Sacramento– A fiercely lobbied plan that restores the right to file bad-faith lawsuits against automobile insurers and others emerged Thursday from the Assembly, despite complaints from insurers that it would dramatically boost premiums and dismantle a state crackdown on five million uninsured drivers.
The Assembly’s action, predictably, was hailed by consumer groups and denounced by most insurers. But one group, Mothers Against Drunk Driving, which thus far has not played a major role in the political fight over the bill, opposed the measure.
“The dark days of insurer low-balling and endless denials of claims may soon come to an end,” said Doug Heller of the Santa Monica-based Foundation for Taxpayer and Consumer Rights, an insurance watchdog group.
The bill is also supported by trial lawyers, who say current law limits victims’ access to the courts and allows insurers to delay legitimate claims.
Gov. Gray Davis office declined to discuss his position on the bill. But sources in the legal and insurance communities both said he was expected to sign it if, as expected, it is approved by the Senate.
Insurers said the bill, which could be considered by the Senate as early as next week, would force court costs upward and cause a sharp increase in premiums. One study commissioned by a coalition of business and insurance interests opposed to the measure said it could boost auto insurance premiums by $ 1.3 billion, or an average of nearly 15 percent for an auto insurance policyholder.
“It’s a devastating bill – devastating to the economy, devastating to the whole state,” said Dan Dunmoyer, president of the Sacramento-based Personal Insurance Federation of California. His group includes State Farm and Farmers, two of the state’s major property-casualty insurers.
The proposal by Sen. Martha Escutia, D-Commerce, described by lawyers and insurers as their top political priority of the year, would reinstate the so-called “Royal Globe” legal doctrine that the California Supreme Court jettisoned more than a decade ago.
That doctrine, named after an insurance company involved in the original court case, was in effect from 1979 to 1988 and allowed automobile accident victims and others to sue insurers for bad faith.
The rule was established by the Supreme Court under Chief Justice Rose Bird; a later court under Chief Justice Malcolm Lucas rescinded it.
California law allows policyholders to sue their own insurance companies for alleged bad faith. The “Royal Globe” ruling expanded that to allow a person to file a bad-faith lawsuit against another person’s insurance company over legitimate claims that were delayed or denied, such as those arising from an automobile crash.
The doctrine also applied to other businesses, as well as government entities sued by members of the public. But it is most closely identified with automobile insurance cases.
Insurers said repealing the doctrine saved litigation costs, but consumer groups said that savings was never passed on to customers.
“In 1997, about $ 8.5 billion in premiums were collected in California, but carriers paid out only about $ 4.1 billion in claims,” Escutia, D-Commerce, said earlier. “When you do the simple math, you don’t know what happened to the other $ 4 billion. But it’s not in the pockets of consumers, I can tell you that,” she said.
The bill extends the doctrine to uninsured motorists, which brought an immediate response from MADD, which said may drivers are uninsured because they have drunken-driving convictions. They noted that the voter-approved Proposition 213 of 1996 was specifically aimed at stopping lawsuits by uninsured motorists.
California has about 20.2 million registered drivers. About a fourth of them are uninsured, despite a state law requiring drivers to carry coverage.
“Not only does this bill create this loophole to Proposition 213, it also will result in premiums going up as the savings realized under the initiative disappear,” said MADD spokeswoman Rebecca Bearden.