Will Initiatives Lead Us to Promised Land or to Wolves?

In what some hail as a long-needed effort at tort reform and others decry as an assault on consumer rights, a trio of California ballot initiatives are aiming to restrict lawsuits and attorney’s fees.

How might these initiatives affect your pocketbook if they pass? Here’s a look.

* Proposition 200: No-Fault

If Proposition 200 passes, every Californian would be required to buy auto insurance liability coverage and show proof of insurance when registering a car. Both sides believe this could lead to a reduction in the number of uninsured drivers and an increase in unregistered cars.

Although there is substantial debate about how the initiative would affect insurance costs, the biggest change would be in how insurance claims are handled.

After an accident, your own insurer would pay the claim or claims. Fault would be determined only to decide whether your rates could rise as a result of the accident. Insurers would be barred from hiking your rates if you were less than 51% at fault.

Insurers would be required to pay claims within 30 days of receiving documentation. Otherwise they would be required to pay interest on the unpaid claim at a rate of 24% annually.

On the other hand, you would not be able to sue a driver who hit you unless that driver was drunk, committing a felony, engaging in a hit-and-run or was transporting hazardous material for commercial purposes and the hazardous material caused the death or injury.

The bottom line of the initiative is that if you want to be reimbursed for losses, you must buy insurance to cover them. Except under extreme circumstances, you are not going to recover in legal settlements or court. (Pedestrians, children and unrelated passengers would be automatically covered under your policy.)

Insurers would be required to offer a standard policy providing up to $1 million in coverage for medical bills, lost wages and rehabilitation. Individuals could purchase less insurance--but would have to sign a waiver saying they understood that some losses might not be covered in an accident.

Opponents say the law could leave victims with insufficient compensation after a bad accident.

Proponents of Proposition 200 say people who buy insurance would be covered and that Californians would save money on their auto insurance. A study by Rand Corp., for example, estimates that the average consumer would save between 11% and 29% on liability coverage--even though the vast majority would have far better insurance coverage than they do today. The reason is that about $2.5 billion in legal fees and court costs would be cut out of the system.

While it’s impossible to say who is right, several states do have no-fault laws, which provide some clues. It’s important to note, however, that no other state has as “pure” a no-fault law as Proposition 200 would create. What does that mean? In most no-fault states, the right to sue is preserved for those who have serious injuries, defined by type or by total medical bills. Proponents say that means premiums would be lower in California than in other states. Opponents say it means Californians are more likely to suffer irreparable harm.

California’s initiative most resembles the law in Michigan, which has been a no-fault state offering unlimited medical benefits to auto insurance policyholders since 1973.

After Michigan’s no-fault law was passed, studies said that claims were paid more promptly, more people received compensation in accidents, and administrative and legal costs fell dramatically.

However, the change did not cut auto insurance premiums.

Although average auto insurance premiums are far lower in Michigan than they are in California, rates rose following the imposition of the no-fault plan, according to a study by the Insurance Information Institute in New York. But rates also rose in other states during the same period--in both fault and no-fault states--so inflation and other factors might be responsible.

A number of states, including Colorado, Florida, Georgia, Hawaii, Kansas, Kentucky and Pennsylvania, passed no-fault laws in the 1970s. However, auto insurance rates fell only in instances where the no-fault law required it.

California’s ballot proposal does not require premiums to drop if no-fault is passed. However, some provisions in existing law--such as prior approval of insurance rate increases by an elected insurance commissioner--would remain. So insurance companies would be hampered in efforts to raise rates--and might be compelled to lower them--if they became more profitable under no-fault.

* Proposition 201: Shareholder Actions

The point of Proposition 201 is to limit shareholder and securities class-action lawsuits. It would do that in several ways.

First, it would require the loser in a class action--or the loser’s attorney--to pay court costs and attorney’s fees for the other side. However, if a judge determines that the losing party’s position was “substantially justified”--or that the requirement to pay the winner’s fees would be unfair--the judge can waive the liability of any and all members on the losing side.

The proposal would also require anyone bringing a suit to post a bond, securing the ability of the plaintiffs to pay these costs if they lose. This requirement is waived if the suing group owns 5% or more of the company’s stock.

Attorneys representing a litigant, or group of litigants, can both indemnify their clients and furnish the bond for them.

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Finally, the process of “discovery,” in which defendants must furnish any requested information--including that which could incriminate them--would not start until 30 days after an action is filed or until the bond is posted, whichever comes last.

