Insurance Revolution
The California Supreme Court, intentionally or not, has injected itself into the most expensive and bitter initiative campaign in state history--the multimillion-dollar, multiple-proposition fight over insurance reform. By overturning a landmark 1979 decision that had allowed insurance companies to be sued for “bad-faith” handling of claims, the court not only remade California law but also put the insurers on the spot and provided ammunition for those determined to step up government regulation of the industry.
Whether this was a wise step for the court will probably be as hotly debated in the law reviews as was Royal Globe Insurance Co. vs. Superior Court, the controversial 1979 decision that the justices have now overruled. The five-man court majority seemed too eager, in our view, to upset a ruling that was only nine years old; the issue of whether Royal Globe should be overruled was never even addressed by the lower courts or by the full Legislature. And, by handing the insurance industry what dissenting Justice Stanley Mosk called a “royal bonanza,” the majority may find itself facing some of the same public scorn that engulfs the insurers.
The Royal Globe decision, written by Mosk, permitted an accident victim to sue the responsible party’s insurance company if a claim had been improperly denied or delayed. This private right of action, which the Royal Globe majority read into a statute banning unfair and deceptive practices by insurers, evened the odds in the David-and-Goliath battles that consumers often wage against recalcitrant insurance companies. If an insurer procrastinated, it could be hit with a bad-faith claim and end up paying damages far exceeding the limits of the policy involved.
But the industry claims that, in practice, Royal Globe was a nightmare. The insurers blame the decision for spawning more litigation, increasing their attorneys’ fees and pushing up premiums for everyone. As their rates have escalated, they have argued that Royal Globe has coerced them into paying even fraudulent claims; rejecting such claims means risking lawsuits for bad faith and incurring big legal expenses even if they win. Bad-faith suits became more common, the insurers say, because Californians suddenly saw a chance to strike it rich.
Chief Justice Malcolm Lucas, the author of last week’s decision overturning Royal Globe, warned that it should not be read as an invitation to the insurance industry to delay claims or to commit other unfair practices banned by the insurance code. He expressed confidence that the state insurance commissioner will respond to any evidence that the companies are showing bad faith--by issuing cease-and-desist orders. We fear that the chief justice’s confidence is misplaced. The statute in question has been on the books for nearly three decades, but, according to Mosk, searches of appellate decisions indicate that the commissioner has not once taken action against an insurer for unfair or deceptive acts.
In combatting Royal Globe, the insurers contended that its reversal would slash their legal costs and reduce Californians’ insurance premiums by hundreds of millions of dollars. Unless the companies start passing on some of their projected savings immediately, however, we suspect that Californians will roundly reject Proposition 104, the no-fault initiative that the industry has placed on the November ballot; polls already show that it is in trouble.
If anything, this Supreme Court decision is likely to spur on efforts, like Propositions 100 and 103, to give the insurance commissioner more muscle and to subject the insurance industry--and its rates--to the kind of regulation that it has long resisted. Frankly, we don’t see anything wrong with that.
