Insurers Cut Car Claims in ‘90s, Study Says

SACRAMENTO —  During the 1990s California insurance companies steadily reduced the size and number of claims paid to automobile accident victims although their profits rose to record heights, a consumer study has found.

Those who did win settlements were likely to receive payments that were much lower than they would have been a decade earlier, the study showed.

The findings were released Tuesday by the Foundation for Taxpayer and Consumers Rights, a nonprofit organization in Santa Monica that monitors insurance practices. The group’s report compares accident settlements in California with those in other states, based on data from the National Assn. of Insurance Commissioners and an insurance industry survey. It was prepared by Allan Schwartz, an actuary and former assistant insurance commissioner for two states.

The study focused exclusively on injured accident victims--those who submitted liability claims to the insurance company of an at-fault driver.

It reported that while the rest of the nation was seeing an increase in the amounts that insurance companies paid victims of accidents to compensate for injuries, health care costs and wage losses, in California the opposite was occurring.

In the past decade, the number of claims paid to California victims decreased 26%, while nationwide it increased 8.5%. At the same time, the value of the claims that were paid to victims of accidents on California highways dropped 4.5%, compared to a nationwide increase of 16%.

Doug Heller, research director for the study, attributed the drop in claims payments to a 1988 California Supreme Court ruling that rescinded the right of accident victims to sue the insurer of an at-fault driver for delaying, underpaying or denying insurance claims. As a result, insurance companies have much more latitude to reject or delay claims, he said.

“We buy insurance to be covered in case of an accident,” said Heller, “but with insurers’ current claims practices, injured motorists are forced to sue the at-fault driver because they don’t have remedies against the insurer.”

Insurance industry officials acknowledged that claims had diminished both in size and number over the last decade, a decline that they said had allowed companies to reduce premiums.

“What you are seeing,” said Jerry Davies, communications director for the Personal Insurance Federation of California, “is fair dollars being paid to people who are injured rather than a lawsuit being threatened.”

Before the 1988 court decision, he said, the constant threat of lawsuits caused companies to pay claims quickly--often without time to investigate their validity--and drove up the cost of insurance to record levels.

He said fraud flourished in the industry and the high settlement costs caused premiums to skyrocket, prompting the 1988 ruling rescinding an earlier decision that allowed “bad faith” lawsuits against insurers. Victims could argue that the insurer was acting in bad faith by failing to pay claims quickly.

The new study is the opening salvo in a campaign to bring the issue to the California Legislature, where lawmakers are expected to be urged by consumer groups and trial lawyers to pass legislation that would once again allow bad faith lawsuits.

“If that happens, what that’s going to mean is higher insurance rates in a very short amount of time,” Davies said.

But Jamie Court, a spokesman for the consumer foundation, said insurance company profit margins have increased so much--400% in the last decade--that there is room to pay higher claims and reduce rates.

“There’s really no right or wrong here,” said Brian Sullivan, editor of Auto Insurance Report, a newsletter on automobile insurance. “It’s a public policy preference.”

If the consumer groups and trial lawyers are successful in the Democratic-controlled Legislature, he said, “the public will gain the right to sue, and that will cause a substantial rise in litigation and a substantial rise in insurance costs.”