It has been more than 20 years since the hard market
in commercial liability insurance that was dubbed the “Insurance Crisis” by consumer media and the general
trade press.
The crisis brought the cause of tort reform to public consciousness and, ever since, the campaign to place limits on jury awards, non-economic damages, “venue shopping,” and the use of certain legal doctrines has been a high priority for insurers and other industries.
“The basic assumption was that insurers would face less underwriting uncertainty in states that enacted reforms, which would translate into lower insurance premiums, higher profitability for insurers, and a greater willingness to underwrite risky lines of business,” reads a 2004 report entitled The Effects of Tort Reform,: Evidence from the States, by the U.S. Congressional Budget Office (CBO).
“If liability reforms worked as intended, they would lead to reductions in both the magnitude and occurrence of damage awards and would have an immediate impact on insurance losses.”
The campaign achieved considerable success over the years, with numerous states limiting or eliminating the doctrine of joint and several liability, where a party with a small portion of the blame for an injury can end up paying for most of the loss--usually through liability insurance.
Other reforms enacted include:
- Limitations on punitive damages and non-economic awards, such as awards for “pain and suffering,” which could be assessed far in excess of actual monetary damages;
- Limitations on the interest rates that could be charged for prejudgment interest, the amount of interest that could be earned on a monetary award between the time of an injury and the handing down of a judgment;
- Increased recognition in trials of “collateral sources” of recovery for plaintiffs;
- Changes in product liability law to give manufacturers more ability to defend against claims when they are not
culpable; and
- Reforms regarding appeal bonds and jury service designed to help defendants compete on a more level playing field than previously.
The cause of tort reform reached a significant milestone--some might say a high-water mark--with the enactment in 2005 of federal laws limiting the amount of non-economic damages in medical malpractice cases heard in federal courts, and imposing federal standards on class action suits.
Things changed in 2006.
With the election of a Democratic Congress, and increased numbers of Democrats in state legislatures, critics of tort reform feel emboldened to challenge its fairness and effectiveness, particularly as it comes to lowering insurance rates.
For years, consumer advocates have argued that tort reform has had little, if any, impact on insurance rates for consumers.
A 1999 report from the Center for Justice & Democracy (CJ&D) entitled “Premium Deceit” claimed that “trends in rates/loss costs do not support the hypothesis that ‘tort reform’ has succeeded in holding down insurance costs or rates.”
The report was authored by J. Robert Hunter, director of insurance for the Consumer Federation of America, and Joanne Doroshow, executive director of the CJ&D. Hunter and Doroshow analyzed adjustments in liability rates and loss costs from 1985 through 1998 by the Insurance Services Office, Jersey City, N.J.
They concluded, among other things, that “states with little or no tort law restrictions have experienced the same level of insurance rates as those states that enacted severe restrictions.”
In a 2002 rebuttal of “Premium Deceit,” the American Insurance Association (AIA) stated that, “The insurance industry never promised that tort reform would achieve specific premium savings, but rather focused consistently on the benefits of fairness and predictability.”
In a changed political environment, supporters of tort reform may be challenged to demonstrate the benefits of tort reform, and to whom those benefits accrue.
The prospect of a legislative roll-back of tort reform seems remote, because tort reform advocates have been largely successful in convincing the public that the civil justice system is abused to enrich plaintiffs and attorneys.
(Tort reform critics argue that this mindset was created by sensationalizing individual lawsuits or judgments that appeared to be outrageous, without providing the full context of a complaint or fully explaining the final disposition.)
There is a much greater possibility, however, that tort reform measures may be struck down by courts and not reinstated.
Before insurers jump to the defense of tort reform, they may want to know: Has tort reform worked, and has it served the industry’s interest?
In its “2006 Update on U.S. Tort Costs,” Tillinghast, the actuarial consulting arm of the reinsurance firm Towers Perrin, reported that the rate of tort costs growth in 2005 was 0.5%, one of the lowest ever recorded. This comes after 20 years during which the tort costs as a percentage of gross domestic product had essentially leveled off, after nearly doubling as a percentage of GDP from 1960 to 1985.
In a 2005 report on “Recent Legislative and Judicial Trends Affecting the U.S. Casualty Industry,” the international brokerage firm Guy Carpenter stated that: “Overall, we would suggest that the U.S. tort system is less hostile and is providing a more level playing field for corporate defendants and their insurers . . . Recent developments on the federal and state levels may have positive effects for U.S. corporations and their insurers.”
In its 2006 update to the report, Guy Carpenter added that “reforms achieved over the years appear to have had a restraining impact on the growth rate of tort costs.
“With continued progress expected at the federal and state levels, it is not too unrealistic to expect that soon we may experience an overall decline in tort costs.”
If tort costs are indeed stabilizing, however, Tillinghast is not so sure that tort reforms deserve the credit.
“”It’s difficult to say whether tort reform measures have impacted this slowdown in tort costs,” says Russ Sutter, a principal in Tillinghast’s St. Louis office, and one of the principal authors of the tort costs study, in a company statement.
According to Sutter, the principal cause of the overall decline in tort costs has been the decline in frequency of auto accidents, which constitute the largest component of U.S. tort costs.
Insurers contacted for this article said that tort reforms contributed to making a market attractive for writing liability insurance, but most thought that other factors--such as rate levels, terms and conditions, and interest rates--were more important factors.
“Tort reforms over the years appear to be having an incremental impact on insurance claims,” says Andrew Marcell, managing director of Guy Carpenter's casualty and professional liability specialty practice.
“Inflation-adjusted growth in paid claims is less than 1% per annum," Marcell adds. "General liability has become a more attractive line.”
There are studies claiming to demonstrate that tort reform has contributed to reduced claim cost and volatility in general liability insurance.
According to the CBO report, a 1993 study demonstrated that modification of joint and several liability, caps on punitive and non-economic damages, and other reforms enacted in 1986 reduced losses by 10.1% and premium levels by 9.1%. Reforms enacted the following year were found to produce reductions of 4.6% and 4.3%, respectively.
Similarly, a 1998 study “found that damage caps and other reforms reduced insurance companies’ costs and the premium they charged, which at the same time increased profitability.”
Kip Viscusi, professor of law, economics, and management at the Vanderbilt University Law School, was one of those authors, and he tells Viewpoint that tort reform has undeniably improved market conditions for general liability insurers.
“Tort reforms, such as limits on non-economic damages and caps on punitive damages, have reduced losses in general liability insurance,” he says.
“To the extent that these caps and limits affect very large awards and the most volatile components of awards, they also make loss levels more predictable,” he continues. “From my vantage point, the primary goal of tort reform should be to enhance the predictability of losses rather than simply lower loss levels.”
The importance of predictability in losses is supported by statements from Scott Harrington, a professor of insurance and risk management at The Wharton School at the University of Pennsylvania.
In a 2004 paper, Harrington wrote that, “A number of studies [has] stressed that increased uncertainty associated with tort rules and jury awards [in the mid-1980s] increased the amount of capital needed to back coverage and, therefore, the cost of capital.”
The paper adds that, “an expanding tort liability system that entails substantial uncertainty about the cost of future claims will inevitably lead to increasingly expensive coverage.”
General liability insurers who are not sure of the benefits of tort reform for their operations may want to find out fast, lest they find out the hard way as reforms are scaled back.
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Tort reform 
