Risk Management

It’s `Scratch and Win’ in the Insurance-Buying Game

How the new Congress will likely treat buyers and sellers of property-casualty insurance.
David KatzJanuary 17, 2001

For the property-casualty insurance industry and the buyers of commercial lines coverage, the new Congress and the presence of George W. Bush as president are starting to look like a scratch-and-win game in which prizes are sure to be won.

In the areas of product and environmental liability reform and the streamlining of asbestos litigation—areas in which insurers and buyers have been calling for curbs on suing—the prospects in the new Congress appear particularly bright.

The fate of broad civil-justice reforms may dim the picture somewhat for Bush. Although the president-elect pushed tort reforms when he was governor of Texas, they may fall prey to Democratic filibustering at the federal level.

That’s the view of Stuart J. Sweet, a Washington insider who counsels investment firms on domestic political risks. Sweet proclaims himself bullish on the p-c commercial lines insurance industry’s progress in the next Congress. And on many issues, the fate of the industry is very much aligned with that of its clients.

The message for CFOs: They can be cheerful about the prospects for curbed litigation costs and cuts in the piece of their insurance premiums taken up with legal expenses.

“Everywhere you turn there are things that are going to be helpful. It’s almost like going to McDonald’s” and playing a scratch-and-win game in which “everyone’s a winner,” Sweet tells CFO.com from his home in Chevy Chase, Md. “You don’t know the size of the award yet, but you’ve won something.”

One area where companies and their insurers seem likely to come up winners is Superfund reform. The aim of Superfund, a federal authority created by a 1980 law and financed by taxes on chemical and petroleum companies, is to see that hazardous spills and other pollution are cleaned up.

One particular bugbear of the p-c industry and its buyers is Superfund’s joint-and-several liability provisions. Under the law, claimants may sue either the group involved in handling the hazardous substance or any one of its members for the entire amount owed.

“Everyone agrees the Superfund program is broken,” says Sweet, who’s the president of Capitol Analysts Network, asserting that under the federal scheme too much money is spent on “lawyering” and not enough on toxic waste cleanup.

Under Superfund retroactive liability, p-c companies that wrote pollution policies that predate the 1980 Act have been sued by insureds, Sweet notes. And such lawsuits have clogged up the courts and misplaced resources.

Since reforms aimed at curbing pollution liability would benefit both insurers and insureds, “we’ll probably see Superfund reform in the [next session of] Congress,” Sweet predicts.

Even if Superfund reform doesn’t pass, Christine Todd Whitman, Bush’s nominee for EPA administrator, has “a fair amount of discretionary authority about how [to] administer Superfund,” and may do so in a way that’s more favorable to businesses and insurers than Carole M. Browner, who has been the administrator under President Clinton, says Sweet.

For instance, he notes, the EPA administrator can choose to order a polluter to achieve a level of cleanliness as pristine as it was “before the Europeans landed in North America.” Or the official can allow the polluter to cover the contaminated site with “four feet of concrete, and build a parking garage on it,” Sweet says.

The answer to the question “how clean is clean?” can produce huge differences in costs for a company, according to the consultant.

The EPA administrator can also choose whether to aggressively pursue legal actions against polluters, he says. Speaking of Whitman, he added, “I would assume she would be more reasonable from an insurance company’s point of view than the people who represented Al Gore.”

Product-Liability Reforms Possible

Sweet also feels that there’s a strong possibility that curbs on the liabilities that product manufacturers and their insurers face will be passed in the new Congress. He thinks a “natural statute of repose”—a period of years after a product has been sold in which a manufacturer can’t be sued—has a chance of making it into a product liability reform bill in this Congress. Eighteen years is often proposed as the proper period of repose.

Another product-liability reform idea whose time may have come is to cap punitive damages awards against manufacturers at three times the amount of economic damages awarded to the plaintiff, according to Sweet.

A bill streamlining asbestos litigation also could be enacted, the consultant thinks. Senate Majority Leader Trent Lott has expressed sympathy for resolution of this issue, he noted. Further, in a recent majority opinion, Supreme Court Justice David H. Souter called on Congress to find a solution to “the elephantine mass of asbestos cases,” according to The New York Times.

A judicial study described in Souter’s opinion found that 61 cents of every dollar that might be available for asbestos-exposure victims was going to pay lawyers and other lawsuit costs, the Times reported.

Propelled by such powerful backers, an asbestos-litigation reform bill “will reach the president,” Sweet predicts. The consultant adds one tack it could take would be that of reducing federal litigation costs and “streamlining the whole process of resolution.”

A second approach asbestos litigation reform legislation could take is to provide tax subsidies for cleanup projects to companies who have been successfully sued, he says. For instance, Sweet adds, “if you are a company that makes $10 million and you’re sued for $100 million…that’s 10 years of your profitability” gone.

To avoid completely destroying such a company and still get cleanups done promptly, Congress might pass a bill allowing the company to, for example, file amended tax returns for the prior 10 years, enabling it to get refunds subsidized by the federal government.

Sadly, perhaps, for Bush, for whom tort reform was a mainstay of his presidential campaign, the odds aren’t as good that a bill changing the federal civil justice system will pass.

“Tort reform is potentially vulnerable to a Democratic filibuster,” says Sweet. “The trial lawyers have convinced Democrats to keep an eye on Republicans [intent on] doing damage to the tort system.”

Jim Green, the risk manager for Justin Industries in Fort Worth, Tex., also feels that the new president’s backing may not be enough to buoy tort reform. “I’m not particularly optimistic about the prospects for meaningful tort reform because of the power-sharing agreement in the Senate,” he says, referring to the recent accord under which Senate committees will be evenly balanced between Democrats and Republicans.

While he believes Bush “will make a genuine effort to get [tort reform done,” it will be difficult, says Green, chairman of the external affairs team of the New York City- based Risk and Insurance Management Society.

The risk manager says that among the reforms his peers would like are limitations on class- action lawsuits, so that the definition of what constitutes a class is clearly defined. Another reform businesses would like to see is a requirement that plaintiffs clearly spell out their reason for filing suit in a particular federal district court, he says.

In addition to lowering the lawsuit costs of companies themselves, businesses stand to benefit from tort reform because it would lower insurance premiums by making the outcome of lawsuits more predictable, says Green.

Insurance premiums are determined by an insurance company’s exposure to loss, he explains. If punitive damages awards, for instance, aren’t capped, that makes it “difficult to quantify the risk,” according to Green. And the result is higher insurance prices.