Premium Hikes Stun MunicipalitiesAuthor(s): Nancy BlodgettSource: ABA Journal, Vol. 72, No. 7 (July 1, 1986), pp. 48-51Published by: American Bar AssociationStable URL: http://www.jstor.org/stable/20758845 .

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^^^^^^^^^^^^^^^^^^^^^^^^^^ By Nancy Blodgett

Children who go to a Chicago Park District playground this summer to zip down the slides, climb across the bars and take a spin on the merry-go-round will find they are gone. Hartford, Conn., the insurance capital

of the world, had its insurance premiums raised by 20 percent to $1.8 million. At the same time, its $31 million municipal liability coverage was reduced to $4 mil lion.

Colorado's liability insurance was can

celled.

Governments large and small are be

coming victims of the insurance panic. Municipalities?in particular?are being overwhelmed by liability insurance prob

their premiums: premium volume was the

goal in the early 1980s. They forgot about basic underwriting principles.

"There were losses growing out there," Chittenden said. "Then interest rates started falling at the same time that law suits were coming home to roost. The lines crossed about 15 months ago.

"Now we're seeing a retrenching." The city of Dallas is a prime example.

The city went "bare" recently rather than pay a 900 percent increase in liability insurance premiums for a substantial re

duction in coverage and a substantial increase in the deductible. "The premium the company wanted?$1.2 million?was

more than the total of all the claims we've ever paid out," said Dallas City Attorney Analeslie Muncy. "We decided it wasn't worth it." Dallas has since self-insured,

warrant. The Supreme Court upheld the

right of the family to maintain the suit against the officers, though not the city, and the seeds of today's civil rights suits were sown.

Originally, these suits were limited to

police brutality actions. By the mid '80s, though, they had expanded into all areas of civil rights and included public agen cies as defendants. And a March 1986 Supreme Court case?Pembaur v. Cin

cinnati, No. 84-1160?held that a munici pality can be held liable if one of its "policy-making" officials with "final au

thority" makes a decision that violates a

person's constitutional rights, even if that decision is an isolated incident and the city has no history of constitutional viola tions.

Expansion of Section 1983, though per

Premium Hikes Stun

Municipalities lems. The reasons?and solutions?are

far from clear.

It was not that long ago that the doc trine of sovereign immunity held: govern

mental bodies were immune from most negligence suits. Today, though, public entities and public officials are fair game for plaintiffs in personal injury, civil rights and even antitrust actions. Through a combination of court rulings and political realities, the situation has changed.

"The premiums in the past were rela tively low," said Chicago lawyer Lyle Sparks. "Municipalities were good risks because of immunity and a pretty good claims history. And now, immunity is eroding and the claims are there. 'Munic ipalities aren't different,' insurance com

panies are now saying. 'We just can't

afford to write them the way we used to."'

"Over time," said Thomas Chittenden, general counsel for the Association Insur ance Company of America, "the liability system has expanded and become less predictable as the philosophy of tort law has changed to assume a broad compen

satory function.

"More immediately, for competitive reasons, some insurers were underpricing

Nancy Blodgett is an ABA Journal reporter.

with $3.5 million in reserve.

"Municipalities are not being singled out," said Lyle Sparks, who specializes in business errors and omissions claims.

"Everyone has to pay more for liability insurance. But there are some special reasons why municipalities are seeing these increases. Governmental bodies get into cases that are difficult to settle and expensive to litigate?cases that involve very important social issues. Ordin?r iy, you can resolve a case by paying moiiey, but these cases don't have anything to do with money.

"Suppose that a municipality is sued by a group of minority citizens who allege that police

* are depriving them of their civil rights. This is expensive to defend and will have to be litigated to the end?

nothing will settle it."

Section 1983 lawsuits These are lawsuits based on 42 U.S.C.?

1983, the federal Civil Rights Act. Na tionwide, 19,553 cases were filed against state and local agencies and officers last year in federal district courts under Sec tion 1983, according to the Administra tive Office of the U.S. Courts.

The case that unlocked Section 1983 was Monroe v. Pape, 365 U.S. 167 (1961). Thirteen Chicago police officers

were sued after searching a black family's house and arresting the father without a

haps inevitable, reinforces a theme that crops up continually in any discussion of insurance problems: predictability. "If you have some predictability, you can underwrite," said Sparks. "But social problems are difficult to underwrite. In surance companies don't want to under write the social and political battles the cities are going to be fighting. Given the political situation we have now, nobody knows how cities are going to fare."

