Welcome to Schaghticoke, N.Y., a chaste Grandma Moses landscape of snow-blown birches, farms, rivers, little commerce, orderly neighbors and no police force.
As recently as four years ago, this township (pop. 7,090) was courted ardently by a pack of insurance companies that expected to profit from her virtue. She'd never been sued. Her virtue remains intact, yet one morning last spring, town supervisor Mark Zaretzki was stunned to read in the Knickerbocker News that good little Schaghticoke's insurance was going to be canceled.
In the words of Mae West, goodness had nothing to do with it.
Schaghticoke had collided with the world of insurance underwriting, where a distinct, and hotly disputed, version of reality prevails. In this world, a computer had digested statistics about distant, scattered events and then decreed that this hamlet in New York's Upper Hudson region suddenly -- without making any mistakes, causing any harm or costing anybody money -- had become a minefield of dangers: a bad risk.
Her insurer, Utica Mutual, headquartered about 100 miles to the west of Schaghticoke near Utica, N.Y., announced last April that, by next August, it will have withdrawn from all municipal liability coverage. The decision applies to 229 townships and villages in New York state and 83 in 13 other states. Utica's president says he knew it would create "chaos."
The "chaos" is not limited to towns and villages. Truckers, baby doctors, chimney sweeps, liquor dealers, bartenders, child care centers, churches, abortion clinics, schools, ski lift operators, bus companies, pest exterminators, trade associations, Girl Scouts and governments around the country are canceling activities, raising prices or taxes, or going out of business -- all because of the difficulty of getting insurance to protect them in case of lawsuits.
Some who have never filed a claim now face rate hikes of 1,000 percent or more. Others can't get insurance coverage and are either doing without it or scrambling for some sort of self-insurance or pooling arrangement.
"We went into a panic," town supervisor Zaretzki recalled. Paying a whopping premium increase for the one, possibly temporary, new insurer they could find has already cost Schaghticoke taxpayers most of a planned tax cut. Their schools, fire and rescue services are also experiencing massive insurance rate hikes. And Zaretzki and the town board still face the possibility that they might have to join the growing ranks of the naked cities with no insurance.
In the nearby state capitol at Albany, soon after he got the news, Zaretzki angrily confronted one of Utica's top executives, who was trying to explain his company's action at a hearing of the legislature.
"I wouldn't repeat some of the language I used," Zaretzki said. "But I was outraged . . . . I asked him how they could cut off such a good town, one that they made money on . . . . The gentleman was unable to explain in any rational way." Apportioning Social Costs
Trial lawyers and other critics charge that the liability crisis that has hit Schaghticoke and the rest of the country is a conspiracy to gouge the public, an illusion cooked up by the wizards of odds in the insurance industry to stampede legislators into changing laws to its benefit. The industry responds with charges of greed by fee-hungry trial lawyers.
But at bottom, the debate is about how best to apportion, or broker, the social costs of misfortune.
Although insurance companies vary widely in size and situation, the reasons offered by the executives at Utica to explain their rejection of municipal liability reflect broader concerns in the industry. By way of another attempt to answer the outraged Zaretzkis of the world, the company's top executives retraced for The Washington Post the process they say led to their controversial decision.
Utica Mutual is part of the Utica National Insurance Group, a middle-sized company, founded in 1914, which provides a mix of commercial and personal insurance and related services. Major policies are set by no more than a handful of senior executives.
They have much in common with town supervisor Zaretzki. Like him, they are educated, middle class, active in community affairs. Jack B. Riffle, the company's chairman of the board, president and chief executive officer, is on the Boy Scouts of America's National Executive Board, has earned the Silver Beaver and Silver Antelope Awards for his leadership.
Zaretzki lives with his wife and son in a rambling, 150-year-old farmhouse that used to be a stagecoach stop. He commutes to his full-time job in Albany but figures he spends a minimum of 20 hours a week on his $7,300 per year supervisor's job.
In their computer printouts, Utica officials said, Schaghticoke and every other town and village, regardless of their histories, presented equal possibilities of death, paraplegia, discrimination, official brutality and other eventualities. What concerns them most, they said, is that in the new legal scheme of things, one of these occurrences can deliver any town into the clutches of a volatile creature known as a jury -- whether or not the town has been negligent or wrong in some way.
The civil justice system "was designed primarily to hold wrongdoers responsible for wrongdoing, not to compensate victims," said Utica's Riffle. "Now we're using the court system to redistribute wealth."
