Declarations and Exclusions

"That's 1 for You and 3 for Me" -- But Nothing From Nothing Leaves Nothing

Two years ago, in the thick of his efforts to improve the state's budgetary posture, California Governor Arnold Schwarzenegger signed into law a statute under which 75% of all punitive damage awards became payable to the state rather than to the prevailing plaintiff.  At the time, I noted the short lifespan set for the statute, and I was skeptical whether the plan would actually produce any benefit to the state's embattled coffers:

The statute remains in effect, unless it is later extended, only until July 1, 2006, and it only applies to cases filed on or after August 16 of this year [2004] that result in final judgments -- really final, with all appeals and post-trial motions concluded -- prior to the statutory expiration date.  It is easy to predict right now that there will be a rash of motions to continue trial dates as that expiration date approaches, so that the judgments will be free of the State's claim.  In fact, given that it takes most of a year to get a typical case to trial, and that any post-trial motions and appeals will likely consume most of another year -- and let us not forget that the U.S. Supreme Court has found that there is a constitutional right to independent appellate review of any punitive damage award -- it is not particularly clear whether any punitive damage awards will find their way into the State's coffers before the statute disappears by its own terms.

Now that the statute has expired, a new bill (Senate Bill 832 [PDF]) sits atop the Governor's desk awaiting signature, veto or veto by inaction by September 30.  If signed, the bill will reinstate the "punitives tax" for an additional five years, until July 1, 2011.

So, if the Legislature is fired up to extend the state's claim on punitive damage awards, the idea must have been a good one, right?  Apparently not so.  Writing in Capitol Weekly, John Howard confirms this weblog's remarkable predictive powers:

Two years later, [the promised] $450 million still hasn't materialized.  Amazingly, not even a penny has flowed into the state Public Benefit Trust Fund, which was expressly set up to handle the punitive-damage money.  This gap between the administration's promise and pocketbook reality is remarkable, even in the smoke-and-mirrors world of state budgeting that, in the end, is based on sophisticated expectations of revenue and expenses.

As Howard notes, SB832 began life as an environmental protection bill before being hijacked in committee in the waning days of the legislative session, rewritten to eliminate every word of its original text and re-tooled as an extension of the punitives-to-the-state (or, as the legislators termed it, "split recovery") statute.  Why go to so much trouble to extend a statute that seems to have produced no discernible benefit to anyone?

'I think the feeling is, why not?  Let it go another five more years to see if money comes in,' said one Capitol staffer familiar with the issue.

There is no indication yet whether the Governor will sign the extension in to law.  The usual public voices on subjects such as this are mixed:  The California Trial Lawyers Association is Consumer Attorneys of California are officially neutral.  Insurers are vocally opposed, even though they are prohibited outright under California law from covering punitive damage awards against their insureds.  The concern, perhaps, is that jurors' knowledge that the lion's share of punitive damages will go to the state will cause the size of those awards to increase in, for example, "bad faith" suits against insurers.

Strangely enough, the insurers are joined in their opposition by The Foundation For Taxpayer & Consumer Rights (FTCR), brainchild of Proposition 103 author Harvey Rosenfield, and no friend whatever of the insurance industry or the Governor.  (FTCR is at least consistent: it was against the idea in 2004 as well.)

When the original bill passed in 2004, Walter Olson expressed at least tentative support for the idea, citing what has long struck me as a reasonable argument for passing all punitive damages on to the public, if one is going to permit punitive damage awards at all: 

Lawyers who sue for a living talk a great deal about how the general public has a stake in the success of their endeavors.  Here's their chance to show they mean it.

Governor Schwarzenegger has ten more days to decide whether to continue this interesting, if thus far ineffectual, experiment.  This post will be updated when news comes in on his decision.

    ~~~

UPDATE [100306]:  Governor Schwarzenegger chose to veto the proposed extension of the "punitives tax."   In his veto message (PDF), he indicates he is not opposed to an extension of the tax in principle, but was concerned because the bill "was amended late in the legislative session and did not provide an opportunity for sufficient hearings to determine whether this policy has been effective or not."   He encourages reintroduction of the bill in the next legislative session for purposes of havein a "full debate" on its merits.

