Nine Suits Challenge Auto Rate Rollbacks : Mandate of Law Called ‘Impossible’ in Insurers’ Pleas

At least nine lawsuits were filed to strike down Ralph Nader’s Proposition 103 Wednesday within hours of its narrow victory, as the shaken insurance industry fought to preserve its California business on existing terms.

While some companies announced plans to quit various phases of the insurance business or at least suspend sales of new insurance--particularly auto insurance--most appeared content to wait to see what the courts would do first about the 20%-plus immediate rollbacks mandated under the measure.

Plea to High Court

Four of the suits were filed in the state Supreme Court and five others in Los Angeles County Superior courts. Probably the most important came in the Supreme Court on behalf of State Farm, the state’s largest insurance seller, as well as Allstate, Farmers, Fireman’s Fund, CalFarm, the Assn. of California Insurance Companies and the Insurance Services Office.

A spokesman for those suing declared:

“Proposition 103 hurts California because it mandates the impossible. It tells insurance companies to sell their product at a price that’s less than it costs to provide the service . . . It simply can’t be done--not without massive problems such as unavailability of insurance for many consumers.”

The insurers asked the courts to order an immediate stay of all provisions of the initiative pending outcome of the litigation.

But Atty. Gen. John K. Van de Kamp quickly announced that he will undertake a vigorous defense of Proposition 103 on behalf of the state.

He said all the suits should be consolidated into one proceeding before the Supreme Court, to expedite a decision. He suggested that if the courts do issue a stay, it should be confined to the rollback provisions and not other parts of the initiative, such as those mandating approval of all future insurance rates and, beginning in 1990, the election of the insurance commissioner.

“I would simply ask them (the insurance companies) to keep their britches on today,” said Van de Kamp. “They are panicking.”

The attorney general also noted that Proposition 103 provides administrative remedies for the companies, allowing them to escape the rollbacks if they can show the state insurance commissioner that they are “substantially threatened with insolvency” by them. He suggested the courts should require the companies to exhaust these remedies before pursuing a suit.

Calls for Escrow

If there is a stay, the attorney general’s office suggested, it should provide that the insurance companies set aside the 20% in escrow accounts to collect interest, which could go to consumers if the court were to uphold the law.

Nader, issuing a victory statement from his Washington, D.C., office, accused the insurers of “using their usual huffing and puffing and intimidation tactics and being sore losers.

“They’re just going to further outrage their customers in California if they pursue the path of obstructionism instead of compliance,” he declared. “But from what I’ve been told, basically they have decided to play hardball. They’re going to file the suits, plead disaster, destabilize the market . . . It’s a real test of wills.”

At a San Francisco news conference, the insurers argued they had little choice but to continue to fight the measure. They spent about $60 million, compared to the Nader campaign’s $2.2 million, but their no-fault initiative still got only 25% of the vote while the Nader-backed measure was winning a majority.

Insurers’ Viewpoint

The industry’s lead attorney, Allen Katz of Los Angeles, declared:

“We think that arbitrarily slashing all property-casualty insurance rates by lowering them to what they were a year ago and slashing them by another 20% (is) arbitrary, confiscatory and a violation of the insurance industry’s and the individual companies’ due process rights under the California Constitution and the United States Constitution.”

Katz said the industry also argues in its legal briefs that a provision in Proposition 103 allowing the state Board of Equalization to increase the tax rates on insurers is a violation of the separation of powers doctrine in the state Constitution, and that the measure impairs contracts in violation of state and federal constitutional principles.

While the challenges to the Nader measure go forward, many companies essentially will do nothing to comply with any of its provisions, particularly its rollbacks, suggested Stanley Zax, president of the Assn. of California Insurance Companies, which is the industry’s leading lobbyist in Sacramento.

‘No Ability to Comply’

Zax said of his own Zenith Insurance Co.:

“My company has practically no ability today to comply with the law . . . It takes a long time to deal with the computer issues and the other issues that are involved here. We have been put in a Hobson’s choice, either forced to violate the law on one hand, or you’re asked to do something that, practically, you can’t do.

“My judgment is that each company individually will deal with these dilemmas in its own way,” Zax added.

But Van de Kamp said he believes that the rollbacks should take place immediately, unless the courts order a stay.

“Consumers who get their bills and find there is no rollback should contact the state Insurance Department right away,” the attorney general said.

Van de Kamp’s pro-103 tone, despite the fact that he had supported a competing initiative, the defeated Proposition 100, was not matched Wednesday by either Gov. George Deukmejian or his insurance commissioner, Roxani Gillespie.

Governor’s Statement

Deukmejian declared at a Los Angeles news conference, “We’ll certainly follow the law with respect to whatever obligations there are of our Administration,” but he added that he saw many problems with it.

“If auto insurance is not available, then that will create just as significant a problem, if not more so, than some of the high premiums that are required now,” the governor said.

Gillespie said, “The people of California may rest assured that it is my intention to administer Proposition 103 according to the law,” but otherwise she added:

“The California Department of Insurance is now reviewing (the measure). Although the department has prepared implementation plans, it is too early to answer specific questions regarding implementation.”