The decision that panicked Schaghticoke was born in a climate of distress for the property and casualty side of the industry (as distinct from the other major segment -- life and health). Every year since 1979, industry analysts say, it has lost its shirt selling insurance, and 1985 was its worst ever.
The losses also spooked the companies (most are foreign-owned) that insure the insurance companies. These so-called reinsurers, such as Lloyd's of London, had joined the orgy of bargain-rate competition and took a worse shellacking than the primary insurance companies.
Where the industry was doing well was not in providing insurance, but in its investments of the tens of billions of dollars in premiums it collected from policyholders.
More than six years of high interest rates produced very high yields on those investments. Company executives guessed (wrongly, as it turned out) that they could lower their premiums drastically, the better to compete, and make up the difference when they invested the premiums.
In short, an insurance price war occurred, driven by the high yields on investments.
"If one overestimates his investment, he will underprice his product. We all did that," said Utica's Riffle.
For a time, Schaghticoke was a beneficiary of that competition. Utica Was Low Bidder
Town supervisor Zaretzki, who is a specialist in budget and administration for the speaker of the state assembly, had appealed to the heavily Republican citizenry with promises of fiscal conservatism to become, in 1982, the first Democrat elected to the office in 40 years.
He thought his Republican predecessors had been paying too much for insurance, so he put it out for bid. Utica was the low bidder, at $10,010 a year, or less than half what the town had been paying. Zaretzki won praise in the local press for this coup.
For Utica, the momentum of competition still outweighed the emerging negatives associated with municipal liability coverage.
In Riffle's words, "It was kind of a little market niche we'd established for ourselves." A number of Utica executives, including the chief underwriter, were reluctant to abandon it. This produced what Riffle called "a very heated debate at the top levels of this company."
Utica was hearing the reports circulating in the industry about rising court judgments and settlements against municipalities. And like most property-casualty insurers, Utica was seeing the actuarial, or statistical, information on national insurance trends -- collected, analyzed and circulated by a nonprofit organization called the Insurance Services Office (ISO), which helps insurers decide how much to charge.
One recent judgment in particular had a shattering impact on insurers. A $15.5 million court judgment against Jackson Township, N.J., required its insurer, Hartford Accident and Indemnity, to pay damages for years of contamination of town wells by chemicals from a landfill. Hartford's policy had specifically excluded pollution coverage, except for "sudden and accidental" incidents. But the court interpreted those terms as applicable to slow years of seepage. (A portion of the verdict was reversed on appeal, leaving a $7.4 million award standing.)
Among other things, the case illustrated to insurers their inability to protect themselves even with the most painstaking contractual language against the whims of court interpretations, many said.
As for Utica's policyholders, officials said the problems came into view a little at a time, on pieces of paper called "serious claims forms," which are circulated to all the top executives.
In November 1983, for instance, there was a report on a single-car accident on a rural road in the town of New Windsor, 100 miles south of Schaghticoke.
"Remarks: Town employes repaved a town road covering repaved section with gravel. Accident occurred on repaved section at intersection with county road. Plaintiff (18) allegedly lost control because of gravel, resulting in one-car accident. Quadriplegia resulted . . . . He was in top 10 percent of high school class and member of honor society. Makes a good appearance and attends college . . . . Settled before trial for $950,000. Our share $650,000, county share $300,000."
That was one of two single-car accidents on the same stretch of road in less than two years. The other involved a motorcycle rider who lost the use of his legs. The allegations were the same.
The New Windsor cases cost Utica more than $1 million.
"Those two cases brought our undivided attention to municipal liability," said Joseph L. Kronen, senior vice president for claims.
Utica executives said they began to notice a change in the overall pattern of such claims, in their "complexion and success" and in their numbers.
Said Riffle, a tall, personable man, "It seems to me that every time there is a serious auto accident in the state, particularly when the 'at fault' driver has low limits [on his insurance coverage], the government responsible for maintaining the street, road or highway gets sued: for too much salt, or not enough salt; for too few signs, or too many signs; for signs too high, or signs too low. Or something."
The increasing uncertainty of an outcome in court, said Riffle, often leads the company to settle, rather than fight and risk a much higher cost at a jury's hands.
In 1980, Utica policyholders nationwide (in all types of insurance, not just municipal) were attracting 196 new lawsuits a month, officials said. Last year, as of October, 278 new suits a month on average were being filed.
