Policy Rates Skyrocketing; Firms Pull Out of Market
Less fortunate officials, suddenly notified of policy cancellations, have been scurrying, often without success, to purchase new insurance.
Their difficulties signal that schools have become the latest victims of a nationwide crunch in the insurance industry that has caused substantial problems throughout the public and service sectors.
The consequence of poor economic conditions and an explosion in lawsuits that make claims against whoever has the “deepest pockets,” industry experts say, the industry crisis is of historic proportions and not likely to abate soon. For schools, officials from coast to coast agree, this is the worst year ever for liability coverage.
''The market has really dried up,” said Russell J. von Frank, vice president of the Joseph A. Lister Inc. insurance agency in Hempstead, N.Y., which stopped insuring school districts last year when its major carrier of school policies decided to get out of the market. ''There are just too many things that can go wrong [in schools]. Everybody now sues first and asks questions later.”
''We’re having to almost beg for coverage,” said Gordon McDonald, director of insurance and retirement for the Montgomery County (Md.) Public Schools, which are covered through the local county government.
''The insurers are beginning to sort out the risks” and to charge higher rates for high-risk situations, according to Marc Rosenberg, vice president for federal affairs for the Insurance Information Institute. ''The risk of a student playing football is much higher than that associated with a student sitting in a classroom and reading,” he said. In some cases, he confirmed, insurance carriers may choose to cancel policies altogether.
Increases, Cancellations
Some examples of the situation:
- In Michigan, Norman Weinheimer, executive director of the Michigan Associa tion of School Boards, said he has seen from 200 to 800 percent increases in school districts’ premiums as well as a number of cancellations of policies.
The new policy, however, did not include sports-liability coverage, which the insurance company offered to the district for an additional $25,000, with a $25,000 deductible per occurrence including legal fees.
The reason given, Mr. McGrew said, was that the insurer was “getting out of the liability business as it applies to athletics.”
But a district that paid $5,500 last year for $10 million worth of umbrella coverage this year paid $35,000--seven times as much, Mr. Craine said. Another jumped from $3,000 to $18,000. And in most districts, some area of high-risk coverage was removed from the policy.
Private Schools Hit
The situation is similar in the independent-school community, where officials report increases in premiums ranging from 25 to 800 percent and where a number of schools have had their policies cancelled.
“The problems are not really of cost,” explained Arthur Broadhurst, director of business services for the National Association of Independent Schools. “We were expecting them to go up in cost for a lot of reasons, including the fact that insurance has been underpriced for a number of years now.”
The real problem, he said, has been in obtaining specific types of liability insurance, such as coverage for trustees. A number of companies, he noted, have decided to go out of the business of writing that kind of insurance.
Independent schools are also finding restrictions written into policies, so that they do not cover such areas as asbestos liability or physical-education courses that insurance carriers consider too risky-such as scuba diving and mountain climbing.
And private schools, like their public counterparts, have also found that carriers are beginning to offer coverage only for claims that are filed during the time the policy is in effect and not after the policy is terminated.
In many schools and districts where policies have been cancelled over the summer, officials have been successful in negotiating insurance coverage with other firms, almost always at a much higher rate. But how those higher costs will be underwritten is uncertain.
Mr. Rosenberg of the Insurance Institute, an industry-sponsored clearinghouse, said the higher premiums may force schools to choose between offering a high-risk athletic program like football and a lower-risk program like soccer. District officials, he added, may have to purchase additional policies to cover such items as field trips and pass the cost on to the students’ parents.
Mr. Weinheimer of Michigan, who has served as chairman of the National School Boards Association’s Liaison Insurance Commission since 1972, predicted more serious difficulties. “There are going to have to be cuts made” in educational programs in the coming school year, he said. “Serious cuts.”
One of the areas that might be cut, he said, is teacher hiring, and that could begin to take place as early as this school year.
In independent schools, Mr. Broadhurst said, any substantial increases in operating costs will have to be made up in tuition increases that could come as early as next year.
‘Sovereign Immunity’ Eroded
Most school districts have purchased general liability insurance for some time to cover third-party injuries. But it was not until the 1970’s, when districts lost their “sovereign immunity,” that they began purchasing policies to cover civil-rights and discrimination claims and the potential liability of schoolboard members, according to Natalie Wasserman, executive director of the Public Risk and Insurance Management Association, a 1,000-member organization of public agency risk managers.
This shift was precipitated by a decision handed down by the U. S. Supreme Court in the 1960’s that made “the first chip in the armor” of what Ms. Wasserman called “the king-can-do-no-wrong theory.” In 1961, the Court ruled in Monroe v. Pape that Frank Pape, a Chicago policeman, was liable for abusing a family whose apartment he entered in the line of duty. One Court justice called the ruling akin to “awakening a slumbering giant,” Ms. Wasserman said.
That ruling and subsequent federal- court decisions have eroded the theory that governments and their agencies are immune from damage suits.
Reasons for Market Change
The insurance market is cyclical, industry representatives note, and there have been tight markets before this crunch. But most acknowledge that this is the tightest market they have ever seen.
