Consumer Alert: Insurance Companies Attack California Consumer Protection Laws, Props 30 & 31

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Californians were bombarded this election season with television ads and mailings urging voters to “fight against insurance rate hikes…fight fraud…stop drunk drivers from filing lawsuits…stop trial lawyers …etc” and vote No on Propositions 30 and 31.

This factsheet, developed before the March 2000 election, provides detailed information about the initiatives and who was behind them:

What are Propositions 30 and 31 and who is behind the campaign against them?

Two laws recently enacted by the California Legislature and signed by Governor Davis give California consumers new protections against insurance companies that unfairly deny, delay or low-ball the payment of a legitimate claim.

Seven out-of-state insurance companies — State Farm, Allstate, Farmers, Fireman’s Fund, Liberty Mutual, Commercial General Union, USAA — want to repeal these new laws.

So the insurance companies decided to challenge these laws under California’s initiative / referendum process.

They hired professional signature gatherers to place two referenda on the March, 2000 ballot in California. Referenda are similar to initiatives. The referenda will give the voters the opportunity to approve or reject the two laws passed by the Legislature. The insurers want people to vote against the two laws.

If a majority of people vote “YES”, the laws will take effect.

If a majority of people vote “NO”, the two laws do NOT go into effect.

What do the laws do?

The two laws are the product of extensive hearings and negotiations in Sacramento between Governor Davis, insurance companies, consumer organizations, the “Consumer Attorneys of California,” and lawmakers.

The first law (Proposition 30) grants consumers greater legal protections when insurance companies refuse to pay claims promptly and fully. It permits accident victims to sue the insurance company of the at-fault driver, if that company unfairly denies, delays or low-balls the payment of a legitimate claim.

For example, Sheryl L., of Canoga Park, CA. was rear ended by a drunk driver in June of 1997. Despite clear evidence that the drunk driver was entirely at-fault (the driver served jail time) and that the accident caused substantial damage (911 tapes indicate how dangerously the drunk motorist was driving), it has been over two years and the insurance company for the drunk driver has still refused to make a fair offer. They delay because they assume that Sheryl L. will eventually accept an undervalued settlement. Over the 30 months that the insurer has refused to pay Sheryl, the company has earned thousands of dollars of interest income by investing the money that should have been paid to Sheryl years ago. Sheryl remains in serious pain — she cannot get the back surgery she needs as a result of the accident until the insurer pays her claim.

Another accident victim, from Grass Valley, California, was severely injured when he was struck by a gas tanker which had lost its brakes. The insurance company did not pay his settlement for over a year and a half. “I could no longer work. . . And just to get by I had to borrow a lot of money. Because I received nothing from the insurer for my injuries, even with the loans, I was about to lose everything, including my house.”

Under current laws, these accident victims cannot sue the insurance company. Under Prop. 30, mistreated victims will have the ability to sue. The ability of a consumer to sue will encourage companies to pay claims properly.

The second law (Proposition 31) places some limitations on such lawsuits. Specifically:

  • it prohibits lawsuits by an injured person who was driving under the influence at the time of the accident;

  • it exempts certain insurers including self-insured public entities such as schools;

  • it does not allow lawsuits based only on emotional distress

  • it exempts professional liability insurers in some situations.

Why did the Legislature pass the laws?

Ten years ago, the California Supreme Court determined that there was no law allowing innocent accident victims – called “third-parties” because they seek a settlement from another party’s insurance company – to sue insurers for unfair claims practices, such as denying the payment of legitimate claims, delaying a claim until an accident victim dies, or low-balling (under-valuing) a claim. The Court ruled that unless a law was passed providing third-parties the right to sue, the responsibility of overseeing industry settlement practices was left to the Department of Insurance.

Insurance Commissioner Quackenbush has a poor track record of helping accident victims recover claims and an even more dismal record of taking action against unfair insurers. According to a recent study, the California Department of Insurance received over 1.5 million consumer calls between 1995 and 1998, but took only 43 actions against insurers resulting in fines during that same period. In fact, the Department, under Commissioner Quackenbush has not issued a single “unfair claims practice” fine against a major insurance company. While the Department of Insurance should become more involved in protecting consumers from unscrupulous insurers, the Legislature and Governor – at the urging of consumer groups – determined that it was essential, for accident victims, to reinstate the right to sue insurance companies when the insurers are guilty of egregious violations of fair claims practices laws and standards.

The advertisements are sponsored by “Consumers against Fraud and Higher Insurance Costs.” What is their interest?

Insurance companies created this campaign committee to hide themselves from the public during the campaign. The people who carried petitions for these referenda at supermarkets and elsewhere were professional signature gatherers who were paid according to the number of signature they collected. Seven out-of-state insurance companies are paying for these signatures and for the advertisements and mailings that many voters have seen.

They are saying consumer groups and small businesses are against the two laws. Are they?

The laws signed by Governor Davis had the support of all of the state’s major consumer groups. The groups listed as “consumer groups” by the insurance industry campaign are mostly political consultants, one-person organizations and phony front groups sponsored by insurance companies to provide them cover.

For example, one of the sponsors of the referenda is a political consultant who uses the name “Voter Revolt” – a consumer organization originally formed by Ralph Nader and Harvey Rosenfield but which disbanded in 1993.

The group has since been used by HMOs, insurance companies, utility and other big business interests to fool voters.

Between August 13, 1996 and October 22 1996, in fact, Voter Revolt received $204,345 in payments from the insurance industry, laundered through another political campaign committee called “Taxpayers Against Frivolous Lawsuits.”

The other business groups listed as opposed to the new laws are mostly Sacramento-based lobbyists and lobbying groups, some funded by insurance companies, with no meaningful role in the campaign except to lend their name as cover for the insurance companies.

They are saying that these laws give drunk drivers the right to sue. Is that true?

No. Although drunk drivers are already barred from filing suit under Proposition 213, the authors of the new laws added a second provision to ensure that drunk drivers would not gain a new right to sue. Prop 31 states:

Insurance Code Section 2871: (e) A person injured in an accident arising out of the operation or use of a motor vehicle, who at the time of accident was operating a motor vehicle in violation of Section 23152 or 23153 of the Vehicle Code, and was convicted of that offense, may not assert a cause of action under this section.

In other words, a drunk driver cannot sue under these laws.

They are saying that uninsured motorists will have the right to sue if the two laws take effect. Is that true?

Under current state law, an uninsured driver can sue the person who caused an accident for economic damages such as medical bills and lost wages, but cannot sue the at-fault driver for non-economic damages such as pain and suffering. Nothing in the new laws changes that.

Under the new laws, all motorists – except drunk drivers – would be allowed to sue an insurance company that does not fairly pay a claim to an innocent victim of a car accident.

They are saying my insurance premiums will go up unless voters block the laws from going into effect. Is that true?

No. Under prop 103, insurers must justify their rates before they can take effect. The rates insurers have requested and received already

cover the cost of full payment of all legitimate claims. Insurers have been pocketing excess profits – 28% higher than what they should be – by not paying these claims properly. So requiring them to pay legitimate claims will not raise rates.

In fact, by encouraging insurance companies to pay claims quickly, there will be less litigation and the costs associated with delays. That will save consumers money.

What about punitive damage awards against an insurance company that is found guilty of unfair claims practices? Won’t they make rates go up?

California law prohibits insurance companies from passing on punitive damage awards to policyholders. So insurers will not be able to raise rates to pay when they are fined for violating the law.

Consumer Watchdog
Consumer Watchdog
Providing an effective voice for American consumers in an era when special interests dominate public discourse, government and politics. Non-partisan.

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