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The Liability System and Medical Malpractice Insurance Issues
Litigiousness has become a societal problem in the United States. The tort sys- tem cost $254.7 billion in 2008 in direct costs, which translates into $838 per person, and many billions of dollars more in indirect costs, according to Towers Perrin’s most recent tort costs study. U.S. consumers pay directly for the high cost of going to court through higher liability insurance premiums because lia- bility insurance rates reflect what insurance companies pay out for their policy- holders’ legal defense and any judgments against them. And they pay indirectly in higher prices for goods and services since businesses pass on to consumers the expenses they incur in protecting themselves against lawsuits, including the cost of commercial liability insurance.
Beginning in the 1980s, in an effort to reduce litigation costs, business groups and others mounted a campaign to reform tort law. Tort law is the basis for the U.S. liability system. Most reforms have taken place on the state level and during the last decade all but a handful of states passed significant tort law reforms. However, some have been overturned by the courts.
Many reform efforts have focused on medical malpractice issues. Medical malpractice insurance covers doctors and other professionals in the medical field for liability claims arising from their treatment of patients.
The cost of medical malpractice insurance began to rise in the early 2000s after a period of essentially flat prices. Rate increases were precipitated in part by the growing size of claims, particularly in urban areas. Among the other factors driving up prices was a reduced supply of available coverage as several major insurers exited the medical malpractice business because of the difficulty of making a profit.
New research suggests that premium increases may be moderating but, for any significant turnaround to take root, major reforms in the delivery of medi- cal care that focus on patient safety need to occur, industry observers say.
State Tort Reform Issues
Caps in Noneconomic Damages: According to the National Conference of State Legislatures, 30 states, the Virgin Islands and Puerto Rico limit jury awards in malpractice cases. In the past few years, a number court have ruled against such limits. In Georgia, the Supreme Court ruled that a 2005 state law that lim- ited jury awards for pain and suffering in malpractice cases to $350,000 improp- erly interfered with a jury’s duty to determine damages in a civil lawsuit. In the decision Chief Justice Carol Hunstein said that limits in any amount violate the right to trial by jury. In Illinois, the Supreme Court overturned the state’s 2005 medical malpractice statute, which capped noneconomic (pain and suffering) medical malpractice awards at $500,000 in lawsuits against physicians and $1 million for hospitals. The court ruled that the law violated the state’s constitu- tional principle of separation of powers in that lawmakers had made decisions that should be made by judges and juries.
Some states, such as Maryland, are deciding to retain their caps when chal- lenged.
Arbitration: To keep small disputes out of the courts, insurers are increasingly turning to arbitration. The nation’s largest arbitration provider, nonprofit Arbi- tration Forums, resolved more than 520,000 inter-insurance disputes in 2009 valued at $2.5 billion, for a savings in litigation costs of $700 million. Disputes leading to arbitration typically arise when insurance or self-insured companies believe their policyholders or employees are not at fault or due to disagreement over the percentage of liability or the amount of damages. More than 85 percent of these disputes involve auto collisions.
Tort Liability Environment: In December 2009 the American Tort Reform Association (ATRA) released its annual list of states and counties characterized as “Judicial Hellholes,” places with courts that have a disproportionately harm- ful impact on civil litigation. ATRA explains that personal injury lawyers seek out these places as targets for their efforts to expand liability and develop new opportunities for litigation. ATRA’s newest list includes six Judicial Hellholes, including holdovers South Florida; West Virginia; Cook County, Illinois; and Atlantic County, New Jersey, and New Mexico appellate courts and New York City, which are new on the list. ATRA highlights several reforms that can help restore balance to these jurisdictions. They include stopping venue shopping (looking for jurisdictions where juries are favorable to plaintiffs), imposing sanctions for bringing frivolous lawsuits, stemming abuse of consumer laws, ensuring that noneconomic damage awards serve a compensatory purpose, and strengthening rules to promote sound science in the courtroom.
Micro Insurance
A growing number of insurers are tapping into markets in developing countries through microinsurance projects, which provide low-cost insurance to individu- als generally not covered by traditional insurance or government programs.
Microinsurance products tend to be much less costly than traditional products and thus extend protection to a much wider market. The approach is an out- growth of the microfinancing projects developed by Bangladeshi Nobel Prize- winning banker and economist Muhammad Yunus, which helped millions of low-income individuals in Asia and Africa to set up businesses and buy houses. American International Group Inc. (AIG) was one of the first companies to offer microinsurance and began selling policies in Uganda in 1997. Swiss Re, Munich Re, Allianz and Zurich Financial Services have also entered the microinsurance arena. Disasters such as the 2005 tsunami in Indonesia and the 2010 Haiti earth- quake have demonstrated the need for insurance in many regions, prompting insurers to develop new products. While the coverage is often geared to protec- tion from natural disasters, there are also programs covering life/health risks as well.
With limited growth prospects in the insurance markets of developed countries, which are largely saturated, insurers see microinsurance in emerging economies as presenting significant potential for growth and profitability. A 2009 Swiss Re report on world insurance markets found that premium growth in emerging markets far outpaced growth in industrialized countries in 2008. The study identified the following regions as “emerging markets”: Latin America, Central and Eastern Europe, South and East Asia, the Middle East (excluding Israel) and Central Asia, Turkey and Africa.
In 2009 the International Association of Insurance Supervisors, the World Bank, the International Labor Organization and other multilateral groups launched a program to improve access to insurance in emerging and under- served markets called the “Access to Insurance Initiative.” Also in 2009 rep- resentatives from over 60 countries participated in the Fifth International Microinsurance Conference, which was organized by the reinsurer Munich Re and the Microinsurance Network, a joint effort of aid organizations, multilateral agencies, insurers, policymakers and academics.