Insurers’ Initiative Is the Most Complex

Of the five insurance initiatives on the November ballot, none is so long, so complicated or would bring about so many changes in the average consumer’s dealings with auto insurance companies as the insurance industry’s Proposition 104.

It is the industry’s response to the public clamor for lower insurance rates, an elaborate formula that would give the insurers extensive new protections against the kinds of claims, lawsuits and other perils they contend are causing the problem.

The 122-page measure would do so by:

- Setting up a so-called no-fault system under which accident victims would be required to collect primarily from their own insurers when they have an accident, regardless of who is at fault.

- Sharply reducing the opportunities for the industry’s traditional rivals, the trial lawyers, to sue in auto insurance cases and by restricting trial lawyers’ fees in order to discourage them from taking advantage of the opportunities that remain.

- Slashing the pain and suffering pay-outs to consumers that have cost the companies so much in the past. The insurance companies would be given more power to monitor, and in some cases suspend, those pay-outs that would still be allowed. Consumers’ rights to recover punitive damages in claims disputes would be substantially restricted.

- Re-enacting or extending all existing state laws that exempt the insurance industry from antitrust laws, prevent agents’ rebating part of their commissions to customers, give the industry freedom from rate regulation and allow continuation of the territorial rating system of pricing insurance by neighborhood, among others.

Proposition 104 specifies that any state legislation to change its provisions would require two-thirds votes in both houses for passage. Given the insurance lobby’s ability over the years to block action not to its liking, the two-thirds requirement could make the insurers’ initiative virtually tamper-proof for years to come.

It is the sweeping nature of the measure--even more than the unprecedented $43 million that the industry acknowledges it will spend to get the initiative enacted--that has made Proposition 104 the focal point of the bitter insurance initiative fight.

The measure is bitterly opposed not only by the California Trial Lawyers Assn., whose members stand to lose much of their livelihood if it passes, but by virtually every consumer group. “Consumers will be at the total mercy of insurance companies” if it passes, predicted Robert Hunter, president of the National Insurance Consumer Organization. “It’s a dream come true for the companies.”

Asked why Proposition 104, with all of its restrictions on policyholders as well as lawyers, would be a good thing for the public, the insurers say it is necessary to bring the costs of insurance down and keep the system viable. Rate rollbacks called for in other initiatives that are not funded by specific restrictions of costs will prove unworkable, they say.

“The central point about 104 is, does it limit lawsuits and does it cut costs,” said Scott Carpenter, the industry’s lead spokesman. “And on that score, it passes both counts.”

Allen Katz, the Los Angeles attorney who drafted the measure, readily agreed in recent interviews that, in exchange for lowering premiums, Proposition 104 would abridge many current consumer privileges.

“The savings come from knocking out pain and suffering” payments, he said.

“No-fault would eliminate a lot of the excessive verdicts and other costs and still afford some protection for the people.”

Defending another restrictive clause, he explained, “We had to put teeth in this and we did.”

Among the “teeth” are these:

- No pain and suffering pay-outs would be permitted unless injuries were both “serious” and “permanent” and both terms would be defined restrictively. By contrast, the New York no-fault system with which the insurers often compare their California proposal, allows pain and suffering for “serious” injuries only, and a “serious” injury in New York could be only a fracture. Proposition 104 would define “serious” injuries as those having “a substantial bearing on the injured person’s ability to resume substantially all of his or her normal activities and life style.”

- Basic no-fault policies would limit damage claims to $10,000. By contrast, in New York, the maximum limit is $50,000. Californians could buy no-fault insurance in excess of the basic minimums, but then the cost would go up.

- Insurers would be given much more power than they now have to force claimants to submit to “independent” medical examinations to ascertain whether they are exaggerating their injuries.

- Many disputes over claims payments would have to be submitted to arbitration. If arbitration was refused, the claimant could not sue and he might not get anything.

