Insurer Sees State Paying Victims for Some Losses

A Lloyd’s of London executive told an insurance hearing here Monday that damage caused by pollution, such as through toxic dumps, or major earthquakes is uninsurable and that the state ought to step in to compensate victims.

The U.S. general counsel for the giant British reinsurance consortium, Donald J. Greene, said such losses are beyond the capability of private insurance companies because “there’s no way to assess the risks” and thus there are no criteria by which to accurately set premiums.

Asked by Assemblyman Robert J. Campbell (D-Richmond) whether he was advocating that the state get into the insurance business, Greene said he did not believe the state should sell insurance.

“This problem should not be dealt with through insurance mechanisms,” he said. “A tax fund, an excise tax, some recourse outside of insurance, is needed.”

The hearing was the third and last held by a special Assembly committee headed by Speaker Willie Brown. Reinsurers had been invited to testify on reports that a lack of reinsurance has caused some types of insurance, such as day care and municipal liability, to become unavailable.

Reinsurance is the process by which insurance companies insure themselves against losses that they may not have the resources to bear. There was testimony here Monday that about 10% of property-casualty insurance premiums go to buy reinsurance.

Another reinsurance executive, James M. Shamberger, senior vice president of the Reinsurance Assn. of America, evaded questions as to what kinds of activities he believes are uninsurable.

But Shamberger testified that of 130 firms that sold reinsurance in the United States in 1984, about 100 have left the business because they were not making money.

40% Raise in Premiums

The 15 largest of those that are left have raised their premiums by about 40%, Shamberger said, and are making sufficient profits to continue in the business.

In saying major earthquakes are not insurable, Lloyd’s of London’s Greene said many California earthquakes, restricted to certain portions of fault lines, are insurable. He said the London reinsurers regularly review earthquake studies to determine how much exposure they should agree to for themselves in the earthquake reinsurance market.

But he said an earthquake the size of last year’s Mexico City disaster would cause $40 billion in damage if it struck Los Angeles, and would be completely beyond the capability of the private insurance system.

Much of Monday’s hearing was devoted to a new round of arguments between lawyers and insurers, and their respective supporters, as to whether changes in the legal system--so-called tort reforms--could possibly lower or stem the rise in insurance costs. The lawyers said no and the insurers said yes.

But there was some independent testimony as well. Washington’s elected insurance commissioner, Richard Marquardt, said, for example, that his state had put tort reforms into effect Aug. 1, but that, so far, insurance companies were refusing to commit themselves to any rate reductions.

Marquardt said he had queried many companies and that all had responded either that the tort reforms adopted did not apply to their costs or that they could not tell at this early stage what their effect would be.

Brown, a lawyer himself, has in the past vocally supported the California Trial Lawyers Assn. position against tort reforms. He lauded Marquardt’s testimony as proof that such changes in the legal system do not resolve the problem of high insurance costs.

Meanwhile, a citizens group aligned with the lawyers known as “Access to Justice” released documents showing two big insurance companies--Aetna Life & Casualty and St. Paul Fire & Marine--had recently notified Florida authorities in writing that tort reforms limiting compensation to injury victims will not reduce insurance rates they charge in that state.

Insurance representatives, however, quickly challenged the significance of the Florida documents.

They made available, by telephone, Aetna officials, who made the points that the Florida law has a sunset provision that eliminates the changes after four years, so there may be no long-range effect, that the law is under constitutional challenge and finally that the changes--such as a $450,000 limit on non-economic damages--might not be all that meaningful.