Do Californians Really Need Even More Lawsuits?

This essay first appeared in the March 3, 2000 Los Angeles Times.

Californians need better schools. Californians need improved efficiency in public expenditures and reforms in a host of other policy areas. What Californians do not need are more lawsuits. Nor are higher insurance premiums and increased fraud to be welcomed. Yet those would be the inevitable outcomes should Propositions 30 and 31 receive voter approval Tuesday.

Individuals involved in auto accidents for which the other party is at faultare entitled to recover their damages from the offending party's insurer.Propositions 30 and 31 would entrench in the law the right of those peopleto sue the insurer should payment be too slow or inadequate in their view.Such suits would be for bad-faith and thus would carry the threat of heavypunitive damages. The potential for abuse is obvious.

Those presenting claims to the insurance companies would have a powerful newtool with which to force insurers to pay illegitimate or inflated claims inorder to avoid potential "bad faith" judgments and punitive damages. It isinevitable that some people, and their attorneys, will seek to exploit suchprospects. This would exacerbate the insurance fraud problem, already animportant source of higher costs and rates.

Does this mean that injured parties seeking legitimate restitution will behelpless in the absence of Propositions 30 and 31? Hardly.

Apart from important competitive pressures upon insurers to pay legitimateclaims, the California Department of Insurance enforces a comprehensive setof regulations on unfair claims practices. The Legislature increased thebudget substantially last year for enforcement of these rules. These claimsare given priority by the DOI over all other consumer complaints regardlessof when received. The insurer is required to provide the full claim file tothe DOI, and such claims on average are resolved within 42 days, at nocharge to the claimant.

That this enforcement has teeth is clear from the evidence. There were 4,448non-policyholder complaints filed in 1998, only a minority for unfair claimspractices. For those complaints, DOI data show that a finding of unfairpractices is unusual but fines are heavy. My estimate of these fines imposedin 1998 is more than $180,000 in only nine cases. If an insurer were torenege on its obligations to large numbers of claimants, such fines quicklywould add up to real money. From 1996 to 1999, DOI penalties imposed in allunfair claims practices cases totaled $3.4 million (in 1999 dollars). (Theproponents of Propositions 30 and 31 are misleading voters by advertising afigure of 40,000 consumer complaints per month. That refers to phone callsto the DOI hotline, most of which are not related to claims and few of whichactually result in a written complaint.)

Moreover, it is clear that insurers systematically live up to theircontractual obligations. In 1998, there were about 38 complaints per 100,000auto insurance policies; only 12% were found to be justified. Only aminority of that 12% was for unfair claims practices, and only a minority ofthat was made by parties injured by the insurers' policyholders. For thelargest 50 auto insurers in 1998, with 15 million to 16 million policies, agrand total of 894 complaints--covering all classes of disputes--was foundto be justified.

Perhaps the attorneys' lobby can answer this: If insurance companiessystematically renege on their obligations to injured parties, why isinsurance fraud such big business? Why would 1,000 "accidents" be stagedeach year if insurers systematically refuse to pay up?

All of us want to be compensated for legitimate damages caused by otherparties. However, we also want our insurance premiums to be reasonable, andwe would like to avoid the very real (but hidden) economic costs imposed bythe litigation system.

The supporters of Propositions 30 and 31 are trying to argue that, upon anunleashing of the lawsuit monster, no one will attempt to use the bad-faiththreat for illegitimate ends, and the resulting claims, costs and litigationwill not affect ordinary people. Snake oil, anyone? The reality is thatPropositions 30 and 31 are full-employment acts for the lawyers. For therest of us, these measures are a perverse solution for a non-problem.

Benjamin Zycher Is an Economist in Agoura Hills and an Adjunct Scholar at the Cato Institute.