Preemptive Strike : Farmers Insurance Was Poised to Fight for a Cut in Lawyer Fees--But the Threat of a Powerful TV Ad Shifted the Balance of Power

No one at Farmers Insurance Group saw the commercial, and no television station aired it. But the impact jolted executives at the Los Angeles offices of the huge company.

The 30-second commercial prepared by the California Trial Lawyers Assn., the insurance industry’s bitter adversary, detailed how a judge had ordered Farmers to pay $57 million and said the company had “lied, cheated, stonewalled and tromped on the rights of the insured to escape its own responsibilities.”

The message was clear: If Farmers persisted in its plan to fund a 1994 California initiative to cut attorneys’ contingency fees, the insurance company would have a war on its hands. The television ad would be the first salvo.

Farmers, the nation’s third-largest insurance company with $2.8 billion in annual sales in California alone, abruptly dropped its plans to back the initiative, known by supporters as the Lawyer Accountability Act. As a result, the initiative, like the television ad, will never get a public airing.

The tale of the ad that never aired and the initiative that never was is a story about the behind-the-scenes maneuvering of some of California’s most powerful interests over one of the state Capitol’s most contentious issues--reform of the civil justice system.

On one side are insurance companies, big business and physicians who, supported by Republicans, seek to limit liability. On the other side are the attorneys representing plaintiffs in civil cases, who often find support among Democrats.

These interests have fueled some of the Capitol’s most legendary battles and deals. Here is a look at the most recent fight, waged almost entirely out of public view.

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In the words of Browne Greene, a Los Angeles attorney and past president of the California Trial Lawyers Assn., blocking the Lawyer Accountability Act from appearing on the ballot was the organization’s finest hour.

The initiative had to be stopped, trial attorneys argued, because limiting lawyers’ contingency fees would deny poor and middle-class people the ability to fight big corporations in the courts.

But Barry Keene, a lawyer and chief proponent of the initiative, said the death of the Lawyer Accountability Act ensures that the state will continue to suffer from “lawsuit lunacy.” Keene called the lawyers’ unaired commercial “political extortion.”

The fight over the initiative brought to an end a shaky truce memorialized in 1987 on a linen napkin at a restaurant in Sacramento. Trial lawyers, doctors, insurance companies and others agreed in the so-called Napkin Deal to a five-year halt in attempts to either limit or expand the right to sue.

The latest chapter began when Keene, a Democrat, resigned from the state Senate last year because of what he saw as the special interests’ stranglehold on the Legislature. Keene took a job as head of the Assn. for California Tort Reform, a decidedly Republican group funded by insurance companies and big business. Its mission is to reduce litigation in California.

Among his duties, Keene joined a group of influential business leaders as part of an organization called Californians for Fair Liability Laws. The members included Kirk West, president of the California Chamber of Commerce; Steve Merksamer, former chief of staff to Gov. George Deukmejian and a lawyer who represents corporate interests in Sacramento; attorney Gene Livingston, representing insurance companies in the state capital, and Jay Michael, a lobbyist for doctors and hospitals.

The group had been discussing the possibility of an initiative to limit the cost of litigation and Keene was enthusiastic about it. In the end, the group decided the best tactic was to go after lawyer’s pay--specifically lawyers who take cases on a contingency basis, agreeing to file lawsuits against businesses, government or insurers on the condition that they receive a third or more of the financial award.

Keene proposed capping contingency fees at 25% of the first $100,000 in a civil award, 15% for the next $100,000 and 10% of any amount beyond $200,000.

He hired campaign consultants and pollsters to test-market the initiative. Based on focus groups and random surveys, he concluded that the public supported such limits by a huge margin. By late summer, Keene thought he had a “slam-dunk” winner.

In September, Keene wrote a confidential memo to potential supporters laying out reasons they should back the measure. He explained that the trial lawyers, among the biggest donors to Democratic candidates, would have to spend their war chest to defeat the initiative, leaving them with less to spend electing friendly lawmakers.

Keene wrote that action in 1994 was urgent. The California Trial Lawyers would have two allies heading the Legislature. In the Assembly, Speaker Willie Brown of San Francisco often supports trial lawyer positions and is the largest recipient of the group’s money--$87,700 of the $716,000 the group gave to campaigns in 1991 and 1992.

In the Senate, Bill Lockyer (D-Hayward) is likely to replace David A. Roberti (D-Van Nuys) as president pro tem. Lockyer and Brown penned the Napkin Deal in 1987. Since then, Lockyer has emerged as perhaps the closest friend of the trial lawyers in the upper house.

Adding to the “peril,” Keene cited the possibility that a Democrat will unseat Republican Gov. Pete Wilson, who favors an overhaul of the civil law system to limit litigation.

“If a governor is elected who can be coerced or cajoled into signing off on a trial lawyer agenda,” Keene wrote, “no one will be spared the ensuing massacre.”

Jay Michael, representing doctors and hospitals, was not persuaded. The medical industry already is protected by the Medical Injury Compensation Reform Act, a 1975 statute authored by Keene that limits awards in malpractice suits. Doctors worried that by backing Keene’s initiative, they would be attacked in competing initiatives by trial lawyers.

