Injustice in the Wake of the False Promise 
of Tort Reform

 By: Michael J. Foley, Esquire, The Foley Law Firm, Scranton, PA ¹

             Pennsylvania’s Constitution was created by our forbears as a bulwark to protect the weakest in our society from the influence of powerful, monied interests that seek to deprive the natural and inherent rights of men.  The false promise of tort reform is a prescription for poverty and injustice for the most severely injured victims of medical malpractice in our society.²

             Many of history's greatest leaders, including Gandhi, Sir Winston Churchill, President Harry S. Truman, and former Vice President Hubert Humphrey, have reminded us that the yardstick by which every society is judged is the manner by which it treats the weakest and most disadvantaged segments of society.  Humphrey said: “It was once said that the moral test of government is how that government treats those who are in the dawn of life, the children; those who are the twilight of life, the elderly; and those who are in the shadows of life, the sick, the needy and the handicapped.”³

            As the great Chief Justice John Marshall of the United States Supreme Court recognized in the landmark Marbury v. Madison decision, the “very essence of civil liberty” is for “every individual to claim the protection of the laws, whenever he receives an injury.”  Marbury vs. Madison, 5 US 137, 163 (1803).

            Lobbyists are attempting to obtain a purely arbitrary cap on the recovery by the survivors of medical malpractice for the value of injury for loss of physical function, such as loss of limbs, double mastectomies, blindness, reproductive health and other life-altering non-economic injury caused by preventable medical negligence.  Loss of function is recoverable as an element of “pain and suffering” damages in civil cases.  Such measures disproportionately affect and discriminate against the elderly, the retired, housewives, children and working poor.  The survivors of those killed by medical malpractice will have dramatically diminished legal recourse.  Like most so-called “tort reforms,” those who make the most money will suffer the least impact because they can still recover what is termed “full economic damages.”  While we sympathize with those physicians who are having temporary increases in their malpractice premiums because of business practices in the insurance industry, caps do not work.  It would be unjust to permanently change our system of justice where there is scant evidence that caps will meaningfully reduce premiums.

            Insurers are increasing doctors' malpractice protection premiums on average –  about 50 percent for 2003 – even though Pennsylvania’s largest settlements and jury awards went up only 5 percent annually between 1999 and 2001, according to state records.  “God, that’s nothing,” said Dr. Bill Dempsey, an emergency room physician at Community Medical Center. (Scranton Times, Dec. 15, 2002)  More recent data from the Rendell Commission may indicate up to 10% annual increase, which is still not reflective of a 50% increase in premiums.  Malpractice verdicts have generally tracked increases in medical inflation over a 25-year period.

            Mark S. Yerby, M.D., M.P.H., Chairman of the American Association of Neurologists, (AAN), Legislative Affairs Committee, was quoted in Neurology Today, January 2003, that “it seems clear to me that the medical liability crisis has less to do with malpractice litigation and more to do with insurance company economic losses in other areas.  Increasing our rates is a good way to offset these costs.”

            Evidence undercuts politicians' belief that frivolous suits are behind rising  premiums.  (See The Austin American Statesman, David Pasztor, 1/17/03)  At a meeting of the Editorial Board of the Scranton Times in January 2003, John Reed, the former Director of the Pennsylvania CAT Fund, stated that the issue of defending frivolous lawsuits has been greatly exaggerated by the organized medical lobby.  Reed said no cases that reached the Pennsylvania CAT Fund were frivolous. He also stated that lawyers have a disincentive from bringing frivolous claims and that those cases generally get weeded out of the system fairly quickly.

            There has been a reduction in the availability of medical liability insurance in Pennsylvania largely because of the insolvencies of PIC, PIE and PHICO amid charges of mismanagement and corruption.  Reliance Insurance, the largest insurance bankruptcy in Pennsylvania history, reduced the availability of excess coverage for hospitals.  Despite an insurance availability problem caused by these failures, the historically predictable retrenchment of insurance industry in a recessionary economy, and a depression-type three-year bear market, the coalition has pushed for the phasing out of the MCARE Fund (former CAT Fund), which paradoxically has exacerbated the insurance availability problem.

            Also, the Philadelphia Common Pleas Court Day Forward/Day Backward programs in the mid-1990s, accelerated claims resolution in Philadelphia County, and required unanticipated earlier payments by insurers.  These programs eliminated the backlog of claims in Philadelphia County where 50 percent of all claims were venued.  This reduced the time between filing a complaint to trial from seven years to two years.

