The Performance of Liability Insurance in States with Different Products-Liability Statutes

The liability crisis of the mid-1980s has led to an extensive reexamination of the liability system. A number of explanations have been offered for the substantial increase in insurance premiums and, in some cases, a decline in the availability of insurance. These include stimulation of the underwriting cycle by a decline in interest rates, collusion among insurance firms, rising tort costs, and uncertainty with respect to the liability burden.\u27 Most observers, however, also point to changes in tort law itself. For example, plaintiffs may now have a more favorable environment for obtaining an award and, if they are successful, they may receive a larger award than in earlier eras. In addition, changes in the legal environment may have fostered considerable uncertainty that itself increases the costs insurance companies face. The liability crisis has led to reassessments of the state of tort law and explorations of ways in which it can be improved. A variety of legal reform groups, a Department of Justice task force, and a recent spate of conferences have all addressed aspects of the liability crisis and ways in which the law can be restructured. A wide variety of states have also begun legislative initiatives to limit tort recoveries. Among the more popular measures are caps and restrictions on punitive damages, caps on pain and suffering damages, modifications in comparative negligence standards, limits on the application of joint and several liability, changes in collateral source rules, and limits on government liability. Most of these changes came in the late 1980s, and it is too early to assess their implications. It is, however, possible to explore the role that earlier statutory reforms have had. Not all states have products-liability statutes, and those statutes that have been enacted differ considerably. This article focuses on how the performance of products-liability insurance varies with the statutory regime by using the complete insurance files for the products-liability-bodily injury lines of the Insurance Services Office (ISO). Section II provides an overview of how the exposure of insurance companies varies under different statutory regimes. A law that increases the availability of insurance should lead to more insurance being written and, hence, to greater levels of exposure. After this overview, the article examines specific products-liability statutes, including products-liability definitions in Section III, state-of-the-art defenses in Section IV, statutes of limitation in Section V, and collateral source rules and damages rules in Section VI. Section VII contains a multivariate regression analysis of premium levels, providing a third set of tests for the effect of statutory provisions. I conclude that differences in the character of state liability statutes are associated with dramatic differences in the performance of insurance across states-differences that persist over time. The failure of the insurance market to adjust completely for differences in statutory regimes illustrates its distinct character