Day-Care Centers Rocked By Rising Insurance Costs
Faced with what they say is their worst year in memory and concerned with continuing reports of child abuse in day care centers, insurance companies are raising premiums of child-care providers and even cancelling their policies.
As policies come up for renewal, child-care experts say, providers are finding that insurance carriers have tripled and quadrupled the premiums and, in some cases, are cancelling policies altogether, forcing centers to close.
What many day-care experts characterize as a "very serious problem" in the industry comes at a time when mothers of young children are entering the workforce in unprecedented numbers. Almost half of the nation's estimated 12.5 million women aged 18 to 44 with children under 5 are classified by the Census Bureau as working mothers.
Within five years, the government estimates that 80 percent of children under 6 will have mothers in the workforce, many of whom will be hard pressed to find adequate and affordable day care.
Insurance for day-care centers, which is regulated on a state-by-state basis, is required in 24 states and recommended in two others, according to the U.S. Department of Health and Human Service's 1980 "Comparative Licensing Study." States also recommend the type and amount of coverage centers should have, with the average level of protection estimated to be $100,000 per year for personal-liability coverage and $300,000 per year for accidental-liability coverage, according to the National Association for the Education of Young Children, a membership-supported organization of child-care providers and trainers.
The day-care-insurance squeeze is "a universal problem," according to Helen Blank, director of the day-care division of the Children's Defense Fund, an advocacy group in Washington. "It's affecting the entire industry--both centers and family day-care homes.
"People from Massachusetts to California are getting their rates tripled and even more than that, and are losing their insurance," she continued. "Programs could be forced to close and go underground. It's a very serious issue. You have to have insurance to operate."
Last year, for example, Diane Beverly, director for 24 years of a morning preschool in Orange, Calif., paid $400 for liability insurance. This year, her insurance was cancelled and estimates for new coverage topped $850 per year. Ms. Beverly, who charged each of her 17 part-time students $65 per month, said she didn't think it was fair to raise those fees and closed her center.
U.S. Representative George Miller, Democrat of California and chairman of the Select Committee on Children, Youth, and Families, is considering legislative options to provide some relief to providers.
"Insurance is primarily a matter regulated at the state level," Representative Miller said last week. "We are, however, exploring what might be most helpful to the child-care industry by reviewing other instances where the federal government came in to try to reduce the risk for insur-ers, and still enable critical services and property to be protected.
"We're looking at things like the federal flood-insurance program and the riot-reinsurance program. After we've completed this review, we will determine whether legislation is the best approach or whether there are other mechanisms that would be more appropriate."
The first signs of the insurance problem appeared in January when reinsurance companies, or underwriters, began to back away from insuring child-care centers, according to Roger Neugebauer, publisher of Child Care Information Exchange, a newsletter for day-care managers. This spring and summer, Mr. Neugebauer said, day-care providers will experience "the awareness period, the shock period," when centers' insurance policies come up for renewal.
New centers will be unable to afford insurance, Mr. Neugebauer said. And centers that can get insurance are likely to pass premium increases on to parents in increased fees, he said.
In addition, some insurance companies that do renew policies for day-care centers will explicitly exclude child abuse from coverage, child-care experts note.
Because most litigation involving child-abuse cases and day-care centers is still pending, insurance experts say there have not been any large awards paid to plaintiffs. But they note that, as a general pattern, the size of awards in liability cases is rising rapidly.
The insurance industry's own financial difficulties are partially responsible for the squeeze on liability coverage for child-care centers.
"In round numbers, the industry lost about $3 billion in its underwriting last year," explained Marc Rosenberg, vice president for federal affairs for the Insurance Information Institute, an industry-sponsored clearinghouse in Washington. "In other words, they paid out in claims about $3 billion more than they took in in their combined premiums. It's their worst year in recent history."
Joel S. Silverman, executive vice president of bmf Marketing, which insures day-care centers, family day-care homes, and foster parents in all 50 states, noted that 1984 was the worst year for the industry since 1906.
"Insurance companies decided they were going to re-evaluate their risk-taking position in relation to their surpluses and the kind of risks they were going to write," he said.
"To oversimplify it," he continued, "if you were in a position to ensure one house and somebody brought you a brick house and a wooden house, it's not hard to see which you'd insure."
Both Mr. Silverman and Mr. Rosenberg pointed out that rates for day-care facilities were artificially low for many years. "It's true that a 300-percent increase is a large increase, and that's probably higher than most industries would find," Mr. Rosenberg said, "but that's more a result of the liability insurance being undervalued in the past."
One of bmf's current underwriters, which has backed family-day-care coverage for two years, is seeking to drop the coverage because of financial losses. The firm's two previous underwriters for family day care also incurred losses, Mr. Silverman said.
Compounding the insurance industry's own problems is the spate of child-abuse allegations involving day-care centers in the past year.
