Auto Tort Reform in Louisiana- A Time for Change?

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1 Auto Tort Reform in Louisiana- A Time for Change? Is automobile insurance tort reform needed in the state of Louisiana? Automobile tort reform encompasses the issue of how the law is applied in the event of an automobile accident. The current legal environment allows occupants injured in an automobile accident to sue to operator of the at fault vehicle for damages in tort, a civil proceeding. This approach to indemnify injured drivers has resulted in many auto accidents being litigated which does not efficiently utilize judicial resources. Also, there has been an increase in the cost of coverage due, in part, to legal proceedings settlements. Perhaps a comparison of the statistics is in order so the reader can make an informed decision on this matter. This article will review industry loss data as it relates to Louisiana and other states, evaluate other states system, and offer some personal insight from an automobile accident. First, let s analyze of the statistics. The Facts: Louisiana is the 22nd largest writer of automobile insurance in the country when based on direct premiums collected amounting to $422,662,000 according to Best Review (October 2001 page 78). That issue stated that we had 505 companies offering coverage which is a fairly healthy competitive environment as compared to California who is the number one state in terms of premium with over $15 billion in premiums and hosting 559 companies. The premium growth is down 0.2% which indicates about the same amount of premium as the previous year which indicates rate stability- as of 10/2001. Now as should be clear, it is not the amount of premium that a carrier collects but rather the amount of claims they pay out that will determine Underwriting Profit, the reason insurance carriers exist. Rates are function of historical losses, carrier expenses and a load for profit. If the cost to repair autos, provide medical to the injured, settle lawsuits goes up then rates go up. The same is true if those variables go down, rates go down. Recall the very healthy competitive environment of auto insurance with 505 carriers vying for your dollar which validates that if loss cost go down then rates will go down. So we have to look at other cost drivers as to why rates at the presently high levels and are going up. Further analysis of the statistics indicates that Louisiana had a 85 % Loss Ratio according to Best Review. Loss Ratio is the amount of dollars paid out in relation to premiums paid in. If you pay $1000 for auto coverage and the carrier pays out $500 they have a 50% loss ratio; (500/1000). Auto and all insurance carriers want low loss ratios as that will increase underwriting profit, recall the reason they are in business is to make a profit and not just fill a social need. Extending that logic, there is two ways to improve or lower the loss ratio: increase the premium and/or decrease the losses. We can all agree that increasing the premiums is not a good option because that cost consumers more money. So, if we don t want to increase premiums to give underwriters the necessary profits to remain viable one of two things will happen:

2 1) Carriers will come to learn that they cannot make an underwriting profit in Louisiana and leave the state which means less competition and therefore increased rates as the market moves toward oligopoly (fewer competitors dictating price), or 2) Carriers will raise the premium level to cover historical losses, expenses and profit. Understand that expenses are fairly fixed and predictable and profit is a hopeful endeavor and not guaranteed. The National Association of Independent Insurers wrote a letter to the Honorable Governor Mike Foster and stated that without tort reform the Louisiana market could be in serious trouble. The letter went on to mention such consequences as market shrinkage (that has happened) higher prices (that has happened) and federal intervention (I don t think that will happen). The letter stated that Louisiana has the third highest loss cost (cost of claims) in the nation which is attributed to the tort environment. So, we must look to the other side of the loss ratio equation for some suggestive solutions. The cost of losses to automobile carriers is the fundamental driver of elevated rates and will not decline until the legal environment and system is evaluated and reformed. Louisiana is a legal system that is an at- fault system. That means if you wreck another drivers automobile they can sue you in tort (a civil wrong) for damages. There are two types of damages: Compensatory and Special. Compensatory Damages will be awarded to compensate for the injury sustained such as medical bills, prescriptions, lost wages, and related hard, quantifiable expenses. Special Damages seek to recover for the soft or unquantifiable damages such as pain and suffering, mental anguish, loss of consortium, and others. Now an at fault system as is ours implies that a driver meant to do damage or harm. I suspect that is not the case in almost all automobile wrecks. So, if you wreck someone s automobile and they may make a claim for damages your insurance carrier has duty to defend you, which cost money, and then settle all claims up to the policy limits. Rampant litigation evidenced by a high Loss Ratio s and a high cost of defense is the root cause of the high premiums. This is the heart of the problem of why the rates are so high in Louisiana. We mentioned that the loss ratio is 85% in Louisiana as of 10/2001. That means that for every $1 you carrier collected they paid out.85 cents on claims leaving just.15 to cover expenses and profit. In very general terms, carriers can enjoy an underwriting profit when loss ratio does not exceed 65%, which leaves 30 % for carrier operating expenses and 5% for profit. Also, they hope to make investment income on invested case reserves and surplus reserved for stability. You might be wondering where that 85% Loss Ratio fits in with the rest of the country. Here we go again: Number One in a bad category! That s right, Louisiana

