William Crawford is the insurance agent for Fisher, Gordon Architects, a district firm that will do about $5 million in work this year and says it has never had any legal problems with a client. So Crawford was more than a little surprised this spring when he was informed by the Insurance Company of North America that it would not renew his client's policy for liability insurance.
About 20 other firms would not even quote Crawford a price for the coverage he sought. Finally, he found two firms willing to provide coverage -- but only at sharply higher premiums. Fisher Gordon now pays about $15,000 for $1 million in coverage. A year ago, that coverage was available for $3,500.
Crawford's predicament is far from unique. The medical malpractice "crisis" of escalating judgments and legal costs has spread to most other professions and businesses that need liability insurance. The list runs the spectrum of risk areas: doctors, lawyers, architects, engineers, accountants, stockbrokers, real estate agents, insurance agents, directors of corporations, nurse-midwives, fishermen and fireworks makers, states, municipalities, transit systems and companies that remove toxic wastes.
Not only have premiums risen anywhere from 50 percent to 500 percent in some lines of liability insurance in the last year, but the availability of insurance has shrunk dramatically. A few groups are going without protection, according to insurance executives.
"You've seen tremendous rate increases in the past, but you've always seen markets staying in there," said Stephen Gerstman, president of INAPRO, the professional liability underwriters for the Cigna Corporation. This time, he added, "There's not going to be a market for everyone to get insurance."
The reason for the crunch is two-fold. Insurance executives primarily blame the explosion of litigation, and the growing tendency of courts to toughen standards of liability in favor of victims of malpractice or malfeasance.
A second factor is the volatile economics of the property and casualty insurance business, which suffered its worst year ever in 1984. Underwriting losses for the industry amounted to $21 million, outpacing investment income for the first time since 1906, the year of the San Francisco fire. David Seifer, who follows the industry for First Boston Corp., said the industry suffered a $2.7 billion loss in all lines of general liability except medical malpractice. In non-medical lines, the industry lost about $1.47 for every dollar received in premiums, and results were even worse in medical malpractice lines, Seifer said.
To stem the red ink, insurance companies have resorted to a host of defensive measures -- jacking up rates, cancelling business, refusing to write certain policies and stiffening the terms of their coverage.
The result of these measures has been a significant, across-the-board contraction of the liability insurance market.
INAPRO, one of the largest writers of liability insurance in the country, said the financial beating it suffered forced it to scale back its coverage by about half in the last year. Gerstman said the company no longer will write insurance for obstetricians, gynecologists and accountants, all professions that have been sued in increasing numbers. The company has raised rates so dramatically in other lines, in some cases quadrupling prices, that some professionals have been forced to cancel their policies.
The scene is similar elsewhere:
*In the last year, about a dozen companies have dropped out of the market for architect insurance, leaving most architectural firms with the choice of two or three companies, say industry officials. Peter Hawes, president of the Design Professional Insurance Company, one of the few remaining underwriters that insures architects, said that average rates have doubled in the last two years.
*In New York, only one firm now writes liability insurance for accountants, said an official with the state's Society for Certified Public Accountants. A few years ago, there were about a half dozen.
*Premiums of the Big Eight accounting firms, which are insured by syndicates at Lloyds of London, have risen an estimated 125 percent, while their maximum limits declined from $200 million to $150 million in the last year, said Donald J. Schneeman, an official with the American Institute of Certified Public Accountants.
*Up until a few months ago, policies for large law firms were written by five major carriers. One has since withdrawn from the market, and two have imposed rate increases of up to several hundred percent, according to figures compiled by the Attorneys' Liability Assurance Society Ltd., an underwriter which soon expects to raise its rates by about 50 percent.
*Five western states were recently told that they would lose their liability coverage, as were about two-thirds of the nation's 2,500 practicing nurse-midwives. And several operators of local child care facilities told a congressional committee last month that they would close their doors this year because their liability insurance policies were canceled.
*It is now virtually impossible for any contractor or engineer to find insurance for hazardous-waste cleanup or asbestos removal. Insurance companies simply are not willing to touch those fields until questions are resolved about the extent of contractor liability and the liabilities imposed by federal Superfund legislation.
The cumulative effect of these cutbacks could have a deleterious effect on social welfare, professionals say. Doctors and lawyers openly speak of turning away patients or clients because of the fear that they might be sued. Architects say that some firms will be less willing to tackle difficult projects under the current litigious climate.
As for citizens who have been harmed by negligence or malpractice, they could have nowhere to turn for recompense if their doctor, lawyer or architect is without insurance, as executives say is increasingly the case.
