The pulse of US tort reform was weak last year, but there are even fewer vital signs in 1999. Mindy Pollack reviews recent court decisions invalidating tort reform laws and wonders if state legislatures will try again or just give up the fight.

You may not have heard the whimper escaping from the US tort reform community on 16 August, but it was audible. On that day the Ohio Supreme Court struck down one of the most comprehensive tort reform laws in the nation, and one of the few then in effect. This development followed closely on the heels of a similar Oregon Supreme Court decision, and a relatively recent Illinois high court action throwing out a reform package designed to survive legal challenge. All three laws had one more thing in common besides their judicial fate: the laws capped non-economic damages, the reform with the greatest influence on awards and settlements.

While three states are a small share of 50, they do reflect what has become a national trend. The strongest tort reform laws enacted from 1986-1996 are now being declared unconstitutional with greater frequency. The scenario is all too common; state legislators enact significant tort reforms, often after many tries and bitter debates, and ultimately the state supreme courts void them. The constitutional infirmities vary across the states, but the most common reason is interference with the right to a jury trial. Establishing damages is a major function of the jury, and a cap denies the full exercise of that constitutional function and right. Whatever the reason, lawmakers and members of the business community are back where they started.

Not all tort reforms have fallen victim to the judicial process. Several important laws have survived challenges in the courts, including the California and Florida medical malpractice statutes revamping damages and procedures. Many reforms focusing on punitive damages and joint and several liability, for example, remain in full effect. Yet, the scorecard for the most far-reaching laws - those with caps on all non-economic damages - shows more judicial defeats than victories, and the momentum is on the side of trial attorneys challenging any limits on recoveries.

These three state court opinions have ramifications beyond their borders. First, the momentum swing may spur more aggressive trial lawyer campaigns to repeal or invalidate existing reforms, placing many favorable laws in jeopardy. Second, lawmakers will shun new tort reform efforts if they believe the judicial branch will later throw out all their hard work, so any enactments over the next few years will be few and far between. Finally, the anti-reform energy may spill over into the insurance regulatory arena, where we could see rate rollback and related proposals. The health of tort reform is not good, and insurers should take notice of the effects.

The agony of defeat
The loss of the 1996 Ohio tort reforms was the last and most disappointing judicial abrogation of legislative action. Ohio lawmakers, like those in Illinois, had seen earlier damage caps and other reforms fail in the courts and wanted new laws to fare better. They bolstered the law and legislative history with citations to successful reforms. However, the Ohio Supreme Court, in a split decision, still found House Bill 350 unconstitutional. Ohio Academy of Trial Lawyers v. Sheward, No. 97-2419 (Ohio Sup. Aug. 16, 1999). In fact, the high court voided the entire statute, not just the caps on non-economic and punitive damages. In plain language, the court said the legislature had converted a drive for civil justice reform into an attack on the judiciary and rights of individuals.

The Ohio Supreme Court left no doubt that the judiciary has the last word, and a very powerful word it is. The high court justices accepted the challenge as a test case without any injured claimant or award on appeal. They declared the nearly 250-page law “unconstitutional in toto,” without addressing all provisions and arguments. They cited the “rich history” of Ohio precedent for finding tort reforms unconstitutional, and chastised the legislature for flouting these past court decisions. We do agree with this last observation, as Ohio courts have thrown out just about every type of reform passed since the mid-1980s.Nearby Illinois experienced similar events only a few years earlier. When caps on medical malpractice damages had failed in the courts, the Illinois legislature passed a broader tort reform measure capping all non-economic and punitive damages. In 1997, the Illinois Supreme Court negated the second attempt at tort reform. In the month preceding Sheward, the Oregon high court also held that its damage caps and other reforms violated constitutional rights to a jury trial. The Oregon statute had been effective for over 10 years before its demise.

Of the states enacting caps on all non-economic damages, only a few are still in effect. Broad damage limitations passed years back in Alabama, Arizona, Florida, New Hampshire and Washington, for example, are now history along with the three states we already mentioned. In contrast, similar caps are still valid in Alaska, Colorado, Hawaii, Idaho, Kansas, Maryland and Minnesota. Given that the Alaska measure only became law in 1997, we should expect legal challenges to emerge over the next few years. Overall, the judicial odds do not favor tort reform.

A few bright spots
Amid the gloom and doom of recent developments are a few victories, at least in some areas of damage caps. One of the most gratifying laws to appear in 1999 is the new Alabama cap on punitive damages, for several reasons. Previous general and punitive damage caps had been declared unconstitutional. Alabama is still the site of the largest average punitive damage awards in the nation, including the infamous BMW verdict that generated the US Supreme Court guidelines on punitive awards. Finally, the Alabama Supreme Court hinted that it would be more receptive to tort reform, giving legislators some comfort that their efforts would not be wasted.

The new Alabama statute, S.B. 137, caps punitive damages in physical injury cases at three times compensatory or $1.5 million, whichever is greater. While the law does not place a flat ceiling on the award, the cap does preclude relatively minor cases (e.g. with low compensatory damages) from spawning unusually high punitive amounts. Moreover, the cap is indexed so that the amounts will adjust upward with inflation, reducing arguments that the cap is too low and outdated. There are exceptions for certain intentional injuries, wrongful death and class actions, but the majority of personal injury actions would fall within its scope.

The Alabama Supreme Court will have the last word, but their early words of encouragement signal a favorable outcome. Neighboring Florida also strengthened its punitive damage caps and other tort reforms, and there again we have no reason to expect judicial reversal. However, it is clear that major tort reforms are not on 1999 legislative agendas, and we do not expect them to appear in 2000. In fact, legislative tort reform activity has been slowing down since 1997 in the states, and we doubt that any federal proposals will emerge unscathed. All in all, we expect to see less new legislation and more challenges to previously passed reforms.

