Insurance Claims Practices. Civil Remedy
|Analysis by the Legislative Analyst|
Under current law, an insurance company must handle claims from a policyholder in a fair manner. It is illegal for an insurance company to engage in "unfair" claims practices, such as:Failing to promptly explain the reason for denying a claim or offering a compromise settlement.Failing to act in "good faith" to settle a claim in which liability is reasonably clear.
If an insurance company unfairly handles a claim (typically referred to as the "underlying claim"), the policyholder has two ways to respond: (1) file a complaint with the Department of Insurance (DOI), which is responsible for enforcing state law regarding unfair claims practices; and/or (2) sue his or her insurance company in civil court. These lawsuits by individuals against their own insurance companies are referred to as "first-party" actions.
There are many insurance claims--especially those involving auto accidents--that involve two individuals. For instance:
Driver X runs a red light and hits Driver Y, causing both bodily injury to Driver Y and damage to her car. Driver X's insurance company is willing to pay Driver Y $20,000 for her injury and damages, but not the $30,000 Driver Y feels is reasonable. Driver Y can either accept the $20,000 or reject it and sue Driver X in court.
If Driver Y feels that Driver X's insurance company did not deal with her fairly throughout the process, Driver Y--as a "third-party" claimant--has only one way to respond. She can file a complaint with DOI for an investigation. She cannot sue Driver X's insurance company for unfairly handling the claim (a so-called third-party lawsuit). These third-party lawsuits were possible in California during the 1980s but are not now. See nearby box for a brief legal history.
Legal History on Third-Party Lawsuits in California Prior to 1979 Third-party lawsuits were not allowed. March 1979 The California Supreme Court ruled in Royal Globe Ins. Co. v. Superior Court that a third party could sue an insurance company for unfair claims practices. August 1988 In Moradi-Shalal v. Fireman's Fund Ins. Co., the California Supreme Court overturned its Royal Globe decision. The court held that state law did not include a right for a third-party claimant to sue an insurance company for unfair claims practices. October 1999 The Governor signed two laws specifically allowing third-party lawsuits in certain situations. These measures were to have gone into effect January 1, 2000. In December 1999, however, referenda on the two laws qualified for the March 2000 ballot (Propositions 30 and 31). Thus, the provisions of the two laws are "on hold" until after the vote on the propositions.
In the fall of 1999, the Legislature approved and the Governor signed SB 1237 (Chapter 720) and AB 1309 (Chapter 721). These laws allow third-party claimants to sue insurance companies under certain conditions. The two laws would have gone into effect January 1, 2000. In December 1999, however, referenda on the two laws qualified for the March 2000 ballot (Propositions 30 and 31). Once these propositions qualified, SB 1237 and AB 1309 were put "on hold" until the vote at the March 2000 election.
If approved, this proposition would allow the provisions of AB 1309 to go into effect. By itself, however, this proposition does not change existing law. It becomes law only if Proposition 30 on this ballot is also approved by the voters. Proposition 31 would amend parts of Proposition 30, limiting to some extent when a third-party claimant can sue an insurance company for unfair claims practices. Figure 1 shows the major changes that this proposition would make to Proposition 30.
Major Changes That Proposition 31 Makes to Proposition 30
Provision Proposition 30 Proposition 31 Who can sue Individuals and businesses can sue. Only individuals can sue. Economic loss claim No restrictions on claim. Claim for property damage must result from car accident. Bodily injury claim No restrictions on claim. Claim cannot include emotional distress resulting from economic loss (such as lost wages), but can include emotional distress resulting from other causes if there are physical signs of the distress. Binding arbitration system In specified cases, if an insurance company agrees to arbitration, the third-party claimant cannot sue the company. In specified cases, if an insurance company requests or agrees to arbitration, the third-party claimant cannot sue the company.
This proposition would have a fiscal effect only if the voters also approve Proposition 30 on this ballot.
As noted above, this proposition changes portions of Proposition 30. We estimated that Proposition 30 would result in somewhat higher insurance gross premiums tax revenues and an unknown net impact on state court costs. If this proposition also passes, state revenues would be slightly less, and the impact on state court costs is unknown.
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