BILL ANALYSIS
SB 49
Date of Hearing: March 12, 1996
ASSEMBLY COMMITTEE ON INSURANCE
David Knowles, Chairman
SB 49 (Lockyer) - July 19, 1995
SENATE VOTE: 31-3
ASSEMBLY ACTIONS:
COMMITTEE JUD. (7/5/95) VOTE 8-6 COMMITTEE> VOTE>
Ayes:Isenberg, Archie-Hudson, Ayes:
Figueroa, House, Knox, Kuehl,
K. Murray, Sher
Nays:Morrow, Alby, Battin, Kaloogian,Nays:
Knight, Setencich
SUBJECT
Vehicles
Background: The sponsor of this bill is the author. It is
essentially a reintroduction of SB 10 of 1992. That bill was the
product of a series of Judiciary and conference committee hearings
on the issue of auto insurance reform. The bill passed both
houses, but was vetoed by Governor Wilson.
NOTE: Due to the numerous provisions in SB 49, the analysis has
been broken down into issue areas of the bill. The changes to
the auto insurance policies and the changes to accidents
regarding non-serious injuries are presented first, and the
remainder of the bill is presented in order as it appears in
the bill.
A) Auto Insurance Policies (Sections 11-14, 23-28)
Existing Law sets the mandatory financial responsibility limits
from 15/30/5 (which means $15,000 bodily injury liability per
accident, capped at $30,000 total for any one accident, and $5,000
per accident for property damage liability). Insurers today can
also sell a first party medical coverage (called med pay).
This bill:
1) Reduces minimum coverage to 10/20/3.
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2) Mandates that the minimum policy contain med pay of
$1,000 per person per accident.
3) Allows a qualified "Good Driver" to waive property
damage coverage, although the driver would remain liable
for property damage caused by their negligence.
4) Requires insurers to sell a "no-litigation" policy where
the insured agrees to submit any third party "non-serious"
injury (as defined in Section B of this analysis) to
binding arbitration.
a) Specifies that the insured must agree to
submit any third party claim involving property damage
or a non-serious injury to binding nonjudicial
arbitration in the following circumstances: between
the insured and the insurer, between the insured and
any person insured under a policy containing a similar
agreement, or between the insured and any person
willing to submit the dispute to binding arbitration.
b) Specifies that this provision does not apply
to first party claims.
c) Specifies that such a provision is voluntary
and that the insured may choose such a policy at the
time he or she applies for the policy and may be
changed in writing at any time.
d) Requires insured purchasing such a policy to
sign a disclosure statement acknowledging that the
policy is provided at a lower price in consideration
for agreeing to resolve minor accidents in
arbitration; and that the insured is waiving any right
he or she may have to a jury trial.
e) Allows the insurer to assert in arbitration
that it is not liable, and allows the claimant or the
insurer to appeal the arbitrator's decision regarding
the insurers liability.
5) Specifies these changes take effect 1/1/97.
COMMENTS:
1) Reduced Coverage. Reducing coverage from 15/30/5 to 10/20/3
will obviously reduce some costs. However, the Office of
Insurance Advisor argues that this bill would achieve savings
through reduced levels of coverage, not through fundamental
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reform.
2) Property Damage Exemption. Allowing Good Drivers to waive the
purchase of property damage coverage will also reduce premiums.
However, one of the main concerns the public has about
uninsured drivers is that, when their car is dented or damaged
by an at-fault, uninsured driver, they have to pay for the body
work on their car. This bill says that now an insured driver
who hits another person's car won't have to be legally covered to
pay for the damage they cause -- even though they will still be
legally liable for that damage. Both bills in the Legislature
this year creating first party coverage (AB 607 (Brulte) and SB
1129 (Killea)) also do not require property damage coverage.
3) No Litigation Policy. The section requiring insurers to sell a
policy of "non-litigation" is intended to reduce costs. The
provision says that the insured will agree to binding
arbitration. But according to some insurers, the problem with
binding arbitration is that the arbitrator tends to split the
difference, whereas today an insurer committed to fighting
inflated claims could fight the case in court and the insured
would get nothing.
4) Mandatory Med Pay. Presently insurers offer a minor "med pay"
policy with full coverages. Med pay is first party medical
coverage for the driver. This bill makes this coverage a
mandatory part of the minimum coverage.
B) Serious vs. Non-Serious Injuries. (Section 4 of the bill)
Existing law does not generally distinguish between serious and
non-serious auto accidents.
This bill allows use of medical profiles in non-serious injury
accidents.
