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Police Brutality Poses Moral Hazard For Insurance Investors

By Elizabeth Daley · 2023-05-26 18:12:41 -0400 ·

Travelers shareholders voted Wednesday on a proposal asking the insurer for a report on its efforts at reducing the financial and reputational "risk of racist police brutality" in a measure that is among the first to link this social justice issue with investor incentives.

The result of the vote is not yet known, but senior associate Julia Cedarholm of Arjuna Capital said the impact investment firm was the first to ask an insurer what "racist police brutality" costs investors. Cedarholm leads Arjuna's efforts to integrate social justice and environmental goals into its investment processes.

The proposal asks for information about Travelers' police liability policies and options to change them "to help ensure its insurance offerings reduce and do not increase the potential for racist police brutality, nor associate our brand with police violations of civil rights and liberties."

While environmental and social justice shareholder proposals abound, a document search of the U.S. Securities and Exchange Commission's archive going back to 2001, shows Arjuna to be the only company to specifically address police brutality. This is the second year the firm has put the proposal to Travelers on behalf of shareholders it represents.

Arjuna attempted a similar proposal to Chubb shareholders in 2021, but it was shot down by the U.S. Securities and Exchange Commission under the more conservative Trump administration. Priorities were revised under Biden. Cedarholm said Arjuna came up with the proposal in the wake of the murder of George Floyd at the hands of Minneapolis police officer Derrick Chauvin in 2020, and the protests that ensued.

"We started to think about what the different levers are that are perpetuating systemic racism," Cedarholm explained, noting Travelers wasn't selected due to a specific incident, but because it offers police liability insurance and was in portfolios managed by Arjuna.

"A lot of police departments have these insurers that are backing them, and if they have insurance companies that are just going to pay out for police misconduct, then there is no incentive really to change behaviors," she said, explaining Arjuna is concerned for financial reasons as well.

The cost of police violence has increased, with single pre-trial settlements reaching $27 million, as in the case of Floyd. In 2022, a jury awarded $100 million to Jerry Blasingame, who was paralyzed by Atlanta police.

The payments usually come from taxpayers or insurance companies, not from personal bank accounts.

But experts say the true cost of police violence is hard to quantify. Beyond the immediate costs of police settlements or judgments, there are collateral costs that are never measured: the cost of mental health services to people who may never file lawsuits. Days of missed work due to wrongful arrests. And more broadly, the emotional cost of widespread fear.

Most are not costs Travelers will have to pay, and the board is unanimously against Arjuna's proposal. Travelers told shareholders that as of December 2022, police liability insurance represented just .13% of its net written premiums.

The company didn't respond to interview requests and doesn't want to comply with Arjuna's demand for a report on the "reputational, competitive, operational, and financial risks" of "racist police brutality."

Insurance Market Grapples With Police Violence

Insurance is known to create moral hazard: increased risky behavior when one feels some degree of protection, according to University of Chicago law professor John Rappaport, whose work is quoted in Arjuna's proposal. In policing "there's kind of already moral hazard," he said, "because the cops know that they're indemnified by the cities or the counties."

This doesn't mean all officers are acting with impunity, said broker Sandra McFarland, who has worked for Marsh for 23 years. However, she noted it's only become harder to find her clients robust police liability coverage.

"Claims are just happening more frequently, and they are more severe," she said, explaining that premiums have doubled while coverage has been cut in half. Large payouts from "nuclear verdicts" have in part caused costs to rise, she said.

In its 2022 letter to the SEC opposing Arjuna's proposal, Travelers itself listed cases it was paying to defend in which officers participating in enhanced policing initiatives were accused of racial profiling and wrongfully killing Black men. A Delaware federal case blamed police for killing Lymond Moses during a canvass for stolen cars. Ricky Ball was killed by an officer stopping cars at random in a high crime area, his estate's Mississippi federal case said.

Black people are 2.9 times more likely to be killed by police than white people, advocacy project Mapping Police Violence found. UCLA law professor Joanna Schwartz said this is due to frequent interactions with officers thanks to biased policing practices, which can be changed.

Travelers mentioned these cases to argue that if passed, Arjuna's proposal threatened its legal strategy and might subject it to discovery or deposition. It does not want to lift the veil on its police liability coverage. However, Schwartz said insurers still might be better equipped to make policing changes because in self-insured jurisdictions police don't often review interactions that end in litigation at all.

This is at least in part because "the city attorney's office believes that it will potentially increase liability risk," she said.

If police were warned that a certain practice led to litigation, they could be found more culpable if they continued it, she explained.

"An insurer can create more pressure than a local government can in a self-insured jurisdiction, because an insurer is immune from political pressure," she said.

Some Insurers Offer Preventative Measures

Insurers often offer police training programs as a risk management strategy. Travelers itself provides tips to departments regarding how to react when being filmed, how to perform strip searches and the importance of body camera policies, according to its website.

Plus, insurers' recommendations may be based on data far beyond what is available to police departments, according to Rappaport and Schwartz, who say insurers may have the best bird's-eye view of law enforcement altercations across the country.

However, Travelers denies it can seriously change policing, writing in its letter to the SEC that "as an insurance company, [Travelers] has no ability to require its insureds to implement any particular policy or practice."

While insurers cannot demand police departments run a certain way, they can have an impact, says Chris Connacher, who insures police as deputy chief underwriting officer of Euclid Public Sector LLC.

Connacher said his company takes certain factors, such as repeat offenses by officers, into account in the underwriting process. If an officer causing losses doesn't improve and the department doesn't consider the matter, Connacher won't continue to offer insurance.

"Derek Chauvin had numerous occurrences of excessive force prior to George Floyd's occurrence. If at any time they had pulled him off the street, Floyd would be still alive and there wouldn't have been a huge payout to his family," he said.

Sometimes, errant officers get retrained and other times, if departments face losses as a result of participating in police chases, "we may say we are charging you extra based on the experience," Connacher said.

Like many people Law360 spoke with for this article, he stressed the inherent decency of most officers, whom he said enter the field to serve the public and are often forced to make split-second decisions.

When something goes wrong, even if they don't pay out of pocket, "these officers are impacted by that adverse event their whole lives," Connacher said.

Like McFarland, Connacher finds earning a profit from police liability insurance challenging. His company won't work in California due to generous juries and high payouts there, and McFarland said at least one client recently had just one insurance option.

Still, even as these supposedly unfavorable conditions exist, professors like Schwartz and Rappaport haven't seen the courts creating massive behavioral changes.

In many ways this is why the Travelers shareholder proposal makes sense to some observers: no one wants to pay for "racist police violence," physically or fiscally.

--Editing by Nick Petruncio.

Correction: A previous version of this story misidentified the firm McFarland works for. The error has been corrected. 

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