Requires insurance companies to pay consumers' legal fees & expenses under certain circumstances. Insurers are attacking this provision of the law. (Feb.'98)
THE ATTACK ON PROPOSITION 103 INTERVENORS
The insurance industry and Insurance Commissioner Chuck Quackenbush have recently leveled a series of attacks on the right of citizens and non-profit consumer protection organizations to defend Proposition 103 in the courts and to make sure that the initiative is properly implemented.
These attacks -- suggesting that consumer advocates are acting improperly or out of a desire for personal gain -- have become the chief strategy of the insurance industry in its efforts to evade compliance with Proposition 103's requirements. No wonder: its other efforts -- to delay 103 with legal challenges and get the Legislature to repeal provisions of 103 -- have been effectively countered by lawyers representing consumers.
The following information describes the purpose, history and success of the intervenor compensation system established by Proposition 103.
Proposition 103 Provided Tools to Defend Against Expected Legal Challenges and to Represent the Public Interest in the Reforms It Mandated
The ability of consumer groups to represent the public interest was of paramount importance in the drafting of Proposition 103. Consumer advocates were well aware that:
- The initiative, if it passed, would be subjected to continuous legal challenges by the insurance industry as well as efforts to undermine or weaken the law in the Legislature and before the Department of Insurance;
- The first commissioner who would be required to implement the measure, Roxani Gillespie, (the last appointed commissioner), would be hostile to the initiative and its requirements;
- Public participation in the regulatory process established by the initiative was crucial not only to the measure's success but also to restoring public confidence in the industry itself.
Proposition 103 established three major avenues for consumer participation in insurance regulatory matters. The initiative as approved by the voters enacted Insurance Code section 1861.10 as follows:
(a) Any person may initiate or intervene in any proceeding permitted or established pursuant to this chapter, challenge any action of the commissioner under this article, and enforce any provision of this article.
(b) The commissioner or a court shall award reasonable advocacy and witness fees and expenses to any person who demonstrates that (1) the person represents the interests of consumers, and, (2) that he or she has made a substantial contribution to the adoption of any order, regulation or decision by the commissioner or a court. Where such advocacy occurs in response to a rate application, the award shall be paid by the applicant.
(c) (1) The commissioner shall require every insurer to enclose notices in every policy or renewal premium bill informing policyholders of the opportunity to join an independent, non-profit corporation which shall advocate the interests of insurance consumers in any forum. This organization shall be established by an interim board of public members designated by the commissioner and operated by individuals who are democratically elected from its membership. The corporation shall proportionately reimburse insurers for any additional costs incurred by insertion of the enclosure, except no postage shall be charged for any enclosure weighing less than 1/3 of an ounce. (2) The commissioner shall by regulation determine the content of the enclosures and other procedures necessary for implementation of this provision. The legislature shall make no appropriation for this subdivision.
First, 1861.10 (a) provides consumers with the absolute right to go to the Department of Insurance or the courts should insurance companies fail to comply with their responsibilities to the individual as provided by Proposition 103. If the Department of Insurance fails to respond effectively to a consumer's complaint, consumers will not be "locked out" of the courts with no remedy, as they were prior to Proposition 103, when the courts simply held that the Department was responsible to address such complaints and the Department never did so.
Section 1861.10 (b) establishes the intervenor compensation system under attack by Commissioner Quackenbush. Citizen groups that make a "substantial contribution" to a rate hearing or other matter before the Department of Insurance, or to a proceeding before a court, are entitled to receive reasonable advocacy fees and reimbursement of expenses for such costs as expert witnesses.
Under the California case law in effect in 1988 and at present, "reasonable fees" has been determined to mean fees equal to that which the industry pays its own attorneys. In other words, 103 gives consumers not only the right to intervene, but the ability to hire top-notch representation equal to that obtained by the insurance companies; note that policyholders presently pay, through premiums, for the cost of the attorneys insurance companies hire to represent their interests.
Any matter covered by Proposition 103 may appropriately be the subject of consumer group involvement; consumer groups may initiate such activity, force the commissioner to do so, or intervene in matters raised by others.
Similar consumer representation systems have been in effect at the state Public Utilities Commission with strong success. Funded citizen intervention programs have protected against unnecessary or duplicative proceedings, while providing consumers with significant, skilled representation. Such advocacy assures policyholders that their interests are being adequately represented; that the regulatory system they established is working properly; and that the rates and practices in effect are fair.
Note that assessments collected from insurers are used to fund the intervenor program. No taxpayer monies are involved.
A Key Mechanism for Public Representation Was Stricken from 103 in 1989
It is also essential to note that Proposition 103 contained an additional mechanism to guarantee effective consumer representation. Under 1861.10 (c), consumers were to be given the opportunity to establish and join a democratically created and controlled advocacy organization. A staff of advocates, funded by voluntary contributions and grants, would represent consumers on insurance matters before the Insurance Commissioner, the courts, and the state legislature. In order to enable the advocacy organization to obtain the support of consumers, insurers would be required to enclose special notices with their premium bills, informing their customers of the opportunity to participate in the program. (Insurers would be reimbursed for any additional expenses caused by insertion of the notice).
However, in its first decision upholding the constitutionality of Proposition 103 in May of 1989 (Calfarm v. Deukmejian), the California Supreme Court struck Section 1861.10(c), ruling that it violated Article II, Section 12 of the California Constitution, which says in its entirety:
No amendment to the Constitution, and no statute proposed to the electors by the Legislature or by initiative, that names an individual to hold any office, or names or identifies any private corporation to perform any function or to have any power or duty, may be submitted to the electors or have any effect.
