Sky-high liability costs have wide impact. Companies cancel policies or jack up premiums to cover increasing risks

It reads like a collection of major disaster-and-tragedy headlines of the 1980s: Toxic waste. Drunk-driving accidents. Child abuse at day-care centers. The Bhopal, India, gas leak. Plane crashes. Surgical complications. Asbestos illness.

Not only were these subjects news in the United States, most resulted in massive lawsuits. And, ultimately, the money for the legal settlements came out of liability insurance policies.

Last year the property and casualty insurance industry suffered a net operating loss of $3.8 billion -- its worst record since 1906 -- due to huge payouts on insurance claims and huge court judgments. But with tax credits and capital gains, the industry was still able to net $1.1 billion.

Things are not so bad this year. The insurance industry, says Ronald C. Wilson of Shearson Lehman Brothers, has improved ``from disastrous to horrible.'' Analysts figure operating losses will be only $1.8 billion this year and see profits ahead in 1986. With recovery anticipated, insurance stocks have soared since late 1984.

One of the reasons for the crunch experienced by users of liability insurance is that in mid-1984 several big insurers were on the edge of ruin.

That followed a period -- 1979-81 -- when insurance companies were engaged in a price war, writing cut-rate policies and taking on risky coverage. They could do this because interest rates were in the high teens, and insurers could make money on any premiums they gathered and invested. Underwriting quality was not scrupulous, analysts say.

Then the wind shifted. US interest rates dropped to their present level, below 10 percent, reducing investment income. More important, throughout the US there were waves of claims and huge jury awards for injuries stemming from medical malpractice, faulty consumer products, and industrial accidents.

In the area of asbestos-related illnesses, many judges and juries have held that all insurance companies involved with coverage at any time are liable. These cases sometimes stretch back 20 or 30 years, and as a result many insurers were assessed retroactively.

Because of these trends, insurance companies, beginning in mid-1984, started canceling policiesor jacking up premiums to compensate for the higher risk. They are ``eliminating business that is undesirable,'' says Frank Angell, professor of insurance and finance at New York University. ``There is so much business that they can be selective.''

Difficult areas in which to secure coverage, according to the Insurance Information Institute (III), include: long-term pollution risks; liquor liability; day-care centers; medical malpractice; high-limit coverage (above $50 million) for industrial concerns; asbestos removal from schools; commercial fishing boats; municipal liability.

Sean Mooney, an economist with the III, says the squeeze varies from region to region and industry to industry. Premiums may be higher, but there is usually a way to get coverage, he says.

In the case of products like interuterine devices or asbestos, Mr. Mooney says, ``there is not a crisis of availability'' of insurance, since coverage includes a whole range of products -- most with no apparent side effects.

Some companies where the product-line is narrow, however, ``could be forced to go bare,'' or without insurance, Mooney says. For products such as football helmets, coverage is virtually nonexistent. And with day-care centers, he says, ``the base is low, and the suits are not spread very far. One $4 million suit in New York can wipe you out.''

Mr. Wilson at Shearson Lehman Brothers says he expects some improvement in insurance availability for day-care centers, big industrial operations, commercial fishing boats, and bar owners. His biggest worry is pollution liability: ``It's extremely debatable whether anybody will be able to provide insurance here.''

There is also a more subtle impact. The high cost of insurance, says W. Bruce Bassett, a professor of business at Columbia University, has caused some doctors to restrict their medical practices and has had a ``chilling effect'' on the process of invention.

With 60 million policies and all sorts of injuries to hedge against, the insurance business is complex. On very risky policies, primary insurers take out reinsurance from companies to back them up in case of excessive claims.

Losses hit reinsurers first. Lloyd's of London last year pulled out of the US market. ``The reinsurance withdrawal forced the primary market to curtail activities,'' Mr. Wilson says.

Mooney characterizes the flight of reinsurers as a ``critical worldwide problem.'' This business has improved somewhat, but it still has far to go. In the first six months of '85, reinsurers had $20 in claims for every $1 earned in premiums.

Insurers and reinsurers have been campaigning for legislative changes that would shield them from the extremes in legal settlements.

They support a uniform federal product-liability code and want to see legislative caps put on jury awards for ``pain and suffering'' beyond actual damages. This is where the biggest financial setbacks occur, Mooney says, and it is also what motivates many lawyers to sue on a contingency-fee basis. Insurers also feel punitive damages for ``outrageous behavior'' should be punished under the criminal code -- or that punitive awards should go to the state, not the plaintiff, Mooney says.

Other proposed remedies include a system similar to workers' compensation that would set aside money for product-liability claims.

As it is, the worst may be over for insurers and the insured. Mr. Wilson says by next year the availability of insurance ``will loosen somewhat.''

The flood of lawsuits and the premium squeeze may have hurt buyers of insurance, but Mooney of the Insurance Information Institute observes it may also have the effect of encouraging corporations and others to move toward creating ``a safer, cleaner society.''

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