New state law allows bad-faith suits

San Francisco Chronicle

In a move praised by consumer advocates, Gov. Gray Davis signed legislation yesterday that restores the right of people injured in accidents to sue insurance companies.

The legislation, sponsored by the trial lawyers, applies to all liability insurance, including auto and home. For example, it would allow people injured or harmed in a car accident to sue the other driver’s insurer for bad faith if they believe the company has unfairly and fraudulently denied their legitimate claims.

The legislation restores a right to sue that was eliminated in 1988 when the state Supreme Court prohibited third-party lawsuits for so-called bad-faith decisions.

Although Davis insisted on compromise language to moderate the legislation, insurers say it will force premiums to rise by as much as 15 percent.

Consumer groups hailed the legislation as historic.

“This will finally end more than 10 years of insurance companies grinding down payments made to victims,” said Doug Heller, a spokesman for the Foundation for Taxpayer and Consumer Rights. Heller called it a “historic change” in the way insurance companies must deal with accident victims.

Supporters said that without the potential for consumer lawsuits, insurance companies have no incentive to settle a claim in a timely manner. They cite examples of companies taking as many as four years to settle a claim stemming from an accident. In other cases, elderly or seriously injured people have died before receiving closure of their cases.

“We didn’t get everything we wanted, but the bill provides essential protection for consumers against insurance company misconduct,” said Sen. Marta Escutia, D-Huntington Park. “Where insurers are dragging their feet and refusing to pay on justified claims this is the only way we have to stop them from taking advantage of innocent victims.”

But a study by Californians for Affordable Insurance Rates, a broad coalition of business and other groups opposing the legislation, said restoration of bad-faith lawsuits could boost auto insurance premiums by $1.3 billion, or an average of nearly
15 percent, for policyholders.

John Sullivan, president of the insurance-industry-backed Civil Justice Association of California, said the industry is seriously considering trying to repeal the law through a ballot initiative.

“We think this poses enough danger in costs to the general public and businesses that buy insurance that it might be worth the effort,” he said. The group would have to gather about 800,000 signatures to put the law on the March ballot.

BOON FOR PERSONAL INJURY LAWYERS

The return of these lawsuits will benefit only personal injury lawyers, said Barry Carmody, president of the Association of California Insurance Companies.

“Everyone — consumers and businesses throughout the state — will feel the financial pain of increased litigation flooding our already overworked court system,” he said.

Sullivan said rates would have to rise because insurance companies would be forced to settle rather than investigate claims. He also said 99 percent of the cases fall under the $1 million threshold, making it an ineffective limitation.

The new law reinstates a narrow version of what is known as the Royal Globe doctrine. Royal Globe dates back to 1979 when the state Supreme Court ruled that a person could file a bad faith lawsuit against another person’s insurance company over justified claims that were delayed or denied.

DECISION OVERTURNED IN 1989

But in 1989 the court threw out that decision citing “undesirable social and economic effects” in the form of high insurance rates and crowded courts. The legislation Davis signed yesterday comes after years of battles between the trial lawyers and business groups.

SB1237 by Escutia, D-Huntington Park, sat idle for almost two months after Davis threatened to veto the legislation he thought was too tough on business.

Lawmakers agreed to modify AB1309 by Assemblyman Jack Scott, D-Altadena, to impose restrictions on the measure, including a six-year sunset date and a limit on action to those in which the net judgment does not exceed $1 million.

In addition to limiting the lawsuits to judgments of less than $1 million, Davis’ modifications exclude business and class action suits, require a study of the impact of the bill and increase the possible fines on insurance companies from $5,000 to a minimum of $50,000.