Do We Really Need Even More Lawsuits?

Californians need better schools. Californians need improved efficiency in public expenditures and reforms in a host of other policy areas. What Californians do not need are more lawsuits. Nor are higher insurance premiums and increased fraud to be welcomed. Yet those would be the inevitable outcomes should Propositions 30 and 31 receive voter approval Tuesday.

Individuals involved in auto accidents for which the other party is at fault are entitled to recover their damages from the offending party’s insurer. Propositions 30 and 31 would entrench in the law the right of those people to sue the insurer should payment be too slow or inadequate in their view. Such suits would be for bad-faith and thus would carry the threat of heavy punitive damages. The potential for abuse is obvious.

Those presenting claims to the insurance companies would have a powerful new tool with which to force insurers to pay illegitimate or inflated claims in order to avoid potential “bad faith” judgments and punitive damages. It is inevitable that some people, and their attorneys, will seek to exploit such prospects. This would exacerbate the insurance fraud problem, already an important source of higher costs and rates.

Does this mean that injured parties seeking legitimate restitution will be helpless in the absence of Propositions 30 and 31? Hardly.

Apart from important competitive pressures upon insurers to pay legitimate claims, the California Department of Insurance enforces a comprehensive set of regulations on unfair claims practices. The Legislature increased the budget substantially last year for enforcement of these rules. These claims are given priority by the DOI over all other consumer complaints regardless of when received. The insurer is required to provide the full claim file to the DOI, and such claims on average are resolved within 42 days, at no charge to the claimant.

That this enforcement has teeth is clear from the evidence. There were 4,448 non-policyholder complaints filed in 1998, only a minority for unfair claims practices. For those complaints, DOI data show that a finding of unfair practices is unusual but fines are heavy. My estimate of these fines imposed in 1998 is more than $180,000 in only nine cases. If an insurer were to renege on its obligations to large numbers of claimants, such fines quickly would add up to real money. From 1996 to 1999, DOI penalties imposed in all unfair claims practices cases totaled $3.4 million (in 1999 dollars). (The proponents of Propositions 30 and 31 are misleading voters by advertising a figure of 40,000 consumer complaints per month. That refers to phone calls to the DOI hotline, most of which are not related to claims and few of which actually result in a written complaint.)

Moreover, it is clear that insurers systematically live up to their contractual obligations. In 1998, there were about 38 complaints per 100,000 auto insurance policies; only 12% were found to be justified. Only a minority of that 12% was for unfair claims practices, and only a minority of that was made by parties injured by the insurers’ policyholders. For the largest 50 auto insurers in 1998, with 15 million to 16 million policies, a grand total of 894 complaints--covering all classes of disputes--was found to be justified.

Perhaps the attorneys’ lobby can answer this: If insurance companies systematically renege on their obligations to injured parties, why is insurance fraud such big business? Why would 1,000 “accidents” be staged each year if insurers systematically refuse to pay up?

All of us want to be compensated for legitimate damages caused by other parties. However, we also want our insurance premiums to be reasonable, and we would like to avoid the very real (but hidden) economic costs imposed by the litigation system.

The supporters of Propositions 30 and 31 are trying to argue that, upon an unleashing of the lawsuit monster, no one will attempt to use the bad-faith threat for illegitimate ends, and the resulting claims, costs and litigation will not affect ordinary people. Snake oil, anyone? The reality is that Propositions 30 and 31 are full-employment acts for the lawyers. For the rest of us, these measures are a perverse solution for a non-problem.