UPDATE 6:54 a.m. Proposition 17, auto insurance
measure, appeared to be headed for defeat. With 99. 1 percent of the
precincts reporting, it was losing by 158,000 votes, or 52-48 percent.

***

California voters were divided closely on a measure Tuesday that
would change state law to allow insurance companies to raise rates on
drivers who let their coverage lapse while allowing insurers to award
discounts to those who maintain continuous coverage.

Supporters of Proposition 17 said the ballot initiative, sponsored
mainly by Mercury Insurance, would lead to more competition and better
rates for consumers who take advantage of “continuous coverage”
discounts by sticking with insurers.

But opponents said the proposition would unfairly raise fees for
drivers who drop their coverage and would erode consumer rights
guaranteed under Prop. 103, the landmark insurance reform measure that
voters approved in 1988.

Tuesday’s low voter turnout could help the measure pass, opponents
said. Early returns showed the measure gaining support in Southern
California counties, while Bay Area counties showed opposition.

“We’re still hoping the votes will come in,” said Doug Heller, a
spokesman for Stop Prop. 17. “We were outspent $16 million to $1
million, so we moved away from expectations, and just hoped voters
received our message.”

The change in the law would allow insurers to penalize drivers who
let their insurance lapse, according to opponents. Under Prop. 103,
insurance companies are barred from considering motorists’ coverage
history when they apply for insurance.

“It’s a positive sign tonight that voters took a careful look at
Prop. 17,” said Kathy Fairbanks, a spokeswoman for the Yes on Prop. 17
campaign. “Voters recognized it fixed a flaw in the system and improved
the insurance market.”

The controversial proposition was heavily financed by the Mercury
Insurance Group, the state’s third-largest insurer, which contributed
more than $16 million to the campaign for the measure.

For months, Prop. 17 has been the target of complaints by Consumer
Watchdog, the Santa Monica advocacy group that was founded by Harvey
Rosenfield, the author of Prop. 103.

Rosenfield has argued that the measure would allow Mercury and other
companies to impose surcharges as high as $1,000 on drivers who have
not had continuous coverage.

Drivers who are students, low-income and members of the military on
duty in other states would be unfairly punished by the new measure,
Rosenfield said.

In February, a state report obtained by The Chronicle through
California’s Public Records Act, alleged that Mercury may have engaged
for years in illegal practices, including deceptive pricing and
discrimination against consumers.

In April, The Chronicle reported that Mercury faced hefty fines after
another state report alleged it violated state laws “despite
agreements with the state to terminate illegal behavior.”

Last month, Consumer Watchdog filed a complaint with the federal
Securities and Exchange Commission, charging that Mercury founder and
Chairman George Joseph hired his nephew as an actuary for the firm
without disclosing the family relationship to investors.

The company has denied any wrongdoing.

E-mail Justin Berton at [email protected].