Challenging Mercury Insurance on Illegal Fees
In the Matter of Mercury Insurance Company,
California Department of Insurance (CDI) File No. NC-03027545
Consumer Watchdog Joins California Insurance Commissioner's Complaint Against Illegal Overcharges by Mercury Insurance Company
In February, 2004, the California Department of Insurance (CDI) filed an administrative complaint against Los Angeles-based Mercury Insurance Co. for forcing customers to pay illegal “broker fees” on top of the prices Mercury advertised. The complaint charged that Mercury “willfully misrepresented the actual price insurance consumers could expect to pay for insurance from [Mercury], and thus deceived and misled consumers.”
Consumer Watchdog requested the right to participate in the case and was granted intervention in May 2007.
Civil Suit by Consumer Against Mercury
The CDI administrative proceeding against Mercury stems from a civil suit brought by a consumer against the company for permitting its insurance agents to charge consumers undisclosed "broker" fees that were added to the price of insurance that was quoted in Mercury’s advertising. In a 2004 decision (Krumme v. Mercury Insurance Co.), the California Court of Appeal the court determined that:
- Mercury's insurance agents were illegally charging auto insurance customers extra money by adding broker fees in addition to standard agent commissions; and
- Mercury ran a deceptive advertising campaign that did not disclose the unlawful fees, thus advertising a lower price than people ended up having to pay.
Mercury's advertising and marketing materials urged prospective customers to compare Mercury's rates with those charged by other insurers, such as State Farm, but the advertising did not disclose the extra "broker" fees that customers would face if they chose Mercury over another insurer.
The court determined that this practice ran afoul of California's unfair competition and false advertising laws (Bus. & Prof. Code §§ 17200 and 17500). The court further concluded that "because broker fees may be charged only by bona fide brokers, not persons and firms claiming to be brokers that are in reality appointed agents, the brokerage fees collected by Mercury's "brokers" were illegal." These practices were found to be deceptive and illegal and were barred by the court.
The Insurance Commissioner Seeks Hundreds of Millions of Dollars in Fines from Mercury
The Department of Insurance complaint accuses Mercury of charging premiums that included the illegal “broker” fees in excess of the rates approved by the Insurance Commissioner, and willfully subjecting consumers to unfair rate discrimination. Both are violations of Proposition 103, the California insurance regulation law that requires companies to obtain the approval of the Commissioner for the rates and premiums they charge consumers, and prohibits unfairly discriminatory charges.
The Department is seeking a fine against Mercury of $10,000 for each policy that included an illegal "broker" fee. Mercury began charging the illegal fees in 1996, according to the agency's complaint. Based on the findings in the civil court case, Mercury could be forced to pay hundreds of millions in fines to the state.
The Department's case against Mercury was initially delayed in order to allow related litigation against Mercury's agent, Auto Insurance Specialists (AIS), to proceed in civil court. AIS ultimately settled that litigation in October 2008, paying about $20 million in refunds to policyholders who paid the extra "broker" fees for Mercury policies. AIS historically sent 90% of its auto policy business to Mercury. AIS's business grew to a full 20% of Mercury's California auto insurance premiums, accounting for $400 million in annual premium out of Mercury's $2 billion total. Simultaneously with the AIS settlement, Mercury bought AIS for $120 million.
Mercury’s Lawyers Fight to Delay and Derail the Case
The Department's case against Mercury was scheduled to go to a hearing before an Administrative Law Judge in March of 2009. However, Mercury's lawyers have employed a variety of maneuvers intended to delay and derail the hearing.
In February 2009, prior to the start of the evidentiary hearing, Mercury sought to block the introduction of evidence, contained in an investigatory report prepared by the Department of Insurance, that the company had engaged in a variety of other illegal actions. The purpose of the evidence was to support the Department’s request for higher penalties based on Mercury’s intentional misconduct. As the Department of Insurance explained:
"Mercury's lengthy history of serious misconduct, and its attitude - contempt towards and/or abuse of its customers, the Commissioner, its competition, and the Superior Court - are all relevant to determining the penalty needed to best ensure the protection of the public from future violations and wrongdoing."