Legislative Update: Necessity Still the Mother of Inventories

Previously, Decs & Excs noted Senate Bill 2 pending before the California Legislature, which proposed to bring "valued policy" principles to bear in determining the amount to be paid for the lost contents of a destroyed home.   Under the bill as it existed at that time, homeowners who sustained a total loss to their residence would be given the choice of either submitting an inventory to establish the existence and value of the damaged contents or being paid 85% of the amount stated as the coverage limit on personal property.   Several insurer groups had expressed displeasure with this proposal, citing the danger that without an inventory requirement some insureds might be paid more than the amount that they actually lost.

The insurers' complaints have apparently been heeded.  On July 6, SB2 was amended in the Assembly to delete the "85% even without an inventory" provision.  Also opposed by the industry -- and also deleted -- were provisions prohibiting insurers from reporting claims information to insurance support organizations' databases without first providing a copy of the report to the insured. 

The amended bill now focuses on educating agents and brokers in arriving at appropriate estimates for future replacement costs in order to recommend appropriate amounts of coverage to their customers, and on mandating a minimum of 24 months of "additional living expense" for losses when a formal state of emergency has been declared.

Progress of SB2 and other bills can be tracked via the Legislative Counsel's Official California Legislative Information page.

Congress on Punitive Damages: "Call Them Non-Deductible"

California law could hardly be more clear on the question of whether the cost of an award of punitive damages can be shifted to the defendant's liability insurers: as a matter of public policy, punitive damage liability is uninsurable.  The rule is unequivocal.  Even a policy provision expressly agreeing to cover punitive damage liability would be unenforceable. 

One of the principal rationales behind the California rule is that punitive damages are supposed to punish the defendant for particularly reprehensible behavior, and they cannot serve that purpose unless the wrongdoer feels the "sting" personally by having to pay them without the help of insurance.   Other states are not so strict, and in some jurisdictions -- although it makes a Californian shake his head in dismay -- insurers are permitted to cover their insureds' liability for punitive damages.

Now, as reported in Business Insurance, Congress appears to be inclining to a version of the California rule.   Because this is the Federal government we are talking about, of course, a direct approach to the issue is not to be expected.   Instead, personal responsibility for punitive damages is to be enshrined as . . . tax policy:

Punitive damage payments would no longer be deductible from federal taxes if the version of a highway funding bill passed by the Senate Tuesday becomes law.

The punitive damage provision in the massive highway funding bill, H.R.3, also holds that any portion of a punitive damage award covered by the defendant's insurance will be included in the defendant's gross income.

There is no certainty that the punitive damage provision will still be part of the bill when it emerges from conference.   For that matter, there is no guarantee that the bill itself will ever become law: if the amount of funding included in the final bill exceeds what he has asked for, the President has indicated he may actually be provoked, as he never has been before, to exercise his veto.

New California Legislation Becomes Law on Jan. 1

Except when passed as "urgency legislation," new statutes become law in California on the next January 1 following their passage.  With that date fast approaching, Insurance Journal summarizes this year's crop of new insurance-related statutes.

Exemplary or Illusory? -- The State of California Claims 75% of Punitive Damage Awards

The Southern California Law Blog reported on this interesting development several days ago, but perhaps you missed it: As of August 16, when Governor Arnold Schwarzenegger signed the legislation as an "urgency" matter [meaning it becomes effective immediately instead of on January 1 of next year], the State of California is effectively imposing a 75% tax on awards of punitive damages.

New Civil Code §3294.5 provides that any defendant against whom a judgment for punitive damages is entered is required to pay 75% of those damages to the state's Public Benefit Trust Fund, from which the state can withdraw for purposes, other than the funding of the courts, "consist[ent] with the nature of the award." The remaining 25% is payable to the prevailing plaintiff through his or her attorney; and lest you should wonder how that attorney is going to be paid, the Public Benefit Trust Fund will disburse 25% of whatever sums are paid into the Fund by the defendant back to the prevailing lawyer, meaning the attorney effectively receives a contingent fee of 18.75% -- that's 25% of 75% -- on the punitive damage award in addition to any other fee. Juries are not to be told during trial about the allocation of any portion of the punitive damages award to the State.

