Relief From High Auto Insurance Not in Sight : Although State Drivers Are Fuming, Powerful Lobbies Stymie Attempts at Legislative Reform

The rising cost of auto insurance in California has fueled a strong public antipathy to the present system, generating mounting pressure on the Legislature and other state political leaders to do something to change it.

But because of political and economic considerations, the chances for substantially altering the system appear slight.

It is not unusual for urban drivers--particularly in Central Los Angeles and the Westside--to pay more than $2,000 a year to insure an automobile. If they have traffic violations or accidents on their record, the cost rises still higher.

At the same time, sharply differing rates and shifting territorial rating boundaries among the hundreds of companies selling auto insurance have caused confusion and bitterness. The rate structure is so complicated as to defy understanding, and efforts on the part of state insurance authorities earlier this year to publicize some comparisons seem only to have compounded the confusion.

Uninsured Drivers

As many as 70% of all drivers in certain East and South Los Angeles neighborhoods have chosen to ignore legal requirements that they carry insurance, and the problem of uninsured motorists extends to a lesser degree to every part of the state. About 2.5 million California drivers are believed to be uninsured--no one knows for sure.

But even as public anger mounts and the insurance laws are increasingly flouted, the political leadership has been failing to act decisively. Powerful insurance and legal lobbies stymied most attempts at legislative reform this year. Some candidates in the recent election talked about insurance issues, but hardly made them a central theme.

So the paradox is that although many agree that California’s auto insurance system is failing, the political odds for changing it appear to be slim.

A recent Los Angeles Times Poll of 2,022 California residents 18 years of age and over found that 65% of those responding considered the pricing of auto insurance by neighborhood to be unfair and 85% believed that the rates overall are too high.

A plurality of those surveyed supported radical reform of the system. Asked if they favored a state-operated auto insurance company that would attempt to make all rates equitable in place of the present system that allows rates to be determined by the marketplace, 44% supported the state-operated system, 38% the private enterprise system and 17% said they were not sure.

Greater Unhappiness in L.A.

The unhappiness was even greater in congested Los Angeles County, where auto insurance rates are the highest in the state. There, 77% said territorial differentials in pricing are unfair, 91% said the rates are too high and 52% would support state insurance.

The basis of the discontent is clear:

- Although auto insurance costs have not been going up as fast as commercial liability rates, recent increases have still been much higher than the rate of inflation. According to federal figures, auto insurance premiums nationwide were up 14% in 1985. In California, according to industry spokesmen, rates are up nearly 40% in the last three years.

- California’s newly tightened mandatory insurance law, under legal attack for allegedly discriminating against the poor, has been suspended by the state Supreme Court. The suspension, already nearly a year old, has put the number of uninsured motorists back on the rise.

- The territorial system of pricing forces the poor who do buy insurance to usually pay far more for equivalent coverage than the rich. The same coverage that costs $2,000 or more a year in the inner city in Los Angeles may cost only $350 in many localities in Northern and Central California.

As paying auto premiums hurts more and more, particularly in the populous urban areas, numerous reforms have been introduced in the Legislature. Most of these, however, represent more a tinkering with the present system than an attempt to overhaul it. In the last year, there have been some minor adjustments adopted but no fundamental ones.

Key legislative leaders say they think fundamental reform is in order.

“I think we have reached a point where there has to be dramatic change in the way auto insurance is handled in California,” state Sen. Alan Robbins (D-Van Nuys), chairman of the Senate Insurance Committee, said recently. “If there isn’t, the system is going to collapse on its own.”

The affordability problem, Robbins declared, is “creeping from one where it’s a problem for people at the poverty level to where it’s a problem for the person who’s lower-middle-income working class.”

If the trend continues, he said, “you’ll have pockets of the state where virtually no one will have insurance, which will create a situation where people from other areas would be afraid to drive into those sections. . . .”

‘A Disgrace’

The retiring Insurance Committee chairman in the Assembly, Alister McAlister (D-Fremont), called the present system “a disgrace.”

“It’s serving the middlemen very well,” he asserted. “It’s serving lawyers, both for plaintiffs and defendants, marvelously well. It serves, for the most part, the insurance men well. . . . The people who get hurt are the purchasers of insurance and the people who are victims of accidents and who file claims.”

