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Insurance Risk and Democratic Police Reform


Anthony O'Rourke (@MrAorourke) is Joseph W. Belluck and Laura L. Aswad Professor of Civil Justice at the University at Buffalo School of Law, SUNY.

Guyora Binder is SUNY Distinguished Professor at the University at Buffalo School of Law, SUNY.

Rick Su is Arch T. Allen Distinguished Professor of Law at the University of North Carolina School of Law.

This post is part of a symposium on the law and political economy of insurance. Read the rest of the posts here.

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Culver City, California was one of the many cities during the summer of 2020 where local organizers mobilized to reimagine policing. A grassroots coalition in Culver City called for the city’s police department budget to be cut by 50%, with the money reallocated toward non-police public safety alternatives, including shifting first-line response away from sworn police officers and toward unarmed public safety workers. In crafting a response to this defunding initiative, the City Manager of Culver City made public a step in the city’s decisionmaking process that is usually concealed from view: soliciting the views of a municipal insurance broker. (The city self-insures—sets aside money to pay out future potential losses—but purchases reinsurance through a broker for high-liability judgments.) 

Culver City’s insurance broker proved an effective advocate against defunding. The broker warned that the defunding proposal could “‘result in the City’s inability to obtain insurance coverage.’” “Insurance carriers across the country,” the broker advised, “are seriously concerned with steps being taken to realign public safety resources.” The broker also cautioned that “the insurance industry is not comfortable with non-sworn personnel”—that is, unarmed public safety workers—“responding to 911 calls”—for fear that these personnel could be killed or injured on the job (and, presumably, require the insurer to pay out a liability judgment).

The Culver City campaign, while achieving some incremental reforms, failed to yield any reduction in the police budget. Indeed, Culver City increased its police department budget by 6% the subsequent fiscal year. The debate surrounding this defunding effort revealed an obstacle to local democratic control of policing that is usually hidden from public view: the influence of municipal liability insurance providers. In previous research, we have identified a number of structural constraints on the power of local democratic majorities to govern police. One of these articles, Defunding Police Agencies, examines how democratic efforts to control police budgets are frustrated by a number of both direct constraints that preclude defunding (such as local and state legislation) and indirect constraints (such as federal grants) that essentially coerce local governments into redirecting social spending into police budgets. 

We are currently expanding the scope of our analysis to explore the role the ways in which private capital diminishes local democratic control over policing. As we explain here, the basic incentive structure of municipal insurance suggests that it is likely to be a significant channel through which private money insulates police agencies from fundamental reform. Insurers have often unrecognized incentives to discourage some reforms aimed at reducing police misconduct.

The Municipal Liability Market 

Local governments rely on insurance markets—both commercial insurance and intergovernmental risk pools—to indemnify themselves against liability for police misconduct. As John Rappaport and others have observed, this reliance can make local governments, particularly small ones, deeply dependent on insurance interests. For example, a crisis in the market for liability insurance in the 1980s, the causes of which remain in question, led many insurance companies to drop municipal coverage. This crisis led some local governments to disband their police forces rather than assume the risk of a catastrophic liability judgment. The crisis also created significant structural changes to the insurance market, leading to the creation of nonprofit, intergovernmental risk pools which cover the liability judgments of their members. 

Today, the market for liability insurance and risk pooling varies by the size of the city and the state where it is located. Smaller municipalities typically rely on state-based, not-for-profit, inter-governmental risk pools which then purchase commercial reinsurance for protection against a certain loss amount. Mid-sized cities also use risk pools, but a substantial minority (about 30%) directly purchase municipal liability insurance on the commercial market. Large cities tend to self-insure, but sometimes buy reinsurance on the commercial market to cover themselves against particularly large liability judgments. Thus, either directly or indirectly (through reinsurance), nearly all municipalities rely on the commercial market to protect themselves against paralyzing police liability judgments. 

