Economic Impact of Self-Insurance Reserve Trusteed Funds: Product and General Liability Exposures

Abstract

Several bills are pending in Congress to amend the Internal Revenue Act to permit corporations to deduct as business expenses contributions made to self-insurance reserve trust (SIRT) funds, established for the purpose of paying product and/or general liability losses.* Through enactment as law, a corporation's decision to retain the general liability or product liability risk would result in the same tax treatment as transfer through commercial insurance. Under one bill, the amount which can be contributed into a SIRT is limited to 3 percent of gross sales of that product, which allegedly is the amount comparable to what the most seriously affected manufacturers are paying for products liability insurance coverage. In that bill, funds so contributed could be used only for the product liability payments, and withdrawals or use for any purpose other than product liability loss payment would be subject to substantial penalties. The other bills are extensions of the same idea to a broader number of covers. At present, none extends to property risks. These bills, particularly the product liability bill, arise because the lack of availability and the high cost of liability insurance is seen as an increasing threat to some sectors of the economy, particularly small businesses within these sectors. The choices available to such business without insurance are bleak: pay-as-you-go, or the establishment of a reserve fund with after-tax dollars. Neither is feasible for that type of loss financing. The product liability bill allows tax deductible contributions to trusts, the proceeds from which can be used to pay products liability losses only. These bills attempt to introduce symmetry in the tax laws pertaining to the business decision regarding loss retention versus insurance. As a parenthetical note, the bills only introduce partial symmetry, since logic would suggest extending them to all property-liability exposures. That aside, where insurance against liability loss is unavailable or not affordable, the inequity involved in the tax treatment of the (forced) decision to retain the loss is apparent. If a loss occurs with pay-as-you-go financing, potential disaster to earnings, especially those of small business is far