Reaction to Insurance Crisis : ‘Deep Pockets’: Ballot Bid to Tighten Liability Belt

As growing numbers of victims can attest, one of the most confounding predicaments facing businesses, governments and professionals has been the inability to obtain or hang on to liability insurance coverage.

Proponents of a ballot initiative in the California June election claim that voters hold in their hands the power to help their counties, cities, stores and family physicians out of the difficulty: vote yes on Proposition 51.

Whether the ballot measure, commonly known as the “deep pockets” initiative, is indeed a cure, a cleverly disguised political placebo or something in between is the subject of an intense debate and a campaign that eventually will cost millions.

Proposition 51 has already become the most hotly contested of the measures on the June ballot. The battle, pitting trial lawyers, consumer groups and victim organizations against an alliance of government, business and professional groups, is being watched closely outside California; its bellwether potential is already being likened to the 1978 property tax-slashing measure, Proposition 13.

The deep-pockets initiative, closely patterned after unsuccessful state legislation first introduced years ago, would partially strip away a centuries-old legal doctrine that was embraced in 1978 by the California Supreme Court. Under the doctrine, known as joint and several liability, a wealthy or heavily insured defendant--one with “deep pockets”--can be made to pay an entire award in a lawsuit if his co-defendants are without resources. Which party was most at fault is not a consideration.

A common instance cited by Proposition 51 proponents as unfair would be the case of an uninsured drunken driver who slams into a pedestrian on a dark city street. Both the city--with its “deep pockets”--and the uninsured driver are sued; the city is later found 5% at fault for inadequate street lighting but, since the principal culprit is broke, winds up paying the injured pedestrian 100% of the damages.

If the initiative passes, the city in this example could still be made to pay an injured person all economic damages, such as hospital bills and lost wages, but the city’s liability for non-economic damages, such as “pain and suffering,” would be limited to its share of blame.

Initiative proponents say the deep-pockets doctrine is one major reason why cities and counties, in particular, have been abandoned in droves by insurance companies in the last year. As a result of this insurance shortage, hardly a day passes without news of a community somewhere forced into cutting back services, a popular parade being canceled or a skating rink closing its doors.

One nationally famous example is in Point Arena, Calif., where the mayor and a city councilman resigned, firefighting was restricted and the volunteer fire chief barred any visitors in his home because the city lost its $2 million in liability coverage.

As might be expected, Proposition 51 opponents see the initiative as no answer whatever to these kinds of problems.

“This (Proposition 51) is a smoke screen for business interests and the insurance industry,” said Harry Snyder of Consumers Union. Snyder scoffed at suggestions that the measure could help alleviate the insurance crunch, saying, “We have an insurance crisis. (The initiative) addresses the tort system. No one has ever proved any connection between the two.”

Snyder says the measure “detracts from two goals of the civil justice system--compensating victims and deterring wrongdoers--and doesn’t put anything back into the system.”

Although other states that are also hit hard by the insurance crisis have been considering, or have passed, legislation aimed at protecting deep-pockets victims (45 states have it in some form), California’s June ballot initiative could signal a major push as the first voter-approved law in this area of litigation. The measure’s passage, plus President Reagan’s recent endorsement of a federal insurance task force calling for liability limitations and ceilings on certain types of awards, would be a difficult mandate to ignore, backers say.

Rejection, meanwhile, could impede legislative efforts to ease the crisis in other states, according to both proponents and opponents of the measure.

Many Not Aware

Public sentiment on the initiative is inconclusive. A recent Los Angeles Times Poll showed opinion about evenly divided--once the poll-taker explained the issue. A California Poll last week showed only 28% had heard of the measure with nearly half of those undecided.

Despite its limited direct effects, Proposition 51 is regarded as important for reasons other than its stated purpose. Many supporters view passage of the ballot measure as the best chance in years for certain special interests, such as doctors and insurance companies, to make inroads against one of the most powerful lobbying influences in Sacramento--the California Trial Lawyers Assn.

Mainly as a result of trial lawyers’ efforts, legislation virtually identical to Proposition 51 has repeatedly failed to pass in the Assembly since 1979, even though the bills won overwhelming approval in the Senate. Proposed Proposition 51-type legislation continues to die in the lawyer-dominated Assembly, most recently last week in the Assembly’s judiciary subcommittee.