            Physicians, the insurance industry and corporate America have been misleading the American public about the reasons for increasing insurance premiums charged to physicians.  (USA Today, “Hype Outraces Facts In Malpractice Debate”, March 7, 2003)  This anti-consumer coalition seeks to capitalize on unstable insurance markets caused by the business practices of the insurance industry itself and, in part, to the undermining of public confidence in the financial markets by corporate America. (See The Wall Street Journal, “Some Bets May Come Back to Haunt Investors”, October 30, 2002, C1;  National Underwriter, “Consumer Advocate Challenges Insurers on “Crisis” In Malmarket, October 2, 2002 , p. 10-11; J, Robert Hunter;  The Allentown Morning Call, “Insurers Blamed for High Malpractice Rates,” April 16, 2003)

            The Wall Street Journal quotes Alice Kirkman, spokesperson for the American College of Obstetricians and Gynecologists, as conceding that business practices have contributed to the insurance problem.  “We are admitting it’s a much more complex problem than we have previously talked about.”  (Wall Street Journal, June 24, 2002)  Physicians are lobbying for damage caps, a remedy which the insurance industry itself has admitted, and history establishes, will do little to reduce the actual costs of either malpractice insurance premiums and/or the true actual costs of medical care in America.

            This anti-consumer coalition of big business, organized medicine and the collective insurance industry has now come out of the closet and publicly acknowledged both the fact of its existence in the New York Times on March 12, 2003 and their opportunistic goal.  Their public face - physicians - are offering America a false thesis, i.e. that access to medical care can only be provided if Americans abandon the elementary principal of justice that the law provide a complete remedy for every substantial wrong.  This simply is not true.  Insurance reform like Proposition 103 enacted in California in 1988, and implemented in 1991, demonstrates the power of insurance reform. In “How Prop 103 Affects Insurers” Philadelphia Inquirer, May 22, 2003, p. A7, states:

“Implemented in the early 1990's, Proposition 103 made sweeping changes in California’s insurance laws.
 

It created a stringent disclosure and ‘prior approval’ regulatory system.  Insurance companies are required to submit applications for rate changes to the Insurance Department for review before they are approved.  The insurance commissioner has the authority to place limits on an insurer’s profit, expenses, and projections of future losses.
 

Proposition 103 also made the insurance commissioner an elected position.
 

SOURCE: The Foundation for Taxpayer and Consumer Rights”

            In order to restrict legal access to the masses, organized medicine has been attacking medical malpractice lawsuits, contingent fees and the jury system since at least the 1850s.  The medical liability issue has been politicized blatantly, resulting in a focus on damage caps despite historical proof and studies demonstrating the false promise of this type of tort reform, and the elementary unfairness of this approach.⁴

            The continued hype promoted by this coalition ignores the sweeping changes that have been made to medical malpractice law in Pennsylvania by legislation addressing collateral sources, periodic payments of future medical expenses, joint and several liability, venue and adoption of court rules discouraging frivolous lawsuits among myriad other changes making it more difficult for malpractice victims to bring valid claims.  On March 4, 2003, Paul Williams, D.O. President of the Pennsylvania Academy of Family Physicians issued an “Alert” regarding the Physician Work Stoppage Proposal, which conceded:

“Physicians won several significant tort reform successes (seven year statute of repose, change of venue limitations and elimination of joint and several)".⁵   

            Even Roger Mecum, former President of the Pennsylvania Medical Society, has now acknowledged that the recently enacted Pennsylvania legislation has been “significant”.  (Philadelphia Daily News, “Docs: Caps Would Help Our Pain and Suffering”, January 10, 2003)  On April 27, 2003, Pennsylvania Democratic Senate Leader Robert Mellow from Lackawanna County accurately wrote:  

“Last year [2002] the General Assembly passed a half dozen bills the insurance industry said would lower premiums.  We agreed to spend $400 million over 10 years to help doctors pay premiums.  The incoming governor appointed a task force of highly qualified experts, and I lent my chief counsel to the group ... Last year the General Assembly passed Act 13 to provide for significant tort reforms and enhance patient safety.  A year later, those reforms, which the insurance industry said would reduce rates, have not lowered rates at all.” (Scranton Times, “Fixation on Caps Impedes Solving Other Vital Issues,” April 27, 2003)     

Republican sponsored legislation seeks almost exclusively to strip the legal rights of deserving victims while completely ignoring the insurance industry component to the problem and substantively doing little to address medical errors.  