3 ranked number one in the amount of money carriers paid out to claims. That is why carriers are seeking rate increases right now, to cover losses, expenses and to try to make a profit. Further analysis of the Louisiana 85% Loss Ratio sheds insight to where those claims payout went. As mentioned carriers have a duty to defend you as stated in the automobile policy. So if you wreck someone and they sue you, the carrier must provide a defense. Legal defense cost money- this is a big outflow of premium dollars. The national average for legal defense, when you add up the cost to defend paid by all auto carriers and divided by the number of carrier is 3.5%, according to Best Review. The Louisiana average is 7% which means that carriers and therefore policyholders (through premium payments) pay double the national average in defense cost because it is easier to sue the at fault driver and collect awards. Yes, 7% of premium for defense cost is the highest in the nation. Loss payout from claims come from bodily injury liability, where you hit someone and they claim that they suffer bodily injury and a host of other related ailments that leads to inability to work, love, play, enjoy life, etc. The at-fault system is antiquated and needs modernization. The workers compensation system by comparison is no- fault. That means when an employee is injured at work he cannot sue the employer for damages and must accept the workers compensation statute as the exclusive remedy, except under a few circumstances. Other States: No Fault is not a new concept. In fact, the concept won widespread political support in the 1970 s. As of states had some form of No Fault Auto Insurance Law (CPCU 4 text, Commercial Liability Risk Management and Insurance). The concept is that the right to sue is reserved only for certain cases of severity. Florida enacted a no-fault system in the mid 1990 s. It was called PIP short for Personal Injury Protection where fault was not an issue until damages exceeded $10,000 in paid expenses. Only after that threshold was pierced was a tort suit for negligence allowed to be brought. This is a general overview of that revised system. Many other states have enacted no-fault auto liability programs. For example, South Carolina has adopted tort reform and modernized their regulatory system. The number of insurance carriers has doubled and that means more competition which pushes rates lower. Also, the average premium cost continues to decline. (Insurance Journal) Personal Story: In December of 2001 I was exiting I-10 at Siegen Lane. The was looking over my shoulder, to the left to see when I could go, When the lane cleared, the car in front of me did not move and I hit them in the rear. I am not attempting to blame others and totally accept that this was my fault. The car had 4 occupants. We called the State Police who said he wasn t going to issue a ticket because it was a simple bump and it would just tie us up in court. The occupants wanted an ambulance to come to the scene but when it showed up refused to be transported. Recall, I was stopped and then just bumped their bumper. Total cost of damage to their auto was $600 for a new bumper cover. Cost for damage to my auto was Zero dollars. I called my carrier and stated that if they sue or demand settlement I want to fight this. The carrier stated it sounds like you would make a good witness and we will fight. About 11

