Liability insurance hassles ease but reforms still seen as needed

The liability-insurance crisis that hit many American cities, counties, and businesses last year is easing, but industry analysts say it could recur unless permanent reforms are enacted. Even as the 18-month-long crisis begins to wane, the insurance industry and those who need protection against lawsuits are trying to convince state lawmakers across the nation of the need for reform legislation.

But there is disagreement between insurers and their customers as to how the system should be reformed. The companies are most interested in having limits placed on damage awards. Their clients don't object to such reforms, but they also want to know that insurance will be both available and affordable in the future.

The insurance industry -- backed by chambers of commerce, local government officials, and physicians -- has pushed through reforms in a number of states, most notably Washington, West Virginia, Maryland, and California (with Proposition 51 in June). The reforms have focused on changes in the civil-justice system such as capping noneconomic damages awarded to a plaintiff, regulating contingency fees for attorneys, and limiting punitive damages paid by a defendant.

``The insurance industry is based on predictability of risk,'' explains Delia M. Chilgren, counsel for the Association of California Insurance Companies. There is no way to predict liability if a municipality or manufacturer must pay 100 percent of a damage award even if it is only 5 percent responsible for an accident or other mishap, she says.

But industry critics say such tort reforms will have little impact on availability and affordability of insurance. The real problem, they say, is the insurance industry itself.

``Tort reform is not the issue. The insurance cycle is the issue,'' says Jay Angoff, counsel for the National Insurance Consumer Organization (NICO), which advocates regulation of the insurance industry. ``There is no connection between [tort] reform enactment and the availability or affordability of insurance.''

A recent NICO survey indicated the insurance market was also easing in 13 states where tort reforms had not been enacted, Mr. Angoff adds.

Even the insurance industry concedes its problems were in part self-inflicted during an unprecedented rate-cutting war that began in the late 1970s. Companies battled each other for premium dollars, even if it meant cutting prices for coverage, so they could reinvest the money at record-high interest rates.

But lower interest rates put an end to price-cutting -- and the companies' profitability. Last year insurers began raising prices and refusing coverage to customers who were too exposed to risk, sparking a nationwide price explosion and insurance shortage.

The industry, after nine consecutive quarters of operating losses, now has posted an operating profit for two quarters. But losses are likely to recur ``because there is still a substantial overexpansion of the concept of liability,'' says Lester O'Shea of the Commission on California State Government Organization and Economy, which has recommended further reforms in the state.

``It's almost to the point that when Johnny's friend hits him with a baseball bat, Johnny's parents sue the baseball bat manufacturer,'' Mr. O'Shea says.

But reforms will not be effective so long as they focus on liability rather than on the insurance industry, Angoff says. Even if the availability crunch is easing, insurance prices remain high and are continuing to rise, he notes.

Because tort reforms have not had as much impact on the market as states expected, Agnoff predicts ``a backlash'' against the industry when state legislatures reconvene next year.

Discontent is brewing in several states. In California the state attorney general's office has subpeonaed more than 130 insurance companies to determine if they secretly and illegally agreed to refuse liability coverage to cities and counties in an attempt to increase pressure on state legislators to adopt favorable reforms.

The investigation, expected to continue at least six more months, could result in criminal indictments if it turns up evidence of ``a conspiratorial agreement'' to engage in unfair methods of competition, says Thomas P. Dove, deputy attorney general heading the inquiry.

Similar investigations by the Federal Trade Commission, at the federal level, and the state of New York found no evidence of collusion, says the industry's Ms. Chilgren. An inquiry in Texas is not yet complete.