Reagan Enters Liability Debate Under Pressure : Groups Stung by Costs Reported Behind Move

For President Reagan, the thorny issue of skyrocketing liability insurance rates pitted his long-cherished principle of states’ rights against the political demands of doctors, businesses, state and local governments and insurance companies that are buckling under the present system.

Politics won.

According to well-placed Administration officials, Reagan reached his recent decision to intervene only after receiving an avalanche of complaints from groups hit hard by soaring costs. Massive awards for medical malpractice claims and other damage suits have forced the cost of liability insurance ever upward, and some groups needing insurance have found it impossible to buy at any price.

Unaccustomed Position

Reagan, whose decision has placed him in the unaccustomed position of supporting federal intervention in a highly complex area that has been the domain of the states for decades, concluded that the states are moving too slowly.

Although legislatures in more than 40 states have grappled with the issue this year, only a handful have managed to revise existing tort, or damage, laws in ways designed to ease the burden of liability insurance.

The President has not yet formulated the details of a plan. But later this month, according to White House officials, he is expected to endorse legislation based on a report by an interagency Tort Policy Working Group, which has recommended a combination of federal and state actions, including limiting lawyers’ contingency fees in damage cases and placing a $100,000 cap on awards for “pain and suffering” and other non-economic losses.

A knowledgeable Administration official, who asked not to be identified, said the Justice Department is circulating preliminary drafts of legislation based on those principles. It was said to include provisions imposing ceilings on settlements from suits against the federal government for liability for deaths or personal injuries, and to shield government contractors from liability suits for defective product design unless information to overcome the defect was available to the contractor when the product was made.

Dole Would Defer to States

If the legislation incorporates changes in tort law, Reagan’s opponents will include no less a figure than Senate Majority Leader Bob Dole (R-Kan.). Noting that he recently met with an insurance group that is working in 22 states to change tort laws, Dole said in an interview: “There’s where it ought to be done--on a state level.”

But both sides can agree on this much: The soaring cost of liability insurance has become a burning political issue. On one side is a coalition of special interests led by the insurance industry, which bears the burden when juries make exorbitant awards in liability cases. On the other are consumer groups seeking to force manufacturers to accept responsibility for damages incurred during the use of their products, and trial lawyers trying to prevent any erosion of the hefty fees they usually collect in such cases.

Dole, who has indicated he will seek the Republican presidential nomination in 1988, said that whenever he attends meetings in Kansas, he is confronted by “three or four people there who can’t buy insurance or had their insurance canceled--and there’s real frustration.”

Similarly, Sen. Paul Simon (D-Ill.) has complained that his constituents are bombarding him with complaints of “skyrocketing insurance rates.” And Sen. John D. (Jay) Rockefeller IV (D-W.Va.) said the situation is “like a dam burst--all of a sudden you couldn’t get insurance.”

Explains Reagan’s Rationale

It is this kind of pressure, said one White House official who declined to be identified, that has made the liability insurance issue ripe for intervention despite Reagan’s well-known aversion to treading on states’ prerogatives.

“If you’re looking at anything that tends to quench the spirit of adventure,” this official said, “that’s something that Ronald Reagan likes to get involved in. And that’s exactly what’s happening. If we make it so people are afraid to take chances, we limit what society can accomplish.”

For years, the insurance industry has complained of major financial setbacks, and it reported losses against premium income last year totaling $25.2 billion. Although it also earned $32.8 billion on its investments and scored a net profit of $7.6 billion, a federal report said the industry’s earnings fell below the historical average and were “well below the profitability of most other major industries.”

Beyond the insurance industry, much of the pressure for federal intervention has come from small businesses and local governments that have been devastated by the high rates and the unavailability of insurance, according to Mitchell Daniels Jr., Reagan’s assistant for political affairs.

Cities Adopt Self-Insurance

“Hundreds of mayors and local officials would agree that it is a problem in which federal action is proper,” Daniels said.

The crisis is so severe in California that more than two-thirds of the state’s cities may be forced to operate without liability insurance by midyear because insurance companies no longer are willing to risk losses from damage suits. Los Angeles, San Francisco and several other cities in the state already have converted to systems of self-insurance.

