Be Careful What You Wish For On Tort Reform

We wouldn't blame insurers for being hard put to suppress a grinwhen they heard about all the tort reforms loaded onto the federalterrorism reinsurance bill by the House of Representatives. Afterall, many of the provisions for controlling liability costs havebeen at the top of the industry's wish list for years.

This all might be a moot point by the time you read thiseditorial, because Congress is expected to act at any time on itsterrorism reinsurance initiative. However, when this editorial wentto press, Congress was still debating the issue, and given theproclivity of our D.C. lawmakers to wait until the 11th hour orbeyond to do what they must, we fear that the unnecessary inclusionof tort reforms might yet sink the entire bill. That would leaverisk managers at the mercy of insurers, who will have no choice butto exclude many terrorism exposures.

The House bill would bar punitive damages and eliminate jointand several liability for non-economic damages such as pain andsuffering. It would also eliminate the collateral source rule forterrorism losses, meaning that claimants couldn't collect for thesame losses from two different policies.

One item sure to delight insurers is the cap on attorney fees,with plaintiff lawyers allowed to get no more than 20 percent ofthe damage award or settlement amount.

The bill passed the House by a 227-193 vote, but the fate ofthese various tort reforms is very uncertain given thedetermination of the Democratic leadership in the U.S. Senate toscuttle any law that would undermine the trial bar's earningspower. Indeed, our concern is that if the House insists onincluding tort reform in the final legislation, it will derail theentire federal terrorism reinsurance initiative, to the detrimentof policyholders and the insurance industry.

Failure to pass a bill would be extremely bad news for the U.S.economy, which cannot afford the fallout if insurers excludeterrorism exposures. It would also come back to haunt insurers, whowould inevitably get the blame for the consequences.

Without a federal safety net to cushion the potential blow fromwhat for all intents and purposes are “war” risks in our globalbattle against terrorism, insurers have no choice but to protectthemselves from another catastrophic loss like the one sufferedbecause of the destruction of the World Trade Center. But try toexplain that to a public that, poorly served by self-appointedconsumer advocacy gadflies, is being told insurers are looking fora “bailout” of their business.

To be fair, the insurance industry never asked for the additionof tort reforms to the House bill, no matter how fervently they maysupport them in principle. Practically speaking, the passage of apure terrorism reinsurance bill is the most important goal, and anyunrelated item standing in the way of that goal must beeliminated.

Thus, if no progress has been achieved on a legislativecompromise by the time you read this, we believe insurers must takethe high road and push Congress for a clean bill that can be votedinto law and signed by President George W. Bush this year. Theclock is ticking on Jan. 1 renewals, and U.S. businesses can't beleft hanging any longer.

Reproduced from National Underwriter Property &Casualty/Risk & Benefits Management Edition, December 10, 2001.Copyright 2001 by The National Underwriter Company in the serialpublication. All rights reserved.Copyright in this article as anindependent work may be held by the author.

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