Prop. 100 Evokes Unrestrained Claims From Insurers, Lawyers

The claims made for and against Proposition 100, the insurance initiative backed primarily by California’s trial lawyers, tend to be unrestrained.

Atty. Gen. John K. Van de Kamp says that of the five insurance initiatives appearing on the Nov. 8 ballot, it is “the best, most comprehensive proposal for real insurance reform.”

“It will replace our antiquated system of non-regulation, of blind trust in insurance companies, of special favors for special interests,” the attorney general says.

On the other side, the insurance industry contends that Proposition 100 would herald a new era of heavy-handed government control. Instead of lowering auto insurance rates for up to 80% of the state’s drivers, as the initiative’s proponents claim, the insurers say the measure would, in fact, raise rates for about two-thirds of all policyholders.

The language of the initiative, however, suggests that it would not bring as much change as its adherents say and would not be as contrary to insurer interests as its opponents contend.

While calling for rate rollbacks, it also offers insurance companies a way to escape them. And the insurers’ contention that it would raise rates for many policyholders is based on language so vague and qualified that its practical effect is open to question.

Proposition 100 was drafted in consultation with the California Trial Lawyers Assn. by Van de Kamp aide Michael Strumwasser, consumer activist Steven Miller and Gene Erbin, an aide to Assemblyman Lloyd Connelly (D-Sacramento).

All three are longtime supporters of the trial lawyer side of the argument over how to reform the insurance system, which calls for requiring insurers to make financial sacrifices. The California Trial Lawyers Assn. originally drafted its own initiative but decided to drop it and support Proposition 100. The trial lawyers, who have contributed three-quarters of the money to finance the Proposition 100 campaign, prefer to describe it as a “consumers’ initiative.” But its most definite language has to do with defending trial lawyer interests.

If Proposition 100 gets more votes than Propositions 104 and 106, the two insurer-backed initiatives, it would rule out provisions in those measures that would limit attorneys’ contingency fees.

It also would give lawyers the power to intervene, at insurance company expense, in insurance rate decisions.

And it would specifically rule out the insurers’ “no-fault” auto system called for in Proposition 104 to restrict lawsuits in auto accident cases while it would give claimants the right to sue insurance companies for acting in “bad faith.”

These provisions, some of which are related to consumers’ rights but all of which protect trial lawyers’ income, are unqualified. By contrast, the measure’s price rollback, territorial rating and rate regulation provisions are qualified.

In three significant ways, all directly affecting consumers, Proposition 100 pulls its punches:

- It calls for a 20% rollback in auto insurance rates from their Jan. 1, 1988, levels for “good drivers” who have had no accidents and no more than one minor traffic violation for the last three years. But companies that can convince the insurance commissioner that the new rates would provide them an “inadequate” return would not have to give the reductions to their policyholders.

- It says policyholders’ driving records, rather than the accident statistics for their neighborhoods, should be the prime criteria for setting rates. This would seem to strike down the territorial rating system under which people in certain “high-risk” neighborhoods are charged more for insurance. But in the next phrase it permits territorial rating to continue if the insurance commissioner finds it justified as a “valid predictor of losses,” a general judgment the commissioner has already made.

- It gives the commissioner rate regulation authority. But generally that authority would apply only in the case of annual increases of more than 7.5% for policies covering individuals and 15% for commercial policies, suggesting that rate increases below those levels would be allowed without significant challenge.

On the rollback, Will Glennon, a legal analyst with the Trial Lawyers Assn., contended in a recent interview that even with these qualifications, the proposition would still provide significant relief from high insurance prices.

“What’s going to happen when this system goes into effect is that the facts and figures about the insurers’ finances will have to come out,” Glennon said. “Some companies will be able to block the discount, but most won’t.”

‘Burden of Proof’

Miller, who is serving as chairman of the Proposition 100 campaign, said: “For a company to get out of the rollback, they have the burden of proof. They have to establish that the new rate would be inadequate under the law.”

Insurance industry experts, however, say companies could make a strong case for exemption from the rollback requirement.

Stanley Zax, president of the Assn. of California Insurance Companies, has already declared that most companies in the state have been losing money on auto insurance for the last five years and cannot afford a rollback that is not accompanied by restrictions on lawsuits and cutbacks in certain damage pay-outs, neither of which are called for in Proposition 100.

‘Illusory, Temporary’

The insurers’ campaign organization, in its analysis of the measure, declares:

“Proposition 100’s arbitrary rate cut is illusory and temporary. Proposition 100 does not cut down on the costs driving up insurance rates--high legal fees, fraud and the burden of protecting ourselves against uninsured motorists. It cannot provide long-term rate reduction.”

If such reductions can be provided, the initiative seems to suggest that the insurance companies could recoup their losses by raising rates for those classified as bad drivers. But rates for California drivers with bad records already are so high that many cannot afford insurance and ignore the state law requiring them to have it.

The insurers have been concentrating their anti-Proposition 100 advertising on the contention that the initiative would end the practice of basing auto insurance rates on where a policy holder lives. The insurers contend that if this territorial rating system is terminated, they would have to charge rural and suburban policyholders more to permit rate reductions for urban customers.

