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UI Research Shows Tort Reform Sometimes Lowers Insurance Premiums

A researcher at the University of Iowa has found that tort reform laws do lower insurance premiums and save consumers money, though it depends on where the consumer lives.

Ty Leverty, TriStar Risk Management Fellow and assistant professor of finance in the Tippie College of Business, recently studied how insurance companies respond to tort reform laws passed by state legislatures. The laws are designed to limit financial awards that can be paid to plaintiffs in liability lawsuits, which saves the insurance companies money and should keep the cost of premiums under control for consumers.

But consumer advocates say that insurance companies don't pass along the savings to consumers through lower premiums. Advocates suggest insurance companies keep the additional money instead and improve their profits.

Leverty's study, though, shows that, in fact, insurance companies do lower their premiums, depending on the circumstances of the law. The decision, he said, turns on the likelihood of each law surviving a legal challenge because tort reform laws have a checkered history in the courts.

Leverty and his co-researcher, Martin F. Grace of Georgia State University, examined tort reform laws passed by state legislatures between 1985 and 2006. The laws -- 148 of them -- were intended to limit liability awards.

Of those 148 attempts at tort reform, 40 -- or 27 percent -- were either struck down by courts or repealed in later legislative sessions.

"When a state legislature passes tort reform law, insurance companies look at the probability of the law passing judicial muster," said Leverty, an expert in insurance. "If it's probable the new law will hold up to legal challenges, then they adjust their premiums. But if they believe there's a low probability the law will survive, then they rationally do nothing."

Considering that insurance companies are in the business of determining probabilities, he said they've become good at determining whether a law will get through a legal challenge.

As an example of the legal uncertainty of tort reform laws, Leverty pointed to Ohio and Illinois, where tort reforms were enacted, struck down, and re-enacted more than once between 1985 and 2006.

"Given that record, any rational insurance company operating in Ohio or Illinois will not immediately respond to tort reform laws passed by those legislatures," Leverty said. Instead, they will determine the likelihood of the law's final legal status before adjusting premiums in response to the reform.


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