This provision was put in place in 1964 to prevent the owners of a lottery company from establishing a lottery by initiative and naming itself within the initiative to an exclusive ten-year franchise to run the lottery. The Supreme Court said that the formation of the organization by 103 "named" a private corporation "to perform" a function, and therefore severed the provision from the initiative.
The loss of this mechanism made the intervenor compensation system even more important.
Why the Intervenor Reimbursement Process Is Crucial to Consumers -- and Insurers
The importance of the intervenor system is obvious, with the hindsight of nine years. Insurance companies have brought over one hundred challenges to various portions of Proposition 103. Virtually all of these lawsuits have been defended -- and defeated -- by lawyers hired by consumer groups to defend the rights of consumers.
Beyond the previous insurance industry challenges to 103's constitutionality, the very strength of the prior approval regulatory system mandated by Proposition 103 depends upon active public participation. The intervenor system encourages non-profit consumer advocacy groups to intervene in the expanded regulatory process to protect the interests of the public by providing a source of funding for such activities. The reimbursement system is intended to enable consumers or their representatives to monitor the Department of Insurance on a stable and professional basis -- to give the public a voice that is experienced and therefore effective, as opposed to simply loud. Such participation is essential if 103 is to work and if consumers are to regain their trust in the insurance industry's practices and rates. After all, it is a basic tenet of democracy and government that each party to a proceeding has the right to be fully represented.
Many insurers view mechanisms for funding consumer intervention as likely to result in uncontrolled, ceaseless regulatory conflict. That view is false, since citizen groups rarely are able to contest any but the most important cases. Since 1988, a mere one dozen organizations have participated in 103-related cases, and only a handful of thousands of rate increase applications have been challenged. Presuming their claims and rate applications are meritorious, insurers should welcome the presence of professionals representing consumers in rate hearings and other matters. The process leads to openness, constructive change, reform and consumer acceptance.
Finally, the intervenor process becomes even more important when, as during the two year tenure of appointed Commissioner Roxani Gillespie and now, under Commissioner Quackenbush, a person hostile to Proposition 103 becomes the commissioner. Under such circumstances, it is crucial that consumers have their own representatives to oversee the actions of the state agency entrusted with responsibility to enforce the law.
After an extensive hearing process, Insurance Commissioner John Garamendi issued comprehensive intervenor funding regulations. Commissioner Quackenbush has revised these regulations and has attempted to discourage intervenors by making it more difficult to receive intervenor funding. At least one non-profit organization, the San Diego-based UCAN, has withdrawn from intervenor status as a result.
A Cost/Benefit Analysis of Intervenor Activities
Commissioner Quackenbush and the insurance industry, working with their political allies in Sacramento such as Assembly Member Lou Papan (D-Millbrae), have begun a concerted attack on the intervenor compensation system. They claim it is too "expensive" and that attorneys representing consumers are paid "too much." The criticism of the intervenor compensation system made by insurance companies always ignores the fact that the program has amply justified the modest fees and expenses of intervenors. Perhaps the best way to analyze the true "cost" of the intervenor process is to make some relevant comparisons:
- The total amount of intervenor compensation paid to consumer representatives since 1988 is estimated at $4.3 million by the California Department of Insurance. By contrast, former Commissioner Garamendi estimated in 1993 that insurers have spent $150 million in legal fees to fight Proposition 103 in the courts since 1988.
- In the landmark lawsuit brought by the insurance industry against the Proposition 103 rollback formula (20th Century), lawyers representing organizations associated with Proposition 103 and the insurance commissioner successfully defended the right of consumers to obtain $1.2 billion in rollbacks all the way up to the U.S. Supreme Court (which rejected the insurance industry's challenge in 1995). Under Commissioner Garamendi's order, consumer representatives received $550,000 for that four-year battle. In other words, for every $1 spent to reimburse lawyers for consumer for fees and expenses in that case alone, California policyholders have already received over $2,100!
- When the full savings from 103 is factored in -- principally the six-year rate freeze issued under 103's regulatory authority -- the additional benefit is calculated at $14.7 billion for auto insurance alone, according to a methodology developed by the National Insurance Consumers Organization to analyze the impact of Proposition 103. California policyholders have thus received an overall return of at least 373,960.6% on $4.3 million in intervenor fees. In short, the intervenor system is the best investment any consumer in California could make; and it amply confirms the wisdom of the voters in establishing the system.
- Chuck Quackenbush has accepted over 40% more money from insurance companies in campaign contributions -- $6.1 million -- than all intervenors have been paid since 1988.
The Political Vendetta Against Watchdog Groups
The timing and nature of the attack on intervenors like the Proposition 103 Enforcement Project makes its purpose all too clear.
Mr. Quackenbush would no doubt like to silence his critics, the watchdog groups and consumer advocates that have closely monitored the actions of three insurance commissioners -- Gillespie, Garamendi, and now Quackenbush himself.
- The Project has been forced to sue Quackenbush in court five times since he took office; by comparison, previous Commissioner Garamendi was never sued by a consumer organization.
- The Project has exposed how Quackenbush, who has accepted over $6.1 million in campaign contributions from the insurance industry, has transformed the Department of Insurance into a tool for implementing the insurance industry's agenda.
Similarly, the insurance industry would no doubt prefer to eliminate organizations that have successfully defended 103 against industry legal challenges and forced insurers to obey the law.
Feb. 1998/Updated 1/03