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Insurer May Have Violated Law, Report Reveals

A high-profile California insurance company that is backing a
controversial insurance measure on the June ballot has engaged in
practices that may be illegal, including deceptive pricing and
discrimination against consumers such as active members of the military
and drivers of emergency vehicles, according to a state report obtained
by The Chronicle.

The report, obtained through the state Public Records Act, alleges
that Mercury Insurance Group may have violated Proposition 103, the
landmark consumer protection law approved by voters in 1988. The
measure limited the cost of policies and made civil rights and
antitrust laws apply to the insurance industry.

The 275-page report by the state Department of Insurance was
authorized for release by Insurance Commissioner Steve Poizner. The
documents, which cover the firm’s practices from the mid-1990s to 2004,
are the state’s most recent completed investigation of the company.

In its reporting, the state found evidence that Mercury may have violated state laws by:

– Flagging some consumers for higher rates if they had been in an accident, even if it was not their fault.

– Not immediately granting coverage to applicants including military
personnel on active duty, “artists,” those employed “in the
entertainment industry as actors, dancers, etc.,” and emergency vehicle
drivers.

– Raising insurance premiums after its sales agents quoted prices
for discounts for which the consumer was not eligible. The department
said this was the single largest category of complaints it received
about the firm.

– Collecting higher premiums than allowed by law by requiring its brokers to return part of their fees to the company.

– Requesting information about customers’ “national origin,” a
practice that the department said “could raise questions about the
legality of Mercury’s personal automobile policy cancellation and
non-renewal decisions” under state law. Mercury agreed to block such
data after the state investigators raised concerns.

State officials said the report uncovered 25 issues or questionable practices by Mercury, seven of which remain unresolved.

Kathy Fairbanks, a spokeswoman for the company, disputed the state’s
findings and said consumer groups intend to use the report to “muddy
the waters” regarding Proposition 17, the June ballot measure that
Mercury is backing.

“We’re talking about issues years ago that have been addressed and
taken care of,” Fairbanks said. “I’m not going to respond (to details
of the report) because it’s unrelated to Prop. 17, which is what voters
are going to review.”

Fairbanks said the June measure, called the “Continuous Coverage
Discount Initiative,” would increase competition and lower rates by
providing auto insurance discounts to millions of Californians who
“continually maintain” auto insurance coverage, an idea she said has
been backed by groups including the California Chamber of Commerce.

Mercury put up $3.5 million last year to back a group called
“Californians for Fair Auto Insurance Rates” to support Prop. 17, which
consumer advocates say would dramatically change state auto insurance
laws.

Prop. 17 Affects Rates

A leading consumer advocate was quick to respond to the state report.

“In my career as a consumer advocate, I’ve never seen such a
devastating indictment of a single insurance company,” said Harvey
Rosenfield, founder of Consumer Watchdog of Santa Monica and author of
Prop. 103. He called the practices “illegal, unfair and un-American,”
saying “it’s shocking that Mercury so brazenly defied the law for so
many years.”

Rosenfield said Prop. 17 will allow Mercury to raise rates for
Californians not previously insured or those who let their insurance
lapse – a practice that is illegal under Prop. 103.

“What’s outrageous is that Mercury is spending millions on an
initiative to legalize the kind of discriminatory surcharges that they
were caught doing by (state) investigators,” Rosenfield said.

Poizner said he could not comment on his department’s findings on
the company because his office is involved in an administrative action
against Mercury for non-compliance on an issue dating back to 1998 that
surfaced in the state’s examination of the company.

But the insurance commissioner, who is a Republican candidate for
governor in the June primary election, said that if the state finds any
insurance company to have violated the law, he will “come down on them
like a ton of bricks.”

Mercury’s performance and its political muscle could also play out
in the governor’s race this year. The company and its chairman, George
Joseph, have donated more than $7.2 million to state political
campaigns in the past decade and rank among California’s most
deep-pocketed political donors.

In 2009, Mercury donated $13,000 to the gubernatorial campaign of
Attorney General Jerry Brown but has not donated to Poizner’s campaign
for governor.

Former state insurance commissioner John Garamendi, now a
congressman, said that starting in 2002 his office “received complaints
about Mercury’s practices – and those complaints rose to the level
where we felt it was necessary to investigate.”

Under Poizner, who was elected insurance commissioner in 2006, the
state has continued to investigate Mercury, the parent firm to the
state’s third-largest auto insurance firm, which serves 10 percent of
the market in California, records show.

“Mercury has a deserved reputation for abusing its customers and
intentionally violating the law with arrogance and indifference,” the
state department wrote in a Feb. 20, 2009, legal filing related to its
administrative case.

Since 2006, the state has fined Mercury $600,000 for violations
based on its own examinations and for consumer complaints about the
firm, state officials said.

Political Clout

Garamendi and others said Mercury has a reputation for playing political hardball.

In 1996, when then-state Senate Pro Tem Bill Lockyer, a Democrat,
opposed Mercury’s effort to amend Prop. 103, company chairman Joseph
responded by writing a $500,000 check – to the state GOP.

“What really perturbed me is that, instead of cleaning up their act,
they decided to try and change the law – to make legal what was
illegal,” Garamendi said. “They went at it through the Legislature and
we ultimately defeated that. And now they’ve come back with Prop. 17 …
so they can do what is fundamentally unfair to the consumer.”

Fairbanks argued that Prop. 17 “levels the playing field and allows
all the insurers to offer the same discount, which ultimately drives
down rates” to benefit California drivers with good records who’ve
maintained their insurance coverage.

Rosenfield said Poizner “deserves accolades for disclosing an
examination that is important for the public to consider – not just
customers of Mercury but voters who will have to assess the credibility
of this initiative.”

Consumer Watchdog has urged Brown – who has yet to formally declare
himself a candidate for governor – to consider revising the title and
summary for Prop. 17 that will appear on the ballot. The group argues
that Brown’s ballot description failed to mention that the measure
could lead to higher rates for some Californians.

Brown’s office has said the summary accurately reflects changes in
the initiative and its impacts. A nonpartisan analysis of Prop. 17 on
the insurance commissioner’s Web site says some consumers will get
discounts under the initiative but it “will result in a surcharge for
other drivers.”

State Report On Insurance Firm

To read the Department of Insurance report on Mercury Insurance Group, go to www.sfgate.com/ZJFW.

E-mail Carla Marinucci at cmarinucci@sfchronicle.com.