Further, the Department stated,
"Among Department [of Insurance] staff, consumer attorneys, and consumer victims of its bad faith, Mercury has a deserved reputation for abusing its customers and intentionally violating the law with arrogance and indifference."
Mercury filed two motions trying to suppress the evidence. Consumer Watchdog filed briefs in opposition, as did CDI. Read Consumer Watchdog's Oppositions to Mercury's Motion for Protective Order here and to Mercury's Motion in Limine here.
In 2010, the Insurance Commissioner made the evidence public in response to an inquiry from the news media. The documents (summarized and viewable here) alleged in detail that Mercury had repeatedly engaged in numerous practices that violated state consumer protection laws. The revelations ignited a statewide outcry, particularly because Mercury was sponsoring the first of two ballot measures that would have legalized other auto insurance surcharges that Mercury had improperly imposed, in violation of Proposition 103. (Despite spending a combined $34 million, both of Mercury’s initiatives were defeated by the voters.)
Mercury Goes to Court to Stop the Department of Insurance from Taking Mercury to Trial
In its efforts to keep the Department’s administrative hearing from going forward, Mercury also brought numerous procedural motions asking the Administrative Law Judge to bar the agency and Consumer Watchdog from submitting evidence of Mercury’s wrongdoing that came from the civil litigation. The evidence Mercury sought to suppress included testimony from Mercury’s own staff and executives.
These motions delayed the commencement of the evidentiary hearing almost two years. In December 2010, the Department amended its regulations to clarify the rules that apply to testimony from witnesses who are not under the control of the party seeking to elicit such testimony, such as insurance company witnesses who the Department or a consumer group may want to examine as part of presenting their case. The Administrative Law Judge refused to apply the amended regulation, however, and in January, 2012, recommended to the Insurance Commissioner that the case be dismissed based on an erroneous interpretation of the procedural regulations. Consumer Watchdog and the Department strongly criticized the Judge’s ruling.
On March 30, 2012, the Insurance Commissioner rejected the Administrative Law Judge’s ruling, and ordered that the case proceed to a full hearing to take evidence on the substance of the allegations against Mercury.
A few weeks later, Mercury sued the Commissioner in Los Angeles Superior Court to overturn the Commissioner’s order. Mercury also asked the court to order the Commissioner to dismiss the case. The Superior Court dismissed Mercury’s lawsuit on September 14, 2012. Mercury filed an appeal.
The California Court of Appeal refuses to block the Department of Insurance from conducting a trial on the charges against Mercury.
On January 3, 2013, the company asked the state Court of Appeal to override the Commissioner and block the Department from proceeding with the case until Mercury’s appeal was decided – a two year delay. On January 14, 2013, the Court of Appeal rejected Mercury’s request to derail the Department of Insurance proceeding.
Mercury is put on trial before an Administrative Law Judge.
An evidentiary hearing before an Administrative Law Judge commenced on April 15, 2013, and continued over 13 days between April and June, 2013. An extensive evidentiary record was developed through the written and oral testimony of current and former Mercury officers and current and former CDI employees, and documentary evidence. The parties submitted post-hearing briefs and expect the Administrative Law Judge to issue a decision later this year. In its post-hearing brief, Consumer Watchdog concluded,
"Based on the … entire record and argument submitted in this proceeding, Consumer Watchdog respectfully urges the ALJ and the Commissioner to hold Mercury accountable once and for all for its willful evasion of the requirements of Insurance code sections 1861.01(c) and 1861.05(a) perpetrated through its illegal “broker” fee rating scheme. Given every opportunity by the Department and the courts to correct its wrongdoing, Mercury persisted in defending and maintaining its profit-driven scheme until January 2009. While the evidence in this case supports a penalty of over $1.8 billion, Consumer Watchdog submits that a penalty in the range of $20 million would serve the interests of justice."
Read about Mercury Insurance Company Losing Its War Against Consumers here.
Read about Mercury Insurance: "Pay to Win" Politics here.
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