1) Distinguishes between "serious" and "non-serious"
injury. Specifies that the court will make a determination
of whether an injury is serious or non-serious.
a) Defines "non-serious" injury as a personal
injury that results in a concussion of a non-permanent
nature or an impairment or injury of the
musculoskeletal system of non-permanent nature,
including sprains, abrasions, bruises, hematomas,
lacerations and injuries commonly characterized as
soft tissue.
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b) Defines "serious injury" as 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.
2) Requires the Insurance Commissioner to establish a
medical profile for non-serious injuries after consultation
with appropriate health care organizations. The profile
shall establish parameters for the treatment of non-serious
injuries.
3) Allows the defendant in a non-serious accident case to
introduce the medical injury profile for the claimed
injury. Specifies that the medical injury profile shall
not be deemed to establish prima facie evidence of
necessary and appropriate treatment.
4) Specifies that these changes take effect 1/1/97.
COMMENTS:
1) Non-Serious Injuries Are The Problem. The Rand Institute, in
their report "The Costs of Excess Medical Claims for Automobile
Personal Injuries" found that 59 percent of the costs
submitted in support of soft injury claims are excess. The
author, while disagreeing with some of the conclusions of that
report, appears to agree with the overall observation that soft
tissue injury cases add a disproportionate amount of costs to
the system.
2) Injury Profiles. This bill responds to that problem by
creating a medical profile of non-serious injury that can be
introduced at the time of a trial. Theoretically, these
profiles might show that this type of injury should cost only
$2000 in medical bills. So when the "victim" shows up with
$7,000 in medical bills, it will look kind of fishy.
3) Definition of "Non-Serious." Alliance of American Insurers
(AAI) argues that industry experience with loose terms such as
"non-serious" in other states shows that such language is so weak
it is bypassed as an insignificant barrier by plaintiff attorneys.
4) Attacking The Symptom, Not the Cause? The Rand study also
found that the presence of general damages (pain and suffering)
creates a significant incentive to build-up medical claims.
Without attacking that incentive, critics say, this bill is
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attacking the symptom, not the cause. Indeed, when the
Governor vetoed a nearly identical bill in 1992 (SB 10 -
Lockyer) the Governor said that SB 10 did not attack the
"underlying factors that are driving up the cost of insurance."
C) Collateral Source Rule (Section 1 of the bill)
Existing law generally holds that evidence of insurance benefits
is unduly prejudicial and therefore excluded as evidence.
This bill specifies that, in a third-party action for an injury
auto accident, the judgment or settlement shall be reduced by an
amount paid from a "med pay" policy (up to $3,000). Requires the
plaintiff to give notice of the action to any health insurer
providing benefits and to the auto insurer providing med pay
benefits in excess of $3,000. Specifies these changes take effect
1/1/96.
COMMENTS:
1) Med Pay Problems. As described above, med pay is a first party
coverage for medical payments for the policyholder to be used
in the event of an accident. Some have used the med pay
provisions to cover their injuries, build-up the claim and
then, in some cases, get double recovery. This provision is
supposed to reduce the problems of double recovery and build-up
associated with med pay, now that med pay would be a mandatory
part of the minimum policy.
2) Opposition. State Farm argues that the savings will be
insignificant. Personal Insurance Federation of California
(PIFC) and the Alliance of American Insurers argue that the
$3,000 cap will create a perverse incentive for plaintiff's to
run up medical costs in excess of the $3,000 in order to recoup
the losses of the reduction.
D) Small Claims Court (Section 2 of the bill)
Existing law provides that disputes under $5,000 may be handled by
small claims court.
This bill increases the jurisdiction to $10,000 for auto accident
cases. Specifies changes in procedure for small claims court for
auto accident cases of between $5,000 and $10,000. Specifies that
these changes take effect 1/1/97.
1) Requires that the claim be heard by a judge or
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commissioner without a jury.
2) Specifies time periods for hearings and fees.
3) Permits a defendant to move to transfer the case to
municipal or justice court.
4) Allows parties to be represented by an attorney; allows
an insurer to provide an attorney to represent a defendant
provided that the insurer stipulates that its policy with
the defendant covers the matter to which the claim applies.
5) Allows an appeal to superior court; allows the superior
court to award for good cause up to $1,000 to a party for
attorneys fees and the costs of the appeal. Allows the
superior court to award attorneys fees and other specified
costs, if the court determines that the appeal was without
substantial merit and not based on good faith, but was
intended to harass or delay the other party.
6) Provides that a plaintiff attorney shall not recover a
contingency fee from the client in excess of 20% of any
recovery in the small claims court unless upon court approval
of a higher fee. The court may increase the allowable
contingency fee if it finds the 20% fee limit would result in
inadequate compensation given the amount of time spent by the
attorney on the case.
