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THE LIABILITY INSURANCE CRISIS
SUMMARY
Faced with complaints from businesses, professionals, and
municipalities about the affordability and availability of liability
insurance, Congress appears likely to consider the issue. What a decade
ago was seen as primarily a products liability insurance crisis is now
viewed as affecting a wide range of those who need insurance against tort
liability. Without affordable liability insurance, the threat of lawsuits
can make it impossible for businesses and professionals to deliver their
products and services.
Both economic and legal factors are being cited as causes of the
crisis. Economic factors include insurance market cycles, underwriting
practices, and international reinsurance considerations. Legal factors
include the alleged litigation explosion and the McCarran-Ferguson Act's
exemption of the business of insurance from most Federal regulation.
Insurers claim an inability to price premiums effectively because
they cannot evaluate risk. This inability, they claim, results from a
litigation explosion, including excessive damage awards in tort suits and
court decisions that have expanded the circumstances in which damages may
be awarded. The litigation explosion, they contend, has made realistic
underwriting (risk assessment and pricing) for commercial liability risks
problematic. To remedy the situation, they have urged Congress and the
State legislatures to enact various tort reforms.
Trial lawyers and consumer groups, by contrast, dispute the existence
of a litigation explosion, and place the blame for the insurance crisis on
the insurers themselves. They argue that, in the recent years preceding
the present crisis, property-casualty companies priced their policies far
below cost to attract funds for investment. Then-prevailing high interest
rates on investments compensated for insufficient premiums. Now that
interest rates have dropped to the point where investment returns are not
able to cover growing underwriting losses, industry critics argue,
insurers are attempting with unreasonable rate increases to recoup losses
too quickly. Industry critics have also called for repeal or modification
of the McCarran-Ferguson Act in order to permit an increased Federal role
in the regulation or oversight of the industry. Insurance community
spokesmen, however, while favoring tort reform, are wary of regulatory
overreaction that will injure the flexibility of a historically successful
industry in responding to market conditions.06--01--87
IB87015
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Cohen, Henry & Whiteman, David. The Liability Insurance Crisis, report, June 1, 1987; Washington D.C.. (https://digital.library.unt.edu/ark:/67531/metacrs9599/m1/3/?q=%22Whiteman%2C%20David%22: accessed May 1, 2024), University of North Texas Libraries, UNT Digital Library, https://digital.library.unt.edu; crediting UNT Libraries Government Documents Department.