Passage of the proposition, backers say, could break the hold of the lawyers in the Assembly and possibly lead to further legislative “reforms”--that is, apply more limits on the damage awards (and the attorney contingency fees scaled to those awards) that lawyers have successfully fought in the past.

“Proposition 51 was only made necessary because of the lock that the trial lawyers appear to have on one house of the Legislature,” said attorney Fred Hiestand of the Assn. for California Tort Reform. Hiestand said passage would demonstrate that the public wants limits placed on damage awards and will resort to the ballot box if the Legislature fails to act.

Possible Legislation

Defeat of Proposition 51, on the other hand, would effectively kill any chances of any future liability-reduction legislation originating in Sacramento, Hiestand said, echoing sentiments by several initiative backers.

“The value (of the initiative) is much greater for what it represents for the future, rather than what it represents in and of itself,” said John McCann of the Insurance Information Institute, an industry lobbying group. “If the proposition fails, there probably will not be future tort reform legislation passed (in California).”

Citing the uncertainties--whether liability insurance would indeed be made more obtainable; whether it endangers an injury victim’s right to full compensation--initiative opponents predict that voters will soundly reject Proposition 51. All a voter need do to see that the initiative is no answer, the opponents say, is look outside California to such places as Kansas, Iowa and Ontario, Canada, where despite passage of laws meant to protect deep-pockets defendants, insurance is still too costly to buy or not available.

So the stakes are high and the campaign budgets of the competitors reflect the size of those stakes.

Financial Backing

Indeed, how the measure fares on June 3 may depend largely on which side spends the most money campaigning. Early predictions are that backers, including a coalition of local governments, business officials, professionals and the insurance industry, will spend as much as $6 million. Opponents, primarily the trial lawyers and consumer groups, say they hope to match that total.

Already, Californians have witnessed the beginning of a multimillion-dollar promotional blitz organized by the Woodward & McDowell political consulting group, based in Burlingame, Calif., which also ran the successful California Lottery campaign in 1984. One of the group’s first TV spots singles out elements of an Antioch case to show how the city, although “only remotely at fault,” wound up paying a large personal-injury settlement. The president of the California Trial Lawyers Assn., Peter Hinton, who represented the plaintiff in the case, bitterly criticized the ad as a distortion.

The opponents, including the lawyers association, have hired the high-powered Berman & D’Agostino Campaigns of Los Angeles, which is expected to follow soon with its own expensive media attack.

Media hype aside, Proposition 51 is a response, however limited, to the very real and continuing liability insurance crisis that began hitting California and the nation last year and shows no immediate signs of easing.

Once Cheap, Plentiful

Only a few years ago, liability insurance was plentiful and it was going cheap. Now it is often impossible to acquire. Where it is available, insureds--many with spotless, no-claim records--are paying premiums up to 10 times more than before for only a fraction of their previous coverage.

In response, thousands of companies, professionals and governments have scrambled into financial wagon-circling arrangements, pooling their limited monies or selling bonds in a grim hope of weathering a major jury verdict.

Frank E. James of Sonoma, Calif., president of an insurance “super-pool” of about 50 cities and smaller joint-powers authorities in need of coverage, said local governments have no choice but to fend for themselves during the current crisis.

“We’ve been getting applications daily,” James said. “It’s been a real onslaught.”

Fifty-four California cities are now “going bare”--operating without insurance of any kind--while 180 more are involved in cooperative agreements in which they pool their monies to pay off claims, said Victoria Clark of the League of California Cities. Clark said that all of the remaining 441 cities in the state are either in imminent danger of losing their coverage or have found it only at premiums averaging three to four times as much as they had been paying.

The City and County of Los Angeles have been self-insured for years.

Also hit hard have been small businesses involved in toxic waste disposal or asbestos removal, many of which have folded because of their inability to show government agencies proof of insurance.

Professionals Feel Crunch

Doctors and lawyers are experiencing their own insurance crunch. So are the insurance companies that, in California at least, have been unable to acquire reinsurance--coverage from larger insurers such as Lloyds of London--that protects a primary carrier’s excess losses after a catastrophe.