And in Chicago, the site of Monroe v. Pape, the park district is reeling from a personal injury case settled last spring. Spiral slides, climbing bars higher than 6 feet and merry-go-rounds are being re

moved from an estimated 300 Chicago playlots in the wake of a $9.6 million structured settlement to 9-year-old Frankie Nelson. He suffered brain dam age, paralysis on his left side and im paired speech and vision when he fell from the top of a 12-foot "tornado" slide in 1978. The park district knew it would have

difficulty convincing the jury it bore no

responsibility for the accident, according to James Creen, its lawyer in the case. "Under the law of joint and several liabil ity, the only way the park district could have come out without a verdict against it would have been to prove that the only cause of the accident was the mother's negligence," Creen said.

48 ABA Journal, The Lawyer's Magazine

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This it could not do. "My recommen

dation for settlement would have been

probably 25 percent of what we offered if the defendant had to pay just the percent age that it was culpable for," he added.

Joint and several liability "The doctrine of joint and several lia

bility is ve*y adversely affecting cities," said Washington, D.C., lawyer and case

several doctrine," said Jeffrey Miller, a

deputy assistant attorney general for the state of California. "We have seen many cases where the state is only in because of joint and several liability."

Californians voted on June 3 to re structure joint and several liability. Known as the "deep pocket" initiative, it will require courts to levy damage awards

against public agencies and individuals

Medicare, Medicaid, welfare depart ments and the Veterans Administration will pick up the tab for injuries formerly paid for by insurance, Withy said.

A tort litigation explosion? One of the more controversial aspects

of the debate is whether more plaintiffs than ever before are lining up to plunge into those deep pockets. The Insurance Information Institute, a

New York-based group that speaks for the property and casualty insurance in

dustry, complains about "the mush rooming growth in litigation and the asso ciated problem of expanding concepts of liability." The Wyatt Company, a risk

management consulting firm in Chicago and Washington, D.C., reports a more

than 40 percent increase in public entity lawsuits between 1982 and 1985. More over, according to James Swanke, a con

sultant with Wyatt, the resulting settle ments or verdicts have become more

severe.

The claims most frequently raised in these lawsuits involve an agency's failure to follow legally mandated procedures; mistreatment of suspects and prisoners by police; employee dismissals; zoning regu lations and discrimination. The highest verdicts and settlements were in anti

trust, property condemnation, employee dismissal, discrimination and police treat ment of suspects and prisoners.

In 1982, Swanke said, the largest settle ment reported by the 1,244 cities, sur

veyed was $230,000. By 1985, that figure had climbed to $500,000.

Some observers maintain, however, that there has been no significant growth in litigation. "Americans have not be

come more litigious," said Marc

Galanter, a professor at the University of Wisconsin Law School and author of a

study on contemporary litigation practic es. Nor have tort actions risen significant

ly, he maintained, noting that in 1984, tort actions accounted for only 14 percent of the federal caseload, down from 36 percent in 1960.

In the 20 state courts reviewed by the National Center for State Courts in a recent study, the number of cases filed?

including tort, contract, real property rights and small claims cases?declined 4

percent between 1981 and 1984. Whether the tort explosion is a myth,

the insurance industry claims that the types of liability for which municipalities can be sued has expanded. Just the threat of an increase in all types of lawsuits has made insurance companies shun munici

palities.

ABAJ/Richard Shay

Scenes from Chicago playgrounds.

book author Victor Schwartz. He noted, in particular, Sills v. City of Los Angeles, C-333504, (San Fernando Superior Court). In Los Angeles in 1979, a driver

high on drugs went through a stop sign and was broadsided by another motorist. A 16-year-old passenger in the first driv er's car was crippled and brain-damaged.

In March 1985, a jury returned a ver dict of $2.16 million against the first driver and the city of Los Angeles. The city was found to be 22 percent liable because it had failed to trim bushes that partly obstructed the view of the first driver. Unless the award is overturned on

appeal, the city will pay nearly all of it. The driver is judgment proof and his three co-defendants settled for their in

surance policy limits?a total of

$200,000. At least 17 states have already limited

or abolished the doctrine of joint and several liability. California will be next. "We have encountered a reaction on the

part of legislators against the joint and

only to the extent that each is held re

sponsible for an accident.