“You don’t kick a mean dog for no reason,” Michael said. “One of the rules around this place is that if it doesn’t affect your business, stay out. That’s a very good rule.”

Some insurance companies also opted out. A lobbyist for the Assn. of California Insurance Companies also feared that lawyers would retaliate with competing initiatives.

The lobbyist dreaded the possibility of another year like 1988, when insurance companies spent $70 million to beat or promote four insurance-related propositions. Voters approved one, Proposition 103, which directed insurance companies to roll back auto insurance rates.

But Keene entered October with crucial support from the Chamber of Commerce, and two insurance companies, Farmers and State Farm, agreed to help underwrite some of the $6 million the campaign was expected to cost.

Then things began to go awry. Harvey Rosenfeld, who sponsored Proposition 103 in 1988, obtained Keene’s strategy memo from a friend in the insurance industry.

“My first reaction was disgust,” Rosenfeld said. “Then I thought, ‘Well, this is pretty damaging. I better let the public know.’ I faxed it to kingdom come.”

The leaked memo led to the first newspaper reports about the planned initiative. Keene shrugged it off, saying: “The logic and analysis is fine for people to know. I wrote it for consumption.”

A more serious event occurred in the Orange County Superior courtroom of Judge C. Robert Jameson. Attorney Daniel J. Callahan, a member of the California Trial Lawyers Assn., sued a Farmers’ subsidiary on behalf of Surgin Surgical Instrumentation Inc., contending that the subsidiary failed to protect Surgin in a lawsuit.

On Oct. 7, Jameson awarded Surgin $57 million and said that the Farmers subsidiary had “lied, cheated, stonewalled and tromped on the rights of the insured to escape its own responsibilities.” In an extraordinary move, the judge directed Callahan to send his comments to Insurance Commissioner John Garamendi and request an investigation. Callahan obliged, summarizing the ruling in a letter to Garamendi on Oct. 21.

Veteran political consultants Richie Ross of Sacramento and Jack Walsh of Boston, hired by the California Trial Lawyers, saw the value of such a ruling. As attorney Callahan put it, “They were the perfect quotes to be used in connection with a political campaign.”

Walsh produced a television commercial.

The trial lawyers would not say how much it cost them and they declined to let The Times view the ad.

But Rosenfeld and others who saw it say the spot opened with Farmers’ motto: “Fast, Fair, Friendly.” Then, a faceless narrator read Jameson’s comments as the judge’s words scrolled over a black background. The ad concluded by suggesting that Farmers customers with a problem should call the Department of Insurance.

Political operatives showed it privately to at least one person backing Keene’s measure. A description of the commercial was relayed to Farmers.

Walsh is blunt and unapologetic about the purpose of the ad. “It was a glass houses thing,” he said. “They started throwing rocks. We said to them, ‘We know where your glass house is, and we’re going to give directions to it.’

“The objective was to have good businessmen at Farmers look at this thing and say, ‘Wait a minute. What are we doing? If we started this fight, let’s find a way to end it right away.’ ”

At State Farm, corporate counsel Kenneth Cooley feared that his company might be subjected to a similar attack.

The Orange County court ruling had other repercussions. At a news conference in Sacramento on Nov. 15, Assemblyman Phillip Isenberg (D-Sacramento), chairman of the Assembly Judiciary Committee, proposed a law requiring courts to inform the Department of Insurance whenever an insurance company loses a case in which punitive damages are awarded.

At the same news conference, Garamendi announced an investigation of Farmers and suggested that Farmers could lose its license to operate in California.

Within days, and after learning of the commercial, Farmers withdrew its support of the initiative. Spokesman John Millen would not discuss why Farmers folded its hand. But a Farmers executive told a trade journal, National Underwriter, that the commercial was one reason.

Millen noted that Farmers is appealing the $57-million judgment and criticized Garamendi for his part.

“Garamendi was grandstanding for his own benefit and for the trial attorneys,” Millen said, calling the insurance commissioner’s action reprehensible.

Replied Garamendi spokeswoman Elena Stern, “The only behavior here that is reprehensible is Farmers’ treatment of its policyholder.”

Once Farmers withdrew support, the trial lawyers shelved the commercial. On Nov. 23, Keene and West announced that they were calling off plans to place the Lawyer Accountability Act on the ballot.

Keene said the experience reaffirmed his view that the initiative process has become one more tool of special interests.

For its part, the California Trial Lawyers Assn. is not home free. The association may be involved in at least one initiative fight in 1994.

Writer Andrew Tobias is promoting a so-called Pay at the Pump initiative and has vowed to spend as much as $700,000 of his own money to fund the signature-gathering effort. It would add a charge of 25 cents per gallon to gasoline and raise vehicle registration fees to pay for auto insurance. The initiative would eliminate most lawsuits over auto accidents by creating a system of no-fault insurance.

But in the fight against Pay at the Pump, the California Trial Lawyers will have powerful allies--the insurance industry, including the Farmers Insurance Group, and the California Chamber of Commerce.