BILL ANALYSIS SENATE RULES COMMITTEE Office of Senate Floor Analyses 1020 N Street, Suite 524 (916) 445-6614 Fax: (916) 327-4478 . THIRD READING . Bill No: SB 49 Author: Lockyer (D) Amended: 5/23/95 Vote: 21 . SENATE INSURANCE COMMITTEE: 8-0, 4/5/95 AYES: Rosenthal, Lewis, Hayden, Hughes, Johnston, Killea, Peace, Russell NOT VOTING: Rogers SENATE JUDICIARY COMMITTEE: 8-0, 5/9/95 AYES: Campbell, Lockyer, Mello, O'Connell, Petris, Solis, Wright, Calderon NOT VOTING: Leslie SENATE APPROPRIATIONS COMMITTEE: 8-2, 5/15/95 AYES: Johnston, Alquist, Dills, Greene, Killea, Leonard, Mello, Polanco NOES: Kelley, Leslie NOT VOTING: Calderon, Lewis, Mountjoy . SUBJECT: Automobile insurance SOURCE: The author . DIGEST: This bill makes major changes to the automobile insurance system with changes in both insurance requirements and the dispute resolution system. Provisions of the bill take effect between July 1, 1996 and January 1, 1997. CONTINUED SB 49 Page 2 ANALYSIS: Existing law: 1. Requires owners and operators of all motor vehicles to maintain ofinancial responsibilityo (usually a policy of insurance) with minimum limits of $15,000 per person per accident, capped at $30,000 total for any one accident, for bodily injury liability, and $5,000 per accident for property damage liability (o15/30/5o). 2. Provides generally that disputes under $5,000 may be handled by osmall claimso court, which involves a judge sitting without a jury and relatively informal rules of evidence. 3. Allows any person obligated to pay for or provide benefits to seek recovery or recoupment from a third party or the third partyos insurer if the injuries were caused by that third party (collateral sources). 4. Requires any person involved in an accident to exchange driveros license and vehicle registration information, and to report the accident to the Department of Motor Vehicles (DMV). 5. Grants the Insurance Commissioner broad latitude over automobile insurerso rating of insurance, subject to criteria contained in Proposition 103. This bill: 1. Reduces the mandatory financial responsibility limits to $10,000 per person, capped at $20,000 per accident, for bodily injury liability, and $3000 for property damage liability (o10/20/3o), with a provision authorizing a purchaser of a minimum limits policy to waive coverage for property damage liability. The bill also adds a requirement that every policy provide first party coverage for expenses resulting from injuries to every occupant of the vehicle, up to a limit of $1000 per person. 2. Establishes jurisdiction in small claims court for auto accident cases up to $10,000, and provides specific procedures, including a 20 percent cap on CONTINUED SB 49 Page 3 contingency fees, for auto accident cases which parties file in the small claims court. 3. Establish a number of new practices and requirements for handling litigation of automobile accident cases, including: A. A requirement for early exchange of information via use of a questionnaire developed by the Judicial Council. B. The right to introduce omedical injury profileso as established by the Insurance Commissioner as nonconclusive evidence of proper utilization of medical services. The bill distinguishes between serious and non-serious auto accident injuries for purposes of controlling discover and medical utilization and for implementing the sale of a no-litigation policy. oNon-serious injuryo means a personal injury that results in a concussion of a non-permanent nature or an impairment or injury of the musculoskeletal system of a non-permanent nature. It includes sprains, strains, abrasions, bruises, hematomas, laceration that are not permanently disfiguring, and injuries commonly characterized in the automobile injury reparations system as osoft-tissue.o oSerious injuryo means a personal injury that results in a fracture, herniated discs, laceration that results in scarring or permanent disfigurement, internal organ injury, loss of sense or senses that is not temporary, loss of body part, any permanent nerve impairment, loss of fetus, paralysis, permanent brain injury, or death. The determination of whether an injury is serious or non-serious shall be made by the court. C. Mandatory judicial arbitration of any case which the presiding judge, in his or her sole discretion, CONTINUED SB 49 Page 4 determines would not result in more than $50,000 in damages. D. A openaltyo requiring any party to pay litigation costs and attorney fees if they fail to better any arbitration award by seeking trial de novo. Provides that nothing in (C) or (D) is to preclude any party from mediating the dispute or utilizing any other voluntary dispute resolution process. E. Changes to the so-called ofast-tracko procedures aimed at facilitating settlements in lieu of getting quickly into costly litigation. F. Adopts a medical fee schedule, initially according to the schedule adopted for workers compensation cases (80% of the usual and customary fee if the service is not scheduled) but subject to modification by the Insurance Commissioner. G. Reforms the collateral source rules, including procedures to notify payors of a possible liability claim, making auto policy first party coverage (oMedPayo) primary (i.e., the third party claimant could not recover from the other party amounts paid directly to the third party by his or her own insurer). Provides that the settlement, arbitration or judgment award of an auto injury claimant would be reduced (up to a maximum $3,000) when the claimant has received benefits for the claimed injury from an auto MedPay policy. 4. Authorizes insurers to use a so-called oPPO for collision repairso if certain quality control requirements are met. 5. Requires owners to establish proof of financial responsibility (insurance) at the time a vehicle is registered at DMV. Requires a $1 fee at the time of registration or renewal of registration of every CONTINUED SB 49 Page 5 vehicle subject to registration, except those exempted under the Vehicle Code from payment of fees. The money collected is to be used to reimburse DMV for costs incurred in implementing these provisions. 6. Requires drivers involved in accidents to exchange, in addition to current requirements, insurance information and to report the possibility of a claim within 10 days of the accident to the insurance company which insures the other party involved in the accident. Requires the DMV to include information concerning these requirements in its Driveros Information Handbook, and to test for knowledge of these requirements. 