            This coalition complains about “lousy juries,” a term coined by President Bush in Scranton, Pennsylvania. (See Times Leader.com “A Pretty Clear Case of Presidential Malpractice,” January 19, 2003)  Paradoxically, President Bush allowed execution of approximately 144 death-penalty verdicts rendered by juries in six years.  (The Wall Street Journal, “The Bogus Tort-Reform Case,” by Albert R. Hunt, March 6, 2003 , A.13.  Garbus, “Courting Disaster, The Supreme Court and The Unmaking of American Law” (Times Books, N.Y. 2002, p. 285)⁶  

            For tort reformers, it is okay for these juries to make life and death decisions about people, but this anti-consumer coalition claims the same juries are incapable of making purely economic decisions about the liability of doctors, which is covered by insurance companies.  These special interests seek special courts and special rules for these “weighty decisions” of their purely economic liability.  Yet, even when special courts are set up, such as Medicare benefit determinations for frail nursing home residents, the Bush Administration wants to remove the fact-finding power of Administrative Law Judges.  (The New York Times, “Bush Pushes Plan to Curb Appeals in Medicare Cases,” March 16, 2003)  Is there an inescapable pattern demonstrated here?  

            As an example of the false promise of tort reform, only recently, public officials in Pennsylvania reported that so-called tort reforms passed in automobile insurance in 1990 were never passed on to policyholders.  On September 12, 2002, the Scranton Tribune reported Michael Powers, a member of Mayor Street’s Task Force on Auto Insurance, stated that the insurance industry has not passed on the savings from the 1990 “limited tort” law to consumers, which is used by 65% of Philadelphia drivers.  

            Restricting the right that one may seek legal redress for every substantial injury so that a victim is to be made 100% whole by a wrongdoer who is responsible for the natural and probable consequences of his wrongdoing – will mark a departure from the very foundations of western philosophy and the traditions upon which our system of justice is based. Former Pennsylvania Secretary of State Black, a delegate to the Convention To Amend the Constitution of Pennsylvania in 1873, in which damage caps were constitutionally prohibited by enactment of then-Article III, Section 21, stated:  

“You cannot say that a man who has suffered an injury at the hands of another shall not recover full compensation, without committing an outrage upon the elementary principles of justice.”⁷   

            The coalition’s proposed “solutions” (Pa. House Resolution 5) to the problems in the insurance markets created by poor business practices and, in part, caused by Wall Street corruption that has shaken investor confidence, will prove to be snake oil.  These “reforms” seek to erode permanently many provisions from the Declaration of Rights to the  Pennsylvania Constitution.  William Penn’s Holy Experiment not only fired the ideal of religious liberty, but was the seat of colonial and anti-slavery movement and, “It was the right place for raising the Revolution, for drafting the Declaration, for composing the Constitution, and for launching the great republic.”  (Pennsylvania: A History of the Commonwealth, p. 382)  

            The Pennsylvania Constitution, which was originally enacted in 1776, derived its inspiration in part from our Founding Fathers, including Pennsylvania’s Benjamin Franklin, Robert Morris, Timothy Matlack⁸ and James Wilson, as well as the Declaration of Independence.⁹  Pennsylvania’s Franklin deferred the original drafting of the Declaration to Jefferson, but served as an influential and critical editor.  The Declaration of Independence states in pertinent part:  

“We hold these truths to be self-evident, that all men are created equal, that they are endowed by their creator with certain undeniable rights, that among these are life, liberty and the pursuit of happiness.”  Id.¹⁰  

            Among the grievances with British rule enumerated in the Declaration of Independence by our Founding Fathers was that “the present King of Great Britain” (George) was “depriving us in many cases of the benefits of trial by jury;” and “he has obstructed the administration of justice by refusing his assent to laws establishing judiciary powers.”   

            In addition to guaranteeing the right to trial by jury as known at common law (Pa. Const. Art. 1,§6),¹¹ the Pennsylvania Constitution provides:  “That the general, great and essential principles of liberty and free government may be recognized and unalterably established, we DECLARE that –  Art. 1, Section 1, Inherent Rights of Mankind. 

“All men are born equally free and independent, and have certain inherent and indefeasible rights, among which are those of enjoying and defending life and liberty, of acquiring possessing and protecting property and reputation, and of pursing their own happiness.”¹²

H. R. 5 also seeks to displace Article 1, Section 11 of the Pennsylvania Constitution, the open courts provision, which provides a remedy for those who are victimized by wrongful conduct such as medical malpractice.

