Tort Reform: What's Really Going On
The late 1970’s and early 1980’s saw a hard insurance market with investment income dwindling. By the mid 1980’s insurance rates when through the roof and there were cries of a “litigation crisis.” The 1980’s tort reform movement was strikingly similar to the modern movement. In fact, many states enacted some measure of tort reform during the 1980’s that modern tort reform proponents are seeking to strengthen. In 1986, the National Association of Attorneys General (“NAAG”) produced a report studying the litigation explosion of the 1980’s, they found:
The facts do not bear out the allegations of an explosion in litigation or in claim size, nor do they bear out the allegations of a financial disaster suffered by property/casualty insurers today. They finally do not support any correlation between the current crisis in availability and affordability of insurance and such a litigation explosion. Instead, the available data indicate that the causes of, and therefore solutions to, the current crisis lie within the insurance industry itself.
Clearly, there is some correlation between the stock market and the insurance underwriting cycle. The question becomes does the stock market drive the underwriting cycle, or does litigation?
In 2003, Weiss Ratings, Inc., and independent agency, explored the relationship between insurance premiums and damage caps. Strikingly, Weiss Ratings found that damage caps produced a 15.7% reduction in payout amounts in states that had enacted them, but the insurance rates in those states were not reduced. Further, this study found that insurance rates in states with caps increased faster than insurance rates in states without damage caps. In that regard, Weiss found there were six factors driving the increase in insurance premiums: (1) medical cost inflation, (2) the cyclical nature of the insurance market, (3) the need to shore up reserves for policies in force, (4) a decline in investment income, (5) overall financial safety considerations, and (6) the supply and demand of coverage. Beyond that, Weiss specifically found that the current rise in insurance rates was due to under-reserving throughout most of the 1990’s combined with the rapid decline of the stock market in the early 2000’s, not a litigation crisis. Clearly, there is something going on with the insurance industry the general public are unaware of. Political banter pushing the tort reform agenda never discusses the inner-workings of the insurance industry itself –after all litigation is to blame. But put all that aside, where has tort reform left us, is this workable for everyday Americans?