The statute remains in effect, unless it is later extended, only until July 1, 2006, and it only applies to cases filed on or after August 16 of this year that result in final judgments -- really final, with all appeals and post-trial motions concluded -- prior to the statutory expiration date. It is easy to predict right now that there will be a rash of motions to continue trial dates as that expiration date approaches, so that the judgments will be free of the State's claim. In fact, given that it takes most of a year to get a typical case to trial, and that any post-trial motions and appeals will likely consume most of another year -- and let us not forget that the U.S. Supreme Court has found that there is a constitutional right to independent appellate review of any punitive damage award -- it is not particularly clear whether any punitive damage awards will find their way into the State's coffers before the statute disappears by its own terms.

The official rationale for the statute is strictly fiscal, as stated in its opening sentence:

The Legislature finds and declares that extraordinary and dire budgetary needs have forced the enactment of this extraordinary measure to allocate temporarily for the state's Public Benefit Trust Fund a substantial portion of any punitive damages paid from a judgment during the limited time period specified in the statute.

An article in Business Insurance (that link is probably for subscribers only - sorry) discloses some of the contortions the legislation was put through prior to passage. Among other things, a number of tort reform advocates who originally favored the bill dropped their support as their preferred terms were withdrawn:

Tort reform advocates had supported the initial split-verdict proposal offered by Republican Gov. Arnold Schwarzenegger because it contained significant tort reform provisions, including permitting only one punitive damage award for any single 'act or omission.' Tort reform proponents held that the provision would help curb litigation costs.

The original proposal also held that plaintiffs attorneys' fees could be based only on the 25% of the award granted to their clients. The state would have received its entire share of the punitive damage award.

But the measure underwent significant changes in the legislative process before receiving the governor's signature last month. Lawmakers stripped the measure-which was contained in a wide-ranging appropriations bill, S.B. 1102-of all significant tort reform provisions. The limit on multiple awards for a single act vanished, and attorneys were granted the right to receive up to 25% of the state's portion of the awards as their fee on top of what they received from their own clients.

Representatives of the plaintiffs' bar are quoted as being reasonably favorable to the statute, if a bit self-satisfied:

An organization representing the plaintiffs' bar hailed the governor and lawmakers for having 'publicly recognized and embraced the valuable function punitive damage awards play in punishing and deterring malicious or despicable corporate conduct,' but called for a balance between the interest of consumers and the state.

'Over the years, Consumer Attorneys of California has advocated and supported the concept of allocating a fair portion of punitive damages to the state to help ensure access to justice; however, such an allocation involves a delicate balance between maintaining consumers' ability and incentive to fight malicious corporate conduct against the interest of the state in reaping part of the award,' said the Sacramento-based Consumer Attorneys of California in a statement released before the law went into effect.

UPDATE: Dan Walters of the Sacramento Bee looks at the statute and expresses skepticism: "Even Gray Davis wouldn't buy a turkey this lame."

Homeowners Insurers Required to Explain Non-Renewal Decisions in Advance

Among the rush of legislation signed into law by departing California Governor Gray Davis is Assembly Bill 1191, expanding the disclosures insurers must make in connection with homeowners policies.

Effective March 1, 2004, homeowners insurers will be required to provide a written explanation and statement of reasons in advance of any decision not to renew an existing policy. (Current law requires an explanation only if the insured requests one within 20 days.) Failure to provide notice, with reasons, at least 45 days before policy expiration will result in an automatic 45-day extension of the existing coverage.

Additionally, the statute adds a new requirement that homeowners insurers provide, within 15 business days of a request by the insured, a written statement of reasons for any change -- up or down -- in the annual premium to be charged on a homeowners policy.

