Nine Suits Challenge Auto Rate Rollbacks : Six Underwriters Say They’ll Halt Coverage in State

At least six insurance companies said Wednesday they have withdrawn or intend to withdraw from the auto insurance business in California, claiming that Tuesday’s passage of Proposition 103 would make it unprofitable to operate in the state.

Meanwhile, dozens of other firms temporarily suspended issuing new policies, according to insurance agents and industry officials, pending the outcome of industry lawsuits challenging the sweeping insurance reform initiative, which would cut rates by 20% from last year’s levels.

The withdrawals by such well-known names as Aetna Life & Casualty and Fireman’s Fund Insurance Cos.--coming amid fears of more withdrawals--immediately sparked concern and confusion about the status of existing policies and whether consumers would have difficulty renewing them or finding new insurance. Many insurance agents complained that business declined sharply Wednesday as they could not write many new policies.

Called Political Ploy

The moves also sparked criticism from consumer advocates who labeled the withdrawals as a political ploy. Some state officials minimized the immediate impact upon consumers or the state’s insurance market, the nation’s largest, with about 14% of all U.S. insurance premiums paid.

“It’s premature to say what is going to happen because there are 650 or 700 firms writing property-casualty business in California,” said state Insurance Commissioner Roxani Gillespie. “Six (withdrawing) out of 650 will not kill the market,” she added. Five of the six firms announcing withdrawals are not among the 10 largest underwriters of auto insurance in California.

Gillespie said her office expects to challenge the withdrawals of four of the firms on grounds that Proposition 103 prohibits insurers from refusing to renew auto policies of existing customers.

Those four firms, Gillespie said, are Fireman’s Fund, Travelers Insurance Co., Aetna and Cigna. Each has a relatively small presence in the state’s auto insurance market, she added. A fifth firm with relatively small exposure in California, Home Insurance Co., also said it would withdraw, but Gillespie could not be reached for comment on whether her office would challenge the company’s move.

Another firm, Mercury Casualty, the state’s eighth-largest auto insurer, said it would no longer write new policies if it is not allowed to raise rates to offset the rollbacks mandated under 103. The firm contends it would become insolvent if forced to cut rates. Under the initiative, companies proving potential insolvency could be allowed to increase rates to offset the rollbacks.

Suspensions Listed

Firms announcing full or partial suspensions on new policies, pending resolution of the industry lawsuits, include Allstate Insurance, the state’s fourth-largest auto insurer, and the Automobile Club of Southern California, the fifth-largest.

Some of the firms, such as Travelers and Aetna, said they are withdrawing from most or all home and business insurance in California as well. Besides auto insurance, various types of property-casualty insurance such as homeowners and business insurance are also affected by Proposition 103.

However, the firms withdrawing said they would continue to honor claims under existing policies.

But some other companies--including Farmers Insurance Exchange, the state’s third-largest auto insurer, and 20th Century, the sixth-largest--said they would continue to sell insurance at current rates, and not at the discounted rates mandated by Proposition 103. That would be an apparent violation of the initiative, but the companies said they want to delay rolling back their rates until the California Supreme Court rules on the industry lawsuits challenging the initiative.

“We fully intend to comply with the law” pending the court ruling, said Farmers Insurance spokesman Jeff Beyer. But “in the meantime, we will continue to provide insurance at current rates while taking steps to provide adjustment to customers.”

Profits Squeeze

Some insurance industry analysts predicted that other firms would pull out of the California market, given their deteriorating profits that companies claim result from rising car-repair rates, medical costs, litigation fees and fraudulent claims.

Indeed, at least four small firms and one large one, Coastal Insurance Co. and its subsidiaries, had announced before Tuesday’s election that they would withdraw from the market on the assumption of adverse election developments.

“They (the withdrawing firms) will not be alone,” said Michael Morrissey, chairman of Firemark Insurance Research, a Morristown, N.J., firm that follows publicly traded insurance firms. Companies, he said, “are more profitability-minded so that, unlike 10 years ago, managements of today are much more willing to walk away from unprofitable business or territory.”

Some firms, such as Fireman’s Fund, also have complained of higher costs due to their use of independent insurance agents, who must be paid commissions for their sales, analysts say. In announcing its withdrawal, Fireman’s Fund said it has been losing money in auto insurance for several years.