“All courts shall be open, and every man for an injury done him in his lands, goods, person or reputation should have remedy by due course of law, and right and justice administered without sale, denial or delay.” (emphasis added)

See e.g. Hatchard v. Westinghouse Broadcasting Co., 516 Pa. 184, 193, 532 A.2d 346, 350 (1987).  (libel case)

            Article 1, Section 25 entitled “Reservation of Powers In People” provides: “To guard against transgressions of the high powers which we have delegated, we declare that everything in this Article is excepted out of the general powers of government and shall forever remain inviolate.”  

John F. Kennedy’s Inaugural Address, January 20, 1961 cited the foundation of natural rights in our laws:  

“And yet the same revolutionary beliefs for which our forebears fought are still at issue around the globe – the belief that the rights of man come not from the generosity of the state, but from the hand of God.”  

Reprinted in “Let Freedom Ring: The Words That Shaped Our America”.  (Sterling Publishing Co. Inc., New York 2001)  

            President Lyndon Johnson stated to the full Congress on March 15, 1965, that the great phrases of purpose in the Declaration of Independence:  

“are not just clever words, and those are not just empty theories.  In their name Americans have fought and died for two centuries and tonight around the world they stand there as guardians of our liberty risking their lives.  These words are promised to every citizen that he shall have the dignity of man.”  

            Article 9 of the Bill of Rights, amending the United States Constitution in 1791, provides that:  “The enumeration in the Constitution, of certain rights, shall not be construed to deny or disparage others retained by the people.”¹³  

            Article Ten of The Bill of Rights, amending in 1791 the United States Constitution, provides that: “The power not delegated to the United States by the Constitution, nor prohibited by it to the States, are reserved to the States respectively, or to the people.” (emphasis added)  

            Our Founding Fathers developed both the United States Constitution and the Pennsylvania Constitution by recognizing that the natural rights of mankind including the “right of personal security” were inherent in mans’ nature.  (W. Pa. Soc. Workers v. Conn. Gen. Life Ins., 512 Pa. 23, 515 A.2d 1331, 1335 (1986); Spayd v. Ringing Rock Lodge, 270 Pa. 67, 113 A. 70 (1920); Pa. Const. Art. 1 §25, entitled Reservation of Rights In People)  

            This was explained in Blackstone’s Commentaries on the Laws of England, Book The First, “On the Absolute Rights of Individuals," Vol. 1, Oxford, England, (1768 p. 112-141.), which was widely read among lawyers in the American colonies, many of whom were our Founding Fathers.¹⁴  In fact, some of the language and concepts in Article 1, Section I and II of the Pennsylvania Constitution appears to be borrowed from Blackstone’s Commentaries.  

Blackstone stated:  

“The absolute right of each individual were defined to be the right of personal security, the right of personal liberty and the right of personal property: so that the wrong or injuries affecting them must consequently be of correspondent nature.
 

I.  As to injuries which affect the personal security of individuals, they are either injuries against their lives, their limbs, their bodies, their health or reputations."

***  

By absolute rights of individuals we mean those which are so in their primary and strictest senses such as would belong to their persons merely in their state of nature, and which every man is entitled to enjoy whether out of society or in it.

For the principal aim of society is to protect individuals in the enjoyment of those absolute rights, which were vested in them by the immutable law of nature.... Hence it followed, that the first and primary end of human laws is to maintain and regulate these absolute rights of individuals.... ]T]he principal view of human laws is, or ought always to be, to explain, protect, and enforce such rights as are absolute, absolute, which in themselves are few and simple...” (Id. at 120-121)

“[T]he residuum, of natural liberty... is not required by the laws of society to be sacrificed to public convenience ...
 

The rights of the people of England...may be reduced to three principles or primary articles; the right of personal security, the right of personal liberty and the right of private property.  

            Blackstone also recognized that laws were need to protect absolute rights.  His Commentaries state:  

“But in vain would these rights be declared, ascertained and protected by the dead letter of the laws and the Constitution had provided no other method to secure their actual enjoyment.  It has therefore established certain other auxiliary subordinate rights of the subject, which serve principally as barriers to protect and maintain inviolate the three great and primary rights, of personal security, personal liberty and private property.”  

See Id. at 136  

            As demonstrated in Blackstones’ Commentaries on the Laws of England, Book the Third, which was published in 1768, the concept of medical malpractice was well recognized by our Founding Fathers in colonial life.   

***  

4.  INJURIES AFFECTING A MAN’S HEALTH, are where any unwholesome practices of another man sustains any apparent damage in his vigor or constitution.    As by selling him bad provisions of wine; by the exercise of noisome trade, which infects the air in his neighborhood ... or by the neglect or unskillful management of his physician, surgeon or apothecary.  For it has been solemnly resolved, that mala praxis is a great misdemeanor and offense at common law, whether it before curiosity, and experiment, or by neglect;

because it breaks the trust what the party had placed in his physician and tends to the patient’s destruction.  Thus, also, in the civil law, neglect or want of skill in physicians and surgeons ‘culpae adnumerantur; veluti fi medicus curationem dereliquerit, male quempiam fe-:’ cuerit, aut perperam ei medicamentum dederit.”  

