Letter to California Gov. Gray Davis regarding third-party bad faith lawsuits

The Hon. Gray Davis

Office of the Governor

State Capitol

Sacramento, CA 95814

Dear Governor Davis:

As you know, the California Legislature has passed SB 1237, which would allow accident victims to bring “bad faith” lawsuits against the insurance company of those allegedly responsible for their injuries. Citizens for a Sound Economy, a consumer advocacy group with roughly 40,000 members in California, is convinced that this bill, if signed into law, will do a profound disservice to insurance policyholders throughout California. Therefore, I strongly urge you to veto the measure.

The enclosed Issue Analysis presents a detailed examination of the effects of third-party bad faith lawsuits—in California during its so-called Royal Globe period, and in the five states that currently have third-party bad faith liability laws similar to that embodied in SB 1237. My analysis makes clear that, if enacted, SB 1237 will

redefine the relationship of insurer to insured, to the detriment of the latter;

change fundamentally the nature of liability insurance; and

increase insurance costs in California by as much as $1.3 billion.

Generally speaking, policymakers interested in promoting economic efficiency, prosperity, and fairness should be extremely skeptical of any measure that expands opportunities for private litigation as a means of regulating commercial activity. SB 1237 would do just that. At a time when many thoughtful citizens have come to recognize that excessive litigiousness is a significant obstacle to increased prosperity, plaintiff attorneys and their political allies would turn back the clock in California to the heyday of adversarial, lawyer-driven insurance settlement practices.

If they succeed, the result will be higher insurance costs for millions of Californians. Moreover, SB 1237’s erosion of the insurer’s contractual duty to vigorously defend policyholders against questionable third-party liability claims will permanently alter the relationship between liability insurers and their customers, so that policyholders will be more vulnerable than ever to frivolous or excessive damage claims. At the same time, organized insurance-fraud rings—already a scourge in California—will see their fortunes rise as insurers come to regard aggressive fraud-detection efforts as hazardous to their bottom lines.

I hope you will bear these factors in mind, now that SB 1237 has arrived at your desk. California’s insurance consumers deserve no less.

Sincerely yours,

Robert R. Detlefsen, Ph.D.

Senior Fellow in Legal Studies