Insurance and the Changing Tort Law

The liability insurance crisis cannot be explained or solved by reliance on unsupported conspiracy theories. Nor can it be written off as a one time aberration caused by a confluence of the underwriting cycle and abnormally high interest rates.

The ICJ data supports the theory that the problem is simply an increase in the amount of litigation and the size of damage awards, but that alone suggests no cure. We must understand why such litigation is increasing, why plaintiffs win more often, and what this does to insurance markets. To do so, we must examine the progress of tort law over the past half century, and relate changes in the law to a handful of fundamental insurance concepts.

A revolution has occurred in tort law. This change is not so much in the formal doctrines of law as in the way in which judges conceptualize and apply those doctrines. This dramatic change, steadily accelerating in pace, has come about with virtually no action on the part of state legislatures, in Michigan or elsewhere. It is a judicial revolution, brought about by well-meaning judges and legal scholars armed with a theory of distributive justice, little knowledge of insurance, and no coherent system for determining right and wrong.

In putting this new system into place, the judiciary has not only created more causes of action for potential plaintiffs, leading to the visible effects of more awards and higher damages, but it has undermined the risk predictability on which the insurance industry relies, and thus made it virtually impossible for the industry to cope with the rising tide of liability. Higher premiums and, in some cases, a complete closure of the market have resulted. It is the contention of this study that while many factors have contributed to the insurance crisis of the 1980s, herein lies the crux of the problem, and until it is attacked, "the sort of reforms enacted thus far are likely at best to slow the rate of premium increases over the long run." [25]