Test on Pesticides : Tort Reform, Industry Reform

Californians are frustrated with the high cost of liability insurance, as their overwhelming approval of Proposition 51 demonstrated. All 50 states have enacted some kind of tort reform to bring down the cost of insurance, and there are many bills in the state Legislature that would place limits on attorney fees and awards for damages. The Little Hoover Commission has recommended a $500,000 cap on awards for damages in pain-and-suffering cases, limits on attorney fees and a stricter burden of proof for punitive damages. But any further reform of the legal system would be meaningless without substantial regulation of the insurance industry.

The liability crisis is real. Last year Californians shelled out an average of 81% more for liability insurance. As a result, businesses have raised prices and local governments have scaled back services. The insurance industry, in addition, has withdrawn from entire markets, like child care. Some 57 California cities do not have any liability coverage. Many businesses and municipalities go without insurance or, in desperation, pool their resources with others and ensure themselves.

The legal system bears at least some of the responsibility for the astronomical increase in insurance rates. The courts have broadened the basis of liability, and since 1978 there has been a fourfold increase in the number of product-liability suits in federal courts. The number of jury awards of more than a million dollars in such cases increased 10 times. And half of every dollar paid for premiums now goes to cover attorney costs. More cases, bigger awards and higher fees have no doubt hindered the insurance industry’s attempts to predict costs, and this helped drive rates up.

But the deficiencies of the legal system can be exaggerated. The average jury award in federal and state liability cases, for example, was a relatively modest $25,000 last year. Tort reform could produce undesirable side effects. California’s liberal liability law, for all its faults, has helped wronged individuals gain compensation. Caps on contingency fees and awards might prevent poor plaintiffs from getting into court by making their cases less attractive to attorneys. The threat of lawsuits and stiff penalties, moreover, has forced business and government to be more conscientious and fair. Certainly any tort reform must be accompanied by new safety guidelines for business and government. Finally, any ceiling on awards is inherently arbitrary. It is a matter best left to jury and judge, who ultimately are responsible for seeing that awards are kept within reasonable limits.

The higher number of cases and larger awards do not necessarily account for higher premium prices. High premium prices may result from an insurance industry trying to recoup its losses from bad management in the late 1970s and early 1980s. The answer won’t be known until a relationship between claims and premiums is established. That cannot be done until insurance companies open their books. Tort reform may be necessary; it may not be. Until the books are opened, there is no way to know.

Tort reform without more oversight of the insurance industry therefore makes little sense. In no state has tort reform, by itself, succeeded in making coverage more available or in bringing down its cost.

Thus tort reform is not a panacea. Before clapping lids on fees and awards, legislators must examine the books of the insurance industry to determine just where the balance between tort reform and industry reform lies.