McAlister said statistics given the Legislature indicate that “well less than 50% of the premium dollar” is paid out in claims that wind up in the pocket of the traffic accident victim. He said most of the rest goes to insurance company commissions and other expenses and to lawyers’ fees. This is not so different from other lines of insurance, but auto claims and litigation resulting from them make up a substantial and highly visible part of the insurance system, one that affects potentially every adult Californian.

The two assertive professional groups McAlister mentioned--the insurance sellers and the trial lawyers--blame each other, often in shrill tones, for the price spiral.

The persistent argument as to who is to blame for the high cost of auto insurance--with political conservatives most often taking the side of the companies and liberals the side of the lawyers--drew an expression of exhausted patience this past spring from Bruce Bunner, the state’s insurance commissioner at the time who later resigned amid signs of Administration displeasure.

“My personal feelings are . . . the trial lawyers are wrong and the industry’s wrong and the consumer groups are wrong,” he said in an interview. “They all have biases. They’re being intractable, and they don’t want to solve the problem. They don’t want to give. I think we can all say in honesty the system is not working the way it should work and it’s not fair.”

Insurance industry representatives blame the lawyers for the rising prices, claiming that there are mounting lawsuits, ever larger expenses of litigating, exorbitant jury awards and also a public that, they claim, often views an auto accident as an opportunity for a windfall.

“In the last 18 years in California, there have been 39 major changes in the law affecting this litigation system,” declared John McCann, San Francisco spokesman for the Insurance Information Institute. The changes, he said, have not only added to the size of claims paid but also left the companies uncertain about how much to put in their loss reserves since they can only speculate what the courts might do to further expand their liability.

Twentieth Century Insurance executive Robert Thompson tells of seeing bumper stickers saying, “Hit me, I need the money,” and laments, “The whole psychology of being compensated for nothing has permeated this area (Los Angeles) particularly.”

Caps on Awards

The Reagan Administration appears to have accepted the argument about exorbitant damage awards and has come out in favor of national legislation setting caps on awards for pain and suffering and restraints on litigation. Similar bills have been introduced in numerous state legislatures and have recently been adopted in more than a dozen, but not in California.

The trial lawyers, on the other hand, suggest that the increases in rates result from the workings of a business cycle--the industry alternately seeking its profits through investments or higher premiums, whichever the economic climate makes easiest. Right now, the lawyers say, with declines in interest rates, raising premiums have been the only alternative.

The increases, they suggest, also may be serving to build public pressure on legislatures to adopt tort reforms that result in lower claims payments by the companies. California Atty. Gen. John K. Van de Kamp’s office recently subpoenaed 125 insurance sellers to give testimony as to whether there is such a connection.

“Almost every tort reform proposal I’ve seen is a euphemism for reducing victims’ rights to recover damages,” said Peter Hinton, president of the California Trial Lawyers Assn. “If I were a president of a property casualty (insurance) company, I’d be laughing now. ‘I recouped investment losses by upping premiums. And I pointed to lawyers and doctors and said it was all their fault.’ ”

Consumer groups most often side with the trial lawyers against the industry. Their calls for reform include greater disclosure of industry profits, more government regulation of the companies and more comparative pricing information for the public.

J. Robert Hunter of Alexandria, Va., president of the National Insurance Consumer Organization (NICO) and a leading industry critic, said a close examination shows that “the primary cause of the insurance crisis is insurer behavior.”

Steven Miller, head of the Insurance Consumer Action Network (ICAN), a small Los Angeles-based group affiliated with Common Cause, asked: “If it’s the very nature of claimants that they pad the claim, is it the very nature of insurance companies that they seek excessive profits?”

Inquiries into the financial backing of both the Hunter and Miller groups show that they have received substantial support from trial lawyers.

The biggest such contributor to both groups is a former president of the California Trial Lawyers Assn., Claremont attorney William Shernoff. A personal injury lawyer, he is the author of the recently published book, “Payment Refused,” about his experiences in suing insurance companies.

Lawyer’s Contribution

Shernoff said he made a $20,000 contribution to help Hunter establish NICO in 1980 and has made other contributions to it since. He said trial lawyers and consumers are in a natural alliance and that before he helped form the consumer groups, “I found in observing the (California) Legislature, almost no one was there to represent the consumer except for the trial lawyers.”

Miller acknowledged that Shernoff gave $5,000 to help ICAN organize its first public conference on insurance problems in Los Angeles in February.

Shernoff, Hunter and Miller all take a similar position on proposed tort reforms: They are willing to accept them only if the insurance companies commit themselves in advance to a specific reduction in their rates in exchange for anticipated savings in legal costs.