One reason, they say, is that in 1984, the insurance industry experienced its worst year since 1906, the year of the San Francisco earthquake. Last year, the industry paid out in claims about $3 billion more than it took in in combined premiums.
Insurance officials also claim that premium rates have been artificially low for many years as a result of their past undervaluation.
Yet another reason for the insurance crunch, according to Susan Weiner, director of risk management for the Dade County (Fla.) Public Schools, is the sharp decline in interest rates in the past few years. When interest rates were soaring, insurance companies were able to offset underwriting losses by investment earnings.
Jury Awards, Future Claims
The reason most frequently given for the growing unwillingness of insurance companies to write policies for public agencies is the amount of damages awarded by juries in lawsuits.
In the past 10 years, jury awards have increased dramatically on the assumption that governments, including local municipalities and school districts, have “deep pockets,” said M. Patricia Casey, counsel for the American Insurance Association, a 177 -member organization of property-casualty insurers.
According to the National Association of Professional Insurance Agents, a group that represents 40,000 independent insurance agents who sell property and casualty insurance, federal courts heard 35,000 cases in 1940; by the 1970’s, that figure had grown to more than 200,000.
In 1962, there was only one court award of$1 million or more; in 1982, there were more than 250.
“We’re in a peculiar situation today,” said Mr. Weinheimer of Michigan. “So often, it’s cheaper to pay a claim than to fight it through the courts before a jury that believes a governmental agency has a deep pocket. As long as it’s the government, the juries are very lenient.”
Mr. Broadhurst of the independent-schools association also pointed out that juries are more lenient in cases involving children. “Insurance executives tell us they are very much afraid of juries, particularly when kids are involved,” he said.
“They tend to decide not on the basis of facts, but on the basis of emotions; [they] tend to think of insurance companies as bottomless pits and that means catastrophic losses for insurance companies.”
Such catastrophic losses can also result from claims that may be filed years from now. For example, the risk of great numbers of future suits based on asbestos contamination has prompted many insurers to discontinue school coverage or to offer policies that exclude asbestos liability.
Solutions Considered
In their search for solutions, public- school officials in Michigan and Illinois are among those educators turning to self-insurance, in which a group makes financial preparations to meet risks by appropriating ample funds in advance to meet both estimated and unanticipated losses.
A number of states, including California, New Hampshire, New Jersey, Vermont, and Wisconsin, have already begun to offer districts some kind of pool arrangement, according to Ms. Wasserman of the insurance managers group.
And the independent-schools association is considering setting up a national insurance plan tailored to meet the needs of its members and negotiated with one or more insurance carriers, Mr. Broadhurst said.
But for small schools and districts in states where there are no such alternatives, education officials are concerned that self-insurance may be too risky. “You’re essentially putting the first million or so of the district’s assets into a potential insurance loss,” said Mr. McGrew of Glenbrook, Ill. “There’s no way of spreading the risk.”
Caps on Awards
Some believe that there will not be any substantial change in the insurance market until legislatures set limits on the amounts awarded by juries to successful claimants.
“You’ve got to solve the problems of the high jury awards that are being made,” said Nicholas J . Matthews, vice president for communications of the professional insurance agents’ organization. “Other solutions are strictly Band-Aid approaches.”
About 28 state legislatures have set such caps in the past 10 years, according to Ms. Wasserman, and efforts to enact similar laws are under way in a number of other states.
Some insurers, however, do not think such caps will always be upheld by the courts, Ms. Wasserman noted. And some educators apparently share that concern. In Florida, where school districts are immune from suits above $100,000, the Dade County public-school system, for example, carries $16 million worth of liability insurance because, according to Ms. Weiner, “we’re dealing with little kids.”
Civil-Justice Reform
A number of insurance groups and public and private entities that have been harmed in the insurance crunch have joined “Project Justice” campaigns that are active in about 15 states.
Such a campaign, launched in Illinois three years ago, claims credit for the passage of a bill requiring that any civil suit for less than $15,000 be arbitrated first and go to court only if the parties are dissatisfied with the results. The bill is currently on Gov. James R. Thompson’s desk and he is expected to sign it.
Although the Illinois campaign has not focused specifically on the issue of insurance availability, its sponsors say their efforts should help the market in the long run. “If we can stabilize the civil-justice system, that will help to bring insurance either back into the market or other kinds of people with capital into the insurance business,” said one of the group’s founders.
Also in response to the insurance crisis, Representative James J . Florio, Democrat of New Jersey and chairman of the House Commerce, Transportation, and Tourism Committee, plans to hold hearings this month to investigate the problem. And the House Select Committee on Children, Youth, and Families held two hearings in July to consider the insurance crisis as it relates to the day-care industry.
Meanwhile, educators have been told by insurance officials that the situation will get worse before it improves because the property and casualty industry is expected to have another poor year this year.
“There are no set rules for next year now,” said Mr. Craine, the insurance agent. “The market is in such a state of turmoil and flux that there certainly would be no guarantee that the rules that held two months ago would hold 10 months from now.”