For his part, Harvey Rosenfield, the Santa Monica-based activist who chaired the Proposition 103 campaign, urged that the state’s insurance consumers lose no time in pursuing their right to a rollback, and he promised to organize a team of lawyers and others “to counter actions taken by insurers to thwart our initiative.”

Arguments in Suits

The four suits filed Wednesday with the Supreme Court include these contentions:

- The Mercury Casualty Co. called Proposition 103 “the most oppressive rate regulation enacted in this country in modern times.”

- The suit filed by the Assn. of California Insurance Cos. and the big sellers said the initiative “unleashes a wrecking ball against the insurance marketplace” and will have “an immediate and catastrophic impact” if not prevented from taking effect.

- The Southern California Physicians Insurance Exchange and three other physician-owned insurance groups founded during the medical malpractice insurance crisis of the mid 1970s argued that if the justices do not strike down the initiative in its entirety, they at least should declare the 20% rollback from 1987 levels unconstitutional and prevent its implementation.

- The Far West Insurance Co., a firm that writes surety bonds, said it should not be covered by the measure.

The four actions were filed minutes after the clerk’s office at the high court in San Francisco opened Wednesday morning.

Later in the day, in Los Angeles Superior Court, a judge issued a temporary restraining order allowing two San Fernando Valley surety bond companies to write policies at current rates, without the rollbacks required by Proposition 103, until Dec. 8 or until the Supreme Court rules on the constitutionality of the measure.

Under the restraining order granted by Judge Miriam Vogel, Amwest Surety Insurance Co. of Woodland Hills and Surety Co. of the Pacific of Northridge were allowed to continue present rates on condition that they post a bond as a guarantee that they will reimburse their customers if the measure is ruled constitutional.

Margin of 200,000

Proposition 103, in nearly final returns, had won by about 200,000 votes, getting 51.1% of the total. By contrast, the insurers’ no-fault initiative, Proposition 104, received only a 25.3% yes vote, the trial lawyers-backed Proposition 100 received a 41% yes vote, Proposition 101, backed by dissident insurer Harry O. Miller of Coastal Insurance Co. got a scant 13.3% yes vote, and the insurers’ Proposition 106, to slash lawyers contingency fees, got a 46.7% yes vote.

All of the other four measures failed by not securing a majority. Only Proposition 103 survived the $81-million war of the initiatives, the most expensive campaign in California history.

Also contributing to this story were Amy Stevens in San Francisco and Paul Feldman and Tracy Thomas in Los Angeles. KEY PROVISIONS OF PROPOSITION 103 Rollback of Rates. Effective immediately, insurers are to reduce charges on every auto, homeowner and commercial or municipal liability insurance policy to 20% less than the rate in effect on Nov. 8, 1987. In the next year, the state insurance commissioner can allow increases from the new levels only after finding that an insurer is “substantially threatened with insolvency.”

Rate Regulation. Beginning immediately, new rates must be approved in advance by the commissioner. At hearings on such increases, the burden of proof will be on the insurance company to justify a proposed increase.

Good Driver Discounts. Beginning next year, drivers licensed for more than three years who do not have more than one conviction for a moving violation during that period can purchase from any company an auto insurance policy at a 20% discount from regular rates.

Elected Commissioner. Beginning in 1990, the state insurance commissioner will be elected by popular vote rather than appointed by the governor.

Emergency Authority. If insurance companies leave the state or quit selling certain kinds of policies, the commissioner will be empowered to establish a joint underwriting authority to assign policies to companies remaining in the market.

Territorial Ratings. Auto insurance rates will be determined by the policyholder’s driving record, the number of miles driven annually, the number of years of driving experience and other factors adopted by the commissioner “that have a substantial relationship to the risk of loss”--in that order. The last category will allow the commissioner to preserve to some extent the territorial rating system, under which rates are based on where customers live.

Antitrust Exemptions. The insurance industry’s California exemptions are repealed.

Banks. Banks now are allowed to sell insurance.

Rebates. The ban on insurance agents giving rebates to customers out of their commissions is repealed.

Group Plans. Group auto and homeowners insurance, similar to group medical plans, are now legal.

Consumer Assistance. The state Department of Insurance will, at a reasonable cost, provide consumers with comparisons of the rates charged by every insurer.

Consumer Organizations. Insurance company billings will contain notices telling policyholders of their right to join an independent, nonprofit corporation to advocate “the interests of insurance consumers” in any applicable proceeding. The organization will be operated by individuals elected by the total membership.

Intervenor Funding. Persons representing the interests of consumers at any rate hearing or appeal who make a “substantial contribution” to the proceedings will be reimbursed for their expenses by the insurance companies.

Premium Taxes. The state tax paid by insurance companies on their premiums will be adjusted to ensure the state will get the same revenue as it has been, even if the companies take in less premium money as a result of the rollbacks or take in more as a result of more people buying lower-priced insurance.

Amendments. Provisions of this initiative can be amended only by popular vote, unless the Legislature proposes an amendment construed as furthering the measure’s purpose. In that case, a two-thirds vote of each house will suffice.