Insurer Gifts for No-Fault Initiative Hit

Opponents of the industry’s no-fault auto insurance initiative Monday accused State Farm Insurance of improperly using policyholder funds for campaign contributions and asked the courts to halt the practice.

A State Farm spokesman immediately denied any wrongdoing and said the company will continue to back the auto insurance industry’s Proposition 104 on the November ballot.

California’s largest seller, State Farm has been the major donor to the insurance industry-backed proposition, contributing $1.4 million as of last month. All told, the insurance industry expects to spend $43 million on its campaign, spokesmen have said.

Could Cripple Campaign

A restraining order preventing State Farm or other major insurance companies from contributing to the campaign could be a critical blow to the effort that already is the most expensive of the five initiatives dealing with auto insurance rates that will appear on the November ballot.

The restraining order is being sought by Claremont attorney William Shernoff, a former president of the California Trial Lawyers’ Assn. and a backer of two rival initiatives. He says he is acting on behalf of one of his employees, Benjamin Barnes, and all other State Farm policyholders. A hearing was scheduled for today in Los Angeles Superior Court.

If the suit is successful, Shernoff said, State Farm will have to take back the money it so far has contributed and will be barred from giving any more.

State Farm and other insurance companies that technically are owned by their policyholders are required to use surplus funds to lower rates or give rebates, Shernoff told a news conference. He was joined by Barnes, Loyola Law School professor Dan Schechter and Steven Miller, chairman of the Proposition 100 auto insurance initiative backed by the Trial Lawyers’ Assn.

Shernoff said State Farm’s actions were reminiscent of “the old (political) dirty tricks (but) just a little more subtle.”

Wrongdoing Denied

Jim Stahly, public relations director for State Farm’s headquarters in Bloomington, Ill., denied that the company had done anything wrong. Supporting the ballot initiative is no different from spending money to influence legislative actions that insurance companies routinely track all over the country, he said.

“We’re using company funds and we’re active in legislatures through the country in looking out for the interests of our policyholders,” said Stahly.

Despite holding nearly $14 billion in surplus funds, Stahly said the company actually had lost money in recent years on its California insurance operations. The surplus, built up over a number of years, is required by a variety of regulations to ensure that the company is solvent enough to take on new business, he said.

Use of the funds is “proper and we will continue to do it,” said Stahly. “There’s no question the propositions would affect our policyholders.”

The no-fault initiative would scrap the current auto insurance system and substitute one in which drivers would be compensated for their damages up to a certain level. In exchange, the drivers would give up their right to sue except in cases of serious and permanent injuries or losses exceeding certain limits. Payments for “pain and suffering” would be reduced.

Supporters of the no-fault system say that by eliminating lawyers and lawsuits from most claims, insurance rates will come down and policies will be more easy to obtain.