Id. Book 3 at 122.  

            These wrongs give rise to an action of damages according to Blackstone.  The party injured is allowed both by common law and the dictate of Weftm..C. 24 to bring a special action on his only behalf by a writ according to the particular circumstances of his own particular grievance.  “For whenever the common law gives a right or prohibits an injury, it also gives a remedy by action, and therefore, whenever a new injury is done, a new method of remedy must be pursued.”  

            President Bush is promoting H. R. 5, despite his frequently cited philosophy of following the original intent of our Founding Fathers, i.e. originalism.  He campaigned on the basis that the Federal government is one of the problems rather than solution to problems.  Many in  medicine cite HMO and federal Medicare reimbursement levels as the most significant financial issue posed to physicians.  Governor Rendell has pointed out that President Bush could remedy this problem with a stroke of the pen.  There has been little physician attention focused on the reimbursement issue because the “reimbursement squeeze” has provided a stage for opportunists to wage their furious assault to undermine the most admired and successful jurisprudential system in world history.  So called tort reformers seek to decapitate the head in order to treat the blemishes.  

            Former Republican Senator Fred Thompson is quoted in the February, 2003 issue of The Federal Lawyer, that it is his “fervent belief” that “government closer to the people works best and that too often Congress gets involved in matters that are better left to the local and state governments.   This fits my longstanding concern that every time there is a news story, we run to the floor and want to federalize something.” Id. pg. 20  

Malpractice Premiums, At Best, are Estimated at 1% or less of National Healthcare Spending  

            At a Health Policy Discussion sponsored by the Kaiser Permanente Institute for Health Policy, the Milbank  Memorial Fund and the Reforming States Group, on January 9 and 10, 2003 in San Francisco, an issue brief presented by the Kaiser Permanente Institute for Health Policy stated that: “The overall expense of malpractice premiums (including alternative risk - bearing  mechanisms) is not high – probably in the range of one percent of aggregate national physician and hospital costs.”  

            The Consumer Federation of America reports that medical malpractice premiums comprise only 0.59 percent of national health care costs – so eliminating medical liability altogether would only do little to reduce health care costs.  “Malpractice Suits Not Driving Medical Costs Up, Says Group,” The New Orleans Times – Picayune, May 5, 1999, at E3.  

            Healthcare spending is now at $1.5 Trillion, and has been growing at double-digit annual rates.  “Hospital outpatient prices soared nearly 15 percent last year and in-house costs surged 11.7 percent, according to research by Goldman Sachs analyst Matthew Borsch.  “Why Medical Costs are High”, New York Post, May 11, 2003, p.30.¹⁵  

            In the USA Today, March 7, 2003 articles entitled “Hype Outraces Facts In Malpractice Debate”, it is stated that on average, the malpractice problem is overstated:  

“Some states have rapidly rising malpractice premiums, especially in obstetrics, neurology and some surgical fields.  But, on average, doctors spend less on malpractice insurance - 3.2% of their revenue - than on rent.”  

            It is especially unfair and onerous to place the burden of balancing the insurance companies budgets, after financial investment losses and underpricing of polices in the 1990's, on the backs of the permanently injured plaintiffs with catastrophic damages because these plaintiffs have the most compelling need for full compensatory damages.  While conservative groups urge “personal responsibility” when preaching to welfare mothers, they perceive little contradiction when they seek legislation to shift the burden and the responsibility for tortious injury from physicians, HMO’s, pharmaceutical companies and their respective insurance companies to the unfortunate victim or the taxpayer.  At its essence, H.R.5 or any bill on damage caps is simply a “corporate welfare” mechanism for shifting the risk of loss from insurance companies for poor business practices, including poor pricing decisions during the 1990's and the investment losses, to the victims of tortious injury.  See e.g. The Wall Street Journal, “Some Bets May Come Back to Haunt Insurers”, October 30, 2002, C1.  Antitrust exemptions facilitate collusive anti-consumer activities.  Phasing out MCARE fund simply plays its hands of the insurance industry.   

