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Court of Appeal Rejects Insurance Industry Challenge to Prop 103 Insurance Rate Protections

Upholds 2013 Order By Insurance Commissioner Requiring Mercury Casualty Co. To Lower Its Overall Homeowner's Rates By 5.4%
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Pam Pressley

Santa Monica, CA—In a published decision issued Friday afternoon, the California Court of Appeal in Sacramento has rejected a sweeping legal assault brought by Mercury Casualty Co. and insurance industry lobbying groups against Proposition 103, the landmark insurance reform law that has saved California consumers over $100 billion since voters passed it in 1988.

Proposition 103 regulations bar insurance companies from charging excessive rates and passing through unjustified expenses to policyholders. In 2013, Insurance Commissioner Dave Jones ordered Mercury to lower its overall homeowner's rates by 5.4%, a savings of $16 million in annual premiums to consumers. Mercury and industry trade associations representing State Farm, Allstate, Farmers and other insurance companies sued, arguing that the Commissioner had misapplied the regulations and that the rules violated their constitutional right to a fair profit and freedom of speech. The Sacramento Superior Court entered judgment against Mercury and industry trade groups.

The Court of Appeal agreed with the lower court, rejecting the insurance industry’s arguments as “hocus pocus” and “smoke and mirrors – nothing more,” “[f]inding no merit in [Mercury and the trade groups’] arguments… offered to overturn the judgment.”

“This latest attack by Mercury and the industry’s lobbying groups is yet another failed attempt to overturn the California consumer protection rules that have saved consumers billions of dollars over the last 28 years while allowing insurers to earn fair profits,” stated Pamela Pressley, Consumer Watchdog Senior Attorney who argued the appeal.

Read the Court of Appeal decision here:

The Commissioner Ordered Mercury to Reduce its Homeowner Rates by 5.4% in 2013; Mercury Filed Suit, and Industry Groups Joined in Attack on Prop 103 Regulations

Proposition 103, approved by voters despite an $80 million industry campaign, requires auto, home and business insurance companies to open their books to public scrutiny and justify rate changes before they take effect. The law gives consumer groups the authority to challenge insurance companies requesting unfair rates.

In 2009, Mercury applied for an overall 8.8% rate increase on its homeowners insurance line. Consumer Watchdog discovered that Mercury was trying to sneak into its rate increase nearly a million dollars’ worth of political contributions and lobbying expenses Mercury paid from 2008-2010 (including over $325,000 in 2010 to its failed Prop. 17 campaign attempting to gut a key provision of Prop 103). The company also wanted to make its policyholders pay for non-insurance related advertising expenses like sport sponsorships totaling $83 million, including Mercury Insurance Group sponsorship of a tennis tournament. Such pass-throughs are barred under Proposition 103.

Consumer Watchdog challenged the rate increase and the Commissioner held a hearing, ultimately rejecting Mercury’s rate increase and instead ordering the company to cut its overall homeowners rates by 5.4% – saving policyholders over $16 million in annual premiums.  

Mercury then filed suit in Sacramento Superior Court, arguing that the Prop 103 rate regulations were unconstitutional because, according to Mercury, it would not earn a high enough profit under the ordered rate decrease. But this was contrary to the evidence, which showed that in 2009 and 2010 alone, Mercury Casualty Company and its affiliated companies reported net income of $339 million, while from 2006 to 2010, Mercury paid shareholder dividends totaling almost one billion dollars. Mercury also challenged the Commissioner’s decision prohibiting the pass-through of its advertising expenses. Six lobbying groups[1] representing virtually all property-casualty insurers selling homeowners and auto insurance in California, including State Farm, Farmers, Allstate, Progressive, Liberty Mutual, and Nationwide intervened in the lawsuit, joining Mercury’s attack on the regulations.

In June 2014, the Superior Court upheld the 5.4% reduction and the Commissioner’s legal interpretation and application of the Prop 103 rate regulations. The Court of Appeal opinion affirms that decision in full.  

The insurance industry trade groups had also argued that the regulation limiting the amount of advertising costs insurers can include in premiums violated the companies’ free speech rights under the First Amendment. The Court of Appeal rejected this argument as well, holding that “the regulation promotes the compelling government interest in ensuring that insurers like Mercury pass on to consumers through their insurance premiums only expenses for advertising that directly benefits consumers by providing them with information pertinent to the consumers’ decision whether to buy a specific insurer’s product. We further conclude that [the regulation] is narrowly tailored to serve that purpose.”

New State Farm Lawsuit Makes Same Constitutional Arguments Rejected by Court of Appeal

Last November, State Farm, the nation’s largest insurance company, filed a lawsuit in San Diego Superior Court seeking to overturn an order by the Insurance Commissioner requiring the company to cut its homeowner, condo, and renters insurance rates by 7% – a savings of about $78.6 million per year compared to the rates State Farm’s 1.7 million customers are currently paying – and pay an estimated $100 million in refunds for past overcharges. In that case, State Farm is raising arguments similar to those rejected by the Court of Appeal decision in the Mercury case. A hearing on the merits of State Farm’s lawsuit is expected later this year.

Insurance Industry Attacks on Prop 103

The Court of Appeal decision is the latest rebuff to the insurance industry’s three decades-long attack on the insurance reforms of voter-approved Proposition 103. Over 100 lawsuits against Proposition 103 have been brought by the insurance industry. The California Supreme Court unanimously upheld the law in 1989, and the rate review regulations in 1994.

In a case currently before the Court of Appeal in Orange County, Mercury has challenged an order by the Commissioner that it pay $27 million in penalties for adding an unlawful fee to the premiums it charged its customers.

The industry has also sought to undermine the law in the legislature and at the ballot box. A successful effort to elect pro-industry Insurance Commissioner Chuck Quackenbush in 1994 ultimately led to his resignation in 2000 under a cloud of corruption. Mercury Insurance, and its Chairman George Joseph, have mounted two unsuccessful ballot initiatives to repeal protections in Proposition 103. Numerous bills to roll back Proposition 103 provisions have been defeated in the legislature or in the courts.

“The insurance industry has decided it will sue every time the elected Insurance Commissioner and the staff of the Department of Insurance take an action that it does not agree with,” said Harvey Rosenfield, the author of Proposition 103 and one of the attorneys on behalf of Consumer Watchdog in these cases. “The insurance industry’s strategy of bringing frivolous lawsuits in order to keep overcharging consumers not only frustrates the will of the people, it costs the taxpayers money by wasting scarce judicial resources.”

According to a 2013 report by the Consumer Federation of America, Proposition 103 saved California motorists over $100 billion in the twenty five years after the measure passed – approximately $8,000 for every family in California.  Read about the CFA report and link to it here: http://www.consumerwatchdog.org/blog/100-billion-win

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