These changes appear to be consistent with the goals of Insurance Commissioner Garamendi's attempts to reform homeowners insurance coverage; earlier posts on that subject can be found here

Spare the Rod? Congress Considers Punitive Damage Reform

Business Insurance magazine reports on September 23 testimony by University of South Carolina law professor David Owen before the House Judiciary Committee’s Subcommittee on the Constitution in hearings on reforming the law of punitive damages:

Mr. Owen spelled out three possible reforms that he thought would help guarantee balance in the system. The first is to raise the standard of proof that must be met before punitive damages can be awarded to 'clear and convincing' rather than the less-demanding 'preponderance of evidence' used in most civil litigation. The second is to require trial judges to issues written opinions explaining the rationale for the punitive damage awards.

The third, which Mr. Owen considered the most important, is to cap punitive damage awards. He suggested treble damages as a maximum punitive damage award, just as treble damages is the maximum in antitrust cases. The cap would not include attorneys' fees and litigation [costs], which would still have to be paid by the defendant.

Putting to one side the issue whether this is a matter for Congressional action in the first place -- good federalists would have cause to insist that punitive damage issues should be matters for state-level policymaking -- the suggestions Professor Owen makes seem prudent, and enter into territory already explored in some jurisdictions. California, for example, already requires "clear and convincing" proof of the elements of a punitive damage claim. The maximum 3-to-1 ratio of punitive damages to compensatory damages was at least tacitly endorsed by the U.S. Supreme Court this past April in State Farm v. Campbell. A requirement of specific findings in support of imposition of punitive damages would also comport with the due process concerns expressed by the Court in Campbell.

There's no indication in this report of any suggestion to modify perhaps the most troubling aspect of punitive damages: that the punishment imposed on the defendant takes the form of an economic windfall to a plaintiff (and plaintiff's attorneys presumably) who has, by definition, already been "made whole" by the compensatory portion of the damage award. (That's what "compensatory" means, right?) The legitimate public purpose of punishing egregious behavior and making an example of particularly bad actors would still be served, without the windfall problem, if punitive damage awards were payable to the state or to an approved charitable institution instead of to individual plaintiffs.

Insurance Journal reports on the hearings as well, focusing on the Alliance of American Insurers' encouragement of punitive damage reform. So far, no non-insurance press reports have turned up.

Final [?] Workers' Compensation Reform Update with Special Guest, Arnold Schwarzenegger

The California Legislature concluded its session on Friday, passing the proposed workers' compensation reform package. The Los Angeles Times' report -- emphasizing the compensation bill, but discussing a number of other bills that did or did not pass -- can be found here. This site's earlier reports on comp reform can be found below or in the "Politics of Insurance" section of the archives, reachable through the link on your right.

In his campaign to replace Governor Gray Davis, Arnod Schwarzenegger has highlighted workers' compensation reform as a necessary measure on which the current administration has not delivered. He has been critical of the reform bill, calling it "bogus." Sacramento Bee reporter Daniel Weintraub tried questioning Schwarzenegger to get specifics of what he (Schwarzenegger) would do differently, but found the responses to his questions to be frustratingly vague. Weintraub's judgment:

This is not new, of course. We know by now that Schwarzenegger is not a policy wonk. He intends to lead with broad strokes while delegating the nitty-gritty to others. And I don’t expect him, or any candidate, to be able to recite chapter and verse on every issue discussed in the Legislature. But Schwarzenegger has chosen to make this issue the centerpiece of his economic plan. I would expect his staff to follow the negotiations, compare them to his proposals, and find at least one specific, major reform that he wants to see adopted and then brief him on that issue so he can respond to a question like this. And I would expect the candidate to insist on it.

The Bee's report on the comp bill's passage, with comment from Insurance Commissioner Garamendi, is here

Conference Committee Passes Workers' Compensation Reform Package, Second-Guessing Begins

The conference committee within the California Legislature charged with finalizing a workers' compensation reform bill has passed along its proposed version for review and vote by the Senate and Assembly. Insurance Commissioner John Garamendi -- whose skepticism of an earlier draft was reported here has expressed his enthusiastic support. Grasping for adjectives, Commissioner Garamendi refers to the bill as "outstanding . . . tremendous, superb". From the Department's press release:

Some of the reforms in the proposed legislation include:

Establishment of an official medical fee schedule for outpatient surgical centers, indexing it to 120 percent of Medicare.

