A New, No-Fault Road Map to Auto Insurance Reform : Consumer action: Although related measures to curb legal excesses also favor business, the package deserves support.
Consumers are badly served by the unyielding opposition of most consumer groups to legal reform. Our civil justice system is too slow, too haphazard, too expensive. While business interests are the primary backers of reform, it is consumers who need it most.
Some proposals for reform are intended solely to tilt the scales of justice in favor of business. Consumer groups are right that such “reform” could turn into a stampede that tramples rights. It is a mistake, however, to respond to these threats by opposing all reform.
Consumer groups and activists ought to be working to fix what’s wrong with the system. That’s why we have joined with some California business leaders to put a package of legal reform initiatives on the ballot next March. While the reforms sponsored by the Alliance to Revitalize California would be good for business, they would be even better for consumers.
By any standard, California’s auto insurance system is a disaster for consumers. Legal fees take 20% of every premium dollar. Faked and exaggerated injury claims, which the liability system rewards people for filing, account for 25% to 32% of premiums, according to a RAND study. Policyholders also subsidize 5 million uninsured motorists--uninsured in many cases simply because they cannot afford the crazy current system.
These expenditures are the price you pay for the right to sue another driver. But your right to sue often doesn’t even get your medical bills paid. RAND reports that those with medical bills and lost wages of $100,000 or more recoup on average just 9% of their losses from auto insurance. Why so little? Because more than half of the cars on the road are driven either uninsured or with minimum coverage. If you are hit by one of them, the most a lawsuit will get you is $15,000 to split with your lawyer, even if you have $600,000 in medical expenses and lost wages.
Under the alliance’s initiative, which would create the first pure no-fault system in the nation, victims would collect benefits from their own insurance companies up to the coverage limits they purchased. No longer would they have to hope that the person who hit them was rich or well-insured. No longer would they have to split the benefits with a lawyer or pay to subsidize uninsured motorists or fraud.
The right to sue and a shot at a damage award would be replaced with the right to guaranteed benefits. Lawsuits would be retained only to punish convicted drunk drivers and others guilty of felonious conduct. The right to sue GM for bad brakes or Allstate for bad faith would not be affected.
RAND estimates that the initiative would provide a motorist with $1 million in medical and wage loss coverage for an average of 48% less than one pays now for much poorer injury coverage. Isn’t that a reform consumer advocates ought to be fighting for? The alliance’s second initiative would limit to 15% the fee a lawyer could charge when his initial “demand” letter results in a quick (60 days) settlement offer--leaving 85% or more in the client’s pocket, not the typical 66%. Of course, the client could reject the offer. In that case, the 15% limit would not apply on anything extra the lawyer managed to win for his client.
The primary intent of the measure is to end the outrageous but customary practice of charging consumers 25% to 40% of settlement awards that require nothing more from a lawyer than writing a demand letter. The secondary intent is to encourage faster settlements and less litigation.
Consumer advocates should support this reform because lawyers have a lot more bargaining power than consumers, and they sometimes can’t resist the temptation to charge a fee that’s unfair.
The alliance’s third initiative aims to discourage meritless class-action shareholder lawsuits--while encouraging legitimate ones--by making the losers in such lawsuits pay the winner’s attorney’s fees.
Securities fraud is real and all too common, and private lawsuits are often merited. In those cases, the aggrieved shareholders would not only win money they would also get their fees paid. That would encourage corporate wrongdoers to settle fast, rather than risk racking up two sets of legal fees. But frivolous and extortionate suits take cash from a company’s current shareholders, siphon about 30% off to the lawyers and return what’s left to the suing shareholders (very often the same ones). The cost of this--in management time and money--cuts directly into the research and development and job creation that are the hope for California’s future.
Consumers desperately need their advocates to take a more pro-active role in this area. The fact that some business groups exploit the crisis in the legal system for selfish ends does not make the crisis any less real. And refusing to address problems that are feeding the public’s increasingly cynical regard for the legal system can only help those who want to tear it down.
