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Who is to blame for the P/C quagmire?

Lawyers are often accused of being responsible for the problems in the property/casualty insurance industry. The plaintiff's bar fee structure is not at the root of the problem, although some criticism is warranted, particularly of high percentage contingency fees in catastrophic cases. Nor is grinding out unnecessary hours in unproductive work by defense lawyers responsible, although some of this still occurs.

Neither is the justice system responsible for the industry's problems. Actually, the system works, although it could work better. The problem is the compensatory system; its preoccupation with fault, its settlement negotiation practices and the lack of communication among claims people, lawyers and insureds.

An Eye for an Eye

The industry's preoccupation with fault has ancient moral and religious antecedents. We as a society believe in punishing the wicked. The Old Testament patriarchs thought punishment should be swift and equal, "an eye for an eye." New Testament writers believed that wrongdoers would punish themselves. Apparently dissatisfied with this theology, early Christian philosophers developed the concept of hell and spoke of punishment after death.

When common law came into practice, a monetary judgment was substituted for the equal justice concept, and the question became a moral one: Whose fault is it? The justification for this moral shift was that punishing fault would deter undesirable conduct and thus better society. And, initially, it did work. Now society, rather than the wrongdoer, is punished, as losses are shifted to consumers through premium and price increases and to the public through higher taxes.

Settlement negotiation techniques also contribute to the industry's problems. The same general principles are applied to settling claims today that were applied by traders during the Stone Age: Is an ax head worth three or four arrowheads?

In addition, injuries are dealt with as if they were commodities. Even though they are liabilities rather than assets, they do possess market value. Whether the transaction results in a profit or loss to the insurer depends on whether that liability is discharged for less or more than its perceived value. As a result, claims become more valuable as trial approaches, and there is a strong incentive to settle and therefore avoid a court determination of whether there was, in fact, a profit or loss.

No doubt, lack of communication drives up costs as well. If, before any costs were actually incurred, the insurer's representative, the trial lawyer and the insured discussed how the case should be defended, what uncertainties would be acceptable, what costs would be justified and what would constitute an acceptable settlement offer, industry profits would increase significantly. Although this practice is carried out to a small extent, it needs to be done on a larger scale.

These thoughts are not to be viewed as solutions. The problems that plague the property/casualty insurance industry are part of a much bigger picture. In the United States, market forces have resulted in deregulation of the airline and trucking industries. Government is getting out of-or being put out of-business everywhere. Prisons are being operated by private companies, and waste collection and disposal is one of the fastest growing industries in the private sector.

Clearly, privatization is in; government regulation, monopoly and protectionism are out. This trend is affecting the legal profession and the property/casualty insurance industry. At the same time, the United States is moving rapidly toward a risk-free society, a movement that is calling into question the entire injury compensation system.

Society's Solutions

The following examples illustrate society's efforts to respond to the failure of property/casualty insurers and of lawyers to meet the increasing demands on the tort system. Indeed, lawyers have priced themselves out of the market by insisting on outmoded methods of dispute resolution, unnecessary legal motions accompanied by expensive legal memoranda and extensive, abusive discovery, which rarely changes the original view of the case.

One change being considered is deregulating the way law is practiced. In May 1990 a bill was introduced in the California Senate that would allow legal technicians to be licensed. The bill is purportedly designed to protect the public, but would, in effect, simply allow those who are not members of the California bar to practice law.

Sponsors of the bill say that, unlike the rich and the poor, the middle class does not have access to legal services. The sponsors blame the high cost of legal services on the high cost of becoming a lawyer and on the profession's monopoly on its services. If this bill passes, most adjusters in California will probably become legal technicians specializing in personal injury cases.

There is also a trend toward mandatory arbitration of civil actions. California, Oregon and Washington already have such laws. In Washington, claims for judgments up to $35,000 must be arbitrated. Either party may appeal the award and request a trial, but if the appealing party does not improve its position on the trial, then costs and reasonable attorneys' fees will be assessed. Apparently, few awards are appealed.

Some reformers are proposing caps on recoveries. Sen. Orrin Hatch, R-UT, introduced a bill that would set a ceiling of $250,000 on awards for non-economic damages, such as pain and suffering, mental anguish and emotional distress, and would provide for periodic payments rather than lump-sum payments. The bill also permitted the award to be offset by recoveries from collateral sources and set attorneys' contingency fees. Despite favorable press, the bill failed to pass. Undoubtedly, similar bills will rise again.

A different approach, one considerably more threatening to the property/casualty insurance industry and its symbiotic relationship to the personal injury bar, is no-fault compensation. Virginia has adopted a catastrophic birth injury bill administered by the state's workers' compensation commission, which is funded by physicians. New York state recently studied a similar plan and concluded that the plan would, at the same or lower cost, compensate 100 percent of catastrophic birth injury cases rather than the less than 50 percent currently funded by the tort system.

In January a bill was reintroduced in the Utah legislature that would provide for payment of attorneys' fees to the prevailing party. Such laws would have a chilling effect on litigation and at first glance appear to benefit the claims industry. An accident victim today can pursue a legal remedy without risk. His or her attorney's fee is contingent on recovery. Court costs can ethically be advanced by the lawyer, and if the case is lost, the defendant's lawyer will be paid by the insurer.

Fewer suits would reach the court if the victim or the victim's lawyer was at financial risk. Is this good social policy? Does it benefit or harm the insurance industry in the long run?

Re-Examining Today's System

During the feudal period, the king and his court traveled to hear citizens' grievances. As the king might not return for years, those with business before the court were required to step forward with witnesses and present their cases for immediate resolution. Today, corporations and government entities make decisions involving hundreds of millions of dollars, work without putting witnesses under oath and do not require them to appear in person at a certain time and place or tell their version of the story in one sitting.

The assumptions that form today's system are being re-examined. People are questioning whether insurance is the best way to distribute personal injury losses. Are lawyers part of the problem of escalating medical costs? Or would a system of compensating for injuries by payment of medical expenses and scheduled disabilities funded by taxes be more efficient and cost effective? Would eliminating the monopoly that lawyers have on their legal services harm the public more than letting the market determine who should perform some legal services and at what cost?

Finally, does the threat of liability for injuries result in more careful conduct or better products? Is the courthouse the best place to resolve every legal dispute? Answers to these and other questions will be broached during this last decade of the millennium. It promises to be an exciting time.
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Title Annotation:property/casualty insurance industry
Author:Christensen, Harold G.
Publication:Risk Management
Date:Jun 1, 1991
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