Two years ago, a 13-year-old Florida boy shot his sixth-grade teacher Barry Grunow to death on the last day of school. The story had all the makings of a great lawsuit: violence, tragedy, and social ills ranging from cheap guns to bad parenting. But the way this case and dozens of other like it is actually playing out in the courts involves something much more mundane: product liability insurance.
The Grunow case represents a new tactic for gun opponents, a strategy that involves scaring insurance companies away from cheap, dangerous guns. The Grunow case did not end up costing the gun businesses much; it was the insurance companies who got hit. And the insurance industry is too smart to pick up the tab for everyone else's mistakes. They are instead raising rates or refusing to take on or insure some gun businesses. Disreputable gun businesses pay dearly—by paying premiums four or even eight times as high as they paid a few years ago, if they can get insurance at all. Where they can't, they will likely be forced out of business, which is OK, too.
It's taken decades for suits against the gun industry to become this sophisticated and successful. When shooting victims first started suing, they went after the manufacturers. But even when they won, they got no money. Tom McDermott was one of the lawyers who worked on the first big successful case against the industry, Hamilton v. Accu-Tek. In Hamilton, the lawyers managed to prove a novel theory: that the industry tightly controlled all aspects of its product while turning a blind eye on who bought the guns. The jury sorted out, company by company, who had been reckless. Not surprisingly, it was the makers of Saturday Night Specials—poorly made guns selling for $35-$150, which frequently ended up in the hands of criminals—who were most culpable. This Brooklyn federal case (though it was eventually overturned) opened the floodgates for the next wave of gun litigation: negligent distribution claims—suits attacking the way guns are sold and the industry's habit of overselling to areas prone to crime or gun smuggling.
But when McDermott went to actually chase down the jury award related to Hamilton, he encountered what had become a rather typical evasive tactic of the gun industry. The company went bankrupt. So McDermott went after its insurance company. For just about any other product made in America, there would have been an insurance policy to clean up the mess left after a judgment and a bankruptcy. But the gun industry hasn't worked this way. Gun-makers have generally fallen into three categories: uninsured, badly insured, and legitimately insured. The high-end companies—the Colts and Smith & Wessons—are insured either through mainstream insurance carriers or through an industry insurance co-op—with such strict standards, it simply excluded all the makers of Saturday Night Specials.
The low-end companies for the most part simply went uninsured for decades, unable to afford legitimate insurance. But some found great deals on cheap insurance. And eventually they mostly were insured by the same company, ABC Co-op.
Faced with a slew of product liability and negligent distribution suits, ABC collapsed. ABC's MO for years had been the same as many of the gun companies it insured: When the claims built up, it would collapse and then restart as a new company. McDermott's dogged pursuit of ABC finally put an end to that. The FBI and a grand jury in Boston are now investigating the man behind the ABC Co-op, Howard Holladay, who claimed to be just a bureaucrat for ABC but who actually owned and controlled an international network of insurance entities. The insurance he sold turned out to be nearly worthless. Last year Kentucky federal Judge Joseph H. McKinley Jr. called Holladay's company "a fiction of the imagination."
That's how McDermott realized that if he could force cheap gun-makers—who nearly all had either no insurance or Holladay's sleazy insurance—into getting legitimate insurance, he would effectively end their racket of dumping millions of unreliable handguns on the poor. Since these companies made riskier products, their rates would become much higher than the legitimate companies—if any insurer would touch them at all.
If nothing else, forcing gun manufacturers to buy legitimate insurance cut down on their juicy, sometimes 100-plus percent profit margins. The result of all these lawsuits—and one of the main goals of the Florida lawsuit—was to make the companies producing cheap, dangerous guns virtually uninsurable.
Grunow's case in Florida is a good example of what insurers now fear. The boy had taken the unlocked gun from a family friend. He went to jail, and the insurance company for the family friend paid the plaintiff $300,000. The insurance company for the pawn shop that sold the gun also paid $275,000. But the case was novel in that it targeted not just the gun owner or gun seller, but everyone along the supply chain. So last month a jury decided that the gun distributor—that's just the wholesaler, not the maker and not the retailer—should also pay Grunow's widow $1.2 million. But the gun-maker, Raven Arms, was already out of business. There was no insurance; Raven had claimed to be "self-insured" (a euphemism for uninsured unless you have a bank account the size of Philip Morris'). The gun distributor's biggest failing was in not checking the validity of Raven's insurance. That's a mistake that few in the gun distribution business will ever make again.
The big revolution in the gun-insurance market was not the direct result of any courtroom victory. Rather, it was that gun businesses started to look out for themselves. As the lawsuits started piling up, gun distributors started demanding that gun-makers submit a certificate of insurance to show that there was a policy to protect the distributor against lawsuits. Without the certificate of insurance, the gun-maker can't market its product.
As a result of these lawsuits, the distributors' demand for meaningful insurance has helped make the manufacture of junk guns financially untenable. McDermott, who has gone on a crusade of sorts ever since Colin Ferguson shot him and 24 others on a commuter train, is now writing up a class-action complaint to file in Judge McKinley's federal courtroom in Kentucky. He's suing on behalf of everybody ever hurt by any crappy gun that Holladay insured. The list will include perhaps hundreds of dead and maimed, including a Kentucky soldier killed when he bent down to tie his shoe and his gun fell and shot him in the stomach and a Philadelphia gun dealer whose hand was turned into a fleshy claw by an exploding gun. McDermott's list is, sadly, still growing; millions of cheap guns Holladay insured are still out there, even though the companies are long gone.
Holladay's insurance let those companies produce guns at historically low prices. It was his cheap insurance and the sloppy insurance policies of others in the trade that fueled a bonanza in handgun sales that peaked at just over 2 million a year in 1993.
The dozens of lawsuits by individuals and municipalities wending their way through the courts have already had their effect. The gun industry does its damage in dramatic, quick incidents. These lawyers do theirs in slow-motion assaults on the economics of the industry. Even without a dramatic courtroom victory—though one may still be coming—they have helped drive handgun sales to roughly half their early 1990s peak. It's certainly nothing flashy, but product liability insurance is turning out to be an effective weapon against the gun industry.
The author wishes to thank Dave Tinker, founder of Firearms Business.