State regulators describe Mercury Insurance as an abusive, anti-consumer company.
The California Department of Insurance recently made this statement before an Administrative Law Judge in an agency enforcement action against Mercury:
Mercury has a deserved reputation for abusing its customers and intentionally violating the law with arrogance and indifference.
- See key pages from that brief here. (See, particularly, page 4.)
- Read the “Notice of Noncompliance” in the administrative proceeding filed by the Department of Insurance here.
Mercury illegally surcharged hundreds of thousands of drivers until it was ordered to stop in 2005.
For years, Mercury Insurance illegally overcharged hundreds of thousands of California drivers hundreds of dollars per year, until they were forced to stop in the wake of a Court of Appeal decision in 2005.
Mercury was sued by its customers for this illegal charge (Donabedian v. Mercury), but continued to impose the surcharge even as it was lobbying Sacramento to delete the prohibition from California’s insurance reform law, Proposition 103.
An internal training manual produced in a civil trial shows Mercury Insurance trained employees to mistreat, neglect and even threaten customers who file claims.
A portion of the instructional guide was disclosed as part of a 2006 lawsuit against the company by a Los Angeles business that sued Mercury for failing to properly pay a claim. During the lawsuit, a Mercury employee asserted that the company no longer uses the training manual.
The unanimous decision came last week after jurors were shown internal training guides instructing Mercury adjustors to low-ball customers, drag out their claims and remind them they could be found at fault in a trial. Amerigraphics Inc. v. Mercury Casualty Company BC331524 (L.A. Super. Ct., Feb. 21, 2008).
Read the Daily Journal article about the lawsuit here.
Mercury had to be forced by a California court to stop its insurance agents from charging illegal broker fees to unsuspecting customers.
In 2003, the San Francisco Superior Court found that Mercury was deceiving customers through its advertising by suggesting that consumers would pay less for auto insurance from Mercury than from other insurance companies. What its ad campaign failed to disclose was that Mercury customers (unlike the comparison companies) would often be required to pay an additional broker fee that is illegal under California law, driving up the actual price. The court issued an injunction ordering Mercury to change its practices.
- Read the judge’s conclusions about how Mercury deceived customers here.
- Read the judge’s refusal to lift the injunction against Mercury over this practice here.
In 2008, Mercury paid the California Department of Insurance a quarter-million dollar settlement for alleged claims handling violations.
The California Department of Insurance investigated Mercury’s claims handling practices, a matter Mercury settled by paying $250,000 (plus the Department’s enforcement and legal costs) and agreeing to pay more penalties if they didn’t improve their practices in six months. The Department of Insurance explained the problem with Mercury in a June 2008 news release:
Read the Department of Insurance news release here.
Mercury Insurance was ordered by Florida regulators to pay $2 million to consumers and $1 million to the state for improperly denying legitimate claims and repeatedly flouting the law.
The examination found a multitude of violations relating to Mercury’s business practices including the unwarranted termination of policies upon the filing of a claim, failing to pay the full amount on covered claims, failing to deliver policies within 60 days, failing to provide specific reasons for denial of claims, and the use of unappointed agents. However, it was the use of unfiled forms and rates to improperly deny claims that the Office considered to be the most egregious violation.
- Read the Florida Office of Insurance Regulation release here.
- Read the insurance publication Best Week story “Florida Orders Mercury General Units to Pay More than $2 Million to Policyholders” here.
According to a smoking gun document, Mercury pays its repair shops incentives to use aftermarket parts.
Mercury offers auto repair shops incentives — up to $750 — to use aftermarket and reconditioned parts and penalizes its repair shops for using original manufacturer parts. Incentivizing repair shops to use inferior parts when repairing policyholders’ cars endangers policyholders even if it may save Mercury money and increase profits.
Read the document here.
Mercury Insurance has a long history of trying to thwart consumer protections and the will of the voters in the state legislature and on the ballot.
Ever since California voters enacted the landmark insurance reform initiative Proposition 103 in 1988, Mercury Insurance has led a series of efforts to undermine or repeal its consumer protections.
Over the years Mercury has sponsored at least eight bills in the California Legislature to repeal or override key consumer protections approved by the voters. These include attempts to gut the 20% Good Driver Discount requirement, to re-impose discriminatory ZIP Code-based auto insurance pricing, to add new surcharges on customers, and to prevent courts and the Insurance Commissioner from ordering refunds when insurers violate the law.
