Toward a Tax-Based Explanation of the Liability Insurance Crisis

The so-called liability insurance crisis of 1985 and 1986 transformed the way we think about tort law and about liability insurance markets. The crisis phenomena, which first appeared in late 1984 and lasted until mid-1986, consisted of enormous increases in liability insurance premiums and alarming reductions in the availability of certain types of liability coverage. In the two principal liability lines of insurance (Other Liability and Medical Malpractice), premiums increased by hundreds (in some cases thousands) of percentage points in a matter of months. At the same time, the availability of liability insurance contracted sharply. The liability policies that were sold during this period contained large deductibles and unusually low policy limits. Moreover, for some specific liability risks-for example, coverage for day care centers-no insurance policies were sold at all; that is, no coverage was offered at a price consumers were willing to pay. In addition, as property-casualty insurers were raising their premiums by unprecedented amounts, the industry in the aggregate was posting its largest underwriting losses ever