THE GREAT INSURANCE SCAM
Peck, Keenen
The Great Insurance SCAM BY KEENEN PECK Joe Mohker is covered if someone springs a leak. He purchased insurance to protect his family-operated plumbing business in Miami. Last year, he paid...
...The arithmetic reflects who's speaking...
...Legal rules declare who should pay for the damage caused by modern technology and by an economic system that rewards corner-cutters with higher profits...
...If capital gains and tax credits are factored in, the industry made $1.7 billion last year...
...The funding problems now asserted by the insurers are of their own making, not the outgrowth of 'unforeseeable' increases in the number (frequency) and size (severity) in malpractice claims...
...Awards for lost income perpetuate disparities in wealth...
...The less liability, the less perpetrators must pay out in compensation to victims...
...HALT advocates no-fault auto insurance and is examining the idea of extending no-fault into other areas, particularly municipal liability...
...In Chicago, a law firm was told that its malpractice insurance would cost $36,000, up from $8,000 in 1985...
...Last year, he paid $12,794 for the policy...
...Punitive damages and "pain and suffering" awards are the favorite targets of insurance lobbyists...
...If one considers unrealized capital gains and dividends paid to policyholders, the industry made about $5 billion...
...Ironically, the statute limited punitive damages even though Illinois does not allow its residents to insure against such awards—more proof that tort reform is only tangentially connected to insurance prices...
...The most equitable and efficient compensation system would be run by the Government itself...
...The lure of high investment returns was too much to resist, but as interest rates and inflation came down, cashflow underwriting lost its luster...
...Insurance profits rise and fall according to a ten-year cycle, Hunter says, and the companies found themselves at the low point in 1985...
...Such rhetoric appeals to the millions of Americans who regard lawyers as sharks...
...The industry contends that such recoveries amount to a windfall for lawyers and should be abolished, or at least capped...
...To clarify the debate, Governor James Blanchard appointed a fact-finder, Robben Fleming, who recommended against a limit on awards...
...It wouldn't necessarily make society any safer...
...So why are they saddling their customers with astronomic premiums...
...According to consumer activist J. Robert Hunter, that fact—and not a tort system gone haywire—goes a long way toward explaining the Great Insurance Crisis of 1986...
...What's more, insurance companies set aside money each year to pay future claims...
...They operate under such names as Project Justice, Coalition on the Insurance Crisis, Coalition for Justice, and Coalition for Litigation Cost Containment...
...The industry's political offensive is on a roll...
...It also appeals to the Reagan Administration, which recently established a Tort Policy Working Group within the Domestic Policy Council of the Cabinet...
...Here, the industry's statistics are inconclusive...
...The most equitable and efficient compensation system would be run by the Government itself As the environmental and social costs of unbridled growth became apparent, the nation started demanding a measure of corporate responsibility and official accountability...
...Insurance companies say the size of awards is increasing...
...Dallas made the same choice, after its premium went from $157,000 to $1.5 million...
...To date, insurers have not produced any empirical data that suggest there is a link between the number of claims filed and claims paid, let alone a direct relationship between paid claims and the losses of the industry," observed Mark Ferraro, risk manager for the city of Dallas, in a trade publication...
...After taxes...
...Leaders of the industry acknowledge as much...
...The immediate impact on insurance consumers has been severe, but the squeeze may have a more lasting—and more pernicious—effect on us all...
...Prudential, for example, invested $38 million every working day in 1985...
...Last October, the U.S...
...Municipal officials decided to "go bare" and do without liability coverage...
...He found the Illinois Medical Malpractice Reform Act to be unconstitutional...
...Increase in Lawsuits Ominous: Insurance Company Losses Mount, reads one headline...
...Indeed, if the power to decide what's an acceptable risk remains where it is today, the number of injuries would probably increase...
...The Michigan legislature, like those in forty-two other states, recently considered imposing such a limit...
...Wosik threw cold water on the industry's plea for relief: "A sharp decline in the value of investments resulted in a reduction of'reserves' for the payment of claims...
...News stories say insurers lost $5.5 billion last year...
...It's balanced," says J. Robert Hunter, a no-fault supporter...
...Jeffrey O'Connell, the law professor who proposed no-fault auto insurance in the 1960s, summed up the situation at a conference in February: "Very few injury victims are in fact paid at all, and those who are get paid only after years' delay, and only after a huge portion of any recovery is turned over to the lawyers...
...It's a matter of ups and downs, and we're at the bottom," says Sean Mooney of the Insurance Information Institute...
...higher standards of proof that damage has been inflicted...
...Several have actually been bankrupted by adverse court decisions...
...Among items on the insurance industry's wish list are screening panels to keep so-called frivolous complaints from getting to court...
