Protesting Too Much

Trial Bar Takes Dead Aim at First Amendment

handsomely ahead of 1976. But insurance is a regulated industry and this is an age of inflation; no prosperity is for

ever, as the debacle of 1974 recalls. Product liability insurance, like law. yers' malpractice coverage, is fast roving uneconomic (Barron's, Jan. 16, Feb. 6).

Everyone-every juror bears a grudge against an insurance company. "The simple fact," wrote a British novelist by way of explaining his success in a libel action against a London tabloid, "is that all four million readers! of the Express detest the paper, are ashamed of reading it, and feel that any damages they can impose on it slightly exonerates themselves." So it is with insurance companies. Hardly anyone Ekes lawyers; nearly everyone resents his insurance company or, at the least, believes it to be a bottomless well of money. Let the industry convince the world otherwise.

Perhaps the least appealing side to the affair is its hypocrisy. The Trial Lawyers, who spent some $315,000 on Congressional campaign contributions in 1976-the roster of recipients, said The Washington Post last summer, "looks like an honor roll of the House Commerce Committee, which has jurisdiction over the no-fault bill"-chastised the insurance companies for trying to "influence legislation." The Bridgeport suit, which dwelled long on the alleged inaccuracies of insuranceindustry advertising, named what ap- • peared to be the wrong agency: Case & McGrath wrote its ads, says Aetna, no! D'Arcy-MacManus & Masius, the defendant, a fact reported in The New York Times last July. Richard A. Bieder, of Koskoff, Koskoff & Bieder, says he has "reason to believe" otherwise.

There remains a question of principle. Not content to condemn insurance advertising, trial lawyers, individually and collectively, mean to suppress it. A copy of the Bridgeport suit, reports the Trial Lawyers Association, "is also being sent to the Federal Trade Commission, asking for a cease and desist order against the companies." In view of last Tuesday's verdict in Santa Ana, as well as a $2.5 million judgment against General Motors in Detroit on Thursday, it is hard to see what effect the advertising has had.

Some lawyers, however, cling to fallacy as if to their profession. Most adult readers are also prospective jurors, they reason; therefore, let the state regulate "commercial" speech that refers to the courtroom. Would this bar advertising on the death penalty? On shoplifting? Arson? On lawlessness and the decline of good breeding? If prospective jurors can read news stories about the incompetence of judges, or the venality of big business, why shouldn't they read ads on the costs of litigation? The doctrine is wrong in practice; it is wrong in theory. Free speec is or ought to be for all. The courts, in cases involving the rights of pharmacists and lawyers to advertise, lately have moved closer to that view. Time has come to move still closer.

-James Grani

Treasury Opposition

The bills rest on logic: pay-
ments for insurance premiums
are now tax-deductible as a
cost of doing business, but con-
tributions for self-insurance
are not. But such legislation
isn't likely to sail through Con-
gress. Donald C. Lubick, act-
ing Assistant Secretary of the
Treasury for tax policy, told
Barron's that the Treasury op-
poses the pending bills and the
whole idea of such tax deduc-
tions. Historically, the Trea-
sury has objected to writeoffs
for self-insurance reserves be-
cause of the difficulty in esti-
mating how much should be
allowed for them, and Lubick
doesn't think the pending bills
have resolved this. Moreover,
he says the pending bills lack
controls to make sure that the

tax-exempt money would not
be used for other things. Such
controls would further compli-
cate the tax code, which Lu-
bick insists is already so com-
plex that it confuses even the

separate consideration. "It is
such a complicated thing," he
says, "that chances are it

won't get dealt with at all if not
attached to a major tax bill."
Tax deductions for self-insur-
ance, Conable believes, are
the route Congress will have to
take in dealing with product li-
ability.

At the request of Ways and
Means and the Senate Finance
Committee, the Treasury is
trying to estimate how great a
loss in revenue the pending
bills would mean. Much could
hinge on the answers, which
Treasury apparently is having
some trouble developing. Pro-
ponents contend losses would
be small because heavy tax-
deductible premiums already
are being paid to insurance
companies. But Lubick says
he believes that the loss would
be substantial. Johnnie Wal-

ters, former Commissioner of
Internal Revenue, says he
doubts that the government
will be able to confine the de-
ductions to product liability,
and that the measure is likely
to become so broad as to seri-
ously hurt tax revenue.

Who Would Benefit?