Read more about Mercury’s efforts in Sacramento to dismantle Prop 103 here.
Mercury has also tried to go to the ballot in order to strip Californians of consumer protections. The 2010 initiative is not Mercury’s first attempt.
In 2006, Mercury proposed an initiative to gut other parts of California’s landmark insurance reform measure, Proposition 103. It would have allowed, among other things, insurers to rate drivers primarily on their ZIP Code rather than driving safety record. After sparking a public outcry, the proposal was withdrawn. Read the Los Angeles Times article describing Mercury’s 2006 attempt to attack Proposition 103 here.
Mercury Insurance is a leader among California auto insurers in one respect: political contributions.
Over the past ten years, Mercury has given more money directly to California state politicians and to California political parties than any of the four other largest auto insurers (State Farm, Farmers, Allstate, and Auto Club of SoCal), according to data available from the California Secretary of State. In fact, just considering donations directly from these insurers, Mercury has given more to individuals and parties between 1999 and 2008 ($2,746,600) than all four companies combined ($2,266,750), even though State Farm, Farmers and Allstate are substantially larger insurance corporations.
Download a spreadsheet summarizing the donations by California’s largest auto insurers here and a pivot table for a detailed comparison at here.
The Wall Street Journal reported that in January, California Department of Insurance (CDI) officials in January threatened Mercury and five related insurance units with fines. Authorities alleged that some of Mercury’s independent brokers improperly charged customers fees, mostly for the purchase of auto-liability and property-damage coverage. According to Joseph, the fines were put on the back burner during a meeting between Mercury and department officials.
Chuck Quackenbush resigned in disgrace later that year in the wake of this and other improprieties that were revealed in the news media. A decade later, Mercury is finally facing a Department hearing on the broker fee practices that were going to be the subject of the canceled 2000 proceeding. (See #1 above.)
Mercury Insurance and its Chairman have been mentioned during two FBI investigations into California political corruption.
In 1991, when the FBI was investigating corruption in the California Capitol that later led to the imprisonment of State Senator Alan Robbins and insurance lobbyist Clay Jackson, wiretaps of conversations between the two often referred to Mercury’s founder and Chairman George Joseph. In one frank exchange, Mercury’s chief was suggested as a possible donor, because he needed some legislative help from the Senator in his campaign to undermine provisions of Proposition 103, the voter approved reform initiative:
Insurance Discrimination and the Mercury’s Relentless Attempt To Raise Your Rates
Mercury’s greed to profit at the expense of hard working middle class families goes back many years.. This page details the history of the insurance overcharges that voters prohibited in 1988 and Mercury Insurance’s decade long effort to reinstate the old insurance surcharges. Prop 17 is only the latest attempt by Mercury to get rid of insurance consumer protections.
Mandatory Insurance Law – 1984
In 1984, the California Legislature imposed severe penalties on drivers who did not carry automobile insurance. At that time, the premiums and practices of insurance companies were unregulated, and, at the same time that the “mandatory insurance law” took effect, premiums began to soar.
The Legislature’s goal was to get uninsured motorists off the road. Unfortunately, uninsured motorists who tried to buy insurance to comply with the law were faced with a “Catch-22”: insurance companies often charged motorists much higher premiums just because they did not already have insurance. In fact, many insurance companies would refuse to sell insurance at any price to people who did not already have it.
California Department of Insurance Bulletin (Bunner Bulletin) – 1985
In 1985, responding to widespread public complaints, the California Insurance Commissioner Bruce Bunner issued a bulletin warning insurance companies not to utilize this practice known as “no prior insurance.” It said:
…The intent of this bulletin is to inform recipients that such rating practice could result in a charge of unfair rate discrimination. It has been the position of this Department that lack of evidence of prior insurance in itself is not a proper rating standard. There are many reasons why an applicant may not have had prior insurance, many of which have no bearing on the applicant’s future loss potential. The carrier should review the specific conditions that led to an applicant’s failure to carry insurance rather than apply a blanket surcharge simply because the applicant has had no prior insurance.
King v Meese - 1987
The mandatory insurance law was challenged in court by citizens who argued it wasn’t fair for government to require consumers to buy auto insurance if there were no protections against unfair rates and abusive actions by insurance companies like the “no prior” practices.
