Headed In The Wrong Direction And Picking Up Speed

In a recent case published in the New York Law Journal, the court held that the New York Public Motor Vehicle Liability Security Fund was financially unable to provide defense and indemnification to defendants who were insured by Reliance Insurance Company prior to its insolvency. The court simply noted that the fund did not have the financial wherewithal to meet those obligations, that it did not have authority to borrow funds from the other security funds, and therefore had no duty to defend and indemnify. (I assume this is why New York may refer to their funds as security funds instead of guaranty funds.)

There is little doubt that this disconcerting trend results from a combination of actions and events, including the protracted soft market characterized by insurers gobbling up market share at inadequate pricing, upward loss cost trends and the deterioration in investment results.

In the area of medical malpractice coverage for long-term care facilities, nursing homes and the like, a crisis has clearly developed in a number of states. Coverage in New York that was going for $90 a bed several years ago has climbed to as much as thousands of dollars a bed in states such as Florida and Texas.

Even at these very substantial rates, coverage is scarce because the limited numbers of insurers willing to assume such risks are intentionally quite selective.

Many states have been called upon to enact tort reform. Perhaps the single most uniform cry is the demand by medical doctors and the industry for a $250,000 cap on non-economic, pain and suffering damages. The reaction in several states was to the contrary.

In Pennsylvania, a reciprocal risk retention group, Pelican Insurance, was formed with $5 million from the state treasury to insure long-term care facilities. Similarly, Florida used $6 million of taxpayers money, but provided that money to a new risk retention group in the form of a surplus note (a loan subordinated to policyholders and claimants) to fund the start-up of the risk retention group. Nevada has also created a similar entity. All three will provide coverage for long-term care facilities.

The New Jersey legislature has a proposal before it to "surcharge" employers, doctors, attorneys and licensed professionals to create a $30 million pool which would be used to subsidize the premiums of certain qualifying physician specialists such as obstetricians and neurosurgeons.

The first problem with state funded risk retention groups is that they are designed to actively compete with those insurers in the voluntary market that would consider underwriting such risks.

Under current conditions, obviously the voluntary market is thin at best and would only underwrite such risks at substantial premium levels. Nevertheless, direct taxpayer funding to compete with the voluntary insurance market is a substantial departure from a traditional residual market mechanism approach and is quite inconsistent with the purposes for which I believe my tax money should be used.

There is a second and overriding problem. Why would any insured choose this RRG mechanism? There is but one answer–to obtain a lower premium charge.

I am sure proponents would argue that the expenses of the RRG may be reduced relative to voluntary insurers and, of course, they would also contend that they will offer loss control services to reduce overall loss costs.

Most insurance professionals, on the other hand, would say the RRGs are unlikely to reduce loss costs and expenses significantly compared to the typical loss costs and expenses of a voluntary insurer. In all likelihood, if voluntary insurers need a certain pricing level to meet future claims costs, the RRGs will not be self sustaining by charging less.

So what is the point?

In all likelihood, taxpayers will simply subsidize the insurance premiums of the insureds who will buy coverage from these RRGs, pushing the crisis–and perhaps the ultimate insolvency of these entities–into the future and into some other leaders administration.

Why? Because the state leaders have failed to address the underlying issues–the frequency and severity of claims payments that drive the loss ratios. The cost of defending very defensible cases alone can eat up a great deal of premium paid to a voluntary insurer.

At the end of the day, this business is a rather simple one. Insurers take dollars in and work to obtain investment income on those premium dollars. And on the other end of the pipe, its dollars out for claim payments, defense and expenses.

Today, the plaintiffs personal injury bar is a permanent part of the American economic landscape. Fueled by roughly 33.3 percent vigor, the great protectors of the proletariat have made frequency, severity and loss costs the "growth" part of the insurance industry.

The plaintiffs bar is a formidable opponent of tort reform in the name of all injured and aggrieved plaintiffs whose right to sue and right to damages should, in their view, not be abated.

Unfortunately, I am at an age where I have firsthand knowledge of what others would refer to as industry history. I watched the replacement of the contributory liability standard by a comparative liability standard. The contributory liability standard was too harsh. If a plaintiff was 1 percent responsible for the cause of their injuries, they were precluded from receiving any compensation.

To put this into context, a nursing home patient who slips and falls while attempting to get out of bed or a wheelchair would have no claim under a contributory standard.

Its obvious that today many suits that result in large settlements or judgments would have been completely precluded years ago.

I also remember days past when plaintiffs in a product liability case were required to prove that they were injured by a particular manufacturers or distributors product, unlike the market share approach in the asbestos cases we see today. Even the concept of strict product liability only took hold beginning in 1963.

It is time for the pendulum to swing back if the country is to have a viable insurance industry and one that does not drive the costs of insurance in America so high that the price for products and services go beyond the reach of American consumers.

When doctors refuse to handle certain patients, perform certain procedures, change specialties or move out of state, there is no getting around the reality that a crisis exists.

Capping non-economic damages is one approach for one segment of the industry. Another approach is mandating blue ribbon juries or specially trained judges who are much less apt to be caught up in the emotions created by a plaintiffs counsel to boost jury awards. A blue ribbon jury or specially trained judges would be more apt to take into account a doctors use of a new or even experimental treatment, the pre-existing conditions of a patient who would undergo such treatment, and even the conditions of an eggshell plaintiff in a nursing home where a patient with severe osteoporosis can fracture bones with no trauma whatsoever.

Limiting attorneys fees is another viable proposal.

Whatever approach to tort reform is taken it should be directed towards:

Adequately and fairly compensating for injuries caused by another.
Creating disincentives and barriers to frivolous, or at best marginal, claims where settlement payments are often a function of the high cost to defend such cases.
Providing fair guidance to proper compensation levels for injuries sustained.

One thing we should not do, however, is ignore reality, allowing the states to push the problem into a future administration without addressing the underlying reasons for the substantial costs of insurance.

Now if youll excuse me, I am going to buy myself a nice McDonalds hamburger to fatten myself up, pour a scalding hot cup of coffee on myself and make some money.

Daniel Maher is the executive director of the Excess Line Association of New York. He can be reached at dmaher@elany.org.

Reproduced from National Underwriter Edition, July 7, 2003. Copyright 2003 by The National Underwriter Company in the serial publication. All rights reserved. Copyright in this article as an independent work may be held by the author.