Tackling Insurance

The insurance industry gave the no-fault insurance concept a bad name with its $70-million election campaign of vitriol and distortion last fall; the public responded by voting down Proposition 104, the industry’s no-fault bill, by a 3-1 margin. But no-fault deserves a second look from Californians; in combination with the the tough regulatory system established by Proposition 103, which will force insurance companies to open their books and justify every rate increase, no-fault holds out the promise of containing accident costs and stabilizing the premiums that Californians pay.

Leading the drive to rehabilitate no-fault is Assemblyman Patrick Johnston (D-Stockton), chairman of the Committee on Finance and Insurance. With the help of Consumers Union, Johnston has introduced a bill to keep about 80% of accident claims out of the court system and tightly control the litigation costs and medical expenses that drive up the price of auto insurance.

The Johnston bill is not to be confused with the stingy no-fault system that the industry pushed in Proposition 104. The two approaches have in common only the premise that motorists involved in an accident should first be compensated for their medical expenses and other out-of-pocket costs by their own insurance companies, no matter who is at fault. Proposition 104 would have capped the available benefits at $30,000--$10,000 for medical costs, $15,000 for lost wages, $5,000 if the victim died--and would have allowed the victim to sue for additional damages, including pain and suffering, only if he could prove that his injuries were both serious and permanent; a broken leg, for example, would not qualify because ultimately it would heal. Johnston’s no-fault bill would cap the benefits at $50,000, would not restrict the payments by category and would authorize lawsuits for all serious injuries without requiring that they be permanent; a victim could sue for fractures and other injuries that sidelined him for three months or longer. There is also a major difference in philosophy: The insurers’ plan would have prohibited state regulation of auto-insurance rates while Johnston’s approach is meant to complement Proposition 103 and its system of advance approval of rate increases by the Insurance Department. Johnston acknowledges that he closely modeled his bill on New York’s system, which combines tough state regulation, prior approval of rate increases and generous no-fault provisions. Using that system, New York has stabilized rate increases at about 4% annually during this decade; in California, by contrast, premiums have jumped 42% since 1985.

The California Trial Lawyers Assn., die-hard defenders of the tort system and of a victim’s right to sue, opposes the Johnston bill. Assembly Speaker Willie Brown (D-San Francisco), a trial lawyer himself, is offering an alternative cost-cutting plan that would require injury claims of less than $50,000 to be submitted to arbitration. It is unlikely that such an approach could yield the same savings as no-fault, but Brown’s bill, like Johnston’s, deserves consideration.

Harvey Rosenfield, the author of Proposition 103, contends that the Legislature should make no move until the California Supreme Court concludes its review and the insurance industry is forced to open its books; those ledger sheets, he says, will show that the industry can absorb 20% rollbacks without further cost-saving measures. That they will seems unlikely, but in any case there is no harm in the Legislature’s calling hearings this spring to get the process rolling. If the rate rollbacks are sustained by the Supreme Court, the industry will be clamoring for relief; if the rollbacks are struck down, the Californians who voted for Proposition 103 will be in a state of near-rebellion. The Legislature should be prepared for either eventuality.