The California insurance industry is up in arms over a bill passed by the legislature late yesterday that would give the state 75 percent off the top of punitive damage awards.

Sam Sorich, president of the Association of California Insurance Companies, reacted today by saying that the industry plans to ask Gov. Arnold Schwarzenegger to veto the bill when it reaches his desk. Under state law, the governor has until Sept. 30 to act on the bill.

From a legal perspective, the industry's concern is that the bill would encourage exorbitant punitive damage awards.

"Although the bill prohibits a jury from being informed that any portion of a punitive damage award will be paid to the state, this information would be widely known by the public," Mr. Sorich said. "Jurors in California are well versed as to what is going on around them."

The bill, S.B. 382, was passed by the state Senate 24-14 on the last day of its current session, just hours after the state Assembly approved it.

No legislative committee considered the measure, which was introduced Aug. 24 in a maneuver employed in the California Legislature--known variously as "gut and switch" or "gut and amend"--that saw language substituted in the bill that had its original language stripped out. In this case an environmental measure introduced in May was involved, according to Mr. Sorich.

The newly-configured bill mandates that awards of punitive damages be directed to the State of California in a so-called "split recovery" scheme.

"The concept makes no public policy sense from either a fiscal or legal perspective," Jeffrey Fuller, the association's executive vice president and general counsel, said in a letter to members of the California Assembly.

As fiscal policy, the bill would burden certain defendants in civil actions with a new obligation to fund the operations of state government, the letter said.

As a revenue source, punitive damage awards would be both unpredictable and unreliable, thereby rendering rational fiscal planning illusory, Mr. Sorich said.

"The bill's limitation on use of the punitive damage awards is meaningless," Mr. Fuller said in the letter and Mr. Sorich reiterated today. "The restriction is so broad that practically any governmental function could be funded from this source," they said.

In an interview, Mr. Sorich said the legislation was pushed through in an unfair manner that did not provide for any public comment. "This was done all wrong," he said. "The legislators should have been informed through use of the committee process so that both sides on the issue could have had some input," he said.

In its letter to the Assembly, the trade group called the bill "unfair." The letter said it "rewards attorneys and limits awards to injured parties."

The letter noted that under the bill, in a typical lawsuit, a punitive damage award of $100,000 would be divided up so that the state received $56,250, the plaintiff's lawyer $27,000 and the injured party $16,750. "This is unfair, unreasonable and bad public policy," the letter said.

Mr. Sorich also said today that no estimates of potential revenue the state would gain through the bill were ever made in the bill's hurried path through the legislature "even though it was portrayed as beneficial to the state's fiscal problems."

He also noted that only a brief debate preceded yesterday's vote on the bill in each chamber.

Special Reports /

Insurers Deplore Calif. Punitive Damages Bill

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