Contingent fees become focus in R.I. lead paint case

Former makers of lead paint went before the Rhode Island Supreme Court in Providence recently to prevent the state from honoring a contract with its private lawyers that is potentially worth tens of millions of dollars.

A jury in February held three manufacturers--Sherwin-Williams Co., Millennium Holdings LLC and NL Industries, Inc. -- liable for creating a public nuisance with lead paint, which was banned in 1978.

The verdict could cost the companies billions of dollars even though the jury did not award punitive or compensatory damages. A judge will decide how much the companies must pay to clean up the problem.

The attorney general's office hired two private law firms to press the suit, which it filed in 1999. It agreed to pay the outside lawyers more than 16 percent of whatever the state received if it won the case.

During a separate proceeding on the contract between the state and the private lawyers, a lawyer for the paint industry told justices the contract was unconstitutional because it gave outside lawyers a financial interest in the outcome of the case. Attorney John Tarantino said defendants have the right to know that lawyers representing the government do not stand to gain financially from the case.

He said the attorney general's office would not be able to give bonuses to its staff after a major victory and that outside law firms should be barred from receiving a similar reward.

Assistant Attorney General Neil Kelly argued that his office, with limited resources, must depend on outside help. He said if the state were not allowed to strike such deals, it would be hamstrung if it wanted to sue an industry with deep pockets.

"We would be curtailed in our ability to bring a matter like that," Kelly said.

Fidelma Fitzpatrick, an attorney from Motley Rice, the law firm that successfully tried the case, said the companies were incorrectly assuming that lawyers paid on a contingency fee basis had more financial interest in the case than those paid through an hourly fee.

The companies are expected to appeal the jury's verdict in the case, and Chief Justice Frank Williams appeared reluctant to issue a ruling before the appeal is filed. Tarantino urged the court to act soon to right a constitutional wrong, but Kelly said there were still issues that needed to be resolved.

Safeco weighs Internet sales of auto insurance

Seattle-based property and casualty insurer Safeco is considering direct marketing its automobile insurance business over the Internet to reach additional consumers that don't like to deal with a middle-man and purchase insurance through agents.

According to Paul Hollie, Safeco spokesman, the company is seeking feedback from independent agents before it finalizes a decision. "We've had several meetings with our agency councils and always keep an open line with agents who are interested in speaking to us about it," he said. "That's why we're talking about it so openly and publicly."

Hollie said that the Internet-based approach would be supplemental distribution arm that would "absolutely not take away from existing business." However, the company wants to meet customers it currently is not reaching through agents.

"We are looking at buying preferences," Hollie said. "We're taking a fresh look at our business and need to work with the marketplace that's before us. We definitely want to have the quality of products available to every customer and allow every customer to purchase it in a way that's convenient for them. That doesn't take away from the independent agency part of our distribution channel. That's the backbone of our company."

While Safeco does not know when it will make a decision on whether to add Internet-based sales to its distribution channel, Hollie said the company "is taking a very close look at it and expect to have some sort of conclusion in the coming couple of quarters."

"One thing I would like to be clear on with our agents is that we're including their feedback in this," Hollie said. We're taking their feedback into our overall research. What form it eventually takes, I can't tell yet."

Critics allege wind modelers following politics over science

Risk Management Solutions has defended its hurricane risk models in the face of consumer groups' criticisms that the models are more political than they are scientific and that they are designed to justify insurance premium increases.

RMS declined to address the specific allegations made by the Consumer Federation of America and the Center for Economic Justice but issued a statement claiming that the groups' viewpoint "is a misrepresentation" of its role in the insurance industry.

Letter to NAIC
On March 27, CFA and CEJ wrote to the National Association of Insurance Commissioners to raise questions about recent upgrades in the RMS wind models that they said would lead to "unjustified increases in homeowners and other property casualty insurance rates." The letter, signed by CFA's J. Robert Hunter and CEJ's Bernie Birnbaum, called for state regulators to increase regulation of RMS and other third-party organizations, including credit-scoring firms, whose work impacts insurance rates and availability.

The groups also blasted state regulators for failing to closely monitor the activities of RMS and other third-party rating organizations.

