Insurers Pay Out Less Than Half As Much As They Collect in Premiums
Los Angeles — Motorists and others injured in auto accidents have received steadily lower health care, wage loss and injury payments from insurance companies during the 1990s, according to a study titled “The Low-Balling of the California Auto Insurance Claim” released today by the non-profit Foundation for Taxpayer and Consumer Rights (FTCR). The study finds that the reduction in the amount insurers pay for claims of innocent accident victims is linked to a California Supreme Court ruling in 1988 known as Moradi-Shalal (Moradi-Shalal v. Fireman’s Fund Insurance Companies, 46 Cal. 3d 287).
The 1988 ruling rescinded the right of an innocent accident victim to take legal action against the insurer of the at-fault driver if the insurer acts unfairly to delay, underpay or deny a legitimate insurance claim. According to the report, the data indicate a need for legislation to hold insurance companies accountable for their claims practices.
According to data insurance companies received more than 8.5 billion dollars in auto liability premiums from Californians, but paid out less than half that amount (4.17 billion dollars) in claims in 1997.
The study also finds that, since the 1988 Supreme Court decision, insurance companies:
- decreased the dollar value of claims payments to California accident victims by 4.5% while the value of claims payments increased 16% nationwide;
- decreased the inflation-adjusted value of a liability claim by 29.1% in California. In 1998, Californians received one quarter less for a claim than the national average;
- decreased the actual value of a liability claim every year since 1992 –no other state has seen such a consistent decline;
- paid 26% fewer claims to California accident victims while accident victims nationwide saw an 8.5% increase in claims settled;
- reduced overall liability payments by 29.2% while payments have increased nationwide by 25.9%.
- increased profit margins by 300%, largely by cutting the percentage of premium returned to accident victims by 40%.
“Just as drivers are expected to pay their premiums promptly and in full, insurers should pay claims on time and at full value,” said Harvey Rosenfield, President of FTCR and author of Proposition 103. “People buy insurance to be covered in case of an accident, but with insurers’ current claims practices, injured motorists are forced to sue the at-fault driver because they don’t have remedies against the insurer. This is not how the system is supposed to work.”
To illustrate the change, an innocent auto accident victim with a $1000 claim would receive nearly one-third less — less than $710 after adjusting for inflation — than he or she would have prior to the Moradi-Shalal ruling.
The data, according to FTCR, demonstrate the need for legislation to restore the right of accident victims to seek legal remedies against insurance companies that engage in unfair claims practices. The report concludes that “there has been a shift away from a fair balance of power in claims settlements. Reinstating the right of an injured motorist or pedestrian to take an unscrupulous insurer to court is necessary to encourage prompt and equitable settlement practices by insurance companies.”
The report disputes the insurance industry argument that restricting accident victims’ right to sue lowers premiums and restoring that right drives premiums up for California consumers. In fact, in other states with Moradi-Shalal-type restrictions on full liability, premiums still increased dramatically during the last ten years. The study shows that the reduction in premiums in California (the only state to see a reduction between 1989 and 1996) is not attributable to the Court ruling but, rather, to Proposition 103, which imposed stringent regulations on insurance premiums beginning in 1989. The study also points out that, due to insurance companies’ high profits, Proposition 103 regulations would not allow insurers to increase premiums if they begin to pay the appropriate value of claims.
“Too much of our premium goes to industry profits and not enough pays for legitimate claims,” said Doug Heller, consumer advocate with FTCR. “Insurers pay out less than half the amount they take in from premiums. Payment on legitimate claims should rise to a suitable level, and premiums should also go down substantially for consumers.”
Innocent accident victims in California had the right to hold insurance companies accountable until the 1988 decision. The dissenting Justices (Mosk and Broussard) in the Moradi-Shalal case concluded that “the insurance industry has succeeded in persuading justices of this court that it is entitled to immunity from the same type of responsibility required of every other business and individual that commit deceptive practices. The question is . . . why this one industry is entitled to be above the law that applies to every other segment of society.”
Advocates expect the California Legislature to consider legislation to restore insurer accountability sometime this year.