COMMENTS:
1) Purpose. The purpose of this proposal is to provide an
informal forum for claimants who wish to resolve their claims
quickly. The author argues that this portion would be
voluntary, but it creates disincentives to appeal the decision.
2) Attorneys In Small Claims Court? Generally insurers don't like
to push auto claims into small claims court because the insurer
has a duty to defend the insured. Since attorneys are not
allowed, the insurers say they cannot adequately defend the
insured. In addition, insurers argue that their personnel are
more experienced at presenting a case, while the insured may
not have any incentive to put on a good case because, in many
instances, the insurer will pay for it anyway. This bill
recognizes this problem and allows both parties to have
attorneys.
3) Opposition. State Farm argues that this provision will
increase auto insurance claims, arguing that "It authorizes
attorneys who operate claim mills to pursue the bulk of
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automobile accident claims in small claims court without any
safeguards to detect excess claims, fraud, staged accidents and
other claim abuses." PIFC argues that since both parties would
have attorneys, they see little savings. PIFC also argues that
"since insurers would only be allowed to be represented by
defense if they stipulate to coverage, the policyholder would
be deprived of the right to a defense under a reservation of
rights, leaving the policyholder unprotected while policy
issues are pending."
E) Mandatory Exchange of Information (Section 3 of the bill)
This bill requires a mandatory exchange of information between a
third party claimant and the defendant.
1) A form for this exchange of information would be
developed by the Judicial Council. The bill specifies that
the forms shall request specified information including:
the name, address, date of birth, telephone number, and
driver's license number of the party; the party's version
of the accident; the names, addresses and telephone numbers
and statements of any witnesses; a police report if
available; a statement of the nature of the damages if the
party is seeking damages; the names of persons who can
substantiate a party's loss of earnings; the names,
addresses and phone numbers of each insurer including the
policy limits of each policy and the existence of any
coverage dispute; and a description of all evidence that
relates to the party's claim for damages.
2) Requires that each party seeking damages or contesting a
claim must complete the questionnaire, and serve the
questionnaire on the other party's counsel or insurer.
3) Requires the insurer to inform any claimant on an auto
claim of the claimant's responsibility to complete the
questionnaire and requires the insurer to furnish the
claimant with the form; gives the claimant 30 days to fill
the questionnaire out.
4) Requires each party to respond to each and every
question; requires responding party to make a reasonable
and good faith effort to obtain the information; allows for
extensions on filling out the
questionnaire; allows either party to examine the records in
case of claim for bodily injury; allows any party to amend any
response to the questionnaire with a showing of good cause.
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5) Specifies these changes take effect 7/1/96.
COMMENTS:
1) Purpose. The author says that the purpose of this proposal is
to eliminate the "gamesmanship" in discovery and to reduce
discovery costs. The author points to testimony that says
mandatory exchange of information will save $200 million. The
author also thinks that this will result in earlier
settlements.
2) Opposition. Insurers argue that early exchange of information
will not decrease costs significantly. PIFC objects to the
requirement that the insurance policy limits be reported,
saying that this will drive up costs.
3) Public Reaction. Ultimately, the increased workload will fall
on those Californians who are involved in auto accidents,
whether it is their fault or not.
F) Mandatory Judicial Arbitration (Sections 5 of the bill)
Existing law provides for mandatory judicial arbitration of all
cases under $50,000 in superior courts with more than 10 judges.
This bill requires judicial arbitration of all auto personal
injury cases under $50,000. Provides for sanctions (attorneys
fees and costs reasonably incurred by the other party) where the
appellant does not improve the arbitration award by 20 percent or
more in his or her favor. Specifies that these changes take
effect 7/1/96.
COMMENTS:
1) Purpose. The author believes that this is a good way to remove
litigation, and the costs associated with litigation.
2) Opposition. Insurers argue that the problem with binding
arbitration is that the arbitrator tends to split the
difference, whereas today an insurer committed to fighting
inflated claims could contest the claim in court, win, and the
insured would get nothing.
G) Delay Reduction Rules (Sections 6,7 and 8 of the bill)
Existing law provides for "fast track" rules (court delay
reductions) which allow a 30 day "hiatus" from the fast track
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requirements to allow parties to discuss a settlement.
This bill adds a new 15 day "hiatus" period prior to the filing of
the answer
to provide an adjuster an opportunity to settle a case before the
insurer has to assign the case to defense counsel.