The consumer watchdogs referred to a recent announcement buy RMS that it is changing its hurricane models. RMS said that "increases to hurricane landfall frequencies in the company's U.S. hurricane model will increase modeled annualized insurance losses by 40 percent on average across the Gulf Coast, Florida and the Southeast, and by 25-30 percent in the Mid-Atlantic and Northeast coastal regions relative to those derived using long-term 1900-2005 historical average hurricane frequencies."

The groups maintained that this RMS shift would mean overall double-digit rate increases from Maine to Texas and that while RMS claims that this increase is necessary for scientific reasons, "the evidence indicates that the primary reason for the change appears to be not science at all, but politics."

RMS has "dramatically altered the methodology that is being used to predict wind events and set consumer rates, breaking promises that were made to consumers over a decade ago when more sophisticated weather modeling was introduced," the letter stated.

Major change
The groups noted that in its press release of March 23, 2006, RMS justified the major change in course as follows:

"To address this period of elevated frequency and intensity of storms, RMS consulted with representatives from all segments of the insurance industry and updated its U.S. and Caribbean hurricane models to provide a 'medium-term' (five-year) forward-looking view of risk for estimating potential catastrophe losses. To date, catastrophe model results have been based on a long-term historical average baseline."

But CFA and CEJ claim that this approach is the complete opposite of that promised by insurers when these models were first introduced. Consumers were promised that premiums would be based on long-term data not short --term weather history, according to these critics.

"Consumers were assured that, although hurricane activity was cyclical, they would not see significant price decreases during periods of little or no hurricane activity, nor price increases during periods of frequent activity. That promise has now been broken," the groups continued.

"RMS has become the vehicle for collusive pricing," the letter charges, because it relied upon opinions from insurers to switch to the medium term five-year view of risk.

Competitive bind
CFA and CJE allege that insurance companies sought this move to justify higher rates and this desire put RMS in a competitive bind.

"If it did not raise rates, the market would likely go to modelers who did. So RMS acted and the other modelers are following suit," the consumer leaders charge, citing AIR Worldwide and Eqecat as two that are reworking their models.

They argue that these third-party firms are operating beyond public scrutiny, unlike ratemaking advisory organizations such as Insurance Services Office (ISO), which are licensed by states and prohibited from collusive pricing activity.

They also cited Fair Isaac and Choicepoint as examples of third-party firms whose credit data are used by insurers in pricing decisions but whose "black boxes" and other formulas are beyond regulatory reach.

The groups blasted the NAIC for not monitoring these third-party rating organizations more closely:

"It is long past time for state insurance regulators to recognize that risk classification methods -- the factors insurers use for underwriting, tier placement and rating -- have a profound impact on insurance availability and affordability and are not subject to competitive market forces that protect consumers. State insurance regulators generally, and the NAIC in particular, have taken no steps to increase oversight of risk classification methods, despite numerous opportunities. The NAIC has done nothing to prevent the adverse effects of insurers' increased use of credit information or improper use of loss history databases. State regulators have also generally done nothing about risk classification factors that obviously discriminate against low-income consumers, including use of information about prior liability limits, education and occupation.

They urged state regulators to reject the new RMS model and examine how it was developed. They also called for regulators to assert more authority over other such organizations and their activities.

The NAIC offered no response as of press time. Scott Holeman, NAIC spokesperson, said the group had received the letter and was still reviewing it.

RMS defends itself
RMS, however, defended itself and its approach in general terms:

"At RMS, our mission is to build models that provide the best possible quantification of risk. We are independent, and our approach to risk quantification is completely objective and unbiased. Our models are updated periodically to reflect new scientific research on the characteristics of specific types of catastrophes, the associated risk, and new computing and data capabilities. These updates can cause our risk estimates to increase or decrease in a given region or locale.

RMS said the upcoming changes to its wind model are designed to "reflect expectations of sustained higher average levels of hurricane activity over at least the next five years" and quantify the implications of increased hurricane activity, which is "currently significantly higher than the long-term average."

RMS maintained that its changes are the result of consulting with a "panel of leading hurricane climatologists."

It maintained that its decisions are independent of how insurance companies may use the models. "We do not provide recommendations on insurance premiums. Our focus is on quantifying the underlying risk, which is an important input to a complex set of decisions involved in how insurers and regulators establish insurance premiums."