“I don’t think anybody wants to vote for a tort reform, only to find that the money saved went to the insurance companies to build their profits rather than to premium holders to reduce their premiums,” Shernoff explained.

Even as the insurance industry insists that reforms come at the expense of the lawyers and the lawyers say they should come at the expense of the insurance companies, it may be significant that in Canada--where far broader reforms have been adopted than any in the United States--the changes have come at the expense of both professional groups.

Public Insurance Systems

Four of the 10 Canadian provinces--Saskatchewan, Manitoba, British Columbia and Quebec--have adopted public auto insurance systems. The object has most often been to cut the price of insurance by reducing the percentage of premium dollars going to the middlemen on both sides.

Some Canadian authorities said they think auto coverage in the United States is headed toward a public insurance system. They point out that some industry representatives in the United States are already talking about having government assume the worst risks.

But California seems very far from enacting a Canadian-style system. Legislative committees have already rejected far less sweeping bills that would in one case have established state rate-making authority over the companies and in another have done away with the territorial rating system of pricing insurance.

Both of these pieces of legislation were aimed at the industry. But the general assessment in Sacramento is that nothing of substance will pass against the lawyers’ interests either.

Assembly Speaker Willie Brown (D-San Francisco) declared in June after passage by the electorate of Proposition 51, the “deep-pockets” initiative, that he would see to it that no legal, or tort, reforms were approved by the Legislature unless there were insurance reforms at the same time. His position hardly came as a surprise. After all, in private life, Brown is a trial lawyer himself.

Brown, in the recent legislative session, offered a plan that would have established a bare-bones liability policy, perhaps priced at a maximum of about $400 a year, to satisfy the state’s mandatory insurance requirements. The cost would have been kept comparatively low because the policy would have paid victims’ economic losses up to the policy limits but no damages for emotional losses such as pain and suffering.

The bill was defeated amid questioning by some legislative aides whether the Speaker was really serious about its passage. It was not favored by the trial lawyers’ lobby.

Contingency Fees

Stan DiOrio, an aide to Assemblywoman Maxine Waters (D-Los Angeles) and an insurance expert, noted that the trial lawyers can be counted on to strongly oppose any bill that would restrict pain and suffering awards, particularly since such awards often go mostly to satisfy lawyers’ contingency fees that may amount to about 30% of the total recovery. At the same time that the Brown proposal was being advanced, some industry representatives were working on an auto liability policy that would have been sold at a reduced premium but would only take care of the injured party at the expense of his policy, with no right to recover through the legal system.

Meanwhile, the state Insurance Department was also discussing a bare-bones auto liability policy that would be offered at a low, flat rate. But its consumer affairs chief, Everett Brookhart, said later that he had been told the trouble would be that everyone in high territorially rated areas would buy such a policy, while those in low rated areas would not need it.

He said he feared that this would leave the issuers of such a policy liable for large pay-outs in areas of the highest risk. So, he indicated that the department believed the idea was unworkable.

In any event, as the legislative session drew to a close, none of the ideas for a bare-bones policy had come to fruition, and even a more limited effort by Robbins to give some relief to senior citizens was finally defeated.

Another Robbins proposal that failed would have mandated premium reductions of up to 25% for people with good driving records and safety equipment on their cars. One trouble with this was that the insurance companies might simply have jacked up other premiums to compensate for the reductions.

Some observers think that major contributions by both the insurance and legal lobbies have a lot to do with blocking legislative action. For instance, California property and casualty insurers, in a two-year period that ended in July, gave $70,582 and $52,100 respectively to Robbins and McAlister; an average of $20,614 for each of the 22 members of their two committees, and an average of $10,045 to other members of the Legislature. Only four of the 120 legislators got nothing. By the same token, trial lawyers have also contributed hundreds of thousands of dollars to lawmakers.

Meanwhile, in the recent gubernatorial campaign, Gov. George Deukmejian confined most of his insurance remarks to the lack of availability and high price of municipal and commercial insurance and scarcely mentioned auto insurance. At the same time, his Administration’s Insurance Department was making some gestures to auto insurance consumers, releasing comparative pricing information and new statistics on complaints against various companies.

It would be the Legislature that would have to act on reforms. What are the prospects?

McAlister, the retiring Assembly Insurance Committee chairman, remarked, “I have to honestly say that I think at this point most legislators would probably rather finesse the issue than really fundamentally solve it, because they’re caught in these cross fires and some of them probably figure it’s going to go away, that they can outlast it.”