4 months latter I got the dreaded knock at the door with a Marshal type asking if I was Chris Conti. After a hard swallow and a fleeting thought of I didn t do it -- he handled my several legal size papers and said you are being sued and you have been served, please sign here. The court Petition (that is the attorney listing the details of the case) stated that: the accident in question was caused soley by Christopher David Conti, in failing to maintain control of his vehicle, failure to observe a traffic sign, failure to use caution and other acts of negligence and fault will be shown at trail. Wow- I did all that but did not even get a ticket. You guessed it, that $600 bumper cover was now a claim for physical injuries (recall no occupant of the vehicle accepted medical care at the scene), medical expenses, pain and suffering, mental anguish, loss of enjoyment of life from their injuries and as a married couple, loss of consortium. All told the carrier paid out about $15,000 to the 4 occupants. The carrier never did not fight the case even though they told me they would. (Lawrence Jones et al verses Christopher David Conti / Liberty Mutual Insurance Company: Docket Number P). I do not blame the plaintiff attorney as he only sought to derive income from a legally acceptable means. Conclusion: When there is a problem to be solved and the first solution does not work it is incumbent on the men who hold high places to go to the next viable option for consideration. When the legislature enacted the financial responsibility law requiring drivers to maintain basic insurance limits it was thought to be the cure all for high rates. It was not. Now we must explore other alternatives to reduce rates to level that of the national average. The reform of tort law that allows bogus and frivolous suits to be brought and settled is one area that needs very serious attention if we are going to lower rates. The statistics indicate that our current system only benefits plaintiffs attorneys and allegedly injured workers. My personal auto accident bears witness to the ease for potential lawsuit abuse with easy payouts. Update: Dateline: November 2003: The October issue of Best Review, an insurance industry publication quoted in the above article, has published this years Loss Ratio and defense cost by state. Louisiana has 376 carrier writing auto liability coverage (down from 505) and is the 19th largest state (up from 22) in terms of premiums dollars which amounts to $515,442,000 in annual collected premium from all carriers. That is an increase of 18.2 percent which validates that insurance carriers had to increase rates due to poor losses which are driven by high defense cost and the ease of suit action and settlement. The Loss ratio is 72% which is down from 85% which is due to the increase in premium. Direct defense cost, the cost for carrier to defend cases is 9.7 % an increase from 7% which means carries are paying more to defend cases which drive up losses. Update 2: December 2004: Under a new No-Fault insurance system, insurance rates have been lowered by 20% in New York according to the New York Alliance Against Insurance

5 Fraud. They attribute the reduction to the decrease in fraudulent activity and the maximization of settlements due to low value claims. (Published article in Property/Casualty Insurance, page 21, 12/04) Update # 3: October 2005: As stated in Best Review, Premium grew by 4.8% in 2003, Loss Ratio is 57.4% for 2003, down from 72% and Direct Defense cost was 7% which is above the national average of 5% up from 3.5%. Update # 4: The Insurance Research Council (IRC) estimates in a new report that fraud and buildup added between $4.3 and $5.8 billion to auto injury settlements in 2002, which represents between 11 and 15 percent of all dollars paid for private passenger auto injury insurance claims in that year. In 2002, the appearance of fraud (the misrepresentation of key facts of a claim) was found in almost one in ten paid bodily injury liability (Bl) claims and one in twenty paid personal injury protection (PIP) claims. Buildup (the international inflation of an otherwise legitimate claim) was more common; nearly one in five paid Bl claims and one in eight paid PIP claims involved the appearance of buildup. In 2002, buildup alone was responsible for 47 percent of the excess payments attributable to fraud and buildup among BI claims for 57 percent among PIP claims. Although insurance fraud headlines often focus on organized fraud rings, planned fraud (that is, staged or caused accidents) accounted for just 3 percent of the excess payments from fraud and buildup. Opportunistic fraud (such as the report of fictitious injuries from legitimate accidents) and other types of fraud accounted for half of excess BI payments.. This study demonstrates that a few extra dollars padded onto individual insurance claims can collectively add up to a significant amount of money, said Elizabeth A. Sprinkel, senior vice president of the IRC. The improvement in dollars lost to fraud and buildup since 1992 suggests that insurer fraud-fighting efforts are having an influence. However, the costs of claim abuse remain high and ultimately result in more expensive auto insurance for consumers. RiskWise provides loss control and injury management services to employers. Chris Conti, the owner, is a Board Certified Safety Professional (CSP), Chartered Property Casualty Underwriter (CPCU), an Associate in Risk Management (ARM) and an Associate in Loss Control Management (ALCM). Also, he is authorized and approved to teach OSHA standards. Chris can be reached at: or chris@riskwise.biz or