Disruptive to insurers
Significant changes to its model, in either direction, have ramifications beyond premium levels and can be disruptive to its insurance and reinsurance clients, according to the modeling firm

"Although higher modeled risk may imply that premiums are inadequate in some areas and should potentially increase, they also imply that insurers may need more capital to underwrite the same volume of business and to maintain their financial strength rating. Due to the pending changes in our hurricane model, rating agencies are actively engaging with insurers and reinsurers regarding the implications of increased risk on capital adequacy and financial strength ratings."

RMS further noted that its models are not totally beyond regulatory scrutiny in that its residential model has been subject to a certification process in Florida for the past seven years. The Florida Commission on Hurricane Loss Projection Methodology has certified the RMS model for use in establishing residential insurance rates in that state. To be certified by the commission, a company must provide extensive documentation supporting the hurricane model's accuracy and be audited by an independent panel of experts, according to RMS.

"We plan to update our model annually to incorporate new data, science, and expert opinion in order to continue representing the best possible quantification of medium term risk. Over time, this may result in either increases or decreases in modeled hurricane risk," RMS added.

States balk at growing trend of federal preemption

The federal versus state insurance regulation debate just beginning to heat up in Washington is part of a larger debate that has been taking place across the country.

"Federal preemption of state authority is a growing concern," said Georgia Senator Don Balfour, chair of the National Conference of State Legislatures' Standing Committees. "These unwarranted power grabs by the federal government subvert the federal system, choke off innovation and ignore diversity among states."

Of particular concern to state legislators is the rise of federal preemptions through the regulatory process. "Federal regulatory preemption is nothing more than a backdoor, underhanded means by which unelected federal bureaucrats impose their will on the states," said New York Senator Michael Balboni, a member of NCSL's Executive Committee. "No single, unelected individual should be able to wield such power with the stroke of a pen."

Insurance regulatory proposals are among those within the states lawmakers' radar. U.S. Senators John Sununu (R-N.H.) and Tim Johnson (D-S.D.), both members of the banking committee, this month unveiled legislation that would allow life and property casualty insurers to choose federal rather than state regulation under an "optional federal charter" system. The legislation is titled the "National Insurance Act of 2006."

State insurance lawmakers and commissioners, along with major interests within the insurance industry, oppose the Sununu-Johnson approach.

Beyond insurance
Beyond insurance, there are other proposals that concern states. NCSL released an updated Preemption Monitor report highlighting 72 bills or amendments that would step on the toes of state policy makers.

State legislators point to a rule proposed by the National Highway Transportation Safety Administration to improve automotive roof-crush standards. The rule would preempt all state common and product liability laws that now hold automobile manufacturers to a stricter standard.

States say that the preemptions would cost them $60 million per year in higher costs to care for those who become permanently disabled.

Among other items on their list of attempts to circumvent state liability laws or regulations are proposals for immunity from civil liability for nonprofit charitable organizations; Consumer Product Safety Commission rules on product liability standards; the federal driver license identification act; a waiver of all liability for producers of antifreeze and coolants; legislation to create association health plans that skirt state regulations; bills on notification of breaches of data confidentiality; bills to ban lawsuits in state courts against food manufacturers for obesity claims; immunity for vaccine manufacturers and medical malpractice tort reforms that pre-empty state laws.

"Federal preemption is nothing more than a one-size-fits-all approach to public policy," says NCSL President-elect and Texas Senator Leticia Van de Putte.

"Our federal system of government was designed so that each state could address the needs of its own people. These blanket solutions to multi-faceted problems just don't work."

Northeast states fair well in legal system fairness rankings by Chamber of Commerce

Northeast states fared fairly well in the latest U.S. Chamber of Commerce ranking of states' civil justice systems, with several in the top 10 favorites. The survey ranks states from best to worst on legal fairness based on a survey of about 1,400 attorneys by the Institute for Legal Reform and Harris Interactive.