Proponents say the law would stop unscrupulous lawyers from filing frivolous claims that simply serve to waste time, energy and money. Opponents say it would prevent individuals who were misled by unscrupulous corporate officers from being fully compensated in court.

The proposal is backed by companies that already find themselves on the receiving end of hundreds of lawsuits every year. It is opposed mainly by plaintiff’s attorneys.

The issue is particularly hot in the high-tech arena because of Comdex, the giant annual computer show that many technology firms attend each year to display their latest products, says James Newman, publisher of Securities Class Action Alert. At these shows, companies often brag about the bells, whistles and sales potential of their upcoming products--even when the products are still on the drawing board or beset by bugs, Newman says.

However, some attorneys maintain that the law would deter only marginal lawsuits.

A case that would clearly be a winner--such as those against convicted felons Barry Minkow of ZZZ Best fame or Charles Keating of Lincoln Savings & Loan--are likely to be pursued no matter how high the barrier, attorneys say. But law firms would probably become more selective about bringing less clear-cut cases.

“There is no question in my mind that securities lawyers have been living on this gravy train of suing high-tech companies in all these instances where the wrongdoing was very marginal,” says Ralph Warner, an attorney who publishes legal self-help manuals. “The question is whether this goes too far in the other direction.”

* Proposition 202: Lawyer Fees

Proposition 202 is one of the simplest measures on the ballot. It would limit attorney’s contingency fees when there has been a quick settlement or a quick settlement offer.

To put it simply, if you hire an attorney to represent you and that attorney is able to win a settlement agreement within 60 days, the attorney’s contingency fee is limited to 15% of the award. Attorneys are required to present all legitimate settlement offers to their clients.

If you reject the settlement and later win in court--or get a higher settlement offer--the attorney’s contingency fee would be based on a two-tier scale. The attorney could collect 15% of the amount first offered and any mutually agreed-upon percentage of the amount exceeding that threshold.

For example, you sue a company for serving a shard of glass in your dinner salad, which breaks your tooth and causes serious dental problems. The company immediately offers to settle for $100,000. You reject the offer because you already have $40,000 in dental bills and are concerned about additional costs--not to mention the need to pay your attorney. Later, after the 60-day window is up, the company offers $200,000 and you accept.

Your attorney would be limited to receiving 15% of the first $100,000. The contingency fee on the remaining $100,000 would be negotiated between the attorney and client. If you had agreed to 30%, the attorney would collect a total of $45,000--15% of the first $100,000 and 30% of the next $100,000--the amount exceeding the initial settlement offer. You would get the remaining $155,000.

This differs from common practice in contingency fee cases, where attorneys collect one-third of the award no matter whether the case settles quickly or after a hard-fought battle. In the above instance, the current system would have the attorney collecting about $66,000.

In dollars and cents, there’s no question that many consumers would save money if this measure became law. It also could spur quicker settlements.

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However, plaintiffs’ attorneys argue that Proposition 202 could reduce the size of settlements for injured parties because companies might be able to manipulate their offers to make it riskier for attorneys to take cases to court. For example, if, within the 60 days, the company offered an amount close to the low end of what the attorney estimated could be won in court, the attorney would be taking a big risk by taking the case to court.

That’s simply because an attorney’s hours and expenses soar once a case is set for trial. If the additional amount that’s likely to be won in court would produce only a marginally higher fee, the attorney is likely to lose money by pursuing the case. So even if the client is not anxious to settle, the attorney may urge settlement simply for economic reasons.

On the other hand, if companies do aim to manipulate outcomes by offering higher settlements within the first 60 days, consumers may well be better off. With less bickering, they get more in a shorter time. And they pay less of it in fees.

Kathy M. Kristof welcomes readers’ comments and suggestions for columns but regrets that she cannot respond individually to letters and phone calls. Write to Personal Finance, Los Angeles Times, Times Mirror Square, Los Angeles, CA 90053.

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Anti-Lawyer Measures

Here is a look at the three anti-lawyer initiatives on Tuesday’s ballot:

Proposition 200: Creates a form of auto insurance called pure no-fault. Bars drivers from suing motorists who cause crashes in almost all instances.

Proposition 201: Limits shareholders in publicly traded companies now can sue when the stock price falls sharply and they believe corporate officers misled them.

Proposition 202: Encourages early settlements by requiring people who sue to reveal theircases at the start of litigation and make settlement demands within 60 days. If the defense agrees quickly, plaintiff’s lawyer’s fees would be capped at 15%, rather than the customary 33%.