State Farm Told to Halt Its Donations to No-Fault Effort

A judge on Tuesday ordered State Farm Insurance Co. to halt further campaign contributions to a November no-fault auto insurance initiative pending a court hearing next week.

However, in issuing his temporary restraining order, Los Angeles Superior Court Judge Barnet Cooperman refused to freeze the spending of more than $2 million in campaign funds already contributed by State Farm to the insurance industry-backed Proposition 104.

Cooperman’s ruling came in a class-action suit filed on behalf of a State Farm policyholder who contends that the firm, which is the state’s largest insurance seller, has no right to use its surplus funds, derived from policyholder premiums, for campaign contributions. Since State Farm, based in Bloomington, Ill., is a mutual company owned by its policyholders, the policyholders’ permission would be needed to contribute funds, the lawsuit charges.

Because the suit was filed only against State Farm, it has no impact on campaign contributions other insurance firms make during the next 10 days. And even if successful, the suit would not affect the majority of the state’s insurance companies, which are standard stock corporations.

“The case does indeed involve a severe clash of constitutional rights,” Cooperman acknowledged in his ruling. “All counsel have conceded that a corporation does have constitutional rights of free speech . . . and that policyholders of mutual insurance companies (also) have rights of free speech.

“There’s no question of the importance of this issue and the possible impact of the issue upon the outcome of the election,” continued Cooperman, setting an Aug. 26 hearing on a request for a preliminary injunction. In the meantime, the judge said, he was imposing the temporary restraining order “to maintain the status quo.”

Claremont attorney William Shernoff, who brought the case on behalf of one of his employees, termed the judge’s action “a courageous step” that proved “this is not a frivolous lawsuit.”

‘Arrogant and Pompous’

In his arguments to the judge, Shernoff, a former president of the California Trial Lawyers Assn. and a backer of two rival initiatives, termed State Farm’s contributions from its national surplus of $14 billion “arrogant and pompous.”

“Insurance executives have money,” he said. “ . . . They should do it with their own money.”

Lawyers for State Farm and for the pro-initiative committee, known as Citizens for No Fault, said they remain confident that Cooperman will side with the insurance industry after the hearing. The restraining order, they added, would have no immediate impact on the initiative campaign.

“We continue to operate and don’t expect any substantial change,” said Scott Carpenter, a spokesman for the committee. “My understanding is we hadn’t anticipated any contributions from State Farm in the next 10 days.”

State Farm spokesman Jim Stahly said the company was disappointed with the ruling but will abide by it.

“We’re confident the hearing on the preliminary injunction will demonstrate the plaintiff’s argument is off base,” he said. “State Farm feels that we not only have the right but the obligation to take part in lawmaking activities and that’s what we are facing in the proposition campaign.”

$2.3-Million Contribution

Thus far, State Farm has contributed $2.3 million to the no-fault committee’s kitty and is expected to contribute another $1.7 million before the end of the campaign.

In all, the insurance industry expects to spend $43 million--by far the most ever spent in a California election campaign--to win approval for Proposition 104, one of five insurance initiatives on the November ballot. State Farm is expected to be the largest individual contributor to the effort, which features a series of TV and radio ads, according to Carpenter.

In court Tuesday, State Farm’s attorney, Frank Rothman, contended that state law and State Farm bylaws give the firm’s board of directors the right to determine how to spend its surplus funds. All corporations, he added, have First Amendment rights “to speak their political mind.”

Shernoff and co-counsel Dan Schechter, however, sought to distinguish between a mutual firm like State Farm and companies owned by public stockholders.

Policyholder Dilemma

Schechter, a Loyola Law School professor, said that to show displeasure with State Farm’s political contributions, a policyholder would have to cancel his insurance policy. But since it is difficult to quickly find a new insurer--and since auto insurance is compulsory in California--anti-initiative policyholders would be caught in a bind and, in effect, be forced to waive their right to free speech.

If the suit proves successful, its sponsors will ask the court to force State Farm to take back the funds it has contributed. The lawsuit, sponsors predicted, could also spur similar actions against other mutual firms, which comprise a minority of the state’s insurance companies.

The no-fault initiative would curtail the current auto insurance system, eliminating lawyers and lawsuits from most claims and substituting a system whereby drivers would be compensated for their damages up to a certain level. The state trial lawyers organization opposes the insurance industry initiative.

Meanwhile, the insurance industry opposes Proposition 100, a competing initiative backed by the trial lawyers.