Insurers Told Rate Cuts Must Precede More Legal Reform

ORLANDO, Fla. â€”  The insurance industry is on notice that its nationwide drive in the state legislatures for change in the civil justice system--so-called tort reform--has gone about as far as it can go unless there is a clear demonstration that the reforms will result in lower insurance rates.

That message was conveyed by state insurance regulators at last week’s meeting here of the National Assn. of Insurance Commissioners. The semiannual meetings attract hundreds of insurance industry executives who open hospitality suites and lavishly entertain the commissioners and their staffs at dinners and receptions.

More than 30 legislatures, responding to the liability insurance crisis and a multimillion-dollar advertising campaign conducted by the industry, this year adopted at least some tort reform, putting limits on damages for pain and suffering, changing some of the rules on the adjudication of lawsuits and slightly restricting rights to sue.

Press for Limits

Industry representatives continue to press for more extensive damage limits. But a number of commissioners from states that already have enacted such restrictions expressed disappointment here that it is proving difficult to get insurance companies to provide reliable statistics on decreases in their claims costs as a result of such reforms.

In a panel discussion and press briefings that were held on the subject, commissioners from Iowa, Washington and Connecticut were particularly outspoken in their disappointment.

(California’s commissioner, Roxani Gillespie, did not attend the meetings, sending several of her top aides instead. Virtually every other state commissioner showed up for the meetings. Gillespie pleaded the press of business at home).

The Iowa commissioner, William D. Hager, said, “Tort reform will lose impetus unless some clearly positive results are seen in terms of lower insurance costs.�

Cites Article

Hager referred to an article he had written for the Iowa Insurance Quarterly in which he stated:

“The insurance industry has argued for some time that insurance rates and availability are predicated upon the high costs associated with the expanding tort system. It should clearly follow, therefore, that insurance rates will decrease and availability improve with the advent of legislative reforms of the tort system.�

But, he went on: “I have been disturbed recently to hear some insurance industry leaders suggest that tort reform will not improve rates nor cure availability problems for several years. As a regulator, I find this to be an unacceptable proposition. If we, as regulators, are to support the industry’s efforts toward tort reform, we must be in a position to witness the prophesied result.�

The Washington commissioner, Richard Marquardt, said he had been chagrined when, after enactment of what he considered significant limits on damages by his Legislature, several big companies informed him that the changes would have little or no effect on their rates.

Target for Lawyers

In fact, he said, some insurers had told him that limits on damages simply give lawyers a target at which to shoot and they may even increase costs to companies.

The Connecticut commissioner, Peter W. Gillies, said he had rejected proposals for an 8% increase in some premiums from one of his state’s leading insurers after the adoption of tort reforms.

“I told them that decreases, not increases, were in order,� Gillies said. “For the industry to do anything less would be ludicrous, if they expect to see tort reform enacted in other states.�

One of the most extensive series of reforms, aimed at both the legal and insurance systems, was adopted in Florida. There the Legislature approved a law that included not only a $450,000 ceiling on damages for pain and suffering but also a rollback of liability premiums and future rate approval by the commissioner on such premiums. There were also limitations placed on policy cancellations, and provisions were adopted to ease the way to self-insurance.

Delay Action

Lawyers for insurance companies have obtained a temporary injunction against the rollbacks and cancellation limitations, while their constitutionality is determined by the Florida Supreme Court. But the other changes have gone into effect, including the ceilings on damages.

Florida’s elected insurance commissioner, Bill Gunter, said that many companies had insisted to him that the Florida tort reforms--mainly the liability ceilings--would have little, if any, impact on their costs. But a few admitted that they would lead to some savings.

The president of the National Insurance Consumer Organization, J. Robert Hunter, said his organization examined the rate filings in Florida and found that of the first 277 filings by 104 insurers, 63%, or 175, claimed there had been no savings from tort reform, while none listed a savings of more than 10%. Hunter said the average claimed reduction was only 1.2%.

Florida’s Gunter said that based on his own study he believes that the tort reforms in the Florida law will result in a 7% savings to the companies, and he has been incorporating this in rate approvals.

Cut Back Requests

He remarked that the Insurance Services Office, a national ratings advisory service used by many companies, had recently recommended a 14.3% rate increase for certain types of liability insurance in Florida. He said he had reduced the requests of companies whose filings had reflected this to 9.8% increases, based on a finding that insurers’ savings from the Florida law had been inadequately reflected in the services office’s recommendation.

President Daniel J. McNamara of the Insurance Services Office used the occasion of the commissioners’ meeting to announce two studies of claims that will seek to quantify savings to insurance companies resulting from the various legislative tort reform actions of the last year.

The studies were welcomed by the president-elect of the commissioners’ association, Edward J. Muhl of Maryland, who said that if the studies indicate that there have been such savings, he believes that “the momentum will still be there� for further legal reform by state legislatures in 1987.

A skeptical view about the willingness of the Insurance Service Office and the insurance industry in general to own up to such savings was advanced at a news conference at the meetings by consumer advocate Hunter, a frequent critic of the industry.

Hunter recalled that in 1975, when New York state enacted tort reform that expanded liability and thus raised insurance costs, the Insurance Services Office had immediately raised its advisory rates by 5% and provided complete actuarial justification for the increase.

Up to now, he said, the services office has steadfastly refused to reflect in its advisories any reductions due to 1986 tort reforms and recently told its member companies that any beneficial effects of tort reforms could not “be quantified with any degree of accuracy.�

“It is ironic that (the services office) can tell us how much rates should rise when tort law expands, but can’t tell us how much rates should fall when tort law is limited,� Hunter said.

Hunter said he was urging the insurance commissioners association to call “an emergency meeting of the insurance commissioners in states that have enacted tort reform, so that the commissioners may determine how best to ensure that the benefits of tort reform are reflected in lower insurance prices.�

Doubts Action Coming

He asked: “If the states knew the results of tort reform would be as modest as they have been so far, would they have been so quick to abridge citizens’ legal rights (to collect damages)?�

“I don’t think the legislatures are going to move any further unless they see some numbers,� he said. “In the next 12 months, there will be insurance reform, not tort reform.�

A few others expressed the feeling, however, that in 1987 more states may follow the leads of Florida and Hawaii, the two states whose legislatures enacted changes this year directed at reforming both legal and insurance practices.

In some states, such as California, the effect of heavy conflicting influence by the legal and insurance lobbies has been to paralyze the Legislature. But in Florida, for example, the lobbying did not block action.

“The lobbies here were powerful, but the people-power involved in this state, particularly from the distressed business community, was dramatic, more so than ever before,� Gunter said. “It supported reforms in both directions and, in the end, it was decisive.