Action Doubted

Consumer advocate Miller said that while there is more public interest than ever before, he questions “whether the Legislature will be able to bite the bullet and take on this enormous economic and political monolith.”

“The indications are that the only sure thing is taking it to the streets, qualifying an initiative and putting it on the ballot,” he said.

One such initiative drive this year, however, fell short of securing enough signatures to qualify for the November ballot. Adam Burton, a retired congressional field deputy from South Los Angeles, succeeded in collecting 362,000 signatures--390,000 were required--on an initiative that would have rolled back auto insurance rates to their January, 1985, level, required public hearings before the rates could be raised and allowed the state to create its own insurance system should the private companies refuse to write auto liabilities policies for everyone.

Burton had been angered by a personal insurance bill that came to an annual $5,026 for his three cars, accompanied by a note from the Automobile Club of Southern California saying, “Rates reflect no surchargeable losses. Thank you for being a careful driver.”

With little financing to circulate the petitions but with volunteers statewide, Burton is planning to try again for 1988 with a broader proposal that would allow the state to set rates for all insurance. “At the rate they’re going in the Legislature,” he said, “there’s no end to the problem in sight.”

Next: Mandatory insurance and territorial ratings.

OVERHAULING AUTO INSURANCE

These are some key proposals being considered by the California Legislature.

Do away with the territorial rating system of pricing insurance and replace it with a pricing system based on individual driving records.

Mandate authority to the Insurance Department to approve in advance auto insurance rates, rather than the present “open competitive” system. A variation of this would set restrictions on the percentage rate of annual premium increases that could be instituted by companies without state approval.

Mandate a state takeover of the assigned-risk plan with the aim of assuring greater availability of coverage to substandard drivers who cannot obtain it from private companies. At present, company representatives form the board of directors of the plan.

Establish a bare-bones, first-party, “no fault” policy to satisfy the state’s mandatory insurance requirements and do away with the present requirement that everyone buy liability coverage. This policy would pay for economic losses but not for pain and suffering.

Require premium reductions of up to 25% for people with good driving records and safety equipment on their cars. Where the money would be made up by the companies is left unclear.

Establish limitations on attorneys’ contingency fees as well as on payments for pain and suffering losses.

CALIFORNIA’S BIGGEST JUDGMENTSAuto insurance companies complain about the spiraling cost of litigation. According to Jury Verdicts Weekly, these are among the state’s highest court judgments:

Leekins v. American Honda Motor Co. and Honda Motor Co.

Verdict: $6,539,000, currently on appeal.

Marchell Leekins , 19, of Santa Maria, was left a quadriplegic on May 29, 1979, when the 1978 Honda Civic in which she was riding overturned near Lompoc. Plaintiff contended that the Honda’s 12-inch bias radial tires did not permit an emergency maneuver and that if the auto had been equipped with optional 13-inch tires, the accident would not have happened. Defendants contended that the accident was the fault of the 16-year-old driver, who was ejected and killed.

Douglas Michaelson v. Tan Jay International, California Yacht Club and Southern

California Edison

Verdict: $4,423,257 against Tan Jay and California Yacht Club. In a later settlement, Tan Jay paid $1.5 million and California Yacht Club $950,000.

Michaelson, 23, was injured in April, 1978, while helping Tan Jay employees tow a sailboat when a mast hit a 16,000-volt electrical conductor; Michaelson received a severe shock. His right leg and a finger were amputated and his left leg was damaged. His attorneys contended that Tan Jay was negligent in sending inexperienced employees to pick up the boat and that the yacht club was negligent because its dock master allowed them to leave with the mast up and failed to show them how to put it down. Tan Jay contended that its employees were given adequate instructions but failed to follow them, and the yacht club contended that it had no duty to warn and that the dock master did not see the plaintiff leave.

Dustman v. AMC Jeep Corp. and McDaniel, and McDaniel v. AMC Jeep Corp.

Verdict: $4,413,100 against AMC Jeep only, $3,882,500 for Dustman and $530,600 for McDaniel. Settled on appeal, but it was agreed not to disclose the amount.

A Jeep driven by Dorothy McDaniel, 18, rolled over on a freeway on-ramp in Redding on Dec. 6, 1980. Passenger Carie Dustman, 18, was killed, and her mother, Diane Dustman, sued, contending that the Jeep was defective in that there was inadequate crash protection, and that there had been a failure to warn of this and false and misleading advertising. AMC contended that the sole cause of the accident was negligent driving.