            Damages caps or one size fits all approaches to compensation ignore recent scientific discoveries that demonstrate that variations of a single gene can dramatically affect a person’s perceptions of pain.  This discovery by University of Michigan neuroscientists demonstrate that gene variations cause people to have tremendous variations in perceptions of pain, that because new research shows how much you suffer is due at least partly to a gene that helps regulate how many natural endorphins, or natural painkillers, your body produces.  Likewise, this variability explains why people respond differently to pain medication and therapies and demonstrates and emphasizes the need to individualize pain treatment.  

            This recognition by modern medicine underscores the need for juries to individually evaluate pain and suffering of malpractice victims when determining a persons compensation for non-economic damages, rather than promote a one size fits all proposition.  

Increase in Medical Malpractice Premiums to Certain Specialties Results from Financial Investment Losses and Poor Business Practices By Insurers  

            The Associated Press, in an article entitled “Malpractice Crisis May Be More Complex Than Blaming Lawyers”, reprinted in the Scranton Sunday Times on May 11, 2003, A-3, reported that: “Cheye Calvosan insurance policy analyst for the National Conference of State Legislators stated that “... a thriving malpractice market [in Pennsylvania] kept premiums exceptionally low during the 1990's, exacerbating the rates’ volatility when the market soured.  Many malpractice insurers have since left the state or gone insolvent, leaving little competition ... It’s an incredibly complex issue and there’s really no one thing causing it.”  

            In “Medical Malpractice Caps Fail to Prevent Premium Increases, According to Weiss Ratings.” published on June 2, 2003, Weiss Ratings stated:  

“Caps on non-economic damages have failed to prevent sharp increases in medical malpractice insurance premiums, even though insurers enjoyed a slowdown in their payouts."

***

Weiss identified six factors driving the increase in medical malpractice rates, each of which may be exerting a greater impact on premiums than the presence or absence of caps:  

                   The medical inflation rate: Medical costs have risen 75% since 1991  

                   The insurance business cycle: The property and casualty industry suffered a 12-year “soft”period through 1999, during which marketing goals often superceded prudent underwriting practices and decision-makers typically relied too heavily on high investment income to make up for losing operations.  In an attempt to catch up, insurers have tightened underwriting standards and raised premiums.  

                   The need to shore up reserves for policies in force: Med mal insurers have been consistently under-reserving since 1997 – to the tune of $4.6 billion through December 31, 2001.  The only way to shore ups reserves is to increase premiums.
 

                   A decline in investment income: Investment income declined by 23 percent in 2001 and then another 2.5 percent in 2002, which is particularly critical for lines of business like med mal since the duration of claims payouts typically spans several years.
 

                   Financial safety: Based on the Weiss Safety Ratings, 34.4 percent of the nation’s med mal insurers are vulnerable to financial difficulties, compared to 23.9 percent of the property and casualty insurance industry as a whole.  To restore their financial health, many med mal insurers will remain under pressure to increase rates despite new laws to cap payout.
 

                   Supply and demand for coverage: The number of med mal carriers increased through 1997 to 274, but has since fallen to 247 in 2002.  

            In December, 2002, Frank Beard of VA RIMS spoke at a meeting of insurance risk managers and  executives in the Cayman Islands.  Beard reported that: Insurance companies lost $8.6 billion in capital, from their investment accounts in the first six months of 2002.  In 2001, the casualty insurance industry lost $2.4 billion of its nearly $300 billion capital reserve, marking the first time since 1984 that the casualty insurance industry lost money from its capital investment reserves (surplus) two years in a row.¹⁶  

            In, “A Captive Solution to the Medical Malpractice Crisis”, originally printed in the Palmetto Captive Insurance Journal and the Self-Insurer’s Publishing Corp., 2^nd Quarter, 2002 edition, Paul J. Struzzieri, FCAS explains:  

“The current hard market is as severe as the last soft market was long.  Beginning with the late 1980's and continuing throughout the entire decade of the 1990's, property/casualty insurance rates remained relatively flat.  This was particularly true for medical professional liability, where the average physician in some states experienced rate decreases over that period.
 

In order to understand how this happened, you need to understand the way that medical professional liability insurance is priced.  Medical Malpractice insurance is one of the longest tailed liability lines of insurance, especially when written on an occurrence policy form.  This means that there can be a very long lag between the date an accident occurs and the date the claim is reported, especially for newborns and young children.  In addition, once a claim is filed, there is an additional lag until the claim is settled.  The settlement lag is particularly acute for claims that become lawsuits.  In total, the most difficult medical malpractice claims can take 20 years or more to settle.

