example, has limited pain-and-suffering awards to $500,000, imposed structured settlements and formed a state-organized insurance pool to ease a shortage of medical malpractice insurance.


Muhl acknowledged that the states are taking “a checkerboard approach,” but, in an effort to increase uniformity, the commissioners last week approved development of a uniform plan to increase financial reporting to the states by insurers in order to improve the states’ ability to assess the reasonableness of premiums.

“Then we can compare various states, one with another” in terms of rates, insurance claims costs and the effect on premiums of changes in civil law, Muhl told reporters.

“We want to make sure that the public is treated fairly in rates,” added NAIC President Josephine Driscoll, Oregon’s commissioner.

Oregon, for example, has adopted a new regulatory policy to review rate changes of 25% or more, she said. “I prefer a competitive rating state,” Driscoll said, but market forces helped create the present situation.


“Competition breaks down in a hard market, and we’re all feeling the consequences,” commented Gold of Massachusetts.

Such comments and developments underlay the incredulity with which the commissioners heard the conclusion of the industry-supported advisory committee’s survey of the availability of commercial liability insurance in the 50 states. The absence--or unaffordability--of liability insurance, the report concluded, “is not as widespread as reported in 1985 and early 1986,” although it conceded that “availability problems do exist” in certain classes or certain geographic regions.

The committee included representatives of agents, insurance companies, reinsurers and Lloyd’s of London, under the joint chairmanship of Driscoll and Muhl. But the commissioners rejected the tone of the report’s conclusion as overly optimistic and unanimously returned it to the committee for further work.

David Childers, Arizona’s insurance commissioner, called the draft report’s conclusions “skewed” and “extremely misleading.”


Driscoll said: “We don’t feel that the problems are over. We see some signs that capacity is improving, but we can’t be lulled into a false sense of security.”

The commissioners were particularly annoyed after representatives of the three trade groups--the Alliance of American Insurers, the American Insurance Assn. and the National Assn. of Independent Insurers--released the report’s conclusion to reporters even before all members of the committee had approved its contents for submission to the NAIC.