There are a few other bright spots in the form of existing caps that have survived several rounds of judicial challenges and even repeal initiatives. The California cap on non-economic damage awards issued in medical malpractice cases is one such law (MICRA). Similar longstanding or at least surviving medical malpractice caps exist in Indiana, Florida, Louisiana and now Virginia, following that state's high court endorsement earlier this year. However, the California cap is the subject of repeal proposals and debate almost every year, so we cannot take any reform law for granted in the legislature or the courts.

Predicting tort reform outcomes
If the courts and even the legislatures can undo reforms, the question facing insurers and business interests is how to predict which laws will stay on the books. Anticipating tort reform outcomes is not a science. However, there are few lessons gleaned from the victories and failures. Interestingly, many of these factors apply to legislative as well as judicial prospects. So, for insurers anxious to predict whether a tort reform measure will pass in the legislature and get the Governor's approval, or if the state high court will uphold the law, this short list might be useful.
• The narrower, the better. The more focused the tort reform, the better its chances at the legislative and judicial levels. It is easier to shepherd a narrow bill through state and federal legislatures, for two important reasons: there is usually a stronger tie between the reform and the problems it addresses, and there are fewer people fighting it. Witness the federal proposals that have become law. Broad product liability reforms have either stalled in Congress or the White House, while those helping only the small plane industry or volunteers have become law. Illinois damage caps in alcohol server liability cases survived challenge, but not caps applied to all types of suits.
• Index those damages. One of the frequent arguments against fixed dollar caps is that the monetary levels are inadequate after years of inflation have diminished their value. The California medical malpractice cap is a case in point. Trial lawyers contend that the $250,000 fixed limit on non-economic damages would be worth close to $1 million today, if indexed for inflation. Compared to other state laws, the original cap amount is probably low. From a fairness and lobbying perspective, inflationary adjustments to damage caps make sense. There are many proposals to raise and index the California damage cap, and we hope that these more rational approaches win out over arguments for total repeal. Indexing the new Alabama punitive damages cap should improve its chances for a long life.
• The legislature giveth. Caps and other reforms affecting statutory rights of action are far more likely to withstand judicial scrutiny than reforms limiting common law rights. The reason is that the legislature created the right and can therefore remove or alter it; common law rights, on the other hand, exist independent of our representatives. As one Illinois court stated, “what the legislature giveth, it can taketh away.” Applying this maxim to tort reforms, damage caps on drunk driving and governmental liability - usually part of liability statutes - have been upheld more than caps on general liability suits. The list of statutory wrongs and remedies varies from state to state, but the general trend holds nationwide.
• Democrats and Republicans. In the end, it all comes down to who controls the legislature, Governor's office and state supreme court. If business interests dominate, the probability of tort reform success is high. If the trial lawyer associations have strong influence, you can expect failure. As you might imagine, it is extremely difficult to have all branches - the legislature, governor and judiciary - in alignment at any one time, making change very difficult. Product liability reform finally passed Congress only to be vetoed by President Clinton, a Democrat; a new composition of the Alabama Supreme Court makes it more likely that the latest tort reforms will be upheld. Check political party affiliation, and then predict.

What is an insurer to do?
The impact of damage caps and related reforms on the insurance industry is not always clear or direct. Damage caps are generally considered to have a greater effect on overall awards and settlements than any other type of reform, but the link varies with insurer and business. For example, a medical malpractice damage cap will certainly contain rates for the primary insurer writing those risks in that state. However, a cap on all non-economic damages may not be of much help to a national umbrella writer. Legislators, regulators and consumers do not always appreciate the correlation, or lack thereof, between reforms and insurance rates, and insurers may have difficulty explaining the gap.

Many insurers have also learned to wait and see how tort reforms play out at all stages in the judicial process. What if a carrier changes all its rating guidelines in response to reforms that are later declared unconstitutional? The pressure to reduce price usually accompanies reforms, and insurers must decide if they will postpone action or adjust rates immediately. Given recent court decisions, the “wait and see” approach seems quite prudent.

In some cases legislators and regulators impose a price for tort reform, via rate rollbacks. California Proposition 103 is the most well-known rate rollback. While the law was generally upheld in the courts, most proponents and opponents would concur that the time, expense and effort expended on the rollback probably exceeded the ultimate premium reductions. A few rollback laws were enacted in other states, but the California experience diminished enthusiasm, at least for a time. We wonder if the growing anti-reform momentum will spill over to insurance regulation and rollbacks in particular. We hope not but cannot ignore the possibility.

Insurers must also decide what resources to commit to future tort reform lobbying efforts. Most insurance trade associations operate at the state level, where the real reforms and insurance regulation take place. Given that the judicial pendulum has swung against tort reform, we anticipate fewer legislative initiatives in the years to come. Lawmakers would simply prefer to spend their time on more promising issues, and a doomed law is not one. I expect insurers and other business interests to shift their resources to maintaining existing caps and reforms rather than passing new or replacement laws. Insurers will not give up on tort reform, but they will allocate their limited resources to keeping what reforms they have before seeking more.

For now, keep your eyes on California, where the medical malpractice damage cap is on the operating table. It is not too early to monitor Alaska, where recently enacted caps will certainly be challenged in the courts. And last but not least, remember that legislators, governors and judges change with elections and time, so that however dismal the tort reform picture looks today, it may be brighter in, well, 2007 (or thereabouts).

Mindy Pollack is Manager, Client Service & Communications, with Risk Capital Reinsurance Company in Greenwich, Connecticut.