In the Treasury's corner, of
course, are the insurers, led by
the American Insurance Asso-

ciation. Walter D. Vinyard Jr.,
AIA counsel, says such deduc-
tions would benefit chiefly his
corporations, which, he
argues, don't need them. He
estimated that the Culver hill

Commerce-led Inter-Agency
Task Force on Product Liabil-
ity, wrote in a memorandum to
Sidney Harman, "Tax incen-
Under Secretary of Commerce
lives that encourage the devel-
opment of self-insurance pro-
grams for companies which
have insufficient capital to
form captives (insurance com-
panies of their own) have
strong potential to alleviate the
product liability problem for;
some insureds." Various ideas
on the subject are now being
Department for comment.
circulated in the Commerce,

Norac Co., a small manu-
facturer of organic chemicals
in Azusa, Calif., provides an
example of the plight the hills
would try to remedy. In 1975,
Mail 186 for $11

According to Norac Presi-
dent Chester M. McCloskey:
"Our broker suggests that the
only way we can survive is to
put away at least $25.000-
$30,000 a year into a reserve to
cover such losses as we may
incur using the $50,000 deduct-
ible policy... until such time
that we accumulate on the or-
der of $500,000 in the reserve,
and then the insurance compa
nies will be willing to cover the
amount... at a more reason-
able cost. The problem ..is
that in order to put money into
a reserve, we have to produce
this in profit, and half or more
goes to the state of California
and the federal government."

Going with only $500,000 of
product

liability insurance
could cost Norac business,
even if it were willing to take
the risk. On May 3, McClos
key wrote Sen. Culver: "We
received this week, from one
of our large customers, W. R.
Grace & Co., a letter stating
that it is henceforth their pol-
icy to require all suppliers of
materials that they resell to
guarantee that they will cover
...W. R. Grace & Co. for
any product liability claims
that may arise in connection

IRS TO THE RESCUE?

Continued from Page 11

with our product, to the extent
of at least $100,000. This is
becoming very common in the
industry, I am informed."
Charles F. Krauter, Grace as-
sistant treasurer in charge of
corporate, risk management,
confirmed that in view of the
increased propensity to sue.
his company is urging all its
divisions to insist that its sup-
pliers have fully adequate
levels of product liability insur-
ance to cover Grace, as well as
themselves.

Stephen Bader & Co., a
polishing machinery manufac
furer in Valley Falls, N.Y.,
. reports that several of its in-
dustrial distributors and cus-
tomers are now insisting on

.such million-dollar coverage.
even though Bader never has
paid a claim. But the company
has had no insurance since last
June, when, according to Vice
President Daniel Johnson, it
dropped a policy for $300,000.
When informed that renewal
would involve a premium in-
crease of 2,500%, Bader tried
coverage, querying 18 carriers.
fruitlessly to obtain less costly
"But the courts have gone ab-
solutely wild," Johnson says,
"and a number of insurance
companies didn't even want to
know what we make, just if
our product has moving parts.
Then they said they weren't
interested. We figured we
could pay the new premium
with the 2,500% increase and
go out of business or wait to he
sued to go out of business. We
chose the latter course."
Would tax deduction for self-
insurance help? Johnson thinks

so, arguing that at least his
company would be better off
than it is now. But he says the
real problem lies with the
courts.

The product liability prob-
lem has also hit Safeguard
Manufacturing Co. of Wood-
bury, Conn., which makes
stamping press safety pullback
devices. Because of rising in-
surance costs, it went without
any coverage for two years.
Now it has insurance at a price
it figures it can afford, but with
a large deductible.

E. D. Joel, assistant to the
president of Safeguard, wrote
Rep. Whalen that the "gap in
our coverage with some acci-
dents and lawsuits that we
know of can put our small com-
pany out of business if the
judgments are at all large and
go against us." Some suits in-
volve the period when Safe-
guard had no coverage, and
Joel considers the Whalen bill
a stopgap measure that would
help the firm stay in business.
But he adds, "There is a mar-
ket limit as to how high we can
price our product to have funds
to set aside in a tax-exempt
trust fund for product liabil-
ity."

,ance reserves that we could
deduct from our taxes, we
were disheartened to the point
of quitting. Now, with help
from people like you, perhaps
we can start getting some eq-

If small firms
self-insure through
a pool, this poses
new problems.

uity in our tax system and later
perhaps more equity from the
courts in the product liability
suits themselves."

Distributors
Inc., a Miami importer of re-
volvers and other firearms, has
many of the liability problems
faced by manufacturers be-
cause the firm is the original
U.S. source of a product mar-
keted here. Recently it found
that it no longer could obtain
product liability insurance. A
company official relates: "Our
original thought was to set up
an airtight trust fund or contin-
gency fund of $700,000 or
$800,000 that would only be
used for legal defense and pay-
ment of any claims made on us
through a court of law. Much
to our chagrin, we discovered
that the IRS codes look upon a
fund such as this as regular
income and fully laxable, and
in our case that tax would
approximately 50%."

Sudenga Industries Inc., a
farm machinery manufacturer
in George, lown, is more en-
The National Machine Tool
thusiastic about self-insurance.
Builders Association says tax
For the past year it has not
deductions for self-insurance
been able even to attract a
"will be of great help to many
quotation on product liability
of our smaller and medium-
insurance. Larry Kruse of Su-
sized members, for whom
denga wrote Whalen: "When product liability insurance pre-
we were informed that we miums have become excrucial-
could not even set up insuringly high and in some cases
unaffordable.