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SACRAMENTO, Calif.-California lawmakers are considering legislation that essentially would codify the controversial 1979 Royal Globe decision that gave third parties the right to sue insurers for bad faith.
The state Supreme Court reversed that decision in 1988, when it barred third-party bad faith lawsuits against insurers in Moradi-Shalal vs. Fireman's Fund Insurance Cos.
But, if A.B. 1109 were enacted, the Royal Globe precedent once again would become law in California.
And because the bill would apply to all lines of coverage-including life/health and workers compensation-the potential for third-party litigation is significant.
For example, the legislation would allow injured employees to sue their employers' workers compensation insurers and possibly recoup damages greater than those prescribed by statute for work-related injuries.
The bill's backers say the legislation is necessary because the Insurance Department doesn't have sufficient staff resources to enforce the state's rigid claims-handling regulations, which require insurers to respond to a claim in as few as 15 days.
"Although the department has regulatory power to enforce the provisions of (the claims-handling act), the reality is that most violations go unaddressed, whether due to lack of resources of the department or other reasons," the legislation states.
"When California citizens, both corporate and private, suffer damages as the result of conduct of another covered by insurance, they are properly entitled to the benefit of the insured's policy coverage for indemnification of their loss or damage," the legislation adds.
"As the law now stands, however, the insurer has no financial incentive to conclude the claim made by the insured citizen in a reasonable, prompt or timely manner. This situation has led to abuses."
Today, insurers seem more interested in fighting claims than settling them, according to David S. Casey Jr., president of
the Sacramento-based California Consumer Attorneys Assn., formerly the California Assn. of Trial Lawyers.
"We've seen cases where they will delay paying while awaiting the death of a claimant or to put a person under economically," he said.
"We're just taking (Section) 790.03 (of the California Insurance Code) and creating a limited civil mechanism for its enforcement since the insurance commissioner is unable to enforce it," he explained.
"In the real world, it's ignored now. That's really the primary reason for this legislation," said Mr. Casey, a partner with the San Diego law firm Casey, Geery, Reed & Schenk.
The legislation, introduced Feb. 27 in the Assembly Judiciary Committee by Assemblywoman and Committee Chairwoman Martha Escutia, D-Huntington Park, would be good for policyholders because it would stop insurer foot-dragging, agreed Jordan Stanzler, a policyholder attorney in the San Francisco office of Anderson, Kill & Olick P.C.
Mr. Stanzler cited a situation involving one of his business clients as an example of why the legislation is necessary.
"One of my clients filed a claim against a California-based insurer. After the insurer failed to acknowledge the claim for three months, I advised my client to write to the DOI to tell them that the insurer is violating the regulations. The department responded by asking the client to fill out a complaint form and return it," he recounted. "But we still haven't heard anything back from the department."
The claim is now six months old, Mr. Stanzler said.
Under the current statute on unfair claims settlement practices, insurance companies have 15 days to acknowledge receipt of a claim and must respond to any other correspondence from a policyholder regarding the claim within 15 days.
But the claims-handling regulations are sufficiently rigorous to protect policyholders, said Wayne Wilson, Sacramento-based regional vp of the American Insurance Assn. The AIA opposes the legislation.
"The regulatory process ought to take its course," he said. "Plus, the claims-handling regulations are more rigorous today."
Giving third parties the right to sue insurers directly also could cost policyholders more in the long run, Mr. Wilson pointed out.
"It'll be used for leverage purposes," he said. "When a company settles a claim, it may pay more than the claim is worth to avoid the threat of bad faith."
So, for example, if a $12,000 claim settles for $15,000, "that $15,000 goes back into the rate base. Eventually premiums will go up," he explained.
The Insurance Department also opposes A.B. 1109, saying that "a better alternative is for the department to continue fighting for consumers by cracking down on those who violate the Unfair Claims Practices Act."
Commercial lines and personal lines policyholders can register complaints against insurers via a consumer hot line staffed by employees in the Consumer Services Division.
The division is headed by Richard Wiebe, who before joining the department in 1994 served as Western regional public affairs manager for the American Insurance Assn.
According to the California Insurance Department Press Office, 50,053 complaints of insurers violating the claims-handling statute were resolved in 1996, resulting in $32.6 million in additional insurance recoveries to policyholders. The department received 13,874 complaints in 1996, a decline of 11% from the 15,630 complaints made the previous year.
While complaints are down, the department maintains that enforcement of the claims-handling statute is up dramatically since Commissioner Chuck Quackenbush took office two years ago.
"In two years, Commissioner Quackenbush has levied over $10.5 million in fines against insurance companies for all violations, while his predecessor only imposed $6 million in four years," Rex Frazier, legislative bureau chief for the department, said in a March 10 statement regarding A.B. 1109.
But "the stats he's given to us don't bear that out at all," said Amy Bach, executive director of United Policyholders, a non-profit insurance consumer education group in San Francisco. "It is mathematically and physically impossible for the department to be delivering the kind of results they claim to be delivering given the lack of training and gross understaffing of the Consumer Services Division at this time," she said.
Ms. Bach, who also is a policyholder attorney, is currently reviving a lawsuit, Bourhis vs. Gillespie, in which the department was ordered to enforce the Unfair Claims Practices Act and prosecute consumer complaints.
Since Mr. Quackenbush has taken office, enforcement has been "a joke," she said. "They are not enforcing the law."
In fact, several Consumer Services Division staff members recently testified before the state Senate Insurance Committee that personnel cuts are threatening the division's ability to properly investigate complaints against the insurance industry.
"In the past, all consumer complaints against an agent, broker or company were investigated. This administration has changed that by first changing the complaint forms the consumer receives. Now, the form asks if the consumer has gone to the company, agent or broker first," one staff member said in anonymous testimony at an Oct. 23, 1996, hearing.
As a result of this procedural change, "delays can occur on otherwise urgent issues or no
response at all, which occurs routinely," the staff member said.
Furthermore, "violations of
law could go unnoticed because there was no outlook (sic) for the consumer to go to and the violators will continue to break the law."