 

The long payment horizon means that insurance companies can invest the premiums for a long period of time and will earn significant investment income on their investments.  Insurance companies are then able to reduce their premiums rates to reflect anticipated investment earnings.  If the investment yield assumptions used in determining the premium rates prove to be too low (or too high), then the difference between actual and expected yields is compounded over the entire claim payment horizon.  

            In the Wall Street Journal, “Some Bets May Come Back to Haunt Insurers”, October 30, 2002, C1, it was reported that:  

“Blame more than a little bit of [insurance earnings shortfalls and ratings downgrades] on a wobbly economy.  Property-casualty insurers hold $8.8 billion of corporate bonds whose issuers are considered “troubled” by ratings from Moody’s Investors Service, Inc.  That represents about 2.9% of the industry’s surplus capital.  But many insurers have also taken on additional risks tied to the economy, according to a new report by Moody’s scheduled for release today.
 

In short, insurers face possibly substantial losses from an array of business activities whose profitability is tied to the ability of corporations to pay off their bond debts.  Most notable among the side bets: In a relatively new line of business, some property-casualty insurers have sold a form of protection under which they’re stuck for the payment of corporate bonds if an issuer defaults.  Ace Ltd., American International Group Inc., the American Re unit of Munich Re, Chubb Corp., Swiss Reinsurance Co., XL Capital Ltd. and Zurich Financial Services Group are notable players in this young but rapidly growing market, according to the report.
 

Moreover, among their old lines of business companies including AIG, of New York, and Chubb, of Warren, N.J., have large volumes of directors-and-officers liability insurance outstanding.  Moody’s notes that “the collateral damage from the rise in corporate bankruptcies and dismal performance of the stock market over the past two years has serious implications for insurers” that have written this coverage, which covers many missteps of executives.  Given the rising tide of accounting scandals and other corporate misdeeds.  Moody’s “expects the number of claims filed under D & O insurance coverages to rise dramatically.”  

Trouble on Their Hands?  

Property-casualty insurance companies are among the largest holders of the bonds and stocks of companies that Moody’s investors Service calls “troubled credits”.  Here are some of those holdings; (in millions)
 

WorldCom - $1,781

Tyco Lati - 1,295

Qwest Communications - 933

Georgia Pacific - 342

Williams Cos. - 326

Gap - 324

Corning - 316

Lucent Technologies - 277

Cablevision Systems - 245

Nortel Networks - 214  

* * *  

For the property-casualty insurance sector, the pile-up of economy-related exposures is partly an outgrowth of a decade-long price war that lowered premium rates and expanded coverage.  The Sept. 11 terrorist attacks, with their steep insurance losses, effectively ended the price battle, and since then, insurers have tightened terms and reduced coverage limits of many types of policies, including directors-and-officers liability insurance.  But many corporate customers purchased multiyear D & O policies back in the era of relative generosity, and they remain in effect.
 

In another expansion of their businesses to fight falling revenue during the tough years of the price war, insurers sold more and different types of surety contracts, Moody’s notes.  Before the price war, such contracts generally were written only to guarantee the completion of construction projects, but ones currently in place have been used to back up complex business transactions, such as the delivery of oil and gas by now-collapsed Enron Corp.  Chubb and AIG booked $220 million and $57 million in charges related to such transactions, respectively, earlier this year.

And increasingly, the insurers have gotten into the business of credit derivatives, giving themselves yet another way to lose money when companies default on debt.  The insurers’ activities are basically twofold.  First, some participate in the oddly named credit-default swap market, where investors with large exposures to an individual corporation can buy insurance that will pay them if an individual company fails to make payments on its debts. In addition, some insurers both guarantee and invest in complicated pools of sliced-and-diced corporate debt, as well as pools of individual credit-default swaps, known as collateralized debt obligations.
 

Unfortunately, the growth of the credit-derivatives market has coincided with a downturn of unprecedented severity in the corporate credit market.  While the so-called CDO’s are highly engineered transactions that are supposed to be relatively safe precisely because they contain upwards of 100 individual issuers, they haven’t been immune to the market’s problems.”  Id.  

            Michelle Baurkot, a Rating Agency Consultant with Milliman USA, wrote in “Current Issues in Property and Casualty” that:

“Given the changing market dynamics, partially initiated in early 2001 due to fallout in the market from rate inadequacies, reserve deficiencies, and a continued downturn in the equity markets, and partially following the tragic events of September 11, pricing has dramatically improved with increases in certain markets continuing to exceed 20%.  With these rapidly increasing rates, premium volumes for many companies have grown significantly over the last 12 months, even if their exposure base remained relatively stable.”  