Californians will have an opportunity June 3 to vote on Proposition 51, which would scale down the size of personal injury awards by limiting liability for non-economic damages to each defendant’s individual percentage of blame.

But the California Legislature, like most state legislatures, has taken no final action of its own. The Assn. of Trial Lawyers of America said a national survey showed that of 44 state legislatures in session this year, 42 have considered measures aimed at reducing liability insurance rates--but only five have actually passed bills.

“State legislatures have not been very responsive to giving special interests an exemption at the expense of limiting individual and basic freedoms to recover damages,” the association concluded.

Trial Lawyers Opposed

Daniels attributed the lack of action at the state level to the opposition of trial lawyers. “Trial lawyers dominate many state legislatures,” he said, “and they are a powerful force against the reform movement.”

Joseph Jamail, the Houston lawyer who represented Pennzoil in its suit against Texaco that resulted in a $10.5-billion damage judgment, said insurance companies are “misleading” the public on the issue. Any successful attempt to curtail contingency fees for lawyers in liability cases amounts to telling the nation’s poor and middle classes, “ ‘you’re not going to be represented by a good lawyer,’ ” he said Sunday during an appearance on ABC’s “This Week With David Brinkley.”

Trial lawyers appeared stunned that Reagan opted for federal intervention. Peter Perlman, president of the trial lawyers’ association said: “I can’t conceive of this Administration seeking to preempt state law. The President is stepping into an area that has always been identified as a states’ rights issue and coming down on the side of big industry and big business interests.”

Both Daniels and Assistant Atty. Gen. Richard K. Willard, who heads the tort working group, disputed that assertion. In separate interviews, they emphasized that the Administration, in drafting federal legislation to meet the insurance crisis, will be especially sensitive to the role of state governments and will provide for only a limited federal role.

More Than Cheerleading

“This is still primarily a state law issue, and we don’t think there should be a nationalization of it,” Willard said. “On the other hand, it wouldn’t be true to say that we’ll just be a cheerleader and not propose a federal role.”

And Atty. Gen. Edwin Meese III insists the Administration’s efforts “will be consistent with principles of federalism.” In a recent speech to the National Legal Center for the Public Interest, Meese described the working group’s proposals as “modest and measured to the need.”

The principles embodied in the group’s report, Meese said, provide “an excellent starting point and basis for legislation at the federal level and also serve as an example for use and adaptation by state legislatures. . . . We prefer to see state governments and state courts weigh some of the alternatives we have presented and any others they deem appropriate.”

Meese emphasized two of the report’s recommendations:

--That non-economic damages, including those for “pain and suffering,” be limited to $100,000.

--That lawyers’ contingency fees for liability awards be limited to 25% of the first $100,000 awarded, 20% of the second $100,000, 15% of the third $100,000 and 10% of the rest. Fees customarily have amounted to about one-third of awards.

Proposals similar to some of the task force’s recommendations are already included in a pending Senate bill sponsored by Sen. Mitch McConnell (R-Ky.).

Would Avoid Courts

Congress should also encourage out-of-court resolutions of liability claims, said Sen. John C. Danforth (R-Mo.), chairman of the Senate Committee on Commerce, Science and Transportation.

“I think there should be a way of getting yourself outside the court system altogether,” Danforth said during an appearance Sunday on the Brinkley show. “I think there should be incentives in whatever we decide so that both plaintiffs and defendants try to get themselves out of this long . . . process . . . and have incentives to settle out of court.

“And I think that if they settle out of court, basically, it should be for economic damages, not for something as nebulous as pain and suffering.”

Another panelist on the show, Robert Hunter, president of the National Insurance Consumer Organization, who served as acting federal insurance administrator under former President Gerald R. Ford, challenged the Administration-backed proposal to put a $100,000 cap on pain and suffering awards. Data has not been developed to show that the cap would save substantial sums, he said.

Hunter maintained that the current insurance crisis results from faulty practices by insurance companies that set premiums unrealistically low several years ago to attract money that could be lent out at high interest rates. While he conceded that out-of-line awards can be traced to a “jury problem,” he argued that available data shows “no evidence of an explosion of cases.”