No cut in insurance prices due to "tort reform"

Tuesday, July 13, 1999

For Immediate Release:
July 13, 1999 (reissued February 12, 2002)
Contact: Joanne Doroshow
New York, NY - A major report released by the national consumer group Center for Justice & Democracy finds that laws that restrict injured consumer's rights to go to court --"tort reform" --have failed to cut insurance costs or rates around the country. The report analyzes for the first time one of the principal arguments on which proponents of "tort reform" rely -- that enactment of these laws will reduce insurance rates -- and finds they are invalid.
The report, Premium Deceit --the Failure of "Tort Reform" to Cut Insurance Prices, is co-authored by actuary J. Robert Hunter, Director of Insurance for the Consumer Federation of America (CFA), former Commissioner of Insurance for the State of Texas, and former Federal Insurance Administrator under Presidents Carter and Ford; and Joanne Doroshow, Executive Director of Center for Justice & Democracy (CJ&D), an attorney who has represented consumer interests on civil justice issues since 1986.
According to Hunter, "This report is the most extensive review of insurance rate activity in the wake of the 'liability insurance crisis' of the mid-1980s ever undertaken. It was designed to test the impact on liability insurance rates of 'tort reforms' enacted in reaction to the liability insurance crisis of the mid-1980s, and in the years since. Despite years of claims by insurance companies that rates would go down following enactment of tort reform, we found that tort law limits enacted since the mid-1980s have not lowered insurance rates in the ensuing years. States with little or no tort law restrictions have experienced approximately the same changes in insurance rates as those states that have enacted severe restrictions on victims' rights."
According to co-author Doroshow, "For years, insurance companies and their corporate allies have argued that our civil justice system is responsible for unaffordable liability insurance. They have convinced lawmakers around the country to enact legislation that makes it nearly impossible for many seriously injured consumers to hold their offenders financially responsible in court by promising such laws would bring down insurance rates.
"This study has, for the first time, definitively exposed the campaign to restrict consumers' rights for what it is -- an insidious public relations scam that has had terrible consequences for many innocent people, while doing nothing to improve the affordability or availability of liability insurance for businesses or professions," Doroshow added.
The report examines Insurance Services Office (ISO) data in every state plus the District of Columbia, for the years 1985 through 1998, covering the following lines of insurance that would be affected by "tort reform": Commercial Auto Bodily Injury and Property Damage Liability, Personal Combined Total Limits Liability, Owner's, Landlord's and Tenants (OL&T) Liability, Manufacturer's and Contractor's (M&C) Combined Total Limits Liability, Special Multi-Peril, Hospital Professional Liability, Physicians', Surgeons' and Dentists' (PS&D) Professional Liability, and Product Combined Total Limits Liability. (ISO data represent the most reliable and largest database for determining trends in insurance costs as measured either by final rates being suggested by ISO in the 1980s or by the trends in loss costs -- i.e. the expected claims costs -- in more recent years.)
The report then measured the impact on insurance costs of major "tort reforms" enacted in each state since 1985. To ensure that only relevant lines of insurance were evaluated, laws were divided into three separate sections: limits that apply across the board in tort cases, limits that apply in medical malpractice cases, and limits that affect product liability actions. States were then arranged into three categories, depending on the number of tort law limits passed and the length of time each has been in place, and analyzed.
The report's key findings are:

  • Enactment of tort law limits around the country over the last 14 years has not succeeded in reducing insurance prices for insurance consumers.
  • Some states that have resisted enacting any "tort reform" since 1985 have experienced low increases in insurance rates or loss costs relative to the national trends, and some states that enacted major "tort reform" packages have seen very high rate or loss cost increases relative to the national trends.

The report concludes, "Laws that restrict the rights of injured consumers to go to court do not produce lower insurance costs or rates, and insurance companies that claim they do are severely misleading this country's lawmakers."
From the mid-1980s until today, the nation's largest businesses have been advancing a legislative agenda to limit their liability for causing injuries. One of the principal arguments on which they rely is that laws that make it more difficult for injured people to go to court (i.e., "tort reform") will reduce insurance rates. This report analyzes these claims, and concludes they are invalid.
The "tort reform" movement largely originated in the mid-1980's while the nation was suffering through a severe "liability insurance crisis." Small businesses, doctors, non-profit groups and others were hit with dramatic increases in insurance premiums, reduced coverage and arbitrary policy cancellations. The situation received extensive media attention, such asTime Magazine's 1986 cover story entitled, "Sorry, Your Policy is Cancelled."
The insurance industry and other large corporations blamed the crisis on the legal system and lobbied extensively for what they called "tort reform" --laws that restrict the rights of injured consumers to sue and obtain compensation from corporate lawbreakers and other wrongdoers. They claimed that enactment of "tort reform" would cause insurance rates to stabilize and even fall.
Great pressure was brought to bear on state legislatures around the country to restrict the rights of innocent victims to recover for their injuries and to hold wrongdoers accountable in court. Many states succumbed to this pressure and passed "tort reforms." Moreover, states have continued to adopt these laws. As recently as the spring of 1999, Florida passed an extensive "tort reform" package. And some New York lawmakers are considering a similarly broad proposal.
This study -- the most extensive review of insurance rate activity in the wake of the liability insurance crisis ever undertaken --was designed to test the impact on liability insurance rates of "tort reforms," specifically those that were passed by state legislators (or voters by ballot initiative) in reaction to the liability insurance crisis of the mid-1980s, and in the years since.
We obtained data on insurance rate and loss cost movement in every state from 1985 through 1998. We then segregated the states into three Categories: states that enacted the fewest number of tort law changes over the period; states that passed a mid-range level of tort law limits; and states that enacted the most "tort reform."
The hypothesis we tested was simple: if tort law limits succeed in reducing insurance costs for consumers of insurance, that should be evident in the trends of insurance costs. As tort law limits get more severe, the trends in rates and underlying loss costs should be less.
We tested this hypothesis for the lines of insurance subject to general tort reform and to product liability and medical malpractice separately, since states often enact separate tort law restrictions to be applied just in those areas.
We found that the trends in rates/loss costs do not support the hypothesis that "tort reform" has succeeded in holding down insurance costs or rates. Despite what "tort reform" proponents promised lawmakers, tort law limits enacted since the liability insurance crisis of the mid-1980s have not lowered insurance rates in the ensuing years. States with little or no tort law restrictions have experienced the same level of insurance rates as those states that enacted severe restrictions on victims' rights.
The "liability insurance crisis" of the mid-1980s was ultimately found to be caused not by legal system excesses but by the economic cycle of the insurance industry. Given large rate increases and cut backs in coverage, the insurance cycle soon turned again and prices began to fall. The nation has enjoyed a relatively "soft" insurance market for over a decade now --with rates of liability insurance not only stable but down.
Just as the liability insurance crisis was found to be driven by the insurance underwriting cycle and not a tort law cost explosion as many insurance companies and others had claimed, the "tort reform" remedy pushed by these advocates failed. As the findings of this report confirm, legal system restrictions are based upon a false predicate. "Tort reforms" do not produce lower insurance costs or rates.

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