Unequal Justice

With a Republican in the White House and Republicans controlling both houses of Congress, prospects looked bright earlier this year for property/casualty insurers to achieve long-sought reforms of the civil-justice system. President Bush had made tort reform a major plank of his legislative agenda, and three bills—on medical-malpractice liability, class actions, and asbestos litigation—had received the approval of the Senate Judiciary Committee. But after a vigorous counterattack by trial-lawyer groups and organized labor, it now appears that only the class-action legislation has a clear chance of passage.

Still, insurance executives like Jeff Post, president and CEO of Fireman's Fund Insurance Co., are sanguine despite the apparent setbacks. "The issue is now out in the open, and the American public is aware of the injustices of a system that, in the case of asbestos liability, rewards people who manifest no illnesses to the financial detriment of those who are truly sick," says Post, a former CFO of the Novato, California-based insurer with $12 billion in assets and $4.3 billion in annual gross premiums.

Post believes Congress eventually will pass tort reforms because the economy depends upon insurance to grease the wheels of industry. "Without tort reforms, the insurance industry will cease to exist in this country," he says. "The industry will simply disappear."

Already, he says, several old-guard insurance companies are ailing or have failed under the weight of asbestos, environmental, and other liability losses, among them Reliance Insurance and Kemper Insurance. Meanwhile, many other insurers have curtailed their underwriting of liability lines, such as The St. Paul Cos., which stopped underwriting medical-malpractice insurance. "I was a medical-malpractice actuary at St. Paul in the 1980s and '90s, and this line of business was our financial bread and butter," says Post.

It's not far-fetched to imagine insurers of other lines—from directors' and officers' (D&O) liability to workers' compensation—following a similar path. But more problematic are the insurers that have been forced to curtail underwriting. In the 18 months ending in June, in fact, 44 insurance companies had been put under regulatory supervision or placed in liquidation by regulators, according to A.M. Best Co. The Oldwick, New Jersey­based rating agency says insurer-insolvency rates are at their highest level in 10 years—the industry failure rate was 1.03 percent in 2002 compared with 0.23 percent in 1999. Standard & Poor's confirms the trend, downgrading the ratings of close to 30 insurers this year.

The problem, say rating agencies, is that insurers have not reserved enough cash to pay for past losses—particularly claims from asbestos and environmental litigation. The result, according to A.M. Best estimates, is that the industry is short some $80 billion. And the solution, insurers believe, is to temper rising jury awards in liability cases, arguing that it will stabilize more players and lead to lower premiums for buyers.

"When it comes to liability lines like D&O, product liability, or medical malpractice, our cost is essentially the cost of verdicts and settlements," explains John J. Degnan, vice chairman of The Chubb Corp., a Warren, New Jersey-based insurer with $9 billion in net premiums written and $9 billion in revenues. "It is the fear and reality of outrageous liability judgments that has contributed to the dramatic escalation in insurance prices. If we can get the system fixed, we can more-predictably and more-appropriately price our products."

Taking Stock
Just how expensive is America's tort system? According to a study released earlier this year by Tillinghast­Towers Perrin, total tort costs exceed $200 billion annually—more than 2 percent of the country's gross domestic product. That percentage has proven to be significantly higher than in any other developed nation, maintains the New York-based consultancy. And of the $200 billion, 19 percent—almost $40 billion—goes to the plaintiffs' attorneys.

But that's just money. In the case of asbestos litigation, insurers argue that thousands of plaintiffs who have no demonstrable illness are receiving payments, while those in the late stages of mesothelioma are given crumbs from the pie. The Manville Personal Injury Settlement Trust, a fund set up in the 1980s to pay claims on behalf of former asbestos manufacturer Johns-Manville Corp., estimates that 91 percent of the claims it received in 2002 were for nonmalignant asbestos cases, not for cancer cases. Those claims have received as much as 76 percent of the trust's funds. "Asbestos is the poster child for the abuse of the tort system," says Julie Rochman, senior vice president of public affairs at the American Insurance Association, in Washington, D.C.

The AIA and other insurance interests were hopeful that the asbestos litigation reform bill, S.1125 (sponsored by Sen. Orrin G. Hatch, R-Utah), would make it through to President Bush's desk intact. But the bill, which would create an administrative mechanism to enable companies to compensate asbestos victims, was "made worse" in markup, and is now "politically trapped," says Rochman.

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