Mandatory adoption of interim utilization guidelines governing medical treatments.

Limits on chiropractic and physical therapy treatments to no more than 24 per claim.

Requires dispensation of generic drugs, unless a brand name has been specifically prescribed.

Repeals existing vocational rehabilitation statute, replacing it with a new supplemental job displacement benefit for injuries occurring on or after January 1, 2004.

Increasing the maximum fine for workers’ compensation fraud from $50,000 to $150,000.

Elsewhere, the Los Angeles Times reports that some are raising questions whether there may be less to the proposed reforms than meets the eye:

Architects of California's latest attempt to shore up the crumbling workers' compensation system trumpeted their efforts Wednesday as the most sweeping reform of the program in its 90-year history. But in the eyes of some, the numbers don't add up.

Observers say the bill that emerged from a bipartisan conference committee late Tuesday contains language virtually identical to that in a preliminary measure circulated last week, except for one key difference: The projected annual savings have mysteriously doubled to a range of $5 billion to $6 billion.

The Times profiles a wide range of interested parties with criticisms of the bill, ranging from insurers (concerned that costs will not actually be cut sufficiently to warrant reentry into the market), various medical providers including chiropractors ("At present, there are no limits on the number of times injured workers can visit a chiropractor. The result is that workers' comp patients in California visit their chiropractors an average of 34 times, twice as often as injured workers in other large states.") and pharmacists (unhappy with price caps on drugs).

The bill is expected to be passed out of the Legislature by the time it adjourns on Friday, and Governor Gray Davis has indicated he will sign it.

Workers' Compensation Reform, continued . . . Legislature Debates, Schwarzenegger States Policy Position

Workers' compensation reform may be moving onto the agenda as an issue in California's recall election. Here is the latest new on the subject:

In a new piece with the provocative title "The Worst Laws I Have Ever Seen", columnist Jill Stewart takes the California Legislature to task for adopting some questionable policies under cover of the distraction created by the pending eleciton to Recall Governor Gray Davis. Among other sins laid at the Legislature's doorstep: failure to do anything substantive to reform what Stewart identifies as the twin causes of the workers compensation crisis:

First, (although the media rarely explains this) California's nutty rules allow the workers to essentially determine if they were injured on the job. Many doctors who make their living off workers comp are happy to oblige, proof or no proof. Only three states give workers so much say in this important matter---and naturally California clings more than any other state to this grossly abused and terribly subjective practice.

In 47 normal states, determining if a worker was injured on the job isn't largely up to the worker because that would be crazy! These states use "objective standards"---basically, an independent doctor who makes no money treating workers comp, and who utilizes American Medical Association guidelines.
But in California, we don't allow independent doctors to make the judgement. The unions view the rampant abuses as a form of paid time off---a perk for their workers. And here's the proof: years ago, special interest groups including the unions pressured the politicos to make it illegal to use the AMA guidelines.

Good Lord.

This site has previously reported on Insurance Commissioner Garamendi's criticism of the direction being taken in the Legislature, and its failure to attack the real cost centers within the current system. [See earlier posts in the "Politics of Insurance" archive, here.]

Would-be governor Arnold Schwarzenegger, meanwhile, has weighed in with his own policy statement on workers compensation reform. The Sacramento Bee's Daniel Weintraub reports:

Here is a summary of the reforms he has proposed so far, according to a statement from his campaign:

--Implement objective and enforceable utilization guidelines and establish a well-defined network of providers to reduce the unnecessary use of medical services.

--Eliminate excessive permanent disability payments by adopting American Medical Association guidelines for claims.

--Reform state vocational rehabilitation programs so that individuals can be more effectively and efficiently trained for new jobs and careers.

--Reduce litigation by adopting an Independent Medical Review process for claims and limiting the grounds to appeal these rulings in court.

--Audit the State Compensation Insurance Fund to identify any operational and fiscal issues.

--Appoint a new team to the Division of Workers' Compensation, and making cost containment job one, in response to recent state audit.