1. Delaware

2. Nebraska

3. Virginia

4. Iowa

5. Connecticut

6. New Hampshire

7. South Dakota

8. Colorado

9. Maine

10. North Carolina

11. Indiana

12. North Dakota

13. Arizona

14. Minnesota

15. Kansas

16. Wyoming

17. Utah

18. Idaho

19. Ohio

20. Maryland

21. New York

22. Michigan

23. Wisconsin

24. Vermont

25. New Jersey

26. Rhode Island

27. Georgia

28. Washington

29. Tennessee

30. Oregon

31. Pennsylvania

32. Massachusetts

33. Oklahoma

34. Kentucky

35. Missouri

36. Alaska

37. Nevada

38. Florida

39. Montana

40. New Mexico

41. Arkansas

42. South Carolina

43. Texas

44. California

45. Illinois

46. Hawaii

47. Alabama

48. Mississippi

49. Louisiana

50. West Virginia
Source: U.S. Chamber of Commerce. Institute for Legal Reform: www.instituteforlegalreform.org

Mass. makes health insurance history by making it compulsory

Everyone pays their part: individuals, government, health care providers and employers," proclaims the document outlining the latest plan to expand health insurance to all citizens in Massachusetts.

The Commonwealth is sailing into uncharted waters by becoming the first state to require all of its adult residents to have some level of health insurance just as it requires all drivers to have auto insurance.

The plan requires that starting July 1, 2007, all adult residents not in the Medicaid or Medicare systems or without access to insurance through their workplace will be required to purchase policies.

Those who do not obtain coverage will lose their personal exemption for that tax year. Additional penalties could approach the premiums they pay for coverage.

Currently, employers with health plans are paying a built-in surcharge to cover the free care for residents without coverage. One aim of the new program is to make all employers pay something. So the plan calls for what is being called a "fair share contribution" from employers with 10 or more employees who do not offer insurance or do not make a "fair and reasonable" contribution to its costs. The "fair share" fee, estimated to be $295 per full time employee per year, reflects a portion of the cost paid by the state for free care. It will be pro-rated for part time or seasonal workers.

The state estimates that there are about 500,000 individuals without health coverage. The uninsured tend to be low income, part time and seasonal workers, single and childless adults, and young adults just starting out. Supporters see the program covering 90-95 percent of the uninsured in the next three years and helping to cut health care costs for employers.

A central component of the plan is a quasi-public clearinghouse where small businesses and individuals can find policies. This entity, Commonwealth Health Insurance Connector, is to make available all of the policies from private insurers in the state.

The Connection would, in some cases, subsidize the premiums, which could be from $200 to $325 a month. A person or family buying through the Connector could qualify to pay a lower premium based on a sliding income scale. Insurance will be free for individuals making less than $9,500 a year. Of the uninsured, an estimated 200,000 are single people earning $29,000 a year or more. Their premiums will not be subsidized.

Individuals will be able to keep their insurance if they change jobs.

Small businesses that do not offer insurance will be required to set up Section 125 plans that allow employees to buy coverage with pre-tax dollars.

The program would allow high deductible policies to be tied to health savings accounts and gives HSAs favorable tax treatment. Family plans will have to allow young adults to stay on the policy for two years past dependency, or until age 25.

The legislation also calls for the eventual merger of the group and non-group markets, which supporters say could reduce single premiums by 25 percent.

Its drafters estimate the program will cost $300 million in the first year and acknowledge that those costs will rise, perhaps to $1 billion by the third year. They are counting on federal monies and payments for health insurance the state already makes to pay for it.

Senate President Robert Travaglini and House Speaker Salvatore DiMasi unveiled the agreement at a Boston news conference. The plan passed overwhelmingly in both the House and the Senate.

Gov. Mitt Romney, a Republican who has shown interest in running for president, has made a health program a priority.

The measure elicited praise from the health insurance community, consumer groups and business.

Dr. Marylou Buyse, president of the Massachusetts Association of Health Plans, called it landmark legislation. "This plan is an important step toward the goal of providing access to coverage for every citizen in the Commonwealth and improving the quality of the health care system," she said.

John E. McDonough, executive director of Health Care For All, called the bill "an important, meaningful step forward on the road to affordable, quality health insurance coverage for every resident of Massachusetts."

The Affordable Care Today Coalition of consumers, businesses, labor and hospitals endorsed the plan. "This bill is good for our economy, good for the uninsured, and good for our health care system," said Phil Edmundson, president of William Gallagher Associates and chairman of ACT. "Covering the uninsured eliminates hidden costs in everyone's insurance premium."

Even manufacturers lent their support. Richard Lord, president of Associated Industries of Massachusetts, representing 7,600 businesses, praised the bipartisan accord as "a forward-looking effort to expand access to health care to residents of the state, and to bring health care costs under control."

Most recognized that while the legislation has passed, there is work to do in putting it into effect.