Georgia Duerr v. Aeroceanic Plastics, Aeroceanic Hardware, Superior Industries,

Triangle Inn, Peter Madrid and Robert de la Cruz

Verdict: $4.2 million against the Aeroceanic firms and Madrid, later overturned. A new trial resulted in a verdict of $700,000 against Madrid only, but, according to the plaintiff’s attorney, he was living outside the country and nothing has been paid.

Duerr, 58, was injured and her daughter, Victoria, 29, was killed on Aug. 20, 1975, while visiting a neighbor’s home in San Fernando. Madrid--who had been drinking, had a blood alcohol reading of .21 and was fleeing from an earlier hit-and-run accident--lost control of his car, which jumped the curb and struck Victoria. The plaintiff was injured while jumping out of the way. With Madrid not appearing and no one putting on a defense for him, the plaintiff’s attorneys contended that a small, customized steering wheel in Madrid’s car was defectively designed. Aerooceanic, the manufacturer of the steering wheel, blamed the accident on Madrid’s drinking and speeding.

Evelyn Resch v. Volkswagen and Judy Shipps.

Verdict: $4.2 million against Shipps only. Shipps carried only $15,000 liability insurance, and, according to the plaintiff’s attorney, that was all that was actually paid.

Resch, 23, a secretary, was injured, suffering paralysis and severe brain damage on Aug. 17, 1975, when the Volkswagen she was driving collided with Shipps’ van in Van Nuys. Resch’s attorneys contended that Shipps violated her right of way and struck her auto broadside at 35 to 40 m.p.h. They also said there was a design defect in her Volkswagen because it had no roof rib and defective welding. Shipps denied negligence and contended that the plaintiff was inattentive. Volkswagen said there was no design or manufacturing defects.

CAR INSURANCE PREMIUMS BY STATE

Best’s Insurance Management Reports--considered the most authoritative source--ranked states by 1984 average auto insurance costs. Still, Best said the rankings are not completely scientific: The figures were compiled by dividing the number of registered cars in each state into the total insurance premiums. The figures do not account for uninsured cars, a factor that would boost average insurance costs; California, with an estimated 15% of drivers uninsured, may well rank higher.

1984 1984 1984 Average 1984 Average Ranking State Premium Ranking State Premium 1 New Jersey 553 *26 Illinois 313 2 Massachusetts 477 *27 New Hampshire 308 3 New York 419 28 New Mexico 303 4 Washington, D.C. 418 29 Minnesota 302 5 Alaska 429 *30 Florida 297 31 Kansas 291 6 Pennsylvania 412 *32 Washington 289 7 Nevada 409 *33 Virginia 283 8 California 401 *34 Vermont 279 9 Louisiana 400 *35 Maine 279 10 Arizona 375 36 Wyoming 276 11 Connecticut 375 37 Indiana 275 12 Maryland 372 *38 Mississippi 267 13 Texas 371 *39 Nebraska 287 14 South Carolina 359 40 Utah 266 *15 Rhode Island 358 41 Idaho 363 16 Michigan 358 42 Ohio 260 17 Delaware 351 43 Kentucky 259 18 Hawaii 336 *44 Wisconsin 256 19 West Virginia 327 45 North Carolina 255 20 Colorado 326 46 North Dakota 252 *21 Arkansas 323 47 Montana 239 22 Oregon 316 *48 Iowa 224 23 Georgia 319 *49 Tennessee 221 *24 Missouri 314 *50 Alabama 217 25 Oklahoma 314 *51 South Dakota 216 National Avg. $343

* States that have no compulsory auto insurance laws, according to the Insurance Information Institute.

RISING COST OF AUTO INSURANCE The Consumer Price Index measures the relative cost of various segments of the economy as compared with a 1967 base. These figures reflect the percentage change from one July-to-July year to the next.

1982-83 1983-84 1984-85 1985-86 Auto insurance 9.8% 7.8% 10.2% 14.1% Food + beverages 1.4 3.7 2.1 3.5 Housing 1.7 4.2 4.0 2.8 Apparel + upkeep 2.8 0.8 3.2 0.2 Transportation 1.5 4.2 2.8 -5.3 Medical care 8.4 6.3 6.2 7.6 Entertainment 4.0 3.8 4.1 3.3 Composite index 2.4 4.1 3.6 1.6

Source: CPI Detailed Reports; U.S. Department of Labor; Bureau of Labor Statistics