Thus, in fe el the and 5 percent believe them to be moderate. None responded with the view that insurance premiums were somewhat low or very low. total, 95 percent of those that carry liability insurance cost is at least somewhat high. For firms that do not carry liability insurance at present, 80 percent gave high cost as their main reason for being uninsured. Only 9 percent said it was because professional liability was not a concern, and only 2 percent said they could not obtain the desired coverage. Reserves Only 22 firms of the 588 surveyed indicated that they currently set aside funds or established reserves. This amounts to less than percent of the firms. In total, these firms reported that they set aside or reserved $166,000 annually. Views on proposal Firms that would use proposal Firms were asked whether they would be likely to establish a tax-exempt liability trust to partially or fully self-insure against liability losses. A detailed breakdown of their responses is given in the following table. Overall, two-thirds of all firms responding to this question indicated that they were likely to establish a professional liability trust. Upon further analysis of these results, we found that of the firms experiencing liability claims, 76 percent said they would use the proposed trust. Sixty percent of those that did not have a history of claims said they were likely to use the trust. acceptance of the proposal regardless of a Thus, there is a high firm's claims history. Fifty-six percent of those firms that do not carry liability insur ance at present favored the proposal; over two-thirds of those that said the present cost of their insurance is very high indicated they would probably use the trust. Firms that would not use the proposal Those who replied 'no' to establishing a professional liability trust A ranking of were asked to rank their reasons in order of importance. 'one' was assigned to the most important reason, 'two' for the next most important, and so on. The following table shows the proportion of firms not likely to establish a professional liability trust voting for that particular reason within a ranking. The major reason for firms not using the proposed trust is that they cannot afford to set aside the funds. Preference for commercial liability insurance and the tax penalty on unauthorized distributions rank as the second most important reasons for not being likely to use the trust. A significant percentage of firms indicated as their second most important reason that the tax benefits of the proposal are not a sufficient incentive to set aside funds. A very low percentage of firms indicated that their reason was that professional liability was not a concern. The limitations on investments only became significant as the third or fourth reason for not being likely to establish a Amount to be set aside The firms that indicated they would use a professional liability trust said they would set aside a total of $3,481,000 annually, amounting to an overall average of approximately $10,000 per fimm. The replies from these firms were analyzed further to determine the amount which would be set aside by size of firm and the relationship to their gross billings. The results of this analysis are illustrated as follows. Table 11 AVERAGE AMOUNT TO BE SET ASIDE AND COMPARISON The amount to be set aside as a percentage of gross billings is highest for firms in the one to nine employee category and lowest for firms in the 30- 199 employee category. Each classification of firm by size would set aside at least 2 percent of their annual gross billings. Fifty-two percent of the firms responded that the amount they would set aside would be sufficient to cover their needs. Action to be taken on insurance coverage Firms in favor of establishing a professional liability trust were The asked what they would do with their present insurance coverage. following table summarizes their replies. Most firms (58 percent) would raise their deductible amount. Raising of the policy limit is the second choice and lowering the policy limit the third. These results indicate that firms are more likely to retain their present insurance policies, while altering their terms, rather than discontinue their insurance coverage altogether. Estimate of tax savings as outlined If the proposed professional liability trust legislation, in the survey, is enacted with an effective date that would allow its use for taxable years beginning after December 31, 1980, the expected federal income tax savings for members of the A/E profession for 1981 is approximately $50 million. The proposal is designed to encourage firms to set aside funds for future liability losses and expenses by allowing a tax deduction at the time the funds are set aside instead of at the time the losses and expenses are incurred. Because of this, the tax benefit derived in 1981 is not permanent but rather is an acceleration of deductions that would otherwise be allowable in the future years when the losses and expenses are actually incurred. This acceleration of tax deductions amounts to a deferral of income tax payments. At the time the trusteed funds are used to satisfy these losses and expenses, the deferral is terminated. Based on the history of claims reported in the survey over the last five years, it is estimated that $25.8 million of the initial $50 million tax deferral will be terminated as it is used to pay liability claims within the first five years of the proposal's existence. Furthermore, based on the history of legal fees paid as reported in the survey, it is estimated that $7 million of the 1981 tax deferral will be terminated within the same period. The methodology used to make these estimates is explained in Exhibit D. EVALUATION OF RESULTS The A/E profession is dominated by small firms. The nature of the professional liability problem projected by the firms appears to be twofold. First, they clearly expressed the view that insurance costs are high. This was especially true for the smaller firms. The second part of the problem is the claims experience. As the size of a firm grows, so does the likelihood of experiencing claims. Although insurance costs and claims experience are problems expressed by all sizes of firms, the relative importance appears to shift from insurance costs to actual claims as the size of the firm increases. A large majority of firms favor federal legislation that would allow a tax deduction for contributions to a tax-exempt professional liability trust. This is true whether or not the firms currently have insurance or have experienced claims. If the legislation were enacted, most firms would qualify as having a severe liability problem. Over half of the firms - 12 · |