“Right now, it’s impossible to estimate exactly, but 55% of what was insured in (California) in the beginning of ’84 is no longer insured,” said Michael Enfield, a San Francisco-based regional manager of Marsh & McLennan, the world’s largest insurance broker.

In Sacramento, more than 100 insurance-related bills are pending, many in direct response to the tight liability insurance situation. One, by state Sen. Alan Robbins (D-Van Nuys), would require a rebate from insurance companies to consumers if Proposition 51 is adopted.

The blame for the liability crisis, and consequently the debate over Proposition 51, has focused on two main settings--America’s courtrooms and insurance company offices.

Insurance officials fault court rulings that, they charge, have slowly expanded the definition of liability to such a degree that juries can now easily award unreasonable multimillion-dollar verdicts to undeserving plaintiffs. The industry, therefore, often is forced into settling “frivolous” cases out of court in order to escape a possible verdict 10 times larger, these officials contend.

Underwriting Practices

Insurance critics, meanwhile, blame the current crisis on insurance companies’ underwriting practices between 1978 to 1984. During that six-year period when interest rates were at record levels, the industry, in a competitive frenzy to acquire investment income from volume business, wrote thousands of vastly underpriced policies.

A favorite example cited by industry critics of these underwriting practices was the sale of $170 million worth of liability coverage to the MGM Grand Hotel in Las Vegas for $35 million. The insurance was written after the hotel’s disastrous 1980 fire that killed 84 people and injured more than 600--and was made retroactive, covering claims from losses caused by the fire before the insurance was obtained. The hotel had only $30-million worth of insurance when the fire struck.

When interest rates began falling in 1983, and claims covered by the underpriced premiums caught up with the industry, premiums were hiked to make up the losses and areas deemed highly risky, such as local government, were eliminated. This condition is not unique, critics point out, it having happened seven previous times this century, most recently in 1975 when the medical malpractice crisis hit.

Proposition 51 proponents voice optimism--but make no promises--that passage will encourage the insurance industry to reenter the “high-risk” markets. Insurance industry officials, meanwhile, shy away from any commitment.

Doubts Felt

Insurance officials predict that with or without Proposition 51, the industry will probably recover from its current downslide later this year or early 1987 as new premium income rebuilds its surplus, much as it did in seven previous cycles. But a number of government risk managers were doubtful that any recovery would be followed by commercial liability insurance becoming readily available--regardless of Proposition 51.

“I maintain they will come back (if Proposition 51 passes) with demands for significant retentions,” said Jeff Pettegrew, risk manager for a self-insuring pool formed in 1978 by a number of Contra Costa County cities. (Retentions are similar to deductibles with the insurance carrier entering a lawsuit only when damages reach a certain level.) “Clearly they don’t want to underwrite the risk . . . no one is willing to tell us what the price will be.”

Marsh & McLennan’s Enfield is quoted repeatedly by initiative supporters, and in their ballot argument, as saying that passage could lead to insurance premium reductions of 10% to 15%. But Enfield said those statements “are taken out of context.” Other factors, such as losses generated by a major catastrophe, could “mask” any recovery and, for this reason, insurance executives can make no firm predictions, Enfield said.

Government Coverage

Insurance industry representatives admit when pressed that passage alone will not encourage them to help out cities and counties, those hit hardest by the liability crisis. At the very most, they hint at some willingness to begin writing excess insurance--that which meets liability over certain levels in major events like natural catastrophes, but which escapes obligations arising from most court awards.

Insurers say that despite their support of Proposition 51, the measure is a two-edged sword: Passage could lead to lower damage awards, which insurers want; but passage could also mean legislative pressure on the industry to return to underwriting high risks, which they do not want. Worse, officials fear regulation or legislation forcing reductions in premiums.

“I suppose there will be some pressure (on the industry) if it passes; (Assembly Speaker) Willie Brown will see to that,” joked McCann, of the Insurance Information Institute. Brown, a lawyer, strongly opposes the measure and recently warned that insurance companies may be forced by law to write high-risk policies if they want to operate in the state.

