Tort Reform SCAM - Insurance Companies Lied

TORT REFORM, which for many years has been an annual feature of the legislative agenda, suddenly seems to be bogged down, and the reformers themselves have grown strangely quiet. This has caused some wishful thinkers to believe that the insurance industry is satisfied with its gains and is content not to further erode the system of compensation which it is supposed to serve.

The truth is that the insurance industry's story of loss and ruin-which they publicly claimed had reached crisis proportions-was wholly fictitious. All the recent "reforms" which have saved the insurance industry money, at the expense of the injured victims' rights, have not gone to relieve the premium payers, but to pad the already swelling pockets of an industry devoid of moral sense and decency. At the very moment when this industry was bewailing its poverty and incipient demise, it was in reality raking in the largest profits in its history. The evidence is now clear that "tort reform" harms the victims of injury without benefiting premium payers at all.

There is no doubt that "tort reform" is reducing judgments, both amounts and frequency, by placing limitations on recovery and putting up procedural barriers and making practice more involved. Malpractice reform in Illinois cut malpractice filings by more than 75 percent in 1986, the year after it was enacted.

Have premium payers seen a benefit? On the contrary, rates have remained high or increased, often dramatically, since the beginning of the tort reform movement. The St. Paul's annual net premiums from malpractice insurance have risen from $200 million to nearly $800 million. Last December, in congressional testimony related to an insurance data collection bill (H.R. 3643), the industry all but abandoned its position that rising insurance rates were linked to a litigation explosion. It is only recently, however, that tort filing statistics have been kept systematically-and what they show is that there was no litigation explosion to begin with: tort filings have increased at a rate only slightly in advance of the growth of population. A recent report by the Rand Institute for Civil Justice shows there may be increases in certain areas, such as products liability, but there have been corresponding decreases in other areas-automobile liability, for example.

What about caps? They are supposed to protect against outrageously large judgments, and to relieve, thereby, the premium payers of the burden which "outrageous" judgments allegedly place on the cost of insurance.

Caps certainly have a potential to harm the victim, limiting recovery to a level that may be arbitrarily low and far less than what would make the victim "whole." But do they really help the premium payer? The evidence is that they do not. In Canada, the enactment of caps has been followed by an increase in rates of up to 400 percent.

In the State of Washington, caps were enacted in 1986. Shortly thereafter, the industry sought a rate increase. In Maryland, a $350,000 damage cap in medical malpractice cases was followed by an increase in the rates for that insurance. Florida passed a $450,000 cap on the basis of leading malpractice carrier St. Paul's representation that it would produce annual premiums savings of $1.2 million dollars. Instead, after enactment, St. Paul sought rate increases of 25 to 35 percent. A spokesman for the company said: "To forecast the effect is highly speculative. Our evaluation of prior losses shows little or no savings under key provisions of the law, and our analysis of other provisions show no expected savings. Our best estimate is no effect from the tort changes."

Best example of all is Colorado. There, a cap of a miserly $250,000 was enacted for malpractice cases, only to have Hartford announce that it would start canceling its current malpractice policies in November of last year.

What have we learned about the insurance industry since the Illinois legislature, and many others, bought the "tort reform" idea? For one thing, massive profits being realized by the insurance industry have come to light.

The insurance industry has more than $310 billion dollars in assets, yet it is controlled exclusively by state regulation. It is an industry which consumes 11 percent of the nation's disposable income-12 percent of the gross national product. Yet little has been known about its economic condition, since the industry is exempt from antitrust laws, FTC scrutiny, and income and payout disclosure.

A recent West Virginia malpractice controversy, however, brought to light a lot of information about insurance industry profitability, as well as the peculiarities of their accounting methods. CNA claimed it had a $16 million loss in West Virginia. Experience showed that, during that time, it collected $27 million in premiums, on which it earned $8.4 million, for a total of $35.4 million in income.

Against this it paid only $4.5 million in claims, while spending $5.1 million in administration. In reality, the loss was predicated on the company's own fictive estimate of $38 million in paper expenses, contingencies, and reserves against non-existent claims, along with an expense of $3.5 million for purchase of "reinsurance policies." (The insurance companies invariably bring these out as an expense-although reinsurance policies never seem to do them any good when dealing with their liabilities.)

Insurance industry profitability can be understood only in the context of these types of accounting methods. As a basis for "tort reform," for example, the industry pointed to a continuing drop in profits beginning in 1978 when where there was $8.6 billion net income, and concluding in 1985 with a $5.1 billion loss. During the same period, however, the assets of the companies more than doubled, rising from $149 billion to $313 billion, prompting federal insurance administrator, Robert Hunter, to brand these companies the "mad dogs of the American economic scene."

It has now become evident-and all but conceded-that any shortfalls which the insurance industry experiences have nothing to do with either amount of litigation or size of recovery. Shortfalls are the product of the cyclic nature of that industry's business, exacerbated by its own income strategy which, beginning in the mid-seventies, was to lower premiums in an effort to increase cash flow for its investment schemes. Thus, the industry made $82 billion dollars between 1980 and 1984 in investment gain, dwarfing its $45 billion dollar underwriting loss during the same period.

Having misinformed the public and nearly every state legislature, and then been called on it, it is hardly surprising that the insurance industry no longer wishes to call attention to itself. Reforms were enacted because of the promise and expectation that high insurance costs would drop, not to ensure that the profits of insurance industry would strain the limits of hypermathematics.

Certainly, the spirit of tort reform is still at large, but it appears to be animated not by the insurance companies, but by their disenchanted customers, who see themselves victimized not only by the tort system, but by their own insurance carriers.

The next wave of reform could be the reform of the insurance industry itself, which many people think is long overdue. In the last few weeks, officials in eight states have charged four major carriers with anti-trust violations. Speaking for the consumers of his state, the Attorney General of Texas accused the companies of "sucking the blood" out of the American economy. These suits may be the tip of the iceberg, as consumer disenchantment continues to grow.

Robert A. Clifford heads a seven lawyer firm specializing in personal injury litigation. He is third vice president of the Illinois Trial Lawyers Association and a trustee of DePaul University, and he is a frequent advocate in Springfield for the rights of injury victims.