"(I)implementation of the bill's many provisions during the period ahead will require cooperation of government, health care providers, employers and individuals. The passage of the bill marks the commencement of a significant effort for the Commonwealth to extend access to health care to all of its citizens," said AIM's Lord.

Senators introduce Optional Federal Charter legislation

Citing bipartisan support to revamp the insurance industry regulatory system, two U.S. senators unveiled legislation that would allow life and property/casualty insurers to choose federal rather than state regulation under an "optional federal charter" system. U.S. Sens. John Sununu (R-N.H.) and Tim John-son (D-S.D.) both members of the Senate Committee on Banking, Housing, and Urban Affairs, introduced the "National Insu-rance Act of 2006" on Wednesday, April 5.

The bill has been referred to the Banking Committee where hearings are expected to begin later this spring.

"Unlike the modernization of banking and securities of the late 1990s under the Gramm-Leach-Bliley Act, the insurance industry remains subject to a patchwork of state regulations that have stifled competition, innovation, and growth," Sununu said. "The existing governing system spreads across more than 50 jurisdictions and has proven burdensome and ex-pensive for all concerned. A more uniform regulatory environment mirroring the highly successful dual banking system is long overdue and stands to substantially improve the environment for those who buy, sell and underwrite life and property and casualty insurance."

An industry divided
The insurance industry has split over the advisability of creating a dual regulatory system with an optional federal charter. The life and financial services industry, some larger property casualty insurers and larger commercial insurance brokers generally favor the option while other property casualty insurers and independent agents oppose it.

The Independent Insurance Agents and Brokers of America said strongly opposes the National Insurance Act.

"There is no question in the insurance industry that the existing regulatory system needs comprehensive reform," said Big "I" CEO Robert A. Rusbuldt. "Change is long overdue, and virtually every industry stakeholder agrees the existing system is a slow, inefficient patchwork of differing laws and regulations. The Big 'I' agrees strongly with the need to update the regulatory system, but a one-size-fits-all scheme that creates a new federal bureaucracy is not the answer."

The Big "I" argues that establishing a dual state/federal system would be very confusing to consumers who may have some insurance products regulated at the state level and others at the federal level.

However, The Council of Insurance Agents and Brokers, which represents large commercial property/casualty domestic and international commercial insurance brokers, supports the optional federal charter system.

"This approach is modeled after the dual charter system for banks, which has worked well and enhanced competitiveness in that part of the financial services sector," said CIAB President Ken A. Crerar.

Crerar said if the United States hopes to be successful in pressing its case for open markets and free trade overseas, it must have uniformity and consistency in the regulatory environment of the 50 states. In addition, he said, an optional federal charter would significantly improve the ability of regulators to monitor the solvency and financial stability of insurers.

Regulators' view
State insurance commissioners have stated their opposition to the Sununu-Johnson approach as well.

Alessandro Iuppa, president of the National Association of Insurance Commissioners says the National Insurance Act would "fundamentally dismantle the current system and allow insurance companies to opt out of state oversight and policyholder protections." He added that state insurance officials are working to continuously retool and upgrade state supervision to provide multi-state platforms and uniform applications to leverage technology and enhance operational efficiency.

But their efforts to modernize the insurance regulatory system are not quick enough, Sununu said.

"State commissioners may have hoped to achieve uniformity and market-based reform within the state regulatory scheme, but those improvements have simply not occurred and are not expected in the near future," Sununu said.

"The National Insurance Act of 2006 is about choice," Sen. Johnson stated. "Consumers should have the benefit of the greatest array of product choice the industry can provide and insurance companies should have a choice between state and federal regulation."

Insurers' view
The American Insurance Association, a supporter of the National Insurance Act, says the legislation would allow consumers to reap the benefits of a modernized market-based insurance system by providing P/C insurers the option of being nationally regulated.

"The legislation is based on a model that has been proven successful for more than 100 years--the national/state banking regulatory system," said Marc Racicot, AIA president.

But insurers opposing the federal charter approach say they are concerned about the establishment of a new federal bureaucracy. "Federal regulation has proven no better than state regulation at addressing market failures or protecting consumer interests and, unlike state regulatory failures, federal regulatory mistakes can have disastrous economy-wide consequences," said NAMIC Federal Affairs Senior Vice President David A. Winston.