Rates Based on Record

J. Gary Gwilliam, president of the Trial Lawyers Assn., originally stated that Proposition 100 would “base auto premiums on our driving records and not on our ZIP codes,” in other words ending territorial rating.

But when insurers launched ads contending this would actually increase rates rates for many drivers, the pro-Proposition 100 campaign stopped saying that the measure would do anything, in actual practice, to end the territorial rating system. Other supporters, however, continue to say it would.

As for the rate regulation portions of Proposition 100, these will probably bring about a significant change in the insurance system, despite the 7.5% private and 15% commercial thresholds.

Glennon contended that setting such thresholds for invoking rate regulation is more effective than requiring insurance commissioner approval of all increases, as would be done by Proposition 103, the initiative backed by consumer advocate Ralph Nader.

‘Tremendous Leeway’

“You don’t want to bog the system down in bureaucracy,” he said. “So you filter out a portion. And tremendous leeway is given to the department to consolidate hearings.”

The rate regulation provisions apply to virtually all property and casualty insurance, not just auto, and past patterns of price increases indicate that many increases will exceed the thresholds and thus would come up for public hearing and review by the insurance commissioner. Health insurance, which has been subject to dramatic rate increases, is specifically included.

The insurers say such a system would be a nightmare.

“The measure will add time, expense and lots of lawyers to enact a price-control policy that does nothing to reduce the cost of insurance,” says the insurers’ analysis of Proposition 100. “Price control simply does not work. In New Jersey, a state with strict prior-approval regulation, insurance rates are the highest in the nation.”

Increases Held Down

However, Proposition 100 supporters point out that in the one area where California’s insurance commissioner has had rate approval authority in the past, over the assigned risk auto system, rate increases have been held far below what the insurance companies wanted, and they suggest that the same thing would hold true for all companies in the system proposed.

Indications are that more than $10 million will be spent on behalf of the trial lawyers’ measure, not as much as the $43 million the insurers plan to spend but still enough to get out a powerful advertising message. The Proposition 100 campaign is being managed by the Woodward and McDowell campaign organization of Burlingame, one of the state’s most respected.

Proposition 100 GOOD DRIVER INSURANCE

PROVISIONS OF THE INSURANCE MEASURES PROPOSITION 100 Main Sponsor: California Trial Lawyers Assn.

Other Supporters: Atty. Gen. John K. Van de Kamp, Assembly Speaker Willie Brown Jr., California Bankers Assn., International Chiropractors Assn. of California, Consumers Union, Common Cause, National Insurance Consumer Organization, League of California Cities, California Peace Officers Assn.

Opponents: Insurance companies and their various lobbying associations, insurance agents associations.

Key Provisions of Proposition 100: Rollback of Rates. Effective Jan. 2, 1989, every insurer would reduce rates for “good drivers” to 20% less than they were on Jan. 1, 1988, unless the state insurance commissioner is shown “clear and convincing evidence” that the rollback would mean “inadequate” earnings for insurers. “Good drivers” are those with not more than one minor traffic violation or any at-fault accidents in the past three years.

Territorial Ratings. Auto insurance rates would be based primarily on a customer’s driving record. Territorial ratings, under which rates are based on where customers live, would not be permitted unless the insurance commissioner finds such ratings are a “valid predictor of losses.”

Rate Regulation. Any annual rate increases for auto, homeowners, commercial liability, health and other types of property and casualty insurance that exceed 7.5% for individuals or 15% for commercial customers would require approval of the insurance commissioner. At hearings on such increases, the burden of proof would be on the insurance company.

Antitrust Exemptions. The insurance industry’s California exemptions would be repealed.

Banks. Banks would be allowed to sell insurance.

Bad Faith Lawsuits. Terms of the Royal Globe decision, recently overturned by the state Supreme Court, would be reinstated, allowing claimants to sue insurance companies for bad faith.

No-Fault Insurance. If Proposition 100 gets the most votes, the no-fault system contained in the insurers’ initiative, Proposition 104, could not go into effect even if it passes on Nov. 8. Under that system, most accident victims would recover damages from their own insurance company regardless of who is at fault.

Attorney Fees. Limits on lawyers’ contingency fees called for in the insurers’ Propositions 104 and 106 would be ruled out if 100 gets more votes than these initiatives.

Intervenor Funding. Nonprofit consumers organizations deemed to have made substantial contributions to Insurance Department rate hearings or judicial reviews of rate matters would be reimbursed for their expenses by the insurance companies.

Consumer Advocate. The state attorney general would appoint a consumer advocate who would intervene in judicial and administrative proceedings involving insurance.

Consumer Assistance. The state Department of Insurance would, at a reasonable cost, offer computerized insurance price comparisons to consumers who request them.

Fraud. Each insurer would pay an annual fee of not more than 10 cents per policy to pay for increased investigation and prosecution of auto insurance fraud.

Senior Citizens. Rules would be established to prevent fraud in the sale of medical insurance to seniors and a bureau would be set up in the Department of Insurance to deal with such abuses.

Public Disclosure. Insurer would be required to report premiums, losses, reserves, expenses, investment income, commissions, lobbying costs, political contributions and other information to the Department of Insurance.

Amendments. Provisions of the initiative could be amended or repealed only by a two-thirds vote in the Legislature, except that the Legislature could pass a no-fault bill, or set limits on attorney fees by a majority vote.