Losses in the insurance industry generated by court actions are out
of control, according to David Arnold, assistant regional manager for
the Insurance Information Institute in Atlanta, Ga.
Civil justice reform, therefore, remains a key issue in the
industry, he said.
The court system has greatly expanded liability and fault,
Arnold said. Consumers are paying the price through higher premiums
to compensate for claim losses.
"As the pendulum of justice springs back and forth, the fairness
issue comes up," he said. "In the past, the pendulum swung against
consumers because they had very little recourse because of the way
the justice system was set up."
Tort law developed as a system to dispense justice to the
injured and compensate them from their injuries. Yet the size
amounts awarded by juries nationwide and the annual total of $1
million verdicts are showing consistent growth, he said.
According to the Institute for Civil Justice, total expenditures
for tort litigation terminated in state and federal courts of
general jurisdiction in 1985 ranged between $29 billion and $36
billion, he said. Of that amount, $16 billion to $19 billion was
paid for various costs of the tort system, above and beyond the net
compensation to plaintiffs.
With claims rising, premiums have been increased. Premiums
charged in the past, however, were artificially low, Arnold said.
Consumers who have been charged higher premiums in recent years are
actually paying the suggested price, provided to the insurance
industry by services.
In the past, premiums were kept below the suggested rate with
discounts, Arnold said, but the industry can no longer afford them.
"Over the marketplace, insurance consumers' premiums have gone
back up to suggested levels. These huge percentage increases have
to be compared to what had occured in the market in the past,"
Arnold said. "Somebody was paying a low premium in the first place."
Consumers now at the suggested price are paying 50 percent to
100 percent more for insurance because their premuims were too low
over the last few years, he said.
Investment income has declined since the Carter administration,
when interest rates were 20 percent, Arnold said. During the Reagan
administration, interest rates on investments dropped to 10 percent.
Insurance companies are still making money on investments, but
the rate of return is lower and not enough to offset losses from
The insurance industry has not made a profit from premiums since
1978. When it is profitable overall, from earnings plus investment
income, it is required through regulation to keep down rates charged
to consumers. …