This bill amends the rule authorizing the parties to agree to a
single continuance of 30 days, by requiring that the stipulation
be made at any time following service of responsive pleadings, but
prior to the status conference. Takes effect 1/1/97, sunsets
7/1/98, at which time the rule would revert to present standard.
COMMENTS:
1) Purpose. The author states this proposal is intended to
facilitate settlements to avoid costly extensive litigation.
They state that as a result of the hearings on auto insurance
reform, they discovered that the so-called "hiatus" period in
the fast track provisions in the law are rarely used because
parties are usually in the midst of conducting discovery and
are not ready to discuss settlement. This bill allows the
parties to obtain a 30 day hiatus at any time after the filing
of the answer.
H) Fee Schedule (Section 9 of the bill)
Existing law requires workers' compensation insurers to pay for
medical expenses according to a fee schedule established by the
Department of Workers' Compensation.
This bill adopts a medical fee schedule for payment of auto
accident injuries. Specifies that these changes take effect
1/1/97.
1) Initially the schedule for workers' compensation would
be used, but it would be subject to change by the
Commissioner.
2) For services not on the schedule, the charges shall not
exceed 80 percent of the provider's usual and customary
charge.
3) Providers would not be allowed to seek more.
4) Cases of overcharging and overtreatment would be
reported to the appropriate licensing agency.
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COMMENTS:
1) Purpose. The author believes that establishing a fee schedule
will reduce total bodily injury costs by almost 10 percent.
2) Worker's Compensation Fee Schedule. According to a 1992 study
Physician Costs Under the Official Medical Fee Schedule by the
California Workers' Compensation Institute (CWCI), the fee
schedule does not "effectively control medical provider costs
in California's workers' compensation system. While containing
the cost of individual medical procedures with specified dollar
limits, the schedule does nothing to control the cost of
unregulated procedures or overall utilization."
I) Penalties For Insurance Fraud (Sections 10 and 18 of the bill)
This bill amends the penalties for insurance fraud. Provides a
five year enhancement for an insurance fraud scheme involving
$100,000 or more. Amends the Penal Code section pertaining to
insurance fraud into the Insurance Code. Specifies that these
changes take effect 1/1/96.
J) Uninsured Motorist Provision. (Section 15 of the bill)
Existing law establishes a "physical contact" requirement for UI
claims where bodily injury has arisen out of physical contact of
the auto with the insured or with the auto which the insured
occupied.
This bill amends the "physical contact" rule to allow an uninsured
motorist claim when the action of an uninsured motorist results in
physical contact between the property and the uninsured motorist
and the insured's vehicle which proximately causes injury or
damage to the insured. Specifies that these changes take effect
1/1/97.
COMMENTS:
1) Purpose. The author argues this language clarifies a coverage
issue to protect against uninsured drivers. The author's
backers argue that the "physical contact" requirement has been
interpreted in an illogical manner so that a claim is permitted
when an uninsured vehicle loses a tire which causes the insured
to crash, but deny coverage when the insured crashes into that
tire on the road.
2) Opposition. State Farm argues that this provision would
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increase claims costs because it would "authorize persons who
are injured by objects thrown from passing cars, and even
drive-by shooters to recover under their uninsured motorist
coverage."
K) PPO's for Auto Shops (Sections 16 and 17 of the bill)
This bill authorizes insurers to use so-called PPO's for auto body
shops. Specifies that these changes take effect 7/1/96.
1) Allows insurers to issue policies which require insureds
to obtain any repair of vehicular damage that is covered
under an insurance policy at a facility under contract to
the insurer.
2) Requires insurers to refer the claimant to three or more
of these facilities within reasonable proximity to where
the claimant requests the repair.
3) Specifies that, if the claimant chooses not to repair
the vehicle at
one of the referral facilities, any payment by the insurer
shall be limited to the cost of the repairs at a contracted
referral facility.
4) Requires insurers issuing policies as described in #1
above to contract with a sufficient number of facilities
throughout the state to allow referrals.
5) Requires insurers issuing policies as described in #1
above, to develop a plan to assure that the repairs were
completed properly and within a reasonable amount of time;
requires the plan to be submitted to the DOI by 7/1/96 and
every three years thereafter.
6) States that it is the intent of the Legislature in
enacting this provision to help control the high cost of
automobile insurance by providing a means for insurers to
hold down repair costs.
COMMENTS:
1) Purpose. The author and his staff say that if insurers
contract in advance with auto shops, the cost of auto body
repair can be reduced. They say this portion of the bill will
save $315 million in collision premium savings, and $66 million
in comprehensive (theft) premiums.