In a major ruling in 1987, the California Supreme Court acknowledged “the lack of procedural safeguards in the area of private insurance,” and that there was no “guaranty that such insurance [was] offered at fair and equitable rates.”
The Court singled out the “no prior” rules, noting that many insurance companies would sell policies “only [to] those who already had insurance.” As a result, many drivers were “unable to afford or obtain private insurance.” The case is King v. Meese, 43 Cal.3d 1217.
A later Court of Appeal ruling summarized:
In his concurring opinion in King v. Meese, Justice Broussard noted two practices were widespread in the insurance industry prior to Proposition 103’s passage: prohibitively high insurance rates for the previously uninsured driver, and the exclusion of uninsured drivers from the insurance market altogether simply because they were not previously insured…Such practices arbitrarily penalized uninsured motorists, leaving many unable to comply with California’s mandatory insurance laws. The Foundation for Taxpayer and Consumer Rights v. Garamendi (2005) 132 Cal. App. 4th at 1369 [emphasis added].
But the Court said the judicial branch had no power to fix the problem, saying that the “case should be made to the Legislature.” (Id. at 1235.) Consumer groups took the Court’s advice, and went to Sacramento to demand reform of the insurance industry’s rates and practices. But the Legislature was deeply influenced by the insurance industry, whose free-spending lobbyists repeatedly blocked the proposals. The only alternative left was the ballot box.
Proposition 103 -1988
Proposition 103, now part of the state insurance code, specifically bars insurance companies from refusing to insure, or surcharging, people who were not previously insured. It states:
The absence of prior automobile insurance coverage, in and of itself, shall not be a criterion for determining . . . automobile rates, premiums, or insurability.
(Insurance Code § 1861.02(c).)
Proposition 103 was enacted in 1988 despite an $80 million campaign against it by Mercury and the rest of the insurance industry.
Mercury Begins Surcharging People Without Prior Insurance
As already noted, insurers are required to set automobile insurance premiums by application of authorized “rating factors” approved by the Insurance Commissioner. As originally adopted in 1996, the commissioner’s regulations included “persistency” as one of sixteen optional rating factors. Persistency means the length of time the insured has been insuredby the company writing the coverage.
When Mercury filed its list of automobile rating factors for approval by the Commissioner in 1996, it included a “persistency” rating factor. In practice, however, Mercury’s so-called “persistency” rating factor turned out to be quite different from what it had disclosed to the Insurance Department. Mercury uniquely defined “persistency” in practice to mean “length of prior insurance coverage with any carrier.” A driver who has been insured by any company gets a discount, while a person who had no prior insurance for a period of more than thirty days is surcharged. This was then a clear violation of the Proposition 103 law § 1861.02(c).
It is also almost exactly what Mercury has proposed in his new ballot measure.
Mercury Is Sued – 2001
A group of plaintiffs filed a class action lawsuit against Mercury in April 2001 for violating Proposition 103’s “no prior rule.”
Before the Court of Appeal, Mercury had contended that under Proposition 103, a discount for continuous coverage with any company did not violate the statute. The Court of Appeal rejected Mercury’s argument, citing with approval the Insurance Commissioner’s determination that “continuous coverage” is the same thing as “prior insurance”:
The Department is aware that that some insurance companies have interpreted “persistency” broadly; to authorize a credit to persons who have switched insurance carriers, but have been continuously insured. Such a definition necessarily requires [an insurance] company to consider a consumer’s prior insurance, or lack thereof. In the Commissioner’s opinion, this type of stretched interpretation of ‘persistency’ would violate Insurance Code section 1861.02, subdivision (c).” Donabedian v. Mercury Insurance Company (2004) 116 Cal.App.4th 968, 974-975.
Mercury settled the case.
Insurance Commissioner Issues Regulations – 2002
In response to Mercury’s conduct and efforts by other carriers to adopt Mercury’s improper redefinition of persistency, Consumer Watchdog petitioned the Insurance Commissioner in May, 2001, for a hearing on the abuse and for development of a regulation specifically forbidding it.
In ordering Mercury and other insurers to cease their violation of the law in September 2002, the Insurance Commissioner made several key factual findings regarding the undesirable effects of Mercury’s unprecedented definition of “persistency.” He found that “[t]he costs of a discount to a person previously insured is borne by those who do not have prior insurance,” creating, “in effect[,] a surcharge to those without prior insurance.” Further, he found that the language affirming the proper application of “persistency” would “encourage[ ] the uninsured to join the pool of insured drivers,” and that “[i]ncreasing the pool of insured drivers will ultimately benefit all insured persons, by lowering the cost of uninsured/under insured motorist coverage.”
