In drafting the New York Advisory Commission report on liability insurance, a central objective was to separate out the broad, philosophical questions about the purpose of the civil justice system - questions to which there are no definitive answers - from the issues for which a reasonably verifiable answer exists. Nothing would advance the public dialogue more than excising this latter category of false issues from the current debate. Let me suggest three persistent issues where the facts should be stipulated.
First, the industry's earnings recovery. The issue is whether the recovery will cure the crisis and obviate the need for tort reform.The reality is that the recovery won't cure the crisis: There's a capacity shortage at least through 1988, and the predicate to the recovery is that companies are repricing or avoiding the problem lines. Full availability of coverage for insurable risks should return by early 1987. But significant price reductions are not foreseeable over the intermediate term.
Even if we were about to witness a surge of new capacity sufficient to reduce rates, it would still be irrelevant to the merits of tort reform. The essential argument for tort reform is that as a nation we are making an excessive investment in satisfying liability obligations, and that that investment undermines our international competitiveness, inhibits productive activity, imposes hardship and threatens the health of the insurance mechanism. Whether we as a society are putting too many dollars in the compensation basket is a legitimate point of contention, but that is the question around which the debate should revolve. The issue is not whether on the day we enact long-term changes in our civil justice system, an industry that is incontrovertibly cyclical happens to be in its recovery phase, at its peak, or at its nadir.
Second, what do we know bout the behavior of liability costs?
We know there have been misstatements. Our so-called litigation explosion is no more severe than Western Europe's. Most of the increase in civil cases has been in family law, personnel and entitlement actions, not torts. The median settlement hasn't risen dramatically.
What should be indisputable is that beginning around 1980, aggregate civil liability costs accelerated rapidly, driven not by an increase in the median claim, but by the exponential growth of the small minority of claims above $100,000. There is ample documentation of that proposition in our report. The experience of self-insureds corroborates that the cost explosion is not an artifact of the insurance market.
What's driving these larger cases? It's not an explosion of hazard and risk. With the exception of the inhalation of toxics, all death rates for accidents, including medical procedures, are down. It's not wage inflation or health-care costs - the cost surge exceeds any inflation index. The cost surge reflects three forces:
An upward revaluation of social concepts of the dollar value of intangible injury;
The evolution from a body of law aimed at deterring unreasonably risky activity to legal doctrines with a primary concern for full compensation of injuries; and
A dramatic rise in transaction costs exceeding even the rate of increase in payments to claimants.
In effect, judges and juries - operating without budgetary constraints - have levied what amounts to a massive tax on society, a tax which at its heart reflects increasing social intolerance of unbuffered risk. If we view that cost increase as a problem, it is not an insurance mechanism problem but a liability problem.
The final issue: Is there a demonstrated, quantifiable linkage between tort reform and premium rates? If not, should we defer tort reform until that linkage is empirically established?
There is no reliable research establishing a quantitative linkage between tort law change and insurance prices. There is some data on the cost savings produced by specific tort reforms, but not on the translation of those savings into prices. There are three reasons why: There are few dispassionate professionals in this field; the research is difficult and complex; and, prior to this year, there wasn't much general tort reform, as opposed to specialized tort reform involving health-care providers. Moreover, because insurance pricing reflects so many variables beyond tort costs, there will probably never be a model that can pre dict the effect of tort law changes on insurance rates.
But quantitative evidence on the linkage should not govern the debate. We do have empirical evidence that tort reform reduces liability costs. We do know that in competitive markets with low entry barriers, cost changes will exert pricing pressure in the same direction. There may not be a 1:1 relationship between tort law change and insurance pricing at any one point in time. But over the long haul, the liability cost structure will determine how much insurance is written and at what price.