Making Sense of the Liability Insurance Crisis
Complex issues are often debated in simple terms. Simple arguments can pose dramatic questions and draw public attention to the issues involved; but they may also deprive public debate of the depth necessary to an accurate understanding of the problem at hand. Debate about the recent crisis in liability insurance cost and availability has elicited both simple explanations and simple solutions. The simple explanations cite simple causes: the natural progression of the "underwriting cycle" resulting from the decline in interest rates that began in the early 1980s; price gouging by the insurance industry; an explosion in tort liability necessitating dramatic increases in premium rates and making insurance against certain risks impossible; the incentives to initiate tort claims created by our system that make increases in the costs of tort liability and in the liability insurance costs that accompany it inevitable.
Simple solutions also abound: limit price competition through regulatory imposition of "flex" rating to counteract the underwriting cycle; repeal the McCarran-Ferguson Act's exemption of the insurance industry from federal antitrust regulation; return to the tort law of three decades ago; control attorney's fees in tort cases; and adopt the English rule that a losing plaintiff must pay defendant's costs.
These explanations for the crisis and the solutions they generate are not only simple, but simplistic. Standing alone, no single diagnosis can account for more than a portion of the recent crisis, no single explanation can adduce sufficiently complete and compelling data for support, and no single, plausible solution has the power to make the crisis disappear. The causes of the crisis are complex, and there are no easy methods of solving the problem, returning premium rates to their former levels, or obtaining complete assurance that similar crises will not occur in the future. In what follows I set out my own view of the causes and possible cures of the crisis by analyzing the four major explanations cited above, exploring the implications of this analysis for the solutions that have been proposed, and indicating the points at which satisfactory analysis is impeded by the absence of data about critical issues.