Mercury Seeks Legislative Repeal of Prop 103’s No Prior Rule – 2003
Hedging its bet that the courts would toss the Donabedian lawsuit, Mercury went to Sacramento seeking legislation to override the Prop 103 provision. Mercury donated a total of over $895,000 to more than two-thirds of the legislature. (Proposition 103 says that it can only be amended to “further its purposes” and then only by a two-thirds vote.)
Championed by then-Senate Majority Leader Don Perata, the 2002 bill authorized insurance companies to penalize motorists who did not previously carry insurance. The legislature passed the measure. Mercury’s campaign ignited widespread outrage and Gov. Gray Davis ultimately vetoed the bill, correctly concluding it did not “further the purposes” of Proposition 103.
In his veto message, Davis asked the Insurance Commissioner to prepare a study of the impact that Mercury’s proposal would have had upon motorists. According to the report that the Insurance Commissioner prepared:
Since insurance is a mechanism, which provides for the sharing of total losses among all insureds within an insurance company, the discounts given to one group of insureds are not simply money saved. The total losses of the insurance company will not change. The sharing mechanism works by making the remaining group who do not qualify for the discounts pay more.
People who do not have prior insurance are surcharged under portable persistency. Many of these people are those that can least afford to pay for insurance or who already have high premiums caused by other rating factors. This discourages them from buying insurance, which may add to the number of uninsured motorists and ultimately drives up the cost of the uninsured motorist coverage for every insured. (Exhibit G, page 6 of the study; italics added.)
Undaunted, Mercury came back the following year. Despite the opposition of citizen groups and Insurance Commissioners Low and Garamendi, the new bill, SB 841, once again got to Davis’s desk. Davis, facing recall that year, received over $100,000 from Mercury prior to the bill arriving on his desk. This time, Davis signed the bill. After it was signed, Mercury donated a total of $175,000 to Davis’s anti-recall campaign.
Like Proposition 17, SB 841 left intact subdivision (c) of section 1861.02 as enacted by Proposition 103, but added additional language that created a “continuous coverage” rating factor “notwithstanding” Proposition 103’s protections.
California Courts Invalidate SB 841 – 2005
Led by Consumer Watchdog, a coalition of consumer, taxpayer and civil rights organizations — Consumers Union, Public Advocates, Southern Christian Leadership Conference, and National Council of La Raza — filed suit in Los Angeles Superior Court on October 15, 2003, asking that the legislation be invalidated as an unconstitutional amendment to Proposition 103 because SB 841 did not further 103’s purposes.
The Superior Court ruled that SB 841 was invalid, as did the Court of Appeal.
As the Court of Appeal explained, providing a discount always requires imposing a corresponding surcharge. The Court of Appeal stated:The premiums for policyholders who, because of their characteristics, do not qualify for a particular discount must be surcharged in an amount equal to the total of the discounts given to the policyholders that qualified for the discount…[If 20% of motorists seeking insurance coverage are uninsured,] This would result in a surcharge equal to a 40 percent increase in premium for…policyholders who do not qualify for the ‘continuous insurance’ discount. Foundation for Taxpayer and Consumer Rights v. Garamendi (2005) 132 Cal.App.4th 1354, 1367-1369
The Court cited both the Bunner Bulletin of 1985 and the Broussard opinion in King V. Meese of 1987 in its decision. In its essence, the Court ruled SB 841 would have allowed insurers to impose an impermissible surcharge on motorists based solely on their lack of prior auto insurance coverage.
Proposition 17 – 2010
Proposition 17 is virtually identical to SB 841. Among the very few differences are the following:
- SB 841 exempted from the no-prior-insurance surcharge “absence from the state while in military service,” while Proposition 17 only exempts “absence from the United States States while in military service. This means that under Prop 17, military personnel will face the Prop 17 surcharge if they didn’t maintain auto insurance while serving on a domestic base.
- Proposition 17 provides no grace period for drivers whose auto insurance lapsed due to missing a payment, while SB 841 offered those drivers a 90 day grace period.
Proposition 17’s findings include the declaration “This measure will simply bring California into line with other states like Texas, New York, Oregon, Washington and Florida.” SB 841 did not invoke other states.