Insurance Risk and Fundamental Police Reform

There is a robust scholarly debate about the extent to which municipal liability insurance providers wield this influence to promote incremental police reform. John Rappaport and Joanna Schwartz have both defended (and supported empirically) the view that insurers regulate police agencies by encouraging them to adopt policies designed to reduce police misconduct. On the other hand, Kenneth Abraham and Daniel Schwarz have recently questioned the empirical support for this “regulation thesis” and have argued that any such loss prevention measures are unlikely to outweigh the moral hazard that insurance creates. They argue that insurance is therefore unlikely to produce a net reduction in police misconduct. Going beyond this argument, Ronen Avraham and Ariel Porat argue that insurers are incentivized less to reduce police misconduct, than to shift the costs of misconduct onto third parties (for example, by instructing police agencies how to avoid legal liability for their actions.)

We do not, and need not, take a position in this debate. Instead, we merely observe that whatever the incentives may be for insurers to encourage incremental police reform, they likely have stronger incentives to block radical transformations to police governance. From the perspective of insurers, democratic reform of police agencies is undesirable, not because it will predictably increase or decrease claims, but because its effects are uncertain. If insurers could confidently determine the effects of a reform, they could adjust their business model and continue to profit from issuing policies. However, because it is relatively untested, radical democratic reform threatens the core of the business model for liability insurance by creating uncertainty as how much municipal liability the insurer will have to cover. 

Insurers require some degree of predictable risk in order to profitably price insurance products. When the probability and frequency of an insured loss are both predictable, the insurer can set a premium that equals the expected loss plus administrative costs and whatever profits they can extract. While insurers have strategies for managing uncertainty, a lack of reliable data will induce them to set premiums far above their best estimate of probable loss. And when uncertainty becomes too great to estimate a probable loss, insurers may simply become too risk-averse to set a premium. This is what Kenneth Abraham has argued occurred in the environmental context in the 1980s, after a strict liability regime was imposed for the costs of cleaning up hazardous waste storage sites. Thus, for insurers, the predictability of future losses is far more important to its business model than the level of those losses.

This suggests that (1) insurers will be incentivized to intervene in the political process to block radical structural reforms to policing and (2) these incentives will be far stronger than those they may have to encourage more incremental reforms designed to reduce misconduct and thereby reduce future losses. If a police agency refuses to adopt policies that would reduce instances of misconduct, insurers can simply adjust the premiums they charge to reflect the predictable risks of the agency’s recalcitrance. Indeed, insurers have a long-term interest in encouraging policies that keep the threat of lawsuits at a level that is high enough to maintain a demand for liability insurance. Just as companies in the business of insuring automobiles cannot make money from increasing use of mass transit, insurers of police agencies cannot profit from a crime prevention strategy prioritizing early education. 

In any case, if a municipality chooses to experiment with a radical change in policing, insurers likely will be unable to price the risks of the reform. Activists and organizers who are committed to police abolition envision a political future fundamentally different from the political present, and do not see uncertainty as a reason for abandoning this political aim. Abolitionists do not prioritize reforms expected to marginally reduce police violence while preserving existing institutional arrangements. Instead, they pursue structural changes designed to promote democratic experimentation and empower marginalized groups to reimagine public safety. This institutional vision is designed to produce a future set of institutional arrangements that are dynamic, with uncertain effects.

This is not a vision insurance companies are likely to embrace. Novel or flexible reforms may generate uncertain or fluctuating levels of claims and damages. From the perspective of an insurer trying to calculate expected losses, there is little to gain by embracing reforms that might greatly reduce police violence, but which will have an uncertain effect on municipal liability. This uncertainty poses a serious enough threat to insurers that they have a strong interest in blocking such reforms. Insurers accordingly may prefer bureaucratic over democratic governance structures because of their greater predictability, irrespective of whether it results in reduced police violence. And the experience of activists in Culver City reveals that, at least sometimes, the insurance industry weighs in on the structure of local police governance.