The Property Casualty Insurers Association of America also opposes federal charter legislation. Ernie Csiszar, president and CEO of PCI says "the positive elements of the OFC proposal can be incorporated into a much less intrusive concept--the SMART Act--that would preserve state regulatory authority but would establish federal standards for key areas of oversight."

Younger adults and those earning above $75K most likely to suffer ID theft

Households headed by young people (18-24 years old), those in urban or suburban areas, and those with incomes of $75,000 or more were the most likely to experience identity theft, according to a new government survey.

Victimization did not differ by race or ethnicity.

The same report found that an estimated 3.6 million households, or about 3 percent of all households in the nation, learned that they had been the victim of at least one type of identity theft during a six-month period in 2004.

The Justice Department's Bureau of Justice Statistics (BJS) also reported that 48 percent had experienced unauthorized use of credit cards; 25 percent had other accounts, such as banking accounts used without permission; 15 percent experienced the misuse of personal information and 12 percent experienced multiple types of theft at the same time.

The findings represent six-month estimates based on interviews conducted from July through December 2004 for the BJS National Crime Victimization Survey.

About one-third of households that were identity theft victims discovered the loss by noticing missing money or unfamiliar charges on an account, and about a one-quarter were contacted by a credit bureau. The estimated loss during the six-month period was about $3.2 billion. This included losses that may have been reimbursed by credit card companies, insurance companies or other financial institutions.

About two-thirds of the households said they lost money. The average loss was $1,290. Some households for which misuse was still ongoing at the time of the interview may have continued to suffer losses.

About one-quarter of all victimized households said the misuse had not stopped. The misuse was more likely to have stopped for households experiencing credit card theft (78 percent) than those experiencing theft of other existing accounts (65 percent) or the misuse of personal information (54 percent).

One-third of the victimized households experienced one or more problems caused by the identity theft. The most common problem was being contacted by a debt collector (34 percent), followed by problems with bank accounts (31 percent) and credit cards (26 percent).

About one-in-five households spent at least one month resolving their problems. One-third said the problems were resolved in one day. At the time of the interview about one-sixth said the misuse was still causing problems.

The survey questions were asked of one household member, who provided information about other property crimes the entire household may have suffered. The survey did not obtain information on which household members were victims.

Identity theft questions were added to the BJS crime survey in July 2004. Only 6 months of data were available for analysis. Annual prevalence estimates will be published when data are available for 2005.

The report, "Identity Theft, 2004", was written by BJS statistician Katrina Baum. It can be accessed at: http://www.ojp.usdoj.gov/bjs/abstract/it04.htm

U.S. tort costs reach a record $260 billion, Tillinghast study reports

U.S. tort costs reached a record $260 billion in 2004, or approximately $886 per person, according to the U.S. Tort Costs and Cross-Border Perspectives: 2005 Update from the Tillinghast business of Towers Perrin. This surpassed the previous record set in 2003 by $16 billion. The 2005 Update analyzes U.S. tort costs from 1950 through 2004, with projections through 2007.

U.S. tort costs grew at a slightly faster pace in 2004 (5.9 percent) than in 2003 (5.5 percent), but still well below the high growth rates seen in 2001 and 2002, which averaged 14 percent each year. The 5.9 percent growth rate was less than the overall U.S. economic growth (as measured by gross domestic product) of 6.6 percent. Since 1950, growth in tort costs has exceeded GDP growth by an average of 2 to 3 percent.

Asbestos claims contributed to the surge in tort costs earlier this decade, but were less of a factor in 2004. In fact, the impact of insured asbestos losses, which totaled approximately $5 billion in 2004, was less than in each of the prior three years.

"There were several years when insurance companies were significantly increasing their cost estimates for asbestos-related liabilities," said Russ Sutter, principal. "Our study indicated that asbestos-related tort costs are still a major issue; however, there were fewer upward reevaluations during 2004."

U.S. tort cost growth since 1950 far exceeds U.S. population growth. Even after adjusting for inflation, tort costs per capita have risen by a factor of more than nine between 1950 and 2004.

International tort costs
The study also examined tort costs in several other industrialized nations and found that U.S. tort costs exceed other countries' by a sizeable margin, when measured as a ratio to economic output (measured by GDP). The U.S. had a 2.2 percent ratio of tort costs to GDP, compared with Germany (1.1 percent), Japan (0.8 percent) and the U.K. (0.7 percent). Aside from Italy (1.7 percent), the other countries examined in the study have tort costs comparable to historic levels observed in the U.S. in the 1960s and 1970s.

