LOS ANGELES DAILY JOURNAL • TUESDAY, OCTOBER 19,1999 • PAGE 6
The Ghost of
‘Royal Globe’
Ill-conceived
Insurance Ruling
Has Come Back
To Haunt Us
By Robert W. Armstrong

wise man once observed:“those who do not learn from the mistakes of the past are condemned to repeat them.” In Moradi-Shalal v. Superior Court 46 Cal.3d 287 (1988), the California Supreme Court heeded this wisdom following nearly a decade of frivolous bad-faith litigation and overruled its earlier decision in Royal Globe v. Superior Court 23 Cal.3d 880 (1979).

Unfortunately, the learning curve in the Legislature is apparently longer than that of the judiciary. The ghost of Royal Globe has now returned in the form of Senate Bill 1237, which allows third party plaintiffs to sue insurers for violations of Insurance Code Section 790.03.

Despite all the hoopla accompanying the signing of SB1237, it should be noted that the bill that has now emerged from the governor’s desk is a far cry from the bad-faith bonanza originally championed by the CAOC as its game plan for reform in the insurance industry. (There has been no “game” quite like it since the Rose Bowl of 1929, when Roy Riegels ran 75 yards towards the wrong goal.)

The fundamental flaw in this legislation is unfortunately also one of its goals: It allows third-party plaintiffs to sue insurers for compensatory and punitive damages when a plaintiff’s attorney “guesses right” and obtains a judgment in excess of the plaintiff’s written settlement demand. However, there are no reciprocal provisions penalizing the plaintiff and the attorney if they “guess wrong” and lose at trial.

The original bill was a veritable wish list from the plaintiffs’ bar. It included items such as awards of attorney fees when insurers declined arbitration demands, and evidentiary sanctions against defendants who did not reveal evidence during discovery to be used as impeachment at trial.

From the defense perspective, the latest version is a definite improvement over the original, but it remains flawed in many respects and several of its provisions are unfair, unclear or simply incomprehensible. (The Legislature couldn’t even get the name right. The preamble says, “this act shall be known and may be cited as the ‘Fair Insurance Responsibility Act of 2000’ or as ‘FAIR.’” Either the Senate knows as much about acronyms as it does about insurance reform or it decided “FIRA” wouldn’t have much of a ring come election time. The Trial Lawyers Full Employment Act of 2000 would have been more fitting but was perhaps too obvious.)

An example of the “incomprehensible” category is Civil Code Section 1782, which sets forth “additional and supplemental provisions” governing arbitration under this new scheme. Section 1782(g) provides that “no

party may introduce new or different information from that provided under subdivision (f) at the arbitration unless it is provided to the other side at least 30 days before the arbitration except when such evidence is offered solely for impeachment.” However, subdivision (f) merely states that “disputes arising regarding discovery shall be resolved by a motion before the arbitrator” and makes no provision for “providing information.” Are parties precluded from introducing “new or different information” only when that information was not provided during “disputes arising regarding discovery”?

As for lack of clarity, Civil Code Section 1777(g) states that the arbitration award “shall not include damages that are not covered by the applicable insurance policies” and Civil Code section 1783(a) states that “the award shall be binding on all parties and upon the insurer and shall resolve all disputes between the parties…” However, the legislation gives absolutely no clue as to how coverage issues are to be handled. Must a claimant waive the right to seek uncovered damages as a condition of the arbitration? Does the arbitrator now resolve coverage issues as well as liability and damages?

or an example of unfairness, see Code of Civil Procedure Section 1779(a), which allows an insurer to remove the case from arbitration if it discovers that the claimant is committing insurance fraud. However, in order to do this, the insurer must provide documentation to the court, who must then release this information to the claimant “unless the court determines that releasing the information would substantially impede the investigation or future prosecution of the claim for fraud.” (Presumably, if the information would only mildly impede the fraud investigation, the perpetrator gets a free peek at the insurer’s ongoing investigation.)

In a very real sense, the Royal Globe decision was a social experiment designed to determine whether litigation, or the threat of litigation, was an effective tool to enforce insurance Code Section 790.03. As the court observed in Moradi-Shalal, that experiment was a dismal failure.

At this point, it appears likely that California voters will have a chance to vote on a referendum to approve or disapprove this ill-conceived legislation. If wisdom prevails, the electorate will respond appropriately with a resounding “no.”

Robert W. Armstrong is a partner at Demler, Armstrong & Rowland in Long Beach and was a consultant to the insurance industry on SB1237. His firm specializes in the defense of insurance carriers in bad faith coverage and casualty litigation.