The Undeniable Truth on Initiatives : They All Promise Insurance Reform, But ‘No’ Would Do Better

Shell-game operators are justifiably miffed at the backers of the five insurance initiatives on November’s ballot. And since the voters can’t follow the pea, they are confused. To get some idea of what the initiatives do and how you should vote on them, you must understand some undeniable truths.

Undeniable truth No. 1: Money, like matter and energy, is neither created nor destroyed, but only changes form and/or location.

Undeniable truth No. 2: Most proponents of any change in the law are trying to reduce their risk and/or increase their income. None of the proponents are charitable institutions and they’re not going through all this effort and expense without expecting some return on their investments.

Undeniable truth No. 3: Insurance costs and expenses are two sides of an equation and you can’t reduce one side without reducing the other. What the initiatives call “reductions” are really shifts in risk or cost--either from your pocket to someone else’s or vice versa.

Undeniable truth No. 4: Like “Comet,” “Bud Lite” or “Passion,” initiative names are product names designed not to inform the consumer but to sell the product. As we go along in this discussion, perhaps we can suggest some more informative new names.

Undeniable truth No. 5: Each of the initiatives will benefit someone, burden someone else and leave a group unaffected.

Last, keep in mind that the winner of the insurance initiative horse race will be with us for a long time, since usually initiatives must be amended in the same way they are enacted--by the voters.

Let’s look at the initiatives individually and analyze them in the context of the undeniable truths.

Proposition 100 specifically preserves the right of a claimant to sue an insurance company. Not surprisingly, the trial lawyers support this.

A famous case known as Royal Globe, which protected the right of a third party to sue an insurance company if it was not settling the claim fairly, was recently overturned by the state Supreme Court. Proposition 100 would restore it as part of preserving a claimant’s overall right to sue an insurance company.

Proposition 100 also subjects insurance companies to the laws against price-fixing from which they are currently exempt. The title “The Good Driver Initiative” is a misnomer. According to undeniable truth No. 3, giving “good drivers” greater premium breaks will raise even further the premiums of “bad drivers,” inevitably forcing them out of the insurance market altogether--but probably not off the road. Thus, everyone else’s uninsured motorist premium will go up. The better name would be “The Trial Lawyers Full Employment Act.”

Proposition 101 is backed by Assemblyman Richard Polanco (D-Los Angeles) and one Southern California auto insurance company, Coastal Insurance.

Polanco and Coastal Insurance are backing Proposition 101 because it shifts much of what is now paid in claims by auto-insurance companies to health and other kinds of insurers. In return for this reduction in risk, Proposition 101 promises a 50% cut in rates for uninsured motorist and bodily injury liability premiums. (If 101 becomes law, look for increases in your health-insurance premiums within a year or two.) However, given the amount the auto insurers will save by transferring much of their risk to other kinds of insurers, the premium reduction seems pretty paltry.

Under Proposition 101, you and your health-insurance company will subsidize all the bad drivers out there and your auto-insurance company will eliminate a very large portion of its risk. So let’s call this one “The Risk Reduction for Auto Insurers and Bad Drivers Subsidy Act.”

Proposition 103 is a social experiment based on the untested assumption that auto-insurance rates are uniformly 20% too high. Proponents Harvey Rosenfield and Ralph Nader propose that the state insurance commissioner be elected, probably naively assuming that by electing the commissioner, he or she will somehow be less likely to be co-opted by the insurance companies. Depending on who is being talked to, Proposition 103 may also rescind the controversial practice of territorial rating. For obvious reasons, in Los Angeles, proponents say that yes, territorial rating could indeed be abolished by Prop. 103. Almost everywhere else in California the proponents say no, the territorial rating system that keeps you from subsidizing those madcap drivers in Los Angeles may very well be preserved as a legitimate rate-setting device.

Proposition 103’s promised rate reduction reduces only one side of the insurance equation--the pay-in side, what the consumer pays the insurance company. According to undeniable truth No. 3, the pay-out or benefit side inevitably will be affected--but no one knows how.

Let’s call this one “The Harvey Rosenfield Income Security Act,” because Proposition 103 also requires all insurance companies to notify all their policyholders of their right to join an “independent nonprofit corporation which shall advocate the interests of insurance consumers in any forum.” One could reasonably speculate that this nonprofit corporation will have a healthy representation from Rosenfield’s Voter Revolt to Cut Insurance Rates. Perhaps even Rosenfield himself, Voter Revolt’s chairman.

Proposition 104 is the insurance industry’s own initiative, so it’s a safe guess to assume that insurance companies will benefit mightily from its passage. It preserves what is already favorable to insurers in existing law and, by re-enacting it by vote of the people, makes it more permanent. It also adds additional benefits for insurance companies.

Like, for example, transferring risks now shouldered by auto-insurance companies to other kinds of insurers by requiring that you, the claimant, pursue your insurance benefits only after you have exhausted everything else, including disability benefits. Issues that now go to court would be arbitrated and both “pain and suffering” and lawyers’ contingency fees would be limited.

Yes, Proposition 104 is “The No Fault Initiative.” But for clarity’s sake, it should be retitled “The How Much Risk Can We Eliminate from the Insurance Business Act.”

Proposition 106, titled “The Lawyers Fair Fee Act,” unilaterally limits fees for lawyers who represent petitioners or plaintiffs in civil suits, like those filed against insurance companies. However, Proposition 106 does not limit fees on the other side of the equation--like those for the lawyers who defend insurance companies. I suggest Proposition 106 be renamed “The Disincentive to Sue Insurance Companies Act.”

How should you vote? Probably the best approach is to vote no on all the initiatives--not by abstaining from voting but an actual vote against each proposition. By enacting any of the propositions the voters are likely to put into motion economic forces more harmful than those under the existing system. Rather than rely on poorly drafted initiatives that fall short of solving the problem, it would be best for the Legislature, paying heed to voter frustration and pressure, to go back to the drawing board when the next session begins in December to devise a comprehensive, well-reasoned solution.