SD12 - The Feasibility of Creating A Liability Insurance Residual Market Facility and Joint Underwriting Association
Executive Summary: During the 1987 Session, the General Assembly adopted Senate Joint Resolution No. 134 which requested the State Corporation Commission's Bureau of Insurance to study the feasibility of creating a liability insurance residual market facility and joint underwriting association (J.U.A.) to assure the availability of liability insurance. As stated in the resolution, all insurers writing liability insurance in Virginia would be required to participate and share in the expenses and profits or losses of such facility and association on a fair and equitable basis. Legislative Request This study was requested by the General Assembly because: 1. The insurance industry has had a history of cycles which at times has made insurance unaffordable, unavailable, or both; 2. There are individuals and businesses in certain professions and occupations that are unable to purchase liability insurance at all or only at very high rates; and 3. Action should be taken to facilitate the availability of liability insurance at fair and equitable rates so that professions and businesses may be able to serve the public interest at all times regardless of the insurance climate. The Liability Crisis In 1985 the insurance climate in Virginia and across the country changed significantly. After several years of competitive pricing practices, insurers began to increase their rates and some insurers discontinued writing certain lines of coverage altogether. Purchasers of commercial, professional, and municipal liability coverage were suddenly faced with the problem of obtaining adequate liability coverage at affordable rates. The shortage of adequate, affordable liability insurance became so severe that in 1986 and 1987 a number of measures were taken in Virginia to help alleviate the liability crisis. Some of these included the establishment of a market assistance plan, the creation of a medical malpractice joint underwriting association, the enactment of legislation allowing the formation of group self-insurance pools for local governments, the enactment of legislation allowing the formation of risk retention groups, the enactment of a law allowing the establishment of self-insurance pools for underground storage tank owners and operators, passage of the Birth-Related Neurological Injury Compensation Act, and passage of House Bill 1234 and House Bill 1235. Changes in tort law were also enacted including placing a $350,000 cap on punitive damages, limiting the liability of corporate officers and directors, revising the statute of limitations for minors in medical malpractice actions, granting limited immunity to members of local governing bodies, and imposing sanctions for frivolous lawsuits. Survey of Other States The Bureau of Insurance reviewed the insurance laws of the fifty states to determine which states had established a joint underwriting association for commercial or professional liability insurance. Twenty-nine states have statutory language which gives their commissioners the authority to activate a medical malpractice joint underwriting association, and in nineteen of these states a joint underwriting association has been activated. Eighteen states have enabling legislation which allows for the formation of joint underwriting associations for other types of liability coverage. Of these, three states have activated joint underwriting associations. Massachusetts has a joint underwriting association which provides coverage for liquor liability. Florida has a joint underwriting association which provides coverage for commercial property and casualty insurance that cannot be obtained in the voluntary market. Minnesota has a joint underwriting association for liquor liability and another joint underwriting association for other commercial liability coverage. Advantages and Disadvantages of Establishing a J.V.A. Joint underwriting associations assure the availability of coverage that cannot be made reasonably available in the voluntary market. It may be in the public interest to establish a joint underwriting association whenever the lack of available insurance protection forces businesses to close down and professionals to discontinue their services. While joint underwriting associations help the problem of availability they do not alleviate the problem of affordability. Joint underwriting associations initially charge the same rates as private insurance carriers because there is no other credible loss experience available. In addition, policyholders are usually required to pay a premium surcharge to help maintain a stabilization reserve fund which is used to cover deficits in loss reserves and ensure solvency. Some of the disadvantages of establishing a joint underwriting association are as follows: 1. A joint underwriting association does not solve the fundamental problem which created the availability crisis in the first place. 2. Insurers may pull out of an already restricted market to avoid participation in a joint underwriting association. 3. Some joint underwriting associations have not operated successfully and are in financial trouble. 4. Some risks are not commercially insurable, i.e. environmental impairment liability and nuclear energy liability. Recommendations Based on the findings contained in this study, the State Corporation Commission recommends enacting a law, patterned after the Medical Malpractice Joint Underwriting Association provided for in Chapter 28 of Title 38.2 of the Code of Virginia, which would empower the Commission to activate a commercial liability insurance joint underwriting association. The Commission would be given the authority to determine, after hearing, whether certain lines or subclassifications of commercial liability insurance could no longer be made reasonably available in the voluntary market and the Commission could activate a joint underwriting association at that time. |
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