The insurers often contend in their campaign that under no-fault, compensation would be “automatic,” but a reading of some of Proposition 104’s provisions shows otherwise. For instance, an insurer could suspend all benefits if the claimant “unreasonably refuses” to go along with requests that he or she undergo medical treatment or rehabilitation.

Such “teeth” are one reason given by the Consumers Union, which has traditionally supported the concept of no-fault insurance, for not liking Proposition 104.

“We oppose Proposition 104 on two grounds,” the group declared in a recent statement. “First, many provisions, unrelated to no-fault, would make dramatic changes in California’s insurance laws. . . . Second, the no-fault provisions are inadequate. . . .

“Proposition 104 is not a balanced proposal. In New York . . . legislators balanced the interests of consumers, insurance companies, doctors and lawyers. The results are systems which guarantee prompt and full payment for virtually all auto accident injuries and have relatively stable rates. Proposition 104 was drafted by the insurance industry to benefit only their interests.”

Another doubt often expressed about the California proposal is that while it would cut back on what the companies have to pay out, it is unclear about how much the public can expect to save on insurance policy premiums.

As written, Proposition 104 says that effective July 1, 1989, prices on the bodily injury liability, uninsured motorist and medical payment portions of auto policies would be reduced by a statewide average of 20% below the levels existing on Election Day and held there for two years.

Nothing is said about what would happen to prices of other components of the policies, but the insurers have unofficially estimated that overall premiums would decline by “an average of 7% to 17%” statewide.

Most companies and the industry campaign committee are not willing to be more precise, despite suggestions by critics that--particularly if the low range of those figures were to apply, and the average decrease was only 7%--some consumers could actually end up with an increase. They also note that many companies have been raising prices prior to the election.

No-Fault Rollback

One Los Angeles company has been more precise than others in pledging no-fault rollbacks. The Mercury group of companies, the state’s eighth-largest auto insurance seller, has stated that in Los Angeles County rates on the affected portions of coverage would come down “about 30% to 35%,” and its chief executive officer, George Joseph, recently indicated that this would amount to a 20% to 23% decrease overall.

Several other large sellers, asked whether they could make a commitment on rollbacks within Los Angeles County or another geographic area, declined to do so.

For instance, State Farm, the largest seller in the state, responded through a spokesman: “We have no plans to make such promises.”

The Automobile Club of Southern California said, “It’s our opinion that rates in the Los Angeles area should end up being reduced in a greater proportion than in other areas, but we don’t have any specific figures at this time.” And Farmers responded, “We have no plans to take any action or make any statements.”

The ‘Bottom Line’

Industry spokesman Carpenter said that the “bottom line” is that the proposed no-fault system would be the best in the country, because it would have “a greater impact on short- and long-term costs to the companies.” These savings to the companies, he said, “theoretically would be passed on (to consumers) because the free market system is at work.”

But while it is clear that policyholders would give up many of the rights they now have to file claims and lawsuits, it is not clear how much they can expect to save on premiums under Proposition 104. Since the initiative rules out future rate regulation by state authorities, there is no guarantee that rates would not go up again after the initial two-year rollback, whatever that might turn out to be.

Proposition 104 is the result of a decision by large insurance companies, including State Farm and Allstate, that they would be willing to finance a no-fault initiative but not one calling for a more limited package of changes in the law.

A Countermove

The measure was drafted as a counter to Proposition 100, which is supported by a trial lawyer-consumer coalition, and Proposition 103, which is backed by consumer advocate Ralph Nader.

A main difference between Proposition 104 and Propositions 100 and 103 is that the latter would put the entire burden for financing cutbacks in insurance rates on alleged exorbitant insurance company profits, while Proposition 104 would put the entire burden on the trial lawyers and consumers.

The insurance industry, supported by state Insurance Commissioner Roxani Gillespie, insists that its profits simply are not sufficient to fund rollbacks. If there are to be any rollbacks, the insurers say, they must come through savings on the companies’ claims and legal costs.