Bill Restoring Right to Sue Insurance Firms Fuels Heated Debate

On her way to work in 1997, Sheryl Landsverk pulled to a stop at a traffic light near her home in Canoga Park. Seconds later a car slammed into the back of her Mazda minivan, sending her to the hospital with a severe back injury.

The other driver, found to be drunk, eventually served jail time. But that driver’s insurance company, Landsverk said, has never paid her a dime. Not for the pain she suffers constantly. Not for the physical therapy she requires. Not for the back surgery she says she needs but can’t afford.

Landsverk told her story last week to the state Senate Judiciary Committee, even playing the scratchy 911 tape of a witness who had called minutes before the accident to report, “There is a drunk woman and she is driving . . . crazy. She’s almost hit two cars already. She’s going real fast.”

In an interview later, officials at the insurance company of the woman who hit Landsverk did not dispute Landsverk’s testimony. But they insisted that any delay in a settlement was caused by her refusal to give them all the medical records they need.

Landsverk’s tale was the opening shot in a high-stakes contest that is developing into a major dispute in the Legislature. The issue is an old one: whether injured parties can sue an at-fault person’s insurance company for failing to offer a prompt and reasonable settlement.

Under a new proposal by Sen. Martha Escutia (D-Whittier), injured consumers could sue the wrongdoer’s insurance company, but only after they have sued the individual who caused the injury and obtained a favorable judgment.

For lawyers, the measure would open a new avenue of litigation, clearing the way for potentially bigger and quicker settlements in injury cases. Insurance companies, on the other hand, probably would be forced to pay more in claims to avoid lawsuits.

Both sides argue that consumer protection is their prime motive.

In 1978, a sharply divided California Supreme Court ruled that consumers had broad authority to sue insurance companies for refusing to offer a fair and timely settlement for injuries inflicted by their policyholders. A decade later, a more conservative court, also divided, overruled the earlier decision, removing the right to sue for bad faith.

That decision stands today. If someone is seriously injured in an automobile accident in which the other driver is clearly at fault, the victim can collect compensation from his or her own insurance company for damages to the car and possibly a limited amount for medical expenses.

But for major medical expenses, lost wages and pain and suffering, a victim must collect from the wrongdoer’s insurer. If that company stalls, offers an unreasonably low settlement or refuses to negotiate, the victim can only sue the individual wrongdoer or complain to the state Department of Insurance.

The battle has raged for decades, pitting insurance companies against the lawyers who sue them on behalf of injured clients. In the legislative arena, the struggle attracts great attention because both sides contribute millions of dollars to lawmakers’ political campaigns.

The insurance companies argue that the 1978 decision--called Royal Globe, after the insurance company involved in the case--forced them to accept inflated settlements to avoid lawsuits. As a result, they said, insurance rates soared to all-time highs and fraud was rampant.

The lawyers contend that after the 1988 decision reversing Royal Globe, injured consumers lost all leverage to demand quick and fair settlements. While insurance rates have declined in this period, so have the number and amount of settlements. In contrast, the lawyers say, the practice of low-balling--offering unreasonably low settlements--has become widespread.

“Without the right to sue, consumers are at the mercy of insurance companies who can delay and delay,” Escutia, a lawyer, told the Senate Judiciary Committee. “Insurance companies have been making record profits, and they are based on not paying claims.”

But insurers predict the legislation would ultimately force consumers to pay higher premiums because the number and size of settlements would drive up the cost of coverage.

“What we will see is that just like the 1980s, a feeding frenzy will take place by the [lawyers],” said Todd Ison, a claims lawyer for the United States Automobile Assn., which insures military personnel. “[Companies] are going to overpay claims rather than defend a lawsuit.”

Alister McAlister, a former assemblyman and now a lobbyist for a coalition that is fighting the new legislation, complained that lawyers are trying to correct an inequity that doesn’t exist.

“It does not benefit an insurance company to delay [settlement],” he said. “The longer they keep a file open, the more it costs. If they’re doing that, they’re stupid, and I don’t think they’re stupid.”

The lawyers have won a preliminary round. The Senate Judiciary Committee last week approved the measure 6 to 1. It still has to pass other committees and both houses of the Legislature before it can reach Gov. Gray Davis’ desk.

The governor has not taken a position on the bill.