            Similarly, Charles Kolodkin of Gallagher Bassett Healthcare Insurance Services, an insurance industry think tank, wrote in September, 2001 that:  

“What is happening to the market for medical malpractice insurance in 2001 is a direct result of trends and events present since the mid to late 1990's.  Throughout the 1990's and reaching a peak around 1997 and 1998, insurers were on a quest for market share, that is, they were driven more by the amount of premium they could book rather than the adequacy of premiums to pay losses.  In large part this emphasis on market share was driven by a desire to accumulate large amounts of capital with which to turn into investment income.”  

            When the recession occurred and the stock market crashed, interest rates were reduced below 2% by the Federal Reserve.  The international reinsurance market tightened in 2000, putting pressure on the market for excess policies.  Florida Today, March 4, 2003.  “Despite Industry Fuss, Malpractice Crisis Doesn’t Exist and Insurer’s Investment Losses Mean Higher Consumer Costs.”  Some say that reinsurance markets were shocked by the September 11^th terrorist attacks.  Because reinsurance became prohibitively expensive in 2000 and 2001, and investment income dried up, the insurance companies simply spread their losses by increasing premiums charged to physicians.  The insurance industry has responded by raising all types of insurance, including home, auto, health and life insurance rather than simply premiums for physicians.  The Wall Street Journal, “Some Bets May Come Back to Haunt Insurers”, October 8, 2002 C1.  

            On January 3, 2002, the International Risk Management Institute issued a statement publicly supporting the contentions of the Pennsylvania Trial Lawyer’s Association that the insurance industry’s own business practices are responsible for financial losses from medical malpractice insurers.  (See International Risk Management Institute (IRMI) Supports Pennsylvania Lawyers: Insurers To Blame for Malpractice Cost Rise.  Insurance Journal, January 3, 2003)  

            Ed  Dench , President of the Pennsylvania Medical Society was quoted in the Scranton Times that “Companies such as PHICO charged artificially low rates during the 1990s.  Dench said investments and reserves were not adequately monitored by the states insurance commission as required by law.”  (Scranton Times, “Rewards; Jury Awards Not Driving Premiums,” Dec. 15, 2002)  

            Echoing Charles Kolodkin’s September, 2001 analysis, Robert White, President of First Professionals Insurance Company, told 600 Palm Beach doctors on January 28, 2003 that: “insurers share some of the blame for the crisis.  Numerous malpractice insurers – undercut rates in the mid-1990's to build market share and grab money they could invest.  When the companies began losing money as the stock market tanked and interest rates fell, many of these firms left [Florida]!”  (“Dose of Reality for Doctors, January 29, 2003, Palm Beach Post.com)  

            The Allentown Morning Call, reported in “Insurer’s Blamed For High Malpractice Rates” April 16, 2003, that Charles Inlander testified before a state senate committee that excessive rates were caused by the insurance industry’s bad investments and lack of regulations.  Inlander, President of the People’s Medical Society, a national group based in Foglesville, testified that insurers low-balled rates, invested in risky bonds and shifted some rainy day reserves into the pockets of shareholders.  After the hearing of the Pennsylvania State Senate and Banking Committee, Dr. Howard Lystina, a private ob/gyn who testified also, said Inlander was right about much of the medical malpractice woes plaguing Pennsylvania.  

            The Wall Street Journal, in an article entitled “Insurers’ Missteps Helped Provoke Malpractice Crisis” dated June 24, 2002, observed:  

“Following a cycle that recurs in many parts of the business, a price war that began in the early 1990's led insurers to sell malpractice coverage to obstetrician-gynecologists at rates that proved inadequate to cover claims.”
 

“Some of these carriers had rushed into malpractice coverage because an accounting practice widely used in the industry made the area seem more profitable to the early 1990's than it really was.  A decade short-sighted price slashing led to industry losses of nearly $3 billion last year.
 

I don’t like to hear insurance-company executives say it’s the tort [injury law] system – it’s self-inflicted.” says Donald J. Zuk, chief executive of Scpie Holdings, Inc., a leading malpractice insurer in California.”  

            Frank B. O’Neill, a senior vice president of medical malpractice carrier Pro-Assurance was quoted in the Scranton Times on October 20, 2002: “Nobody is saying that tort reform is going to reduce rates.  Certainly, its better than doing nothing, but it would be false hope for people to think its going to result in any immediate rate decreases.  Nobody should have ever represented that to be the case.”  “Medical Damage Limits No Cure-All”, Scranton Times-Tribune, 10/20/2002.  

            Other supporters of the industry acknowledge that enacting tort reform will not produce lower insurance premiums: