2nd Insurer Directs Buyers to Costlier Unit

Following the lead of State Farm Insurance, Government Employees Insurance Co. has begun channeling all new applications for car insurance to a subsidiary that charges good drivers substantially higher rates than other GEICO subsidiaries charged before passage of Proposition 103.

GEICO, which insures about 300,000 vehicles in California through its four subsidiaries, confirmed Wednesday that anyone in the state seeking new auto coverage from the company must now apply through GEICO Indemnity, a unit whose premiums for good drivers average 65% higher than at GEICO’s other subsidiaries.

The Washington-based insurer said that, as of last Monday, it suspended writing new auto insurance policies in California at its three remaining subsidiaries--GEICO, GEICO General and its subsidiary for high-risk drivers, Criterion.

“I want to do business in California. We have a constituency there we want to continue to serve . . . but we have to be fiscally responsible,” said Eugene J. Meyung, president of Government Employees Insurance Co., which specializes in coverage for government workers.

GEICO’s announcement came only two days after State Farm Insurance, the largest seller of automobile policies in the state, said it has also shifted its auto policy underwriting to an affiliate that charges higher rates. State Farm said the rates offered by its State Farm Fire & Casualty unit would be be about 20% higher than its principal auto insurance division, State Farm Mutual.

State officials said GEICO had not yet notified the Department of Insurance about the action. But a department lawyer called the move illegal and criticized both GEICO and State Farm.

“If, in fact, they (GEICO) are doing what State Farm is doing, it appears to us that their actions violate those provisions of the insurance code that prohibit charging different rates for similarly situated policyholders,” said Reid McClaran, a department staff attorney. “What that means is that a company can’t charge different rates” for two applicants with similar driving records.

“Obviously, we don’t like what they are doing . . . but we have to wait until we verify (matters) before we can take any action,” McClaran said.

The Department of Insurance “is asking us to do something that is fiscally irresponsible,” Meyung said. “Our lawyers tell me we can go ahead and do what we’re doing. Your state ought to realize there’s no such thing as a free lunch.”

Under Proposition 103, which voters approved last week, the insurance industry was ordered to roll back rates to levels 20% below those of Nov. 8, 1987. But implementation of the initiative has been suspended by the state Supreme Court while it considers legal challenges filed by insurers.

Meanwhile, consumers in search of coverage are finding turmoil in the insurance marketplace.

The Department of Insurance on Monday was to have issued a list disclosing which insurers were still offering insurance at unchanged rates but has not been able to compile such a tally because some insurance companies are still mulling over their options.

Some smaller insurers in California have suspended writing new policies altogether in the wake of Proposition 103, the department said.

Two insurers, Allstate and Mercury, initially suspended sales of new policies but then resumed sales after the state Supreme Court issued its stay.

But several major California insurers contacted Wednesday said they will continue to write policies as before.

“We are continuing business as usual until we have a ruling from the California Supreme Court,” said Richard Donegan, Los Angeles regional director of underwriting for Farmers Insurance. He said demand for automobile insurance at his company is running at normal levels.

“We normally write about 600 to 1,000 policies a week,” Donegan said. “At first, we got a lot of inquiries from people concerned about (insurance) availability after Proposition 103. . . . But it doesn’t seem to be as much of an issue now.”

The Automobile Club of Southern California, which insures 1.3 million vehicles in the state, also said it is continuing to write new policies as usual.

GEICO is California’s 13th-largest auto insurer. Its principal market is military personnel in the San Diego area.

Although GEICO’s action drew fire from insurance industry critics, including the National Insurance Consumer Organization, one insurance industry analyst Wednesday expressed fears that, although the stopgap measures undertaken by GEICO and State Farm may be financially prudent now, they could create marketing problems later, after the dust finally settles over Proposition 103.

“They must continue to write new policies at a level that will support” loss claims, said Gerald S. Haims, an insurance industry analyst for Seidler Amdec Securities in Los Angeles. “It’s questionable whether these measures being taken as a stopgap” can accomplish that, he said. “They could ultimately cause consumer confusion.”