DISTORTED TORTS

Rough Notes, Apr 2005 by Levy, Emanuel

Reforms are needed to bring an out-of-control system into balance

Many years ago, Chubb & Son released a book about its history in the business, choosing as its title the phrase, If There Were No Losses. The obvious implication was that without life's hazards, there would be no need for insurance. It's a stark and simple principle, not subject to challenge.

Many insurance historians accept as the origin of this concept the agreements reached by Phoenecian maritime traders to pool resources so that any of the participants who suffered losses to their cargo, from the ravages of the seas or attack by pirates, would be reimbursed. The methodology persisted and was adapted by shippers who gathered in Lloyd's coffee house in London centuries later.

That's about as watered down a scenario as necessary to catapult us into today's reality, where the title of the book might be changed to What If There Are Too Many Losses? The insurance business in the United States (and elsewhere in the world) has faced this challenging dilemma over the centuries as the economy, the trappings of life and the exposures they create have expanded and called for the vital protective cloak of insurance. The question of what if there are too many losses has been answered in manifold ways, including the demise of many insurers, the creation of many more by courageous entrepreneurs, the merger and combination of others, the tremendous growth in assets and surplus through investment returns and good underwriting years, the diversification of operations, the vast increases in premiums, the development of safety and loss controls, and the fantastic advances in information technology and management.

Yet today, as the 21st century moves through its early years, the adage persists: The more things change, the more they stay the same. Natural disasters, terrorist attacks (and the threat of more), high levels of consumer fraud, and the runaway costs of litigation laced with exorbitant judgments and settlements are all contributing to "if" with respect to losses.

The volume of claim litigation continues to be the center of controversy, with business, the insurance industry and elements of government on one side and consumer associations, victims and trial lawyers on the other. That's probably an oversimplification because even after decades of dispute the two sides remain resolutely at odds, with opinions depending on whose ox is going to be gored.

What is reasonable?

A principal dilemma relates not to the right of victims of accidents or other torts to be reimbursed by the tortfeasor but to the legitimacy of the claim and the fairness of the outcome, or the reasonableness of the recovery. Obviously, what is reasonable is not easily defined or agreed upon, and this is the crux of the dispute. A basic premise of insurance is that insurers collect premiums from the many to pay the claims of the few. But when the payout for the few goes out of balance, insurers take the initial shock and must recoup by increasing premiums, reducing exposures or abandoning an unprofitable class of business. That's a simple premise, but its significance is often lost in the complexity of the system.

The means of restoring balance to the system has often been government intervention, and legislative activity over the past decade or so has created numerous laws to establish regulatory structures and firewalls. There are many state laws that attempt to prevent fraud, monitor access to the courts by means of statutes of limitations or application of the collateral source rule, restrictions on joint and several liability and punitive damages, and other so-called tort reforms. State legislatures continue these activities at each session, invariably driven by interest groups, pro and con. Those who contend that the states are not concerned with challenges to the tort system and that congressional action is called for are either unaware of the progress in the states or favor federal intervention as the solution to all problems.

The drive to bring the federal government into the tort reform picture has been pressed by the Bush Administration, and in August 2003 the House of Representatives passed bills to regulate class action lawsuits and medical liability. The Senate failed to act on the legislation because a Democratic filibuster could not be overcome. But tort reform remained an integral part of the Republican platform, which charged that "America's litigation system is broken." And the persistence of the Administration was clear when President Bush, at the beginning of his second term, expressed his firm support for a federal law to cap recoveries for non-economic damage at $250,000, a limit already in force under some state laws. He also took aim at class action suits and, on February 18 of this year, signed into law a bill to reduce "forum shopping" by trial lawyers.

A major crusade has been undertaken by the American Tort Reform Association (ATRA), a Washington, D.C.-based group, to identify and unravel what it describes as "judicial hellholes." The reference is to state court jurisdictions where, ATRA asserts, "equal justice under law" does not exist, and where trial lawyers gravitate in their forum shopping for sure wins in frivolous lawsuits. The bill recently signed by President Bush is designed to end this system by mandating that class action lawsuits, which have multi-state elements, must be tried in federal courts.