7. Requires liability policies to include an option for the policyholder to agree that any property damage or non-serious injury liability claim will be submitted to binding arbitration. 8. Amends the penalties for insurance fraud. Provides a five-year enhancement for insurance fraud scheme involving $100,000 or more; misdemeanor penalties for auto repairers who offer kickbacks to offset deductibles on an auto insurance policy. 9. Expresses legislative intent that: A. Minimum limits policies be sold to good drivers in all areas of the state for $450 ($350 if property damage liability coverage is waived). B. The Insurance Commissioner reach the target price by use of between five and eight geographic regions. C. The Insurance Commissioner establish a way to orecaptureo subsidy to minimum limits policies by surcharges on policies providing higher limits. D. The Insurance Commissioner establish a premium exchange mechanism to ensure an equal distribution among insurers of the costs of providing a minimum policy to good drivers. CONTINUED SB 49 Page 6 10. Provides that a violation of the provision of law requiring the wearing of a seatbelt does not result in a violation point count. Comments Purpose of the bill: The author has been pursuing comprehensive reform of the automobile insurance system for several years, and this bill continues that pursuit. The approach is to attempt to maintain the basics of the liability system while attacking the areas which drive the high costs of the system. Previous legislation: SB 10 (Lockyer) of 1992, which was vetoed, contained most of the provisions of this bill. SB 10 went to conference committee, and was the subject of substantial hearing, debate, and study. Much of the work focused on quantifying potential savings to the automobile insurance system which would result from the various provisions of the bill. oI am returning Senate Bill 10 without my signature. oThis bill includes a number of provisions: it imposes a reduction in financial responsibility limits from $15,000/30,000 bodily injury, and $5,000 property damage to $10,000/20,000 bodily injury and $3,000 property damage; sets a price target of $350-$450 for the basic policy with rates and territories to be set by the Insurance Commissioner; and makes several changes in law relating to small claims, mandatory arbitration, and exchange of information among parties. oThis bill fails to achieve comprehensive reform of the auto insurance system because it doesnot address the underlying forces causing the greatest increases in costs, particularly in the bodily injury liability system. oFor drivers who purchase a basic liability policy only, this bill would achieve savings through reduced levels of coverage, not through fundamental reform. Premium increases in liability insurance have been driver by perverse incentives that drive up actual injury claims, CONTINUED SB 49 Page 7 reward fraud, allow excessive involvement of attorneys in claims, and award pain and suffering damages for eve minor injuries. SB 10 does not meaningfully correct any of these deficiencies in the present system. oMoreover, unlike SB 941 of the 1991 Session, the no-fault proposal which guaranteed a price of $220, SB 10 does not guarantee low-cost insurance for California drivers. The provisions of SB 10 would not produce significant cost reductions, and the target price in the bill is not guaranteed. The projected savings in SB 10 are predicated on a number of unproven assumptions which are not actuarial sound. Other reform proposals, particularly SB 941, have met a very rigorous burden of proof showing that the proposed solutions would in fact produce savings. That standard has not been applied to SB 10. oConsumer Union has opposed SB 10, and noted in its letter to the California Legislature that, oPossible savings claimed in the system are not adequately documented, and are too speculative.o Other consumer groups have requested that SB 10 be vetoed because it does not truly reform the auto insurance problem in California. oI am committed to fundamental reform of the auto insurance system and believe that no-fault insurance, not SB 10,, will be most effective in attacking the underlying factors that are driving up the cost of insurance. SB 10 is nothing more than an empty promise to lower the cost of insurance. Californians donot want any more empty promises, they want guaranteed, available, low-cost auto insurance. oI will continue to work in the next legislative session with a coalition of consumer groups, businesses, and legislators from both parties to enact comprehensive real reform of auto insurance.o It passed the Senate 24-8 (Noes: Calderon, Hill, Johnston, Killea, Leonard, Leslie, Maddy and Rogers). Related bills: SB 1229 (Killea) proposes a no-fault solution to automobile insurance problems, and has been referred to the Senate Judiciary Committee. AB 607 CONTINUED SB 49 Page 8 (Brulte), also a no-fault bill, has been referred to the Assembly Insurance Committee. FISCAL EFFECT: Appropriation: No Fiscal Com.: Yes Local: Yes SUPPORT: (Verified 5/23/95) California Defense Council OPPOSITION: (Verified 5/23/95) Office of Insurance Advisor Association of California Insurance Companies Consumers Union California Judges Association Department of Finance California Association of HMOs ARGUMENTS IN SUPPORT: The authoros office states, oThis measure seeks to ensure that affordable automobile insurance is made available to all Californians through the implementation of a variety of cost containment, tort reform and anti-fraud components. The bill oseeks to reduce insurance costs by requiring each participant in the process to give up a piece of their share of the pie. Don Bashline, an independent actuary from Massachusetts, has evaluated the reforms in SB 49 and concluded that auto insurance under the terms of this bill can be offered on a statewide flat rate of $260.o ARGUMENTS IN OPPOSITION: The California Association of HMOs opposes the provision in SB 49 eliminating from any auto accident recovery the first $3,000 of reimbursement for medical expenses, arguing that this would unfairly shift costs from insurers and tortfeasors to auto accident victims who will pay higher health care premiums as a result. Consumeros Union (CU) opposes SB 49 because it does not guarantee that automobile insurance will be available at a price low enough to allow low-income drivers (many who are currently uninsured) to purchase insurance and thereby CONTINUED SB 49 Page 9 comply with the law. CU does not believe that sufficient costs are taken out of the system by the bill. CONTINUED DLW:ctl 5/24/95 Senate Floor Analyses SUPPORT/OPPOSITION: SEE ABOVE **** END ****