Insurance: Special-Privilege Industry : Judges and Juries Get Unfair Blame for Soaring Rates

How many dollars does the insurance industry pay out each year--in each state, and for each type of claim--and how many dollars does it take in? Although insurance rates have skyrocketed during the last year, insurance companies have rarely been asked this question. And they have never answered it.

Studies indicate, however, that insurance companies’ payouts have not been increasing significantly. The most comprehensive data probably come from the Rand Institute for Civil Justice in Santa Monica. The institute, which receives about half its funding from the insurance industry and most of the other half from businesses that are often defendants in liability cases, examined 5,300 cases in San Francisco and 9,000 cases in Cook County, Ill., that have been decided since 1960. The Rand researchers concluded:

--When population growth is accounted for, the number of lawsuits filed has remained constant over the last 25 years.

--The median verdict has remained essentially constant--at less than $20,000 in 1979 dollars--for the last 25 years, and has actually declined in recent years.

--Between 1980 and 1985 less than 4% of all cases won by plaintiffs resulted in million-dollar verdicts.

--And there is “a general stability and consistency in jury decisions over time and across jurisdictions.”

Other studies support the Rand conclusions. A UCLA law review survey, for example, finds that Americans sue at about the same rate as do the British, Canadians and people of several other Western nations. And studies done in California and Missouri found no consistent upward trend in cases filed over time.

The data seem to indicate, therefore, that although insurance rates have skyrocketed, the amount that insurance companies pay to injured people has not. The data also indicate that limiting compensation to injured people does not bring insurance rates down.

In 1983, for example, the Iowa Legislature eliminated joint and several liability--the doctrine under which an injured person recovers his full damages from any one of the negligent defendants causing the injury, who must then straighten things out among themselves. Insurers had told the legislature that if it would make each negligent defendant liable for only its pro-rata share of the injured person’s damages, insurance would be readily available. Yet 41 Iowa counties, most of which had rarely been sued, had their liability insurance canceled two years after joint and several liability was abolished.

Similarly, Pennsylvania in 1978 enacted a law making all of that state’s municipalities immune from most kinds of liability suits and limiting liability for even catastrophic events to $500,000 per occurrence (thus, if 50 people were killed in an explosion, their families would receive a maximum of $10,000 each). Yet Pennsylvania cities and towns are still having their insurance policies canceled.

Perhaps most significant, virtually every restriction that insurers seek to enact in the United States has long been in the law in the Canadian province of Ontario. Damages for pain and suffering are capped at $185,000 (Canadian dollars), punitive damages are virtually unknown, contingency fees are prohibited and a losing plaintiff must pay the defendant’s attorney’s fees as well as his own.

Yet insurers are raising premiums 400% and more, canceling coverage in mid-term and refusing to provide certain types of coverage at any price in the province--for example, the city of Toronto, day-care centers and Ontario ski teams have all had their liability insurance canceled.

Obviously a different approach is needed. If Congress is truly interested in bringing down insurance rates, it should repeal some of the insurance industry’s special privileges--such as exemptions from federal antitrust laws, federal regulation and federal income taxation--that enable the industry to raise prices with impunity. The states, which alone regulate the industry, should prohibit insurance companies from canceling policies in mid-term, require that insurance rates be based on experience (a business that has never been sued may today pay the same rate as a business in the same industry that has lost several suits), repeal state laws that prohibit most businesses and consumers from banding together to buy insurance at a lower rate, and establish public-advocate offices to intervene in insurance-rate cases.

Perhaps most important, state regulators should insist that insurance companies disclose the amounts that they take in, and the amounts that they pay out, for each state, for each year and for each type of insurance. The disclosure of such data would confirm what academic studies and experience in several jurisdictions have already shown--that judges and juries have not caused insurance rates to go up, and that restricting judges and juries will not cause insurance rates to go down.