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Tort Reform Savings on Insurance Overstated

12/21/1999

By Terrence Stutz / The Dallas Morning News

AUSTIN – Lawsuit reforms in Texas have not produced the huge savings for insurance consumers that some have claimed, a national consumer group said Monday.

A study by the Consumer Federation of America said premiums are rising more slowly in Texas since reforms were approved in 1995, but restrictions on lawsuits have been only a minor factor in controlling insurance rates.

“Let’s give credit where credit is due,” said J. Robert Hunter, author of the study and the top insurance regulator in Texas under former Gov. Ann Richards. “Slowing of insurance rate increases in Texas is due to the same reasons rates are stable or lower across the nation – safer cars, the aging of the baby boomers [leading to fewer accidents] and increasing competition between insurance companies.”

The study also said the Texas Department of Insurance’s estimate that Texas consumers have saved $2.9 billion over five years because of lawsuit reforms is greatly exaggerated. Mr. Hunter said actual savings were closer to a quarter of that. Furthermore, he said, insurance company profits have “skyrocketed” in Texas in the last few years.

Current state Insurance Commissioner Jose Montemayor disputed his predecessor’s numbers, saying the $2.9 billion savings estimate is firm.

“This isn’t a matter of conjecture. I know the savings are there,” said Mr. Montemayor, who was appointed by Gov. George W. Bush.

The 1995 reform laws are designed to make it harder for people to sue. Restrictions are put on where a case may be tried, punitive damages are limited and penalties are imposed on those who file frivolous lawsuits.

Mr. Montemayor, who ordered a $685 million decrease in insurance premiums this fall to reflect lawsuit-reform savings, noted that the state “requires insurance companies to demonstrate that they have built these mandatory savings into their rates.”

When the lawsuit reforms were passed, supporters said fewer frivolous suits in Texas would reduce insurance costs. Lawmakers ordered insurers to pass those savings on to consumers.

The problem, according to Mr. Hunter, is that after the premium rates are lowered, insurers are allowed to offset those cuts by raising rates for other reasons.

“They [state officials] say they are cutting rates, but they don’t take into account that insurers increase premiums at other times of the year. They also can do things like move customers into higher-cost companies,” he said.

Jerry Johns, an industry spokesman, disputed the results of Mr. Hunter’s study.

“Certainly, safer cars, aging drivers and better roads have contributed to lower insurance rates, but in Texas we have virtually eliminated frivolous lawsuits – and that has been a major contributor to lower insurance rates,” he said. “We believe the savings to consumers has been in the billions of dollars.”

Mr. Hunter said it is interesting to note that insurance premiums in Texas have risen only slightly less than in states that have enacted few lawsuit restrictions. He also said that while Texas officials say consumers have seen big savings in insurance rates, total premiums for liability coverage rose 8.2 percent from 1995 to 1998.

Liability protection represents about half the cost of a typical auto insurance policy in Texas.

“It is strange to claim savings when premiums are rising,” Mr. Hunter said.

The Consumer Federation of America represents about 240 consumer groups across the nation with a combined membership of 50 million Americans.