...To secure higher profits...
...In fact, the industry is doing just fine, thank you...
...At any rate, such damages make it tougher for businesses to pass—or to plan to pass—the cost of their mistakes on to consumers...
...Though the campaign tries to project images of fairness and efficiency, it has a self-interested purpose: to limit the liability of those who produce defective products, botch surgical procedures, fail to repair streetlights, spill toxic chemicals, or otherwise harm the citizenry...
...business as a whole...
...It would be unfortunate if the insurers' shell game—watch the lawyers, not our profits—delayed positive reform...
...in 1984, there were 401 million-dollar verdicts...
...Injured workers have little power, lawyers have conflicting interests, courts defer to other priorities, dispositions are slow, recoveries are inconsistent...
...Last December, three major trade associations adopted "An Agenda for Joint Action" to change the legal system...
...trial lawyers respond that the majority of juries find for the defendant...
...In a sense, the Great Insurance Crisis has little relation to premiums, lawyers, or profit margins...
...These are typical stories from the Great Insurance Crisis...
...In fact, it turned out to be a disaster...
...Now the captains of industry want to turn back the clock on their legal liability...
...In other words, the industry was un-derpricing malpractice insurance for many years...
...Since that's difficult to do, the policy encouraged economic growth—even at the price of personal injury...
...The courts responded by expanding Willard's "traditional tort-law doctrines...
...The Rand Corporation's Institute for Civil Justice reached a similar conclusion in regard to "toxic tort" actions, such as the suits against asbestos makers...
...medical reformers respond that few such cases go to verdict, and doctors win most of the time...
...When the media report a hair-raising "average award," that figure doesn't encompass the many zero-dollar verdicts...
...The industry and its allies therefore focus public attention on the "greedy plaintiffs' bar," and especially personal-injury lawyers, who are accused of suing at the drop of a hat and driving up everyone's premiums...
...Insurers have had a record high stock market performance since 1978," adds Hunter, now head of the National Insurance Consumer Organization...
...Miami Beach and Dallas can take the risk of being self-insured, but smaller cities cannot...
...Fleming endorsed other tort-reform proposals, but he chided insurance companies for conducting "little or no risk management, loss prevention, or quality assurance activities, despite the existence of strong evidence that the potential for malpractice can be reduced by such techniques...
...It did so for liability coverage in general...
...The industry is being swamped by a civil justice system that pours money out," Keenen Peck, a member of The Progressive's Editorial Advisory Board, studies law at the University of Wisconsin...
...Physicians, afraid of being sued for malpractice, perform redundant and dangerous tests...
...The reform package has many components...
...Another such increase and Mohker will hang up his pipe Wrench...
...Supreme Court let stand a California law that limits "pain and suffering" awards to $250,000 in medical malpractice cases...
...All are designed to discourage lawsuits...
...Lawyers and "activist judges," he says, are "engaged in an effort to destroy traditional tort law doctrines that limit legal liability so that the legal system can be used as a vehicle to restructure society and administer a massive redistribution of wealth...
...There was another surprise in Fleming's report: Physicians' premiums declined by about half between 1976 and 1982, then increased so that, in real terms, "1985 levels are generally at 1976 levels...
...Nationalization, however, would improve only the quality of assistance provided to the victims in our midst...
...Our system boomerangs, too...
...Relief is spelled P-R-I-C-E H-I-K-E...
...The corporations would do as they please and expect the Government to pick up the tab...
...Arobust industry, pretending to be on the skids, is advancing reforms that are unnecessary and possibly dangerous...
...Some have already been enacted in various states...
...How many are overturned on appeal...
...Hardly a day goes by without a new statistic showing how litigious our society has become, and how disastrous our losses have been, far outstripping the ability of premiums to keep up...
...A tort is an injury to a person or property...
...What we are witnessing is a manufactured crisis intended to bloat insurer profits and reduce victims' rights' "What we are witnessing," Hunter says, "is a manufactured crisis intended to bloat insurer profits and reduce victims' rights...
...Tort reform is needed regardless of whether or not there's an insurance crisis," says George Milko, staff attorney for HALT, a legal reform group in Washington, D.C...
...He seems to think that the legal system is a communist conspiracy...
...Large damages remain an important deterrent while the Justice Department takes a hands-off approach to corporate crime and while the medical and bar associations fail to discipline their members...
...If those reserves are punched into the computer, the industry made $15 to $20 billion, says J. Robert Hunter, who served as Federal Insurance Administrator under Jimmy Carter...
...By holding out the promise of lower prices, insurance corporations have rallied their customers behind the campaign...
...and transaction costs are high," the Institute said...
