Liability Insurers Are Fleeing Field in Wake of Big Damage Awards

KANSAS CITY —  Although the Environmental Protection Agency has distributed $50 million to the states to help finance removal of asbestos from schools, the program has been delayed because contractors can’t find insurance to cover workers removing the toxic stuff formerly used as insulation.

Moreover, all businesses that handle, transport or store hazardous wastes--including asbestos--face a Nov. 8 deadline for meeting EPA financial responsibility requirements demonstrating their ability to shut down, clean up and maintain terminated operations safely. But finding environmental liability insurance--an EPA-approved method of showing financial strength--is proving difficult and expensive.

Insurers have fled the market, the nation’s insurance regulators were told repeatedly during a meeting here last week, because of record losses--$4 billion last year, even adding in investment income. Insurers and regulators agree that much of that loss stems from outsize jury awards sanctioned by a civil justice system run amok.

“The industry is not crying wolf,” Iowa Insurance Commissioner Bruce W. Foudree, president of the National Assn. of Insurance Commissioners, told reporters. “This is a threat--and a real one. As regulators we have to ask ourselves where this is going to end.”

Becoming More Cautious

Weakened property-and-casualty insurance companies are becoming more cautious, noting the risk of court awards that can be based on claims lodged years, even decades, after the insurance has lapsed.

“The current asbestos lawsuits against the manufacturer of asbestos products, totaling hundreds of millions of dollars, have caused the insurance market for asbestos contractors to virtually vanish,” said Larry Ledford of the Asbestos Research Group, representing asbestos contractors.

Companies that have found liability coverage, Ledford said, are paying extremely high rates.

Utica Mutual Insurance Group, which provided municipal liability coverage for 230 rural and suburban communities in New York, plans to terminate those policies by next year, said Chief Executive Jack B. Riffle. The company abruptly terminated liability policies for 585 schools in Ohio, he added, because the business was generating 327 loss claims a year.

“Schools, like other entities, have become a deep pocket,” Riffle said, alluding to their vulnerability to massive liability lawsuits because of their ability to pay large claims. “The insurance industry is not the problem,” he said. “Nor are we the solution. Rather, we’re one of the victims.”

Edward J. Noha, chief executive of Chicago-based CNA Insurance Cos., cited a number of civil court awards he considered excessive, saying: “The size of awards often bears no economic relationship to actual damages.”

$10-Million Judgment

He cited the case of a physician insured by CNA. The jury determined that his surgical procedures caused a 2-year-old child to sustain a perforated intestine and die, and awarded the family $10 million. While nothing can compensate for the loss of life, Noha said, the family’s actual expenses had totaled $7,000.

In another case, he said, a CNA-insured physician and a second doctor were found negligent in treating a patient whose leg later had to be amputated. A jury awarded the victim $1.5 million, to be paid by the two doctors and the hospital. The second doctor was uninsured and declared bankruptcy, Noha said.

“The court ruled, under the doctrine of joint and several liability, that our insured was responsible for paying his own share of the verdict--$600,000--and also for paying another $600,000 toward the uninsured physician’s share,” Noha said.

Finally, he said, an insured motorist was struck by a hit-and-run vehicle and collected $500,000 in damages even though the customer’s uninsured-motorist coverage was limited to $250,000. Because the insured had two vehicles on his policy, each with a $250,000 uninsured-motorist limit, Florida law permitted him to “stack” the coverage.

“The premium we charged was calculated to cover only the $250,000 policy limit,” Noha observed, “and policyholders have the option to buy higher limits.”

Regulators were told last week that reform of the civil justice system is imperative if the insurance industry is to survive. Insurers took aim in particular at the increasing frequency of punitive damages--particularly in California--in addition to victims’ compensation; at the “deep-pockets” doctrine of liability, and at the practice of allowing attorneys to charge “contingency” fees (under which a lawyer takes on a case without charge to the client unless an award is made), which they claim tends to encourage outsize claims.

Quest for Fees

“Our ability to insure depends on our ability to estimate the likelihood of claims and the size of the loss,” Noha said. “We can’t do that unless we know what our obligations are. . . . Some lawyers,” he added, “bring suits simply because they are more likely to produce fees rather than produce justice.”

Insurance regulators are not unsympathetic to the insurers’ problems, said Bruce Foudree, president of the national association. “Deformities of the legal system are creating distortions. . . . Megabuck jury awards, formerly rare, have become all too common.”

For regulators, Foudree said, such awards raise questions about the adequacy of insurers’ reserves. How do regulators measure solvency when long-forgotten risks can produce claims, such as for asbestosis, symptoms of which can emerge decades after exposure?

But while the property-casualty insurance industry may be “bleeding to death,” in the words of Lloyd’s of London Chairman Peter Miller, insurers conceded some responsibility for their current sad state.

Accepting Responsibility

“Underwriters have got nobody to blame but themselves,” Miller told reporters after speaking to the insurance regulators. “It is a fault that they themselves cannot escape.”

Much of that loss came because insurers, during a period of high interest rates, slashed rates to gain as much premium income as possible, expecting investment income to offset likely increases in insurance losses. Once interest rates fell, however, many companies were left with insurance rates far below their probably exposure to risk.

Miller estimated that rates in some high-risk categories are one-tenth of what they should be. But moderating those rate increases depends mainly on reforming civil justice in the United States to reduce outsize court awards for compensatory and punitive damages, the Londoner said.

“There is no pot of gold” for financing those payments, Miller said. “It comes from the great American public itself.”