The Insurance Mess

Two years ago the city of Lafayette, Calif., complained to Atty. Gen. John K. Van de Kamp that it couldn’t buy insurance on any terms or at any price, though it had approached 118 insurance companies across the country. That complaint culminated last Tuesday in the filing of a massive antitrust suit, by Van de Kamp and the attorneys general of seven other states, that will test the theory that the pillars of the insurance industry triggered the liability crisis of the mid-1980s through “an international conspiracy to manipulate the insurance market.”

The suit, one of the most ambitious undertakings ever mounted by the states, alleges that four major insurance companies colluded with Lloyd’s of London and the Insurance Services Office Inc., a trade association, to limit the liability coverage available to public agencies, businesses and nonprofit organizations and to eliminate all coverage for pollution damage. This was done largely, the states say, by shifting the standard insurance policy offered customers from the “occurrence” form, which covers all accidents that occur while the policy is in effect, no matter when the claims are filed, to the “claims-made” form, which pays only for claims filed during the policy’s life.

The “occurrence” form was standard for general commercial-liability insurance until it became apparent to insurers that some hazards, like asbestos or certain medications, have what the industry calls “long tails”; the injuries aren’t discovered until years, even decades, after exposure. Battered by huge losses from long-tail claims and by declining investment income as interest rates fell, Allstate Insurance Co. and Hartford Fire Insurance Co. switched to the more profitable “claims-made” form and, according to the suit, then used their market power to persuade other insurers to join their boycott of more comprehensive “occurrence” insurance. When persuasion failed, it is alleged, these companies as well as Aetna Casualty and Surety Co. and Cigna Corp. conspired with Lloyd’s of London to deny reinsurance--the policies that insurance companies buy to protect themselves from extraordinary losses--to all insurers who wouldn’t go along with the conspiracy.

The result of this “collusive exercise in corporate greed,” Van de Kamp says, is that commercial insurance evaporated or priced itself beyond the reach of many customers. Van de Kamp’s class-action suit was filed on behalf of California’s cities, counties and other public agencies, some of which responded to the liability crisis by padlocking baseball diamonds, closing parks and furloughing police officers that they could no longer afford to insure. Small businesses from bus companies to day-care centers shut down, went without insurance or passed on enormous premium costs to consumers.

The extensive two-year investigation by the states, conducted here and abroad, turned up plenty of evidence suggesting a collaboration hatched in executive suites, pricey restaurants and private London clubs. But even if this evidence eventually persuades a federal court that there was an illegal conspiracy to boycott some kinds of insurance and to sell only stripped-down policies, the states’ legal theory doesn’t explain all aspects of the liability crisis that shook this country in 1985. The huge legal judgments awarded by juries in personal-injury cases may be as much to blame as the insurance companies for skyrocketing premiums--the real source of agony for many insurance customers.

The insurers deny that there was any wrongdoing or any collusion; one insurance executive derides the states’ lawsuit as a “coordinated, political public-relations effort by a few attorneys general.” In truth, the states jumped onto this issue because, as New York Atty. Gen. Robert Abrams has complained, the federal government “did nothing”--either because of Reagan Administration inertia or statutory prohibition.

The 1945 McCarran-Ferguson Act specifically exempted the insurance industry from most anti-trust laws--although boycotts, coercion and intimidation can still be pursued under the Sherman Act, as Van de Kamp and company are doing. While the states’ lawsuit begins what is certain to be a long and tortuous journey through the courts, perhaps Congress should consider repealing the exemption and making insurance companies play by the same rules that other businesses must obey. If automobile makers are subject to full scrutiny under the antitrust laws, then why not the companies that insure our cars, our houses and our businesses?