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Manhattan Institute

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Of Conspiracies and Crises

issue brief

Of Conspiracies and Crises

March 1, 1988
Legal ReformOther

On March 22 the attorneys general of eight states filed an antitrust suit against the leading companies and trade associations in the liability insurance business. The action can best be understood as the latest salvo in the ongoing battle between supporters and critics of the present tort system. Many supporters of that system are at pains to deny that spiraling court awards were the primary cause of the liability insurance crisis that erupted in 1985. In search of other plausible explanations for what happened, they have most commonly fixed on the idea of a conspiracy by insurers.

The conspiracy idea would logically suggest that antitrust laws might have been broken somewhere along the line, and the perennially confused state of antitrust law leaves ample scope for debate about whether a business decision like the hasty exit from a market is a legitimate response to changing conditions, or an illegal boycott. Since the first days of the crisis the most vocal liability advocates have been demanding and predicting antitrust action of the sort launched this week. They now appear to have found a sympathetic ear in the offices of eight of the fifty state attorneys general, many of whom, like California Attorney General John Van de Kamp, have been in the forefront of opposition to tort reform.

Conspiracy explanations of the crisis have tended to meet with a far more skeptical reception from leading academic observers. Among them is Professor Kenneth Abraham of the University of Virginia School of Law, an adjunct scholar with the Manhattan Institute's Project on Civil justice Reform. Prof. Abraham is the author of DISTRIBUTING RISK: Insurance, Legal Theory, and Public Policy (Yale University Press, 1986), a book that has attracted note as a trenchant, balanced and moderate account of the state of insurance law. The attached is an essay he prepared for our forthcoming volume on the tort crisis, NEW DIRECTIONS IN LIABILITY LAW (jointly published with the Academy of Political Science). Although the galleys are still at the correction stage, we think them too timely to hold back.

Especially salient at the moment is the discussion under the heading "Collusion." Conspiracybased explanations of the crisis are "implausible," Prof. Abraham explains, because "the structure and recent history of the commercial liabilityinsurance market reveal no evidence of a cartel" and much evidence of competition. The current profitability of the industry can't be known with accuracy, since it depends on future claims, but the past profits have not been unusually high. And insurers' collective role in urging tort reform is "equally open to noncollusive explanations based on the individual interests of each company." The hypothesis of collusion "falls not only because the arguments for it are weak, but also because the alternative explanation for the crisis—the combination of the surge in tort costs and the predictability problem—is persuasive."