The doctrine of joint and several liabil

ity should be abolished, said William McCormick, CEO of the Fireman's Fund Insurance Companies in Novato, Calif.

"A defendant should be financially re

sponsible only for his own fault in the incident, and not for someone else's fault

if that person can't pay." "This initiative will reduce an individu

al's ability to collect damages," said Berkeley plaintiffs' lawyer G. Todd

Withy. "It won't reduce insurance costs

at all. It will put the burden on an injured person to make sure he has brought all the responsible parties in and then he will have to collect from all of them.

"If someone is only 10 percent respon sible for something but is the one who can afford to pay, does that mean an injured person only needs partial compensa tion?" Withy asked. He predicted that

taxpayers will end up paying more to fund social services.

July 1, 1986 . Volume 72 49

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I

rife B E|g|8^ffl^B|BB -iP k Mfiii

Hartford, Connecticut.

these rates then came back down and its

profitable cycle bottomed out in 1985. So instead of raising rates reasonably over a

multi-year period, these companies sim

ply gouged everyone." Insurance company representatives

readily admit there was a "price-cutting war" in property and casualty policies around the beginning of this decade. They note that total property and casual ty premiums were $6.5 billion in 1978 and were still at that level in 1984 while incurred losses had increased more than

150 percent by then. "The insurance premium rate war con

tinued until 1984," said Sean Mooney, senior vice-president and economist for

the Insurance Information Institute. "If a

major underwriter had raised its rates before then, business would have just walked away from it. That year and the

following one, there were record insol vencies. That's when the companies went

through the shock treatment. It's just a feature of competition."

In 1985, the property and casualty in surance industry showed a record opera

ting loss of $5.5 billion, following a re cord loss of $3.8 billion in 1984.

Justin Vigdor, president of the New York State Bar and a member of Gover nor Mario Cuomo's Advisory Commis

sion on Liability Insurance, said the re sult of years of poor underwriting is

compounded by two basic economic fac tors. "There are not that many insurance

companies writing for municipalities," he said. "And for those companies, that's a

small part of their revenue and a large part of their losses." In addition, the reinsurance market?primarily foreign insurance groups?has dried up, he said.

The evaporation of reinsurance "The reinsurers at Lloyds of London

and in Japan say they are not making money on these risks," Vigdor said.

Insurance companies generally are re

insured on the excess of a loss?the con

tract with the primary insurer requires reinsurers to pay any excess of a specified dollar amount. The loss experience of reinsurers is usually a catastrophic loss

experience, and they charge a relatively lower premium than primary insurers

charge their customers, said Chittenden. "As the shock-losses come through

?in an unpredictable fashion?all the calculations of the reinsurers are thrown

into a cocked hat," Chittenden said. "So

they pull back. They are free to do that because they are lightly regulated. And you have an absolute domino effect?the direct insurers are compelled to pull back in reaction to their potential losses."

The Utica National Insurance Group, in Utica, N. Y., for example, used to

insure 229 municipalities in New York and 85 in 13 other states. It dropped that business after its incurred loss ratio be tween 1981 and 1984 increased to a factor of 2?that is, for every premium dollar it earned, it had to pay out two dollars in claims.

Expanding concepts of liability "Insurers have seen tort law changing

in sudden leaps," said Schwartz. "New

obligations are being placed on municipal employees, such as police and firemen, for things like failure to provide adequate protection. Cities can be held liable for what someone else did because they failed to prevent it from happening.

"This is open-ended liability. This is insuring for the potential harm caused by the whole world."

"If you could see a predictable pattern over time," said Chittenden, "then you could charge the right premium. But it you are going to get blind sided by shock losses or changes in tort law, you can't

predict that."

An example of municipalities' expand ed liability risk that is often cited by the insurance industry is Irwin v. Town of

Ware, 467 N.E. 2d 1292 (1984). The

Supreme Judicial Court of Massachusetts there held that a municipality could be held liable for the negligent failure of its

police officers to arrest someone for driv

ing under the influence if that person subsequently injured others.

In its opinion, however, the court notes that the "abrogation of the doctrine of governmental immunity by the [Massa chusetts Tort Claims] Act simply re moved the defense of immunity in certain tort actions against

. . . municipalities .... It did not create any new theory of

liability for a municipality." L.S. Carsey, a Houston lawyer, said,

"It's irrefutable that the expansion of liability and damages has made it almost

impossible to predict losses with sufficient accuracy. The insurance companies have

been getting bombed by big judgments and that makes the settlements go up, too."