"Our comparison of international tort costs was somewhat surprising, since we had been hearing anecdotally that tort cost trends in the U.S. were making their way overseas. We saw a greater disparity in tort costs than we were expecting between the U.S. and other countries," said Steve Lowe, leader of the firm's global P/C insurance consulting practice. "Tort costs in the U.S. far surpass those of the other countries we examined, partly a result of different health care systems and legal systems. However, this difference may raise the issue of competitiveness of U.S. products in a global marketplace."

Medical malpractice tort costs increase
Medical malpractice tort costs totaled $28.7 billion in 2004, up from $26.5 billion in 2003. Since 1975, medical malpractice costs have increased at an annual rate of 11.7 percent versus 9 percent for all other tort costs, according to Tillinghast.

"The growth rate for medical malpractice costs continues to lessen," Sutter said. "Some of the moderation may be attributable to various state tort reforms enacted during the past decade."

Commercial outpaces personal growth
Commercial tort costs have outpaced personal tort costs since 1990, according to Tillinghast. Personal tort costs have changed annually by an average of 3.7 percent since 1990 and 5.0 percent since 1999, while commercial cost changes have averaged 5.9 percent since 1990 and 11.6 percent since 1999. Even after removing insured asbestos losses, the growth rate for commercial tort costs over the last 13 years remains higher than the personal rate.

"The battle lines of the tort reform debate ebb and flow with changing patterns in tort costs each year; personal and commercial tort cost trends can point to where the next set of debates may lie," Sutter said. "In the near term, we expect commercial tort costs to continue growing at a faster rate than personal tort costs so the tort reform debate will likely consist of the business community on one side, countered by consumer advocates and the trial bar on the other side."

Future implications
Given current trend patterns, Tillinghast expects U.S. tort costs to increase approximately 6.5 percent for the next three years.

A number of factors may influence the growth of tort costs in the near future, including: whether litigation related to directors and officers of publicly held companies has peaked; how significant the costs from litigation pertaining to certain prescription drugs will be; and whether the damages sustained from Hurricane Katrina--and any future catastrophic events--will lead to material tort litigation costs. The full report is available at www.towersperrin.com/tillinghast.

Private companies at increased risk of liability lawsuits, Chubb & Son survey reports

Today, many private companies are planning activities that may increase their exposure to management liability risks, Lisa McGee, vice president, Chubb & Son, said at a recent Inc. 500 Conference. Sixty-seven percent of private companies are likely to broaden their product offerings, 20 percent plan to reduce or eliminate some employee benefits, 21 percent plan to reduce their workforce, 18 percent plan to add an outside board member, 27 percent plan a major acquisition, and 31 percent plan to outsource functions or operations, according to Chubb's 2005 Private Company Risk Survey.

"As privately held companies continue to escalate their activity in areas that were once considered the domain of large publicly owned companies, they have increased their exposure to potentially costly liability-related lawsuits, as well as to crime events such as workplace fraud and extortion," McGee said. "In an area such as directors and officers liability, the stakes can be especially high and financially devastating."

Survey participants in those 112 companies that were named in a D&O liability lawsuit reported average total defense, settlement and/or judgment costs of $308,465.

"Private companies have many of the same exposures as publicly traded companies," McGee said. "For instance, outsourcing jobs can lead to an employment practices liability lawsuit alleging discrimination and/or wrongful termination, and an expansion of products or services can increase a company's risk of an errors and omissions lawsuit."

Survey results showed that 33 percent of private companies do not purchase D&O liability, employment practices liability, fiduciary liability, E&O, crime, kidnap/ransom and extortion, or workplace violence expense. The top two reasons cited for not purchasing were "no need" or "low risk." Ironically, almost two-thirds of private companies surveyed had experienced some management liability event in the past five years, most often an EPL, D&O liability or crime event.

"More than half of private companies with more then 250 employees purchase some type of management liability coverage, but they may not be purchasing the full amount of protection needed," McGee said.

McGee says that smaller companies, often more financially vulnerable to a liability lawsuit or crime-related event, are simply less likely to purchase any type of management liability coverage.