Insurance Industry Target in Rising Spate of Lawsuits
When George A. McKeon started working as a lawyer for Travelers Corp. nearly two decades ago, there were a trickle of lawsuits against the company.
Today, it’s a torrent.
McKeon, now the company’s general counsel, says the number of lawsuits has soared from about 20 when he started to more than 2,000 now pending. His yearly budget to handle litigation has also skyrocketed, from $21 million in 1967 to about $270 million this year.
Travelers--and much of the insurance industry--is facing a new legal landscape.
Not only has the number of normal claims-related lawsuits increased, but the industry itself is embroiled in high-stakes legal battles that pit it against the government and private industry.
Barry Ostrager, a New York lawyer involved in much insurance industry litigation, has dubbed these cases “bet the company suits” because of their potential costs to insurers.
For example:
- Insurance companies have been sued by more than 200 manufacturers, including many Fortune 500 companies, over who will pay the bill for cleaning up America’s toxic waste sites. The cost of cleaning up these sites has been estimated at $300 billion to $700 billion.
- A sweeping antitrust lawsuit has been filed by 19 state attorneys general, accusing leading insurers of conspiring to restrict liability coverage for businesses and municipalities nationwide.
- The Department of Justice has sued three leading insurers, including Travelers Corp., claiming that Medicare erroneously paid millions of dollars in claims that the three companies should have covered. Government lawyers say similar lawsuits against other insurers are likely in coming months.
Americans in general are increasingly turning to the courts to settle disputes of all types. And lawyers say there is a growing realization that the insurance industry has vast financial resources that can be tapped.
Seen as More Vulnerable
Also, there is anger in many quarters toward the industry. Some of it stems from problems that businesses and municipalities had finding insurance policies in the mid-1980s, and some stems from rising insurance costs. All of this has combined to create a political backlash against the industry.
“Everybody’s beginning to feel more powerful vis-a-vis the insurance industry,” said Robert Hunter, president of the National Insurance Consumer Organization, which promotes insurance industry reform. “Invisible and invulnerable they are no longer.”
To be sure, the industry has faced large potential problems before from product liability lawsuits involving asbestos and Agent Orange. But, lawyers say, the recent environmental lawsuits have upped the ante.
A notable example was a recent legal battle between Shell Oil Co. and about 240 of its insurers over who should pay the bill for cleanup at a toxic waste site near Denver. Cost estimates for cleaning up the site ranged from $750 million to about $4 billion.
Ostrager, who represented Travelers and was the lead industry counsel in the Shell case, said the insurers spent tens of millions of dollars in the yearlong trial and that Shell spent about $50 million. A jury ruled in favor of the insurers this spring, saying that Shell’s pollution at the Rocky Mountain arsenal facility was not an accident but the result of its normal business operations.
Politics Is a Factor
Lawyers say court rulings in recent years have been fairly evenly divided between insurers and manufacturers.
While many lawyers believe that the industry’s deep pockets have spurred the toxic waste lawsuits, George Bernstein, a Washington lawyer and former federal insurance administrator, said political motivations are driving the antitrust litigation.
“I think one of the key motivations behind the lawsuits was to speed repeal of McCarran Ferguson,” Bernstein said about the congressional act passed in 1945 that provides insurers major exemptions from antitrust laws.
Some industry analysts, say the effect of the antitrust lawsuits is in some ways potentially larger than that of environmental litigation.
The lawsuits, most of which were filed in March and June, 1988, claim that four major insurers--Allstate Insurance Co., Aetna Casualty & Surety Co., Hartford Fire Insurance Co. and Cigna Corp.--conspired with two trade associations, brokers and reinsurers to limit the availability of liability insurance for dozens of towns and businesses.
If the state attorneys general, including Connecticut’s, win the case, it would have a profound effect on the insurance industry, including its long-held exemption from some antitrust laws.
The insurance industry has also recently become a target of federal lawsuits. Government lawyers and investigators involved in the investigation of alleged Medicare payments say private insurers might be liable for as much as $10 billion in claims that Medicare has paid erroneously. Besides Travelers Corp., the Department of Justice has sued Michigan Blue Cross Blue Shield and Provident Life & Accident Insurance Co. of Chattanooga, Tenn.
The lawsuits were spurred by 1982 changes in the Medicare law that made private insurers the primary insurer for about 2 million older Americans who continue working after 65.
Medicare was designated the secondary payer--it is supposed to pay only what the primary insurer does not cover.
The three lawsuits contend that Medicare has paid millions of dollars in claims that the private insurers should have covered under the new guidelines.