The problem has even prompted congressional concern. Rep. James J. Florio (D-N.J.), chairman of a House commerce and energy subcommittee with jurisdiction over the industry, said Friday he was planning to hold hearings to investigate. He said he was worried about a "pattern in which insurance companies don't have an interest in insuring anymore."
As the insurance industry sees it, the basic cause for the crunch is the rise of litigation and punitive awards in the courts. The problem, executives say, is that the unpredictability of the courts has made it impossible to maintain a rate structure that is adequate to pay for future losses.
"Because of the out-of-control tort system, insurance companies have found they cannot price the product," said Gerald Lewinsohn, an industry analyst with Merrill Lynch. Jerry Thompson, an underwriting officer at St. Paul's Fire and Marine Insurance Company, said the insurance problem is a "direct manifestation of the claims being made against the professions."
But some industry analysts say the country's tort system is not so much to blame for the current problem as the insurance industry itself and the tremendously cyclical business of providing property and casualty coverage.
"It is odd that the crisis seems only to last with the cycle," said J. Robert Hunter, the former head of the Federal Insurance Administration. In 1974 and 1975, when the casualty-property industry last hit bottom, he said, there were similar cries of a "crisis" in medical malpractice insurance. But the real problem, Hunter said, lies with the "manic-depressive" nature of insurers.
"At the top of the cycle they cut prices. . . , Hunter testified before Congress last week. "At the bottom they cancel everyone, even businesses that never once had a claim, just because of the fear they feel of any possible risk." Hunter now heads the National Insurance Consumer Organization.
Industry officials don't entirely disagree with his assessment. They acknowledge that the market is contracting following an unusually long "soft" period that was ushered in with the high interest rates of the late 1970s.
Sharp competition among companies drove prices down, often to imprudently low prices, according to insurance executives. Insurers were willing to slash prices because they expected to win back any money lost in premiums by investing their money at high interest rates. When rates fell during the past several years, however, companies did not have enough money to pay the claims that started to roll in.
"The business looks lucrative at any point in time," said Frank Patalana, vice president at CNA, a Chicago-based underwriter of liability insurance. But, he added, many of the companies that jumped into the game in the late 1970s didn't reserve enough money for future losses.
The market has also dried up in certain areas of coverage because of the risk ratios that state insurance agencies require companies to maintain to make sure claims can be paid off.
The rule of thumb is that the ratio of premiums written ought not to exceed a company's surplus funds by more than 3 to 1.
With surpluses driven down by losses, however, companies are constrained in the amount of premiums they are allowed to write.
Insurance executives say the ultimate solution is legislative reform of the legal process that produces the costly, often crippling lawsuits.
"Reform has got to come, if for no other reason than the fact that the commercial insurance industry is not going to reduce itself to a social agency," said Albert Salvatico, managing director of the insurance brokerage firm of Marsh & McLellan Inc.
This kind of tough talk worries critics of the industry, who feel that the tort system has provided the last means of defense for citizens against professional malfeasance.
"I don't think policy makers should change tort law under this kind of pressure," said NICO's Hunter.
"The guy in the least position to lobby is the guy who's going to be the victim. Let's not deny the ultimate hammer to the little guy."
Hunter said the first priority of lawmakers ought to be to figure out how to smooth out the economic cycle in the insurance industry.
He suggested that Congress grant power to federal agencies to offer reinsurance, an approach that he said kept insurers in the inner cities during the riots of the late 1960s.
Yet others outside the industry say the problem is more profound. David Austern, director of education at the American Trial Lawyers Association, said the economy simply cannot support the interpretation of liability toward which the courts are heading.
"It is certainly the case that when you add up new individual legal entitlements, you can have a new social effect that was not intended," added William Galston, the former issues director for Walter Mondale, who now heads economics and social programs at the Roosevelt Center for American Policy Studies.
"Not every victim of everything that goes wrong can be compensated one hundred percent," Austern said. "There's not enough money out there."
In a similar vein, Richard K. Willard, acting assistant attorney general in charge of the Justice Department's civil division, recently told the American Chamber of Commerce that the current explosion of tort litigation in the courts threatens to severely damage the economy.
"The use of new thories of liability and 'damage' awards unrelated to any harm the defendant has done to the plaintiff poses a fundamental question," Willard said in a speech delivered June 27. "Will decisions about allocation of resources be made by the market, with legislative corrections where there is a societal consensus? Or will they be made by a largely unelected judiciary imposing its risk preferences on the rest of society?"