Two years ago, the Utica executive vice president for underwriting, who had championed municipal coverage, retired. His successor, Wallace Watkins, recalled that he promptly asked for a breakout on how Utica was doing with that line of coverage. After several months, officials said they found that in municipal coverage, for at least two years, Utica had been paying out two dollars for every premium dollar it took in.
It was at this point, said Richard J. Beidleman, a vice president for underwriting, that he changed his mind and joined those who wanted to stop insuring towns.
Underwriters such as Watkins and Beidleman are the oddsmakers of the insurance business. They "select" which risks to bet on, or cover, and they make recommendations about how much the bet is worth. They operate on a basic principle of insurance: the law of averages, or as their boss Riffle prefers to call it, the law of large numbers. "The law of large numbers is what distinguishes insurance from gambling," said Beidleman. Without it, Riffle said, "Take your money to the track."
Simply put, the law states that events occur with predictable regularity, and the more times an event happens, the more closely the results will approach the predicted outcome. Operating Loss Reported
Officials at Utica and elsewhere state flatly that they are a for-profit business, not a quasi-social service bureau. In its 1984 annual report, Utica reported a net operating loss of more than $13 million. Its net worth was nearly $103 million, but that fell short of the ratio of $1 for every $3 in premiums sold that is widely accepted as a safe standard for a reserve fund to pay off possible claims.
There came a time, late in 1984 by some estimates, when the industry collectively began to slap itself out of its binge and try to return to first principles. Their investments were, and are, still making money, but no longer enough to overcome massive losses on the insurance underwriting side, analysts say. Some industry officials say their critics are right when they charge that premiums are being raised more than necessary just to cover claims. Insurers are also building back their depleted reserves and working capital.
At Utica, Riffle recalled, there came a day when his underwriting, marketing, claims and other senior executives recommended the drastic measure of withdrawing -- gradually, they emphasize -- from an entire market. "They came to me and said, 'Well, there could be some political fallout.' I said, 'Do what you gotta do . . . . ' "
But he added, "Give me a choice between chaos and insolvency and I'll take a little chaos. And it our decision is creating chaos. We've got a lot of people mad at us."
The state superintendent of insurance, whose office regulates Utica and other New York-based companies, and some state legislators are among those mad at Utica and other insurers.
"We didn't like it, but it was the company's right to do it," said Kevin Foley, a spokesman for the state insurance superintendent's office.
Dick Lownes, an independent insurance agent in Schaghticoke who had followed in his father's footsteps in selling policies, including Utica's, to area towns and villages, is another who is upset.
"Schaghticoke had next to nothing as far as claims experience. Fender bumps, a stone that fell off a truck and busted a windshield. That kind of thing. And they've bent over backwards on their town dump. It's the only one in the county that meets state guidelines," Lownes said.
Across the street from Lownes, the Hoosick Valley Central School District elementary and high schools that serve the area, formerly insured by Utica under a separate policy, are facing a 400 percent increase in premiums for one-fifth the amount of coverage, according to Superintendent Joe Colistra. The volunteer fire and rescue squads are also facing large increases and have asked the township of Schaghticoke for extra financial help.
One recent snow-covered day in Schaghticoke (an Indian name meaning "warriors of the mingling waters"), Zaretzki inventoried the situation, at the home of town bookkeeper Nancy Harder, who keeps the city records in her son's bedroom under a Hulk Hogan poster. Getting Less for More
After Utica withdrew, the only new insurance policy the town could get increased the premium by 400 percent, to $48,000 a year, for one-third the amount of coverage.
The total town budget for 1986 is $800,000, of which $246,000 comes from local taxes (the lowest in the county) and the rest from state and other sources. Its citizens were looking forward to a 35 percent tax cut, Zaretzki said. Instead, the cut was only 10 percent.
Meanwhile, he said, "We're trying to govern defensively." The 15-square-mile township, whose roads follow paths used by horse-drawn carriages and Indian hunters centuries ago, has increased spending by $16,000 for road repairs and maintenance, with another $300 spent on a device to measure the distance of signs from intersections. "A road gets fixed or it gets closed."
The closing of one road has cut off irate property owner Gwendolyn Fox from her farm, she complains. But the township can't afford the $3 million it would cost for repairs and "the board has decided our possible liability exposure is so high we can't take chances."
As for the new insurance policy, it can be canceled on 30 days notice, Zaretzki said. "We don't know what the situation will be next year . . . . We could literally be talking about a 300 percent increase in taxes if we had to cover a major court award."