Saying that passage of Proposition 51, the "deep pockets" initiative, is not the remedy for the liability insurance crisis, California's Little Hoover Commission Monday proposed a broad series of further insurance and legal reforms to make such insurance more available and affordable.
In a report after a seven-month study, the commission, headed by builder Nathan Shapell, said middlemen in both the legal and insurance professions are taking the lion's share of what California businesses and municipalities are paying for liability insurance.
Estimating that 54 cents of every dollar paid out by insurance companies goes to lawyers and other costs of litigation and another 30 cents to insurance company commissions and overhead, panel staff members said only a small fraction of what the insureds pay in premiums is getting back to them in actual damage claims paid.
To deal with this situation pertaining to the large insurance buyers, the commission proposed new curbs on lawyers and new financial reporting requirements and other restrictions on insurance companies.
Among the recommendations are:
- Enactment by the Legislature of a $500,000 cap, with a cost-of-living allowance, on the recovery of compensatory damages in personal injury suits.
- Institution of a much stricter burden of proof for punitive damages.
- Limiting plaintiffs' attorney fees to one-third of damages awarded, unspecified limits on defendants' attorney fees and establishment of penalties for frivolous claims or defenses.
- Establishment of a statewide reinsurance pool for municipalities and other public entities. The commission reported that nearly half of the traditional reinsurers have dropped out of the market.
- Legislation requiring that insurance companies disclose their loss data on a line-by-line and state-by-state basis.
- An increase in penalties and fines against companies for non-compliance with the state Insurance Code.
In addition, the commission, a group of citizens established in 1962 to review the operations of state government and known formally as the Commission on California State Government Organization and Economy, said the governor and the Legislature should consider requiring prior approval by the insurance commissioner of any rate increases in excess of 15%. The study found that commercial general liability rates went up by 81% in 1985 alone.
In addition, the commission said consideration should be given to establishing a five-member, part-time commission, which is both bipartisan and independent, to replace the lone insurance commission. It also said the proposed commission should be given the authority to compel insurance companies to participate in market assistance plans and joint underwriting efforts.
Proposition 51, adopted by a 62% majority of the electorate on June 3, limits the joint and several liability system, under which those with the ability to pay damages can be compelled to pay them all, in case other parties that are ruled liable do not have the wherewithal to pay. The commission termed this only a first, partial step to resolve the crisis.
Shapell said the study disclosed that 50% of California businesses surveyed have raised the price of their goods or services to cover the increased cost of liability insurance, that half of the 370,000 trucks on state highways are operating without coverage and that 14% of all doctors surveyed who previously delivered babies have ceased doing so because they do not want to pay the high insurance rates.
For this state of affairs, the commission's report blamed a legal evolution that has seen the concept of liability "expanded enormously in a series of judicial decisions," a corresponding rising lack of predictability in risk assessments by companies, unsound rate-setting practices in the industry, withdrawal of the reinsurance market and the insurance commissioner's lack of authority and leadership in the rate-setting process.
Find Some Give
In addition, the commission indicated that it believes the insurance industry is far more profitable than it is admitting, so rate-setters would find some give.
Joining the Los Angeles news conference at which the report was released were several legislators, including the retiring chairman of the Assembly's Insurance Committee, Alister McAlister (D-Fremont), and Assembly Majority Leader Mike Roos (D-Los Angeles). They disagreed how likely the Legislature will be to act.
McAlister, saying he had become so alienated from the insurance system that he believes only the most radical changes will make it adequately serve the public, nonetheless expressed deep pessimism that "this Legislature, the next, or the next after that" will "do anything of major significance." He said that with the power of the legal and insurance lobbies, it is simply too difficult politically.
Roos said he thinks popular outrage at the way the system is operating may mount to such a point that the Legislature will act. However, he cautioned that there is not quite enough outrage yet to bring about such action.