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2) Already Being Done? A number of insurers, including State Farm
and Mercury Casualty, say they have already set up such
arrangements.
L) Proof of Insurance At Registration (Section 19 and 20 of the
bill)
This bill requires drivers to show proof of insurance at
registration of a vehicle. Requires drivers to pay a $1 fee at
the time of registration to pay for the DMV implementing this
program. Specifies that the program is to be implemented 1/1/97,
with the fee to start 1/1/96.
COMMENTS:
1) Purpose. The author's actuary claims that this will reduce the
uninsured motorists population by 75 percent and that it will
reduce uninsured motorist premiums by more than 58 percent.
2) Do Compulsory Insurance Laws Work? In 1989, the All-Industry
Research Advisory Council, a group backed by the insurance
industry, released a study called Uninsured Motorists. The
study examined the "extent of the uninsured motorist problem in
the United States, the types of laws in effect to encourage
financial responsibility, [and] the effectiveness of these
laws..." They did this by comparing bodily injury claims to
uninsured motorist claims on a state by state basis.
Among the conclusions of the study: "Uninsured motorist
populations vary considerably from state to state, regardless
of the type of state laws used to encourage the purchase of
insurance."
3) AB 650 (Speier). This portion of the bill is significantly
different than AB 650 (Speier) which accomplishes the same
goal. The DMV believes that this system will be very costly
(about one dollar per car per year to check and see if a proof
of insurance form is in the envelope with the registration
forms). The author has agreed to charge drivers to pay for
DMV's check.
AB 650, in addition to requiring proof of insurance at
registration, also re-enacts the law allowing police officers
to cite uninsured drivers. The author of AB 650 intends to use
some of the fines from that provision to pay for the proof of
insurance registration provision, thus eliminating the need for
the $1 charge.
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M) Seat Belt (Section 21 of the bill)
Existing law specifies a point count for violations of the Vehicle
Code. The Department of Motor Vehicles may discipline a driver
(including the removal of a license) for a driver whose record
contains a specified point count.
Under Proposition 103, a driver is qualified for a Good Driver
Discount (20 percent below the lowest rate for non-Good Drivers)
if that driver has, among other things, a point count of less than
two for three years.
This bill would specify that the violation of the seat belt law
would not result in a violation point count. Specifies this
change takes effect 1/1/97.
COMMENTS
1) Frustration With Proposition 103. Under Proposition 103, a
driver with two tickets in three years loses his or her Good
Driver Discount. Many critics of the present system argue that
a minor infraction should not be an excuse to raise insurance
premiums.
2) Opposition. Insurers argue that this provision essentially
encourages drivers not to wear seatbelts. They argue that seat
belts do reduce bodily injuries, thus this section, they say,
will increase costs for auto insurance.
N) Notifying Insurers and Other Drivers. (Sections 22, 29 and 30
of the bill)
Existing law requires any person involved in an accident causing
property damage to furnish specified information when requested.
Existing law also requires a driver involved in an injury accident
to furnish specified information to the other driver, not
including evidence of insurance. Existing law requires a driver
involved in an injury accident to file a SR-1 with DMV within 10
days of the accident.
This bill:
1) Requires the mandatory exchange insurance information
with the other party at the time of the injury accident
without request. Specifies that this change takes effect
7/1/96.
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2) Requires that the driver notify his or her insurer of an
injury accident. Specifies this change takes effect
1/1/97.
3) Requires an injured party to notify a third party
insurer of a potential claim within 10 days of discovering
the injury. The failure, without good cause, to provide
the notice may be introduced by the defense, at the court's
discretion, to contest the reasonableness and necessity of
medical services provided to the injured party. Specifies
this change takes effect 1/1/97.
4) Specifies that the DMV shall include these new
requirements in their written and test materials.
COMMENTS:
1) Purpose. According to supporters of the bill, the purpose of
this section is to provide first party and third party insurers
with early notice of potential claims, with the goal of
enabling the insurer to spot "build-up" of fraudulent claims
before they occur.
2) Another Requirement On Drivers? Early warning to insurers of a
pending claim would be helpful to insurers. However, those
consumers who make an honest mistake in not notifying the
insurer would be disadvantaged.
SUPPORT
California Defense Council
OPPOSITION
Office of the Governor's Insurance Advisor
Alliance of American Insurers
Association of California Insurance Companies (ACIC)
Consumers Union (concerns)
California Judges Association
California State Automobile Association
Department of Finance
Personal Insurance Federation of California (PIFC) (concerns)
State Farm Insurance Companies
Automotive Service Councils of California
Automotive Trade Organizations of California
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