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Tort Law, Insurance, and the Insurance Crisis
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15664 |
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Section : |
MODERN THOUGHT
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2 / 1989 |
6,763 Words |
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George L. Priest
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Between the late months of 1984 and the early months of 1987, an accumulation of reports documented unusual changes in certain commercial casualty insurance lines. Most prominent were extraordinary increases in yearly insurance premiums, increases of 60 to 100 or, in some instances, 1,500 percent. For a small number of entities--day-care centers, some municipalities, nurse-midwives, as examples--insurers refused to offer coverage at any price. Insurers also drastically reduced the terms of basic insurance policy coverage. Insurance deductibles were doubled (for example, for the Kennestone Hospital, Marietta, Georgia, from $1 to $2 million) and redoubled (for the City of Baton Rouge, from $100,000 to $500,000). Coinsurance proportions were increased. Levels of aggregate insurance coverage were lowered dramatically (for example, for the City of Hartford, from $31 million to $4 million). In addition, insurers excluded activities and liabilities from coverage altogether (for example, pollution claims and employment discrimination claims from municipality policies; claims related to mergers and acquisitions from directors' and officers' policies). In these same lines of commercial coverage, insurers substituted a claims-made for an occurrence policy.
In the months since 1987, the crisis appears to have subsided. But the price increases from liability insurance premiums remain intact. Those products and services withdrawn from markets remain withdrawn. A 1988 Conference Board survey of manufacturers also showed that 39 percent had decided against introducing new products and 25 percent had discontinued new product research. Although many cities have been able to restore essential services by forming mutual insurance groups, mutual insurance only postpones the effects of increased liability, rather than curing them.
These insurance changes generated, in turn, drastic responses from product manufacturers and service providers. Prices were increased to offset increased premiums. Those firms and entities denied insurance coverage were forced to curtail operations. Jails were closed and police patrols suspended until municipal mutual insurance programs were arranged. Many cities and park authorities removed slides and swing sets from public parks. Schools removed diving boards from swimming pools. The Conference Board survey of manufacturers revealed that 47 percent had withdrawn products from markets for liability reasons.
These events represent a genuine crisis. The wholesale withdrawal of products and termination of product research certainly does not benefit society. Equally, these events are evidence of the withdrawals of the insurance industry from the business of insurance. The decline in insurance coverage is obvious with respect to those lines for which commercial coverage was refused altogether--such as midwife and day-care coverage--as well as for those sets of specific claims now excluded from coverage--such as pollution claims against municipalities. The other changes in insurance coverage, however, each add to the reduction in the total financial resources available for insuring injuries. When deductibles and coinsurance are increased and aggregate coverage reduced, the insured and the insured's potential victims bear more of the risk of future losses themselves. Similarly, adoption of the claims-made policy, which limits coverage to claims made during the policy period, cuts off coverage of losses that occur during the policy period but become manifest only after its expiration. The claims-made policy thus shifts the risks of latent injury or disease to the insured and to
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