The insurance rate war The insurance industry, though, may

have mismanaged its way into its own

problem. "In the late 1970s to early 1980s, the insurance industry was in a

price war," said David Decker, president of the Illinois Trial Lawyers Association. "It cut rates to get premium dollars to invest them at high interest rates. But

50 ABA Journal, The Lawyer's Magazine

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'The capacity of the American market

to write all the kinds of liability coverage that we require just isn't there," said Chicago lawyer Lyle Sparks. "The Amer ican market has had to reinsure out a

great deal of liability insurance to Lloyds. And a lot of it is reinsured beyond that on the Continent and Japan?the whole of the Western world is our insurance base.

That base is eroding as reinsurers have been burned and that leaves less insur

ance capacity in this country. Insurers

look to where they are likely to get hit." And they see municipalities.

Expanded responsibilities "What I see is the development of

law," added Sparks. "In products liabili ty, what we said as a society is: you people are putting these products into the stream of commerce, so you have to take

responsibility. As government under

takes to do more, it has to take responsi bility for the inevitable problems that come up."

To compound the situation, the new federalism of the Reagan administration has pushed more responsibility for ser vices to the cities while reducing federal aid. "This means more problems and

more litigation," Sparks said. Take the problem of insuring against

pollution mishaps, for instance. Ever since the ruling in the Jackson Township case, insurance companies have shunned

insuring any entity that might pollute or

produce hazardous waste, including mu

nicipalities, according to Mooney. Jack son Township v. Hartford Accident and Indemnity Company, 451 A. 2d 990

(1982). There the New Jersey Supreme Court

held that the general liability insurer owed a duty to defend Jackson Township in a suit in which the township had been charged with polluting groundwater

?causing property damage and personal injury?despite a pollution exclusion clause in the policy designed to bar just that coverage.

The insurance industry's reaction to this decision has forced municipalities to

expand their responsibilities and handle what the private sector formerly took care of. "Self-insurance and the pooling of funds will probably be the way munici

palities will deal with pollution prob lems," said Enid Beaumont, director of the Washington, D.C.-based Academy for State and Local Government. "I don't

think insurance will ever be available from companies to cover these kinds of things."

To address the liability problem, mu

nicipalities and other groups in a majority

Dallas, Texas.

of states are intent on reforming the tort

system through legislative action. In Texas, the Austin-based Texas Civil Jus

tice League will propose that the state

legislature place a cap on punitive dam

ages and pain and suffering awards; elim inate the doctrine of joint and several

liability; restrict contingency fees and in stitute structured awards.

On the other hand, trial lawyers and consumer groups in a majority of states are proposing insurance industry re

forms. The Illinois Trial Lawyers Associ ation plans to propose legislation to regu late the insurance companies in Illinois.

According to ITLA president David Decker, the provisions would:

provide for prior insurance-rate ap

proval;

require the state Department of In

surance to hold hearings when an insur

ance company plans to raise its rates more than 15 percent;

establish a state joint underwriting authority in which commercial liability insurers would be required to participate;

provide insurance for those the vol

untary market cannot handle; allow businesses or professions to

pool their funds to form self-insurance groups;

create a state reinsurance program.

On the federal front, Sen. Paul Simon,

D.-Ill., plans to introduce legislation to

eliminate the insurance industry's general exemption from antitrust laws. At the same time, the Reagan administration is

drafting tort reform proposals. It is con

sidering, for example, recommending a

$100,000 limit on noneconomic damages, fee schedules restricting the percentage a

lawyer can receive from a client's award

and a reduction in awards when the claimant receives other compensation, such as disability and insurance, for the same injury.

The ABA is urging Congress and state

legislators to be cautious about changing the tort system. "Bills limiting liability awards, regulating insurance practices or

altering established liability theories have been introduced or passed in all 50 of our state legislatures," said ABA President

William Falsgraf. "Many of the proposed solutions

would limit the right to be compensated for injuries and pain and suffering caused by the negligence of others," he said. "Members of the legal profession have an

obligation to ensure that whatever chang es are made, the rights of the injured are not denied."

_lournal

July 1, 1986 . Volume 72 51

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