Nine state attorneys general last week charged in court that leading insurance companies illegally conspired to restrict the liability-insurance coverage offered to municipalities and school districts.
“The conspiratorial action of these companies created the so-called liability crisis,’' said James M. Shannon, the attorney general of Massachusetts. “Unless we stop this collusive behavior, there is no guarantee that it won’t happen again.’'
In a lawsuit filed in U.S. district court in San Francisco, the attorneys general allege that four major firms--Aetna Casualty and Surety Company, Allstate Insurance Company, Hartford Fire Insurance Company, and CIGNA Corporation--worked with reinsurers, brokers, and a trade association to sell stripped-down policies that reduced costs to the insurers.
Although the insurance industry is not subject to most federal antitrust laws, the prosecutors charge that this collusion amounted to a boycott, which is illegal.
In addition to Mr. Shannon, the plaintiffs include the attorneys general of Alabama, Arizona, California, New York, Minnesota, Wisconsin, and West Virginia.
James Mattox, Texas’s attorney general, filed a similar suit in state court, because that state’s antitrust laws are tougher than the federal law, a spokesman said.
School officials, who have faced skyrocketing premiums and shrinking coverage over the past few years, hailed the actions. “We are thrilled,’' said Louis Grumet, executive director of the New York State School Boards Association. “School districts in New York State have been the victims of the insurance industry.’'
“We definitely have been under the belief that something strange was going on,’' he added. “We did not think it was normal business practice.’'
Mr. Grumet added that his association may also pursue legal action against the insurers.
But a spokesman for the insurance industry called the charges “unfounded.’'
“The policies [cited in the lawsuit] were all approved by insurance commissioners in each state,’' said Julie A. Rochman, a federal-affairs specialist for the Insurance Information Institute, a Washington-based trade group. “It’s not like anything was done covertly.’'
The action by the attorneys general marks the culmination of a two-year multistate investigation into the insurance crisis, which has caused financial hardships for many school districts and forced the termination of athletic and day-care programs.
The insurance industry has argued that these effects were the result of a “lawsuit crisis.’' Jury awards from claims against cities and districts had grown so rapidly, industry officials maintained, that insurers had to raise premiums and curtail coverage to meet costs.
With the backing of industry officials, many state legislatures have since enacted curbs on jury awards.
But the attorneys general charge that the insurers manipulated the insurance market to gain support for favorable legislation.
“This was a conspiracy to set prices and boycott persons who want insurance, in an effort to ... get the tort laws changed,’' said Ronald Dusek, a spokesman for Mr. Mattox of Texas.
Specifically, the prosecutors charge that Hartford and Allstate, faced with declining profits because of a drop in investment income, hatched a plan to reduce costs by limiting the type of insurance they offered to customers.
“They wanted a vastly different product on the market, in order to save money,’' said Mark D. Kindt, deputy attorney general of West Virginia. “It was simple greed.’'
To ensure that they were successful, the suit charges, the firms “gradually enlisted the assistance of other carriers, then of reinsurance companies, and finally of the insurance companies’ trade association, to guarantee that no U.S. insurer could, even if it wanted to, write the broader insurance that had been available.’'
According to the plaintiffs, the firms, joined by domestic and foreign reinsurance companies--firms that insure other insurance companies--were able to enforce their policy by persuading the Insurance Services Office Inc., the trade association, to change the standard form used for most policies.
The change had a substantial effect on schools, according to Arthur G. Broadhurst, former director of business services for the National Association of Independent Schools.
“The forms were not in the interest of customers,’' he said. “They were clearly designed to limit the exposure of insurance companies to loss.’'
Mr. Broadhurst noted, for example, that the new forms limited coverage to claims made only while the policy was in effect.
“It is possible for an incident to be brought to light and a claim made years after the policy expired,’' he said. “The new form gave an education institution little protection.’'
The revamped form also excluded some activities from coverage, Mr. Broadhurst said. The lawsuit states that the form excluded pollution injuries, but other school-related injuries, such as in athletics, were also excluded, he said.
“There was a general agreement that certain types of risks would be excluded,’' he said. “These were precisely the things a school needs protection from.’'
The exclusions, he added, were “in effect, another form of price increase.’'
“It’s like making a Hershey bar smaller while keeping it at the same price,’' Mr. Broadhurst said.
The new policy forms also sought to hold down insurance-company losses by including within the coverage limits the cost of legal defense, the prosecutors charge.
This provision posed “a troublesome problem for schools,’' according to Mr. Broadhurst, because it increased a school’s risks. Under the revised system, if a school had a $1-million policy, and it incurred $100,000 in lawyer’s fees defending itself against a claim, the insurance company would only pay $900,000 toward the claim.
The lawsuit asks the federal court to enjoin the defendants from any further violations of law, and to award money damages to the affected municipalities and school districts.
In addition, the plaintiffs seek to require the firms to resume writing policies that they had allegedly boycotted, and to restructure the ISO to include public-interest representatives on its board of directors.
While those actions may prevent a reoccurrence of the crisis, observers predict, the liability market has changed substantially since the difficulties began.
For one thing, noted J. Robert Hunter, president of the National Insurance Consumer Organization, the dramatic premium increases and coverage restrictions have eased. “Prices have fallen, and availability is back,’' he said.
In addition, many school groups responded to the crisis by quitting the commercial market.
The New York school-boards association, for example, formed a pool to insure its members, and the independent-schools association created a company, United Educators Insurance Risk Retention Group Inc., to provide similar coverage for members.
“The crisis led us to determine that it was simply smart for us to stop our dependence on an erratic, irrational market,’' said Mr. Broadhurst, who will become vice president and chief operating officer of the company this spring.
A version of this article appeared in the March 30, 1988 edition of Education Week as Nine States Sue Major Insurers Over ‘Boycott’