Insurance Shock

Business executives and public officials lately have been receiving a new kind of letter bomb: their insurance bill. These days many letters from insurers announce increases in annual premiums for liability coverage of 50%, 100% or even 1,000%. The rocketing price of insurance has created a crisis for everything from manufacturers to municipalities. Doctors, tavernkeepers, high schools, bowling alleys, exterminators and banks are all being hit hard. Says Don Benninghoven, executive director of the League of California Cities: “This is the most serious issue I can ever remember cities dealing with.” In the end, citizens and consumers will pay the bill in the form of higher taxes and prices.

Drained by a growing number of huge personal-injury awards, insurers are struggling to increase profitability by boosting rates and even refusing to renew risky policies. Many of their rejected customers are having a hard time finding insurance at any price. Says Robert Rearden, president of Duncan Peek, an Atlanta insurance-brokerage firm: “At times it’s extremely frustrating. ) The other day a salesman here said to me, ‘I need an extra day off. It’s tiring delivering all this bad news.’ ” Many businesses and local governments have been forced to go uninsured, thereby risking bankruptcy or at the very least a fiscal squeeze if they encounter a large lawsuit.

The insurance shock is forcing communities to curb services and boost taxes. Northfield (Ill.) Township High School District 225 canceled its summer basketball and baseball programs this year for lack of coverage. In Blue Island (pop. 22,000), a Chicago suburb, citizens held a noisy meeting last month to debate a 30% tax increase. Reason: the city’s insurance premiums had jumped from $175,000 to $435,000 in one year. In July the Southern California Rapid Transit District came within nine hours of idling its 2,500 buses for lack of insurance. The annual premium rose from $67,000 to $3.2 million.

Businesses have been hit just as hard. Even firms that have never had a suit filed against them have difficulty if they are in a troubled industry. Day care has become a high-risk business because of sexual- abuse cases. Liquor stores have been denied coverage because they are sometimes liable for death and injury caused by drunken customers. Bismarck Food Service, which sells beer at Detroit’s Tiger Stadium, saw its insurance bill increase from $50,000 in 1983 to $1 million.

The airline industry could face large insurance-premium increases as the result of this year’s string of fatal accidents. The crash of a Japan Air Lines 747 is expected to cost the carrier and its insurance company as much as $200 million in compensation to victims’ families. Last week Delta Air Lines, facing heavy costs from its L-1011 crash in Dallas, asked a U.S. District Court to require the Federal Government to share responsibility. The carrier contends that federal air-traffic controllers were at fault in the crash because they failed to warn the pilot sufficiently of bad weather conditions.

The rise in product-liability lawsuits, notably in the case of the Dalkon Shield intrauterine birth control device, has resulted in ballooning insurance rates for manufacturers. And Union Carbide’s Bhopal disaster, which prompted more than $100 billion in lawsuits, has helped make toxic-pollution insurance virtually impossible for most chemical companies to obtain.

Professionals ranging from doctors to accountants have been hit with bills large enough to make them think twice about their career choices. An estimated % 18% of obstetricians in the U.S. will switch to other specialties this year because coverage against malpractice suits now runs as high as $72,000 a year. Says Dr. Harry Cole, president of the St. Louis Metropolitan Medical Society: “It’s getting frightening. Unless we can get some relief, we’re going to see high-risk patients having difficulties finding doctors to treat them.”

Property-and-casualty insurance companies say they have no choice but to hike rates because they are scrambling to recover from $3.8 billion in red ink last year. Some of the current losses are the result of a six-year rate war in which most insurers slashed premiums with competitive abandon. But a greater problem is the growing number and size of personal-injury lawsuits. Says Rudolph F. Landolt, president of Chicago’s Kemper Group of Insurance Companies: “You have an accident, and everyone involved gets sued. We live in litigious times.” Insurance companies blame courts for being far too generous in determining liability and juries for granting exorbitant awards. “There is no limit to it,” says Albert Abend, spokesman for Hartford’s Aetna. “There are no federal standards. What kind of business environment is this?”

Consumer advocates respond that insurers are pushing rates higher than necessary. Last month Ralph Nader and Robert Hunter, president of the National Insurance Consumer Organization, asked the Justice Department to investigate whether the insurance industry is illegally boycotting some businesses. “What we are witnessing,” said Hunter, “is a manufactured crisis intended to bloat insurer profits and reduce victims’ rights.”

Meanwhile, many desperate businesses and municipalities have started practicing do-it-yourself insurance. The smaller cities and companies do this by joining together to create a reserve of cash from which claims can be paid. Larger ones simply salt away what they think will be enough money to cover any lawsuit. Then they start hoping that they will not be sued.