Propositions 30 & 31

Title:			Referendum Petition to Overturn "The Fair Insurance Responsibility Act," and Referendum Petition to Overturn Amendments to "The Fair Insurance Responsibility Act."
Sponsor:			Consumers Against Fraud and Higher Insurance Costs
Legislative History:			SB 1237 (Chapter 720 of 1999) AB 1309 (Chapter 721 of 1999)

Major Provisions:

• Referendum asks whether voters approve of SB 1237 which allows plaintiffs (after judgment of a trial, default or arbitration award) to file suit against the defendant's insurance carrier for acting in bad faith, and allows binding arbitration of claims of $50,000 or less for plaintiffs who are represented by counsel.
  
  
• Asks whether voters approve of Sections 2, 3, 4, 6, 8 and 9 of AB 1309. AB 1309 amends SB 1237 by limiting the rights of injured persons to sue defendant's insurer, exempts professional liability carriers from such suits, and requires the State Auditor to evaluate and report on the Fair Insurance Responsibility Act.

Background:
In 1979, the California Supreme Court, in Royal Globe Insurance Co. v. Superior Court, ruled that third-party claimants could sue an insurance carrier in a separate proceeding for violating the Unfair Claims Settlement Practice Act. In 1988, in Moradi-Shalal v. Fireman's Fund, the California Supreme Court overruled its Royal Globe decision.

During the Royal Globe era, the number of lawsuit filings soared, but they dropped precipitously after 1988 when the third-party edict was repudiated. For example, from 1982-83 to 1985-86, the number of court cases increased by 40,000 or 76 percent. However, in 1989 after third-party lawsuits were outlawed, motor vehicle personal injury filings began dropping at a rate of 7 to 10 percent. From 1988-89 to 1996-97, the number of lawsuits plummeted by more than 47,000.

Since third-party lawsuits were repudiated in 1988, there have been several legislative attempts to re-enact them, such as AB 1109 and SB 985, both of 1997. Although these measures failed in the Legislature, Senator Martha Escutia introduced SB 1237 in 1999. Proponents of Royal Globe claim this legislation is needed to compensate for the inefficient management of unfair claims practices by the Department of Insurance. Proponents also claim that since third-party lawsuits were banned, values of claims have dropped and the number of accident settlements have been suppressed.

To combat the passage of SB 1237, a group of diverse businesses formed a coalition called Californians for Fair Insurance Rates. Cal-Tax joined the coalition to defeat the measure due to its adverse impact on California taxpayers and tax-supported programs. Specifically, Cal-Tax opposed SB 1237 for these reasons:

Increased court costs:

• Several studies found that court costs would be increased by nearly $25 million from a surge of frivolous lawsuits (as was experienced by the increase in the number of court filings when third-party lawsuits prevailed). Also, court costs would be enhanced as court personnel supervise arbitration systems and handle cases inappropriate for arbitration settlement. These added pressures would exacerbate California's already underfunded and congested court system.

Redirects funds from tax supported programs:

• Although the measure exempts self-insured public entities and public entities insured by private insurance carriers from third-party lawsuits, it does not shield their insurance administrators or insurance carriers from third-party lawsuits. This exposure could have a significant and adverse impact on insurance rates, and possibly coverage, for every public entity that relies wholly or partially on insurance to cover liability for wrongful death or bodily injury from any cause, or property damage from automobile incidents. Another cost concern for local and state government is enhanced fees for attorneys since government will be working in a more legally complex environment.
  
  
• As governmental entities are forced to pay higher insurance costs, tax revenues could be diverted from vital programs (such as law enforcement, infrastructure and education) to pay these higher premiums.

Although SB 1237 passed the Legislature, the governor threatened to veto the bill in its current form. As a result, proponents were forced to amend the measure via a companion bill, AB 1309, authored by Assemblymember Jack Scott. Consequently, the governor signed both measures. To prevent the enactment of these measures, a coalition, Consumers Against Fraud and Higher Insurance Costs, was established to place two referenda on the March 2000 ballot.

