Insurance Chief Should Answer to Voters

The California Supreme Court recently overruled its 10-year-old Royal Globe decision, which allowed an individual to sue insurance companies for engaging in unfair and deceptive practices like failing to pay legitimate claims. Under the court’s new decision, Moradi-Shalal vs. Fireman’s Fund, a policyholder’s only remedy is to inform the California Department of Insurance that an insurance company has wrongfully refused to pay a claim and then hope that the department will take action against the company.

Unfortunately, in California that is a vain hope. As the Supreme Court pointed out, California law does give the insurance commissioner, who is appointed by the governor, the authority to order an insurance company to cease engaging in fraudulent practices, fine the company and suspend its license to do business in California for up to a year. However, as the court was forced to acknowledge, there are no reported cases in which the Department of Insurance has ever punished an insurance company in any of these three ways. Since insurance commissioners have never exercised their authority in all these years, the obvious question is: Why not?

The explanation most frequently given for the department’s failure to police unfair practices of insurance companies is its lack of resources. For example, the budget of the department is about $30 million while the amount of insurance written in California is about $30 billion.

Even more significant, however, is the manner in which the insurance commissioner is selected: He or she is appointed by the governor rather than elected by the people. Appointed commissioners typically come from the insurance industry, spend a few years as commissioner and then return to the insurance industry, according to a 1979 study by the U.S. General Accounting Office. Of course, their salaries are considerably higher the second time around.

Because appointed commissioners come from the insurance industry, they tend to sympathize with it. And if by some chance they “get religion” during their terms as commissioner and decide to get tough with the industry, the industry can always get tough itself and pressure the governor to find a new commissioner. Consider the case of former California Insurance Commissioner Bruce Bunner. After long, intense pressure from consumer activists, he began to gather information to prove or disprove, once and for all, the assertions of the insurance industry in support of its territorial rating system. In 1986 Bunner publicly criticized insurers for refusing to sell auto insurance in the inner cities. Shortly thereafter, Gov. George Deukmejian accepted his resignation. The governor maintains that Bunner’s resignation was a coincidence; Bunner has not commented.

Elected insurance commissioners, however, owe their jobs to neither the industry nor a governor. Because they must persuade the public that they will protect the public’s interests in order to get the job, they must run on a platform of protecting insurance consumers, not insurance companies. And if they want to keep their jobs they must protect consumers. The Supreme Court’s decision in the case of Moradi-Shalal vs. Fireman’s Fund gives the commissioner alone the power to punish insurer fraud and deception. That makes it more important than ever before for California’s insurance commissioner to be answerable only to the public--not to politicians or to the industry.

The insurance industry’s exemption from both federal regulation and federal antitrust enforcement makes an elected insurance commissioner even more essential. For example, the Federal Trade Commission, which can prosecute all other businesses for fraud, was prohibited by Congress in 1945 from prosecuting the insurance industry. State insurance commissioners, therefore, have awesome responsibilities, and they are more likely to live up to those responsibilities if they are elected rather than appointed.

The strongest argument against an elected insurance commissioner is that candidates for the office must raise campaign funds and that insurance companies have a lot more money to contribute, and a lot more interest in contributing, than any other interest group or the public. But campaign contributions must be publicly disclosed. A candidate whose campaignis being funded almost exclusively by the insurance industry will have a hard time maintaining credibility with the public.

This is what is happening in Florida, the largest of the 11 states that elect their insurance commissioner. One of the candidates for Florida commissioner has refused to accept campaign contributions from insurance companies, and is challenging his opponents to do the same. In addition, Florida’s incumbent commissioner, Bill Gunter, is generally acknowledged to be one of the most enforcement-minded commissioners in the nation. He has forced insurers to moderate their rates, for example, and auto-insurance rates in Miami are now 40% less than in Los Angeles.

In November Californians will have an opportunity to vote to elect their insurance commissioner for the first time. Proposition 103, sponsored by a grass-roots citizen organization called Voter Revolt to Cut Insurance Rates, is the only proposition that would establish an elected insurance commissioner. (It would also roll back all property/casualty-insurance rates--including auto, homeowners and all business and professional liability insurance--by 20%, and it is the only ballot initiative that is sponsored by neither insurance companies nor lawyers.)

The insurance industry believes that insurance-company money can defeat enforcement-minded insurance commissioners who run for election. But all the money in the world will not defeat an idea whose time has come. An elected insurance commissioner, which the California Supreme Court has now made the consumer’s lone defense against insurance-company abuse, is such an idea.