In fact, when day-care directors press insurance companies for an explanation of their cancellations, said Mr. Neugebauer, "the reason tends to be the sex-abuse cases."
In California, a survey of state-supported resource and referral agencies found that the reason most often cited by insurance companies for increasing premiums or cancelling policies was the "adverse publicity" generated by child-abuse cases, according to Carol Stevenson, a staff attorney for the Child Care Law Center in San Francisco.
Although centers cannot be insured against a criminal act such as sexual abuse, civil lawsuits can be and have been brought against centers for negligent hiring or supervision practices. None of those has yet been resolved, Mr. Rosenberg said.
Insurance companies, Mr. Silverman said, "have determined because of all the adverse publicity in the news media regarding the problems in the day-care community that child care is a very high-risk, high-potential, volatile type of exposure."
James Smith, vice president for general liability for Fireman's Fund Insurance Company, said the incidence of child-abuse cases has been a factor in his company's decision to get out of the day-care field altogether.
"Day-care centers from a general-liability standpoint have always been somewhat of a problem because of injuries that could arise out of playground equipment," said Mr. Smith, whose company writes approximately $2 billion annually in premiums, some $100,000 to $200,000 of which has in the past been for day-care centers. But recent reports of child abuse in day-care centers, he said, have made it necessary to take "a very, very conservative approach" to insuring centers.
In attempting to control losses, it is possible to alter playground equipment to make it less danger-ous, he said, but it is not possible to control the behavior of employees. "It would be a rare occasion where we'd write a new [day-care policy]," he said. "And it would be a very rare occasion where we'd renew."
Effect on Care Providers
The cancellations and raised insurance rates, contended Mr. Neugebauer, are likely to severely harm the smaller, "mom-and-pop" segment of the day-care industry.
"It really hits hard in day care because we don't have other choices [for coverage]," he said. "Organizationally, day-care centers are really independent. They're not part of a larger organization; they don't have anything to fall back on."
Ms. Stevenson said that in California, where bmf Marketing provides most of the coverage for family day care, its policy covering most care providers is underwritten only through the end of June.
"If they don't get another underwriter," she said, "a huge number of family day-care providers would have their insurance cancelled."
Mr. Silverman of bmf, which is a subsidiary of the insurance firm of Bayly, Martin, and Fay International, said the day-care division has not cancelled any policies to date but may have to do so if another underwriter is not found.
Day-care experts have considered borrowing solutions from other industries. For example, Mr. Neugebauer pointed out, physicians with insurance problems have succeeded in separating general-liability policies from high-risk, or malpractice, policies.
"If we could separate out what the high-risk issues are, which tend to be the abuse issues, from the low-risk, such as a child tripping on a rug, we might be able to provide some sense to the policy, so we can get some general insurance coverage," Mr. Neugebauer said.
Mr. Rosenberg of the Insurance Information Institute said that because insurance companies have begun to reassess which premiums are profitable and which are not, the day-care industry should devise standards by which to measure risk.
"If you want protection against potentially very large claims [such as abuse charges]," he said, "then you have to pay for it."
Ms. Stevenson, pointing out that solutions will have to be devised on a state-by-state basis, said that they should address the distinct issues of access to insurance and the affordability of premiums.
"There might be some legislative solutions regarding access that spread the risk around to different carriers" similar to California's all-risk automobile-insurance plan, which divides high-risk individuals among a number of insurers.
Another option being considered is self-insurance. Under such a plan, all day-care providers would form a large pool and raise funds to cover expected liabilities within the industry. Such a proposition, Mr. Neugebauer and others acknowledged, would require that all participating centers put up funds to start the insurance program.
A concept that has been attempted on a limited scale for the National Association for the Education of3Young Children is to bind all day-care centers into a single national association that buys insurance coverage from one carrier, but even that program apparently has fallen vicim to publicity about child abuse in day-care centers.
naeyc, a 47,000-member organization representing day-care providers, began offering liability insurance to its membership in 1980, according to Marilyn Smith, executive director of the association. A center can obtain coverage through the association if at least one staff member is an naeyc member. Ms. Smith said she did not know how many centers the association insures.
The association is currently negotiating with a new insurer because the original insurance company began to exclude certain states from liability coverage, starting with California and Texas, despite the fact that naeyc had never processed a claim on the policy, Ms. Smith said.
Despite months of negotiations with the new insurer, Market Dyne, Ms. Smith said the firm has experienced "cold feet" throughout the process, "explicitly because of the fear that there's going to be a lot of potential exposure" should a child-abuse case come to light. "They think the issue will put ideas in people's heads to sue."
Even after naeyc agreed to exclude sexual abuse from liability coverage, the association could not get the company to put the program on the market, according to Ms. Smith. And attempts by naeyc to contact the firm's president have been unsuccessful, she said.
"I'm afraid we've only seen the tip of the iceberg," Ms. Smith said. "We're going to see much more of this panic."