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Penalties for Frivolous Claims Discourage Insurance Misuse

Capital District Business Review, December 28, 1987
Copyright 1987 UMI Inc.;
Copyright Albany Business Journals, Inc. 1987;

SECTION: Vol 14; No 37; Sec 1; pg 22

HEADLINE: Penalties for Frivolous Claims Discourage Insurance Misuse

BYLINE: Carl Filsbrich

Insurance companies in New York state have a new way of protecting themselves against frivolous lawsuits. Judges can now order the plaintiffs in such suits to pay both court costs and legal fees for the defense, up to $ 10,000.

In the past, insurance companies often chose to settle a suit out of court, no matter how frivolous they considered it, because legal fees and court costs could easily exceed the amount of the settlement.

But now the situation is different.

Donald Winyall, supervisor-adjuster in charge of the Albany office of United States Fidelity & Guaranty Co., offers an example of the type of case that might be considered frivolous.

A motorist smashes his car into a tree while trying to avoid what he considers to be a ruinous pothole. He sues the town, the county and the state for failing to maintain the road properly. In fact, only the state was responsible for maintaining the road. The town and the county had neither the right nor the responsibility to fill in potholes.

The plaintiff in such a case, and his attorney, can be sanctioned by the judge and ordered to pay the legal fees for both the town and the county. Of course, the real defendant in a case like this is the insurance company which provides coverage for the municipalities involved.

"The insurance industry has become the prime target for anyone who feels he has been misused. It costs the industry millions of dollars a year to defend itself against frivolous claims," Winyall said.

Federal judges have always had the authority to sanction the plaintiffs in frivolous cases. In 1983, the U.S. Supreme Court reaffirmed that judges have the right and the duty to punish those who abuse the legal system.

A recent case in Pittsburgh illustrates how expensive such abuses can be.

A widow claimed that her husband developed a fatal case of leukemia from handling benzene on the job. Because the widow's lawyers were unable to determine who sold the benzene to the company where the husband worked, they sued all 101 companies that manufactured benzene at the time.

Of the defendants, 89 were able to show that they could not have been responsible for the benzene in question. Alan Bloch, the judge in the case, ruled that the lawyers who brought the case should pay $ 160,000 in legal fees for these 89 firms.

"Corporations do not have such deep pockets that they should be forced to defend themselves against totally baseless claims," Bloch said.

In 1985, the New York state Legislature added a section to the civil practice law to deal with the problems of frivolous lawsuits.

The new law allows judges to impose penalties on anyone who makes a frivolous claim or counterclaim in a suit that involves personal injury, injury to property or wrongful death -- the types of cases that are the greatest concern to the insurance industry.

The penalties may include court costs and reasonable fees for attorneys, up to $ 10,000.

This law discouraging frivolous suits was intended, in part, to deal with the "insurance crisis" of 1985. In the early 1980s, insurance companies were scrambling for new business so they could take advantage of high interest rates. In the heat of competition, some firms cut their premiums to unrealistic levels.

Then, interest rates fell in the mid-1980s, while juries continued to award enormous sums to plaintiffs in personal injury and wrongful-death suits. The prospect of even greater awards in asbestos-related cases made the future look bleak.

Insurance companies responded by raising rates sharply and mounting a campaign to inform the public about how the high cost of litigation was affecting their industry. The state Legislature's action to discourage frivolous lawsuits was a relatively easy and non-controversial way to address the crisis.

Has the new law reduced the number of frivolous suits?

Local attorneys think that it has. "If a lawyer is working on a contingent-fee basis, he has no economic incentive to file a suit that has no chance of winning," said James Bendall, an attorney in Schenectady. He thinks that intelligent lawyers have always stayed away from frivolous suits. He said the new law is forcing attorneys "to take an even closer look at the outset before bringing a suit that might be considered frivolous."

Charles Harding, an attorney with the Schenectady firm of Parisi DeLorenzo Gordon Pasquariello & Weiskopf PC, thinks that the new law serves a valuable purpose. "There is no place in the system for a frivolous claim. If someone does assert a frivolous claim, he should have to pay the penalty," he said.

Local attorneys also stressed that it is essential to distinguish between truly frivolous claims and claims that involve only minor personal injury or damage to property. In many cases, it is not worthwhile to sue for minor damages, but the new law was not intended to discourage such suits.

Not all local attorneys thought that the new law against frivolous suits was a good idea. Seymour Fox, an attorney in Troy, fears that it threatens civil rights.

Fox believes that some lawyers may be unwilling to take on legitimate cases that might, in the eyes of a judge, be considered frivolous. This determination is a completely subjective judgment: it is up to individual judges to decide whether a suit is frivolous.

Both attorneys and insurance companies believe that the law is having an effect on their business by discouraging groundless litigation.

"When an insurance company has to pay enormous legal fees, it has to raise the premiums it charges its customers," Winyall said. In the end, the customer is the one who pays for frivolous lawsuits.

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