...A few miles to the north, the city of Miami Beach saw its yearly insurance premium rise from $750,000 to almost $2 million...
...But that still leaves the insurance companies turning a profit on the misfortune of Americans...
...Punitive damages reduce the resources available to pay future victims...
...How much do plaintiffs end up collecting...
...The mass media parrot that explanation...
...That assertion flies in the face of 900 years of legal history and even the Bible, which sanctioned double damages in Exodus...
...In no-fault schemes, victims are quickly compensated for economic losses but forgo the right to sue...
...A program that would reduce victims' compensation is not politically attractive, even if it promises cheaper insurance...
...Two provisions of the act—screening panels and a requirement that awards be paid out gradually— were, respectively, a denial of the right to trial by jury and an illegal "taking" of plaintiffs' property, he said...
...The reforms proposed by the insurance companies would amount to more deregulation...
...But the effort to restrict awards is picking up steam...
...Indiana maintains a similar cap, though the high courts of Texas, North Dakota, New Hampshire, and Ohio have struck down ceilings on awards...
...It is important to keep in mind," Fleming wrote, "that the concept of medical liability, by creating a deterrent to unacceptable health care practices, makes a contribution to the maintenance of high standards of quality for health care...
...Wosik's ruling is on appeal...
...But insurance companies have enormous investments in real estate, farming, oil and gas, art, and other areas...
...What you see, though, depends on how you look at the numbers...
...Tort law did not cause this crisis...
...A better way to assess punitive damages is to examine what they're meant to do-punish the defendant and deter like conduct by others...
...And yet the tort system stands in need of an overhaul...
...The crisis is in the way we let others increase the risks to which we are exposed...
...But Willard has a more fundamental gripe...
...The industry's rate of return lags behind U.S...
...How many awards are reduced by trial judges...
...In a separate study, the Rand Institute found that minority plaintiffs win less often, and are awarded less money, than white plaintiffs who suffer identical injuries...
...In Pontiac, Michigan, the school district's insurance bill quadrupled to $810,000—"the equivalent of eliminating programs for over 200 students," according to the deputy superintendent...
...The firm found a cheaper policy, but it provides only limited protection...
...The folly of revamping tort laws to bail out the insurance companies was recognized last December by Cook County Circuit Judge Joseph Wosik...
...In the companies' zeal to protect markets and increase market share, we got into an intense and ludicrous rate war," noted Joseph Marcum, president of Ohio Casualty...
...Richard Willard, the Assistant Attorney General assigned to lead the working group, calls lawyers the "primary beneficiaries" of today's civil-justice rules...
...In 1962, says Sean Mooney, an economist with the Insurance Information Institute, there was a single million-dollar punitive damage award...
...None of the five lawyers has ever been sued for malpractice...
...this year, he has to pay $27,156...
...No-fault schemes hold promise to the degree that they push lawyers out of the picture, thus keeping down "transaction costs...
...In theory, at least, insurance prices would decrease as liability diminishes...
...Complain to your insurance agent, and you'll be rebuffed with a line like this: The insurance industry must boost premiums because it's losing money on account of wildly inflated jury awards...
...Rates are going through the roof, and the roof is coming down on businesses, consumers, and taxpayers...
...Still, despite the paranoid tone of his rhetoric, Willard has hit on an important point: Tort principles do affect the distribution of wealth...
...The $5.5 billion figure represents operating losses—the difference between what the companies received from premiums and what they paid out in claims...
...It's driven by the economics of the industry...
...Newspapers, afraid of being sued for libel, tell reporters to soft-pedal their stories...
...By these lights, punitive damages are not doing enough, if the incidence of corporate misconduct is any indication...
...In more than twenty states, insurance companies, large manufacturers, physicians' groups, local governments, and chambers of commerce have joined forces to influence legislation...
...asserts Lowell Beck, president of the National Association of Independent Insurers...
...Doctors say they're being crushed by malpractice awards...
...A Washingtonbased lobby, the American Tort Reform Association, opened in February...
...a ban on lumpsum awards, and restrictions on class-action suits...
...limits on contingent fees, in which lawyers take a percentage of any awards their clients receive...
...Before the industrial revolution, courts sanctioned a kind of strict liability...
...The U.S...
...method of compensating victims is too expensive and cumbersome...
...accident victims will now be compensated directly out of tax revenues...
...Punitive damages "are essentially criminal in nature and have no place in a civil liability system," stated the Agenda adopted by the insurers...
...In the mid-1800s, however, judges began limiting liability by requiring plaintiffs to prove negligence on the part of defendants...
...The industry, blaming its losses on the legal system, is pressing for reforms that make it harder for injured persons to obtain redress in the courts...
Vol. 50 • April 1986 • No. 4