Policy Considerations:

• Have referenda proponents considered the consequences of one referendum passing and the other failing? For example, if the SB 1237 referendum passes, but the AB 1309 referendum fails, would this make the carriers of other lines of liability insurance (medical, health, legal) vulnerable to third-party lawsuits - since AB 1309 limits the scope of SB 1237? Could this confusion lead to costly, long-term court battles between the insurance industry and personal-injury attorneys?
• If the referenda should fail, shouldn't critics of the Department of Insurance (DOI) seek fairness and relief from unfair, inefficient insurance practices by striving for administrative or legislative changes to the DOI, as opposed to costly, egregious solutions such as attempting to reinstate third-party lawsuits?

Fiscal Impact:
Former Legislative Analyst Bill Hamm concluded that these types of third-party lawsuits could increase the cost of auto insurance by as much as $300 a year for all drivers, and increase insurance rates by as much as 15 percent, requiring consumers, businesses and taxpayers to pay a total of $1.5 billion more a year in higher insurance costs and increased costs for goods and services.

A 1995 Rand Corporation study estimates that inflated claims add $2.3 billion to insurance premiums in California.

Support Arguments:

• To protect your newly restored right to hold insurance companies responsible, voters must approve the Fair Insurance Responsibility Act. Too many insurance companies unfairly delay paying what they owe you, making your life miserable. On balance, the Fair Insurance Responsibility Act offers fair and needed protections to injured, innocent victims and reasonable incentives for insurance companies to do the right and lawful thing. Under California law, insurance companies penalized for violating this law cannot pass on those penalties to consumers by raising your premiums.
• Proposition 30 prohibits drunk drivers from suing and does not give uninsured motorists the right to sue you. In fact, if you're injured by a drunk driver, Prop. 30 requires the drunk driver's insurance company to pay your claim on time.
• Prop. 30 will reduce the number of lawsuits in California. If an insurance company agrees to resolve your claim through arbitration, or simply decides to treat your valid claim fairly, there are no lawsuits.

Support Arguments Signed By:
Senator Martha Escutia; Kay McVay, president, California Nurses Association; Lois Wellington, president, Congress of California Seniors; Howard L. Owens, executive director, Consumer Federation of California; Rosemary Shahan, president, Consumers for Auto Reliability and Safety.

Opposition Arguments:

• After careful study, Mothers Against Drunk Driving concluded that Props. 30 and 31 "Would give drunk drivers new rights to sue ... even if they are drunk at the time of the collision."
• If Propositions 30 and 31 are such good laws, why did the personal-injury lawyers who wrote them specifically exempt their own insurance companies from their provisions? They did it to protect themselves against higher insurance rates.
• California's retired Legislative Analyst warns that measures like Props. 30 and 31 will increase insurance rates up to 15% and "could easily cost taxpayers millions." Make no mistake. Personal-injury lawyer-sponsored Props. 30 and 31 will drive up insurance rates and fraud, allow two lawsuits for every auto accident claim, give uninsured and drunk drivers a new right to sue - and cost taxpayers millions.

Opposition Arguments Signed By:
Rebecca M. Beardon, Mothers Against Drunk Driving (MADD) chairperson, California Public Policy Committee; Michael Johnson, executive director, Voter Revolt; Jim Conran, president, Consumers First; John Sullivan, president, Civil Justice Association of California; Larry McCarthy, president, California Taxpayers' Association; Mary M. Martin, chairman of the Board, Seniors Coalition.

Cal-Tax Position:
Oppose. Because of the way a referendum works, supporting the sponsors means urging a "no" vote on the propositions. The qualifying of a referendum suspends the new law that is in question and allows voters to vote on whether the law becomes effective. A "no" vote would repeal the law that was enacted by the Legislature.

Cal-Tax actively engaged in the defeat of SB 1237 and AB 1309, sending letters of opposition, providing legislative testimony, and joining the coalition to defeat them. Due to their adverse fiscal effect on local and state government, by increasing premiums and diverting vital tax dollars from important public programs, Cal-Tax is supporting the efforts to overturn these laws, by urging a "no" vote on the two third-party lawsuit referenda.