On the 'Crisis' In Insurance For Schools
Scholars, practitioners, and policymakers in public education generally agree that the cost of school liability insurance constituted a crisis during the 1980s.
In a statement before a state commission considering tort reform in 1986, for example, former Mayor Edward I. Koch of New York City described increases in municipal insurance premiums, including those for the public schools, as "outrageous." A U.S. Justice Department report in the same year referred to the low availability and high cost of governmental insurance as having reached the level of "crisis." Doctoral dissertations and media reports have used the same term in characterizing the urgent search for solutions to the drain of funds from education programs to insurance premiums.
Two causes for this "crisis" are obvious: poor preventive practices and the need for tort reform. But a more insidious cause is exploitation by the insurance industry.
Unfortunately, because of the insurance lobby's power, the case is difficult to prove. When 19 states went to court charging that the insurance industry had manipulatively raised rates and canceled coverage to municipalities and school districts in violation of federal antitrust legislation, for example, the suit was dismissed on the grounds of a special exemption for insurance companies. The plaintiffs have filed an appeal, but without a change in the legislative exemption, they face a steep uphill battle.
Exploitative practices are also hard to substantiate because the insurance companies closely control information about their profit-loss experience. Consequently, the evidence as to whether there is a bona fide crisis is relatively scattered and circumstantial.
Still, the results are cumulatively consistent. My research leaves me with the suspicion that, like the gas lines and fat profits of the oil industry in the early 1970s, the school-insurance crisis has been manufactured.
A thorough review of the literature and interviews with insurance specialists reveal woefully insufficient information. Finding a paucity of published data, I called various school officials in charge of their districts' insurance. One told me that the lack of information was "shocking." None had specific data about why insurance costs were skyrocketing, and most referred me instead to the insurance companies. The company representatives then led me on a not-so-merry chase for two years, leading to carefully limited data.
The information I was able to wangle suggests that high rather than low profits are behind the limitations on liability coverage and the explosion in premiums for two principal types of policies: "general liability" and "errors and omissions." For instance, in the mid-1980s--the period when the crisis was most widely publicized--the number of claims per 100 districts for errors-and-omissions insurance was relatively level, and the incurred losses for the same period decreased. The number of general-liability claims was similarly stable during the mid-1980s, and it dropped notably in 1986 and 1987--years when the total amount of school-district premiums increased dramatically.
Recent studies of education litigation show that the explosion of public-school-related court decisions ended in the 1970s. The high point was around 1977; the past decade has seen a downturn in decisions involving school districts. Although most of these have been at the appellate level, the outcomes have also swung notably in the direction of the defendant-districts, causing the odds to disfavor prospective plaintiffs at the insurance-claim and trial-court levels. Why were the premiums and exclusions increasing while adverse decisions and losses were decreasing?
A 1986 survey by the New York State School Boards Association found that premiums of member districts increased at a time when liability limits were dropping, deductibles were rising, and new exclusions, nonrenewals, and policy cancellations were increasing. Twenty-three percent of the districts, for example, had had their package policies canceled or not renewed, and 28 percent had had their umbrella policies canceled or not renewed.
When the N.Y.S.S.B.A. went through the extensive and expensive process of forming its own insurance program, the established insurers dramatically dropped their rates. For instance, according to the N.Y.S.S.B.A.'s executive director, Louis Grumet, one of the dominant companies reduced its premium quotation for a Long Island district from $152,000 to $51,000 one month after the district was offered the association's program. He concluded that "the threat of new competition was the most effective force in ending the spiraling increases in insurance costs."
An article in the June 1987 issue of School Business Affairs reported that, in the previous year, New Jersey districts paid $65 million in premiums for excess liability coverage, while their insurers paid out only $1.2 million in major claims. The insurance industry pointed to the need for judicial reform, but the authors concluded that the industry was also to blame.
The National Association of Secondary School Principals reports that when its insurance company kept doubling the per-member premium for its group-liability policy in the late 1970s, the organization changed to a largely self-financed arrangement. Whereas the company had quoted a premium of $14 per member for 1979, the organization found the average cost to remain level at approximately half that figure for the 1980s.
A recent dissertation by James Watts, a school principal, focusing on Indiana districts, also calls the crisis into question. Faced with the shortage of data available from the insurance establishment and the professional literature, Mr. Watts went directly to the clients with a questionnaire about their insurance experience from 1982 through 1986. During this period, he found, responding districts experienced a 229 percent increase in the cost of general-liability insurance and only a 25 percent increase in the total cost of their awards and settlements.
Some movement toward solutions has begun. For example, the American Tort Reform Association, which is backed by the insurance lobby, is pushing for setting a ceiling on punitive damages, reforming the doctrine of "joint and several liability," and authorizing judges to award attorneys' fees for frivolous suits. Districts are fighting the crisis with self-insurance, especially on a pooled basis, and preventive law practices, including legal audits.
The war cannot be won, however, without parallel progress on another front, that of the insurance industry itself. First, we need more complete and useful information from insurers. David H. Moyer, superintendent of the Deptford Township, N.J., schools, points out, for instance, that the companies report under "incurred losses" not only the actual cost of claims but also the amounts they reserve for future obligations under the same policies.
"By putting reserves into the formula," he explains, "the industry can arbitrarily show 'high losses' and little or no 'underwriting' profit by a stroke of the pencil or a touching of the computer key. The methodology used in calculating and reporting statistical data must change if the general public is to understand the 'real financial state' of the insurance industry."
If such information is not sufficiently forthcoming or favorable, we need either closer administrative regulation or less favorable legislative treatment of the industry. In any event, the government should improve the climate for competitive alternatives.
Are the insurance companies fabricating a crisis in school insurance to line their own pockets? Like the residents of Prince William Sound, Alaska, we are left with the feeling that "something smells." To protect and preserve our nation's children, we must make a concerted and comprehensive effort to spend less on insurance premiums and more on education programs.
Vol. 9, Issue 22, Page 48Published in Print: February 21, 1990, as On the 'Crisis' In Insurance For Schools