Backers of Proposition 51 readily concede that because the measure stops short of controls on economic damages such as medical expenses and loss of income, its protection for deep-pockets defendants is limited. At the same time, key strategists said they deliberately chose the “compromise” language dealing only with non-economic damages to bolster the initiative’s chances of success.

Legislative Battles

“It won’t cure it all overnight,” said state Sen. John Foran (D-San Francisco). “It’s a piece of the jigsaw puzzle of overall tort reform. The system is broken and it has to be fixed.” Foran, honorary co-chair of the Proposition 51 campaign, has battled unsuccessfully for years to get the legislation, which the measure is patterned after, through the Assembly.

Though instances are rare, initiative backers argue that California law holds that a deep-pockets defendant could technically be required to pay 100% of a jury award while found only 1% responsible for an injury.

There is no clear measure of what effect this legislation would have on the typical personal-injury award, but the best guess is not very much. Statistics are murky but indications from governmental risk managers are that, in overall cases of recent years, pain and suffering damages have been much lower than economic damages. In fact, a number of cases cited by initiative proponents as “abuses” actually were instances where no non-economic damages were awarded and thus would not have been affected by Proposition 51.

One such case involved a body surfer left paralyzed several years ago after diving into a sand bar off Newport Beach. He was eventually awarded $6 million, but the damages included none of the “pain and suffering” compensation that is the target of Proposition 51.

While its imprint on liability law may be limited, the proposition’s potential effect on other tort reform measures is seen as considerable. Proponents predict that a heavy favorable vote will lead to even stronger limitations, for example, on attorney contingency fees and ceilings on pain and suffering awards.

Medical Malpractice

The only limitations on liability damages in California were adopted in 1975 and apply solely to medical malpractice cases. Those limits allow for a sliding scale for attorney fees and place a $250,000 ceiling on pain and suffering damages.

Backers argue that, under the present system, attorneys enhance their fees by inflating “pain and suffering” claims that are difficult to quantify while at the same time serve to bolster the value of an award.

Leading trial lawyers counter, however, that economic damages alone are not full compensation to some injured plaintiffs. Hinton, of the state trial lawyers association, who prefers the phrase “human damages” to non-economic ones, cites the following as a type of case in which pain and suffering damages are most justified:

A 16-year-old girl loses her leg in an auto accident in which she was a passenger. Hinton said the girl may be fitted with a prosthesis and taught how to use it at a cost of about $100,000. That portion of the girl’s expenses falls into the realm of economic damages and would be the major share of that portion of any court award.

But, Hinton added, “What about the loss that would accrue to compensate her . . . if she wanted to go out on a date, go out for athletics, in her childbearing years? She may always have an altered image of herself as a one-legged person.” For these losses, he said, the victim deserves further compensation.

Initiative proponents, of course, view arguments such as those by Hinton and other trial lawyers as laden with crocodile tears. The lawyer’s contingency fee--ranging up to half of the award in some cases--is what the lawyers association is trying to protect, not the plaintiff, they charge, pointing out that if Proposition 51 passes, there is a strong likelihood that those contingency fees will take a sharp nose dive.

THE ARGUMENT OVER PROPOSITION 51

THE MAJOR BACKERS California Chamber of Commerce

California State Parent-Teacher Assn.

California Taxpayers Assn.

County Supervisors Assn. of California

League of California Cities

MAJOR ARGUMENTS FOR The “deep pockets” law is unfair because often the party least at fault for an accident is forced to pay all or most of a judgment or settlement.

It protects two victims--the one injured in an accident and the taxpayer.

It will help reduce the number of lawsuits of dubious merit.

It is a fair compromise. Injured victims will be fully compensated for all real costs, such as medical expenses and lost earnings, but pain and suffering will be paid only on the basis of actual fault.

It will help cities and counties, once again, to get liability insurance.

MAJOR OPPONENTS California Labor Federation

California Trial Lawyers Assn.

Consumer Federation of California

Consumers Union

Silicon Valley Toxics Group

MAJOR ARGUMENTS AGAINST It will encourage more environmental pollution and the manufacturing of dangerous products and unsafe and hazardous streets.

It will increase taxes by creating more court congestion.

It will eliminate fair and full compensation of victims.

It will exacerbate problems within the legal system and encourage more litigation.

It will not help municipalities find liability insurance.