Prop. 103 Ruling Creates Loophole for Rate Hikes

The California Supreme Court has created a loophole that will allow insurance rate increases in coming months while the fight over the constitutionality of Proposition 103 is waged before the high court.

The court’s decision on Wednesday to continue its stay on the 20% rate rollback provision of Proposition 103 gives insurers the right to not only maintain current rates, but to raise them virtually without restriction, according to key legislators and consumer activists who have vowed to fight such hikes.

At the same time, the Supreme Court’s decision allows the rest of Proposition 103 to take effect, including the following provisions that could have big effects on the cost of insurance:

-- Allowing banks to sell insurance, introducing competition that could reduce the cost of policies to consumers. Two of the state’s largest banks--Security Pacific and First Interstate--said Thursday that they have filed applications with the insurance commissioner for licenses to sell all lines of insurance. Security Pacific said it plans to have solicitations to customers in the mail by January and hopes to have tens of thousands of customers signed up quickly.

-- Permitting consumers to seek discounts and rebates from insurance brokers and agents. Though most brokers say they will not discount, many fear that some of the larger agencies will begin offering kickbacks and that could open flood gates that will be hard to close.

-- Letting employers and community groups seek low-cost group policies and discounts on auto and homeowner’s coverage. Some consultants and insurers say that because of high administrative costs and other complications they do not expect many corporations to sponsor such programs.

The ruling also allowed some important consumer protections to take effect, including:

-- An immediate ban on insurers refusing to renew policies. Under Proposition 103, insurers may only drop a customer for cause, such as a drunk-driving conviction that would significantly change the driver’s risk level. State Sen. Alan Robbins (D-Van Nuys), who is chairman of the Senate’s Insurance Committee, recommends that Californians who have received cancellations since passage of Proposition 103 file complaints with the insurance company or the insurance commissioner.

-- A provision that will apply the state’s general consumer protection laws to insurance companies for the first time, ending a preemption in the insurance code.

The ruling also sets the stage for some significant changes in the way insurers deal with each other and that could lead to lower prices for consumers.

Proposition 103 removes the insurance industry’s exemption from antitrust laws. Consumer advocates, such as Harvey Rosenfield, who authored Proposition 103, say that will end collusion and rate-setting among the state’s insurers and lead to lower rates over time.

It was clear by Thursday morning that the antitrust provisions were already having an effect.

Some normally outspoken industry representatives were closed-mouthed Thursday, fearing that anything they say could be seen as urging industrywide action that would violate antitrust laws.

George Tye, a spokesman for the Assn. of California Insurance Companies, the insurers’ chief lobbying arm in Sacramento, said that he was now under instructions from the association’s lawyers to say nothing about the situation. Tye referred all inquiries to individual insurance companies, which, he said, would now have to speak for themselves.

Jim Stahly, a spokesman for State Farm Mutual Auto Insurance Co., would not say what his company’s options are at this time, for fear of being accused of “signaling” State Farm’s intentions to others in the industry.

Other big changes promised under Proposition 103 will not take effect for 11 months, including the end of territorial rate setting; the start of a “good driver” 20% discount and state regulation of rates.

Proposition 103 calls for a 20% rollback from insurance rates in effect in November, 1987. It provides for freezing the rates at the reduced level until November, 1989, at which time the insurance commissioner is required to have in place regulations controlling proposed rate increases.

But the court stayed the rollback and freeze provisions, leaving Californians temporarily without any new protections against rate increases.

Robbins said this loophole is “obvious” and he will seek to close it through legislation. His staff is now drafting legislation that would recapture any excess profits made from increased premiums.

Assemblyman Pat Johnston (D-Stockton) said he is considering legislation to simply ban any rate increases until the court completes its review.

And Rosenfield said his Voter Revolt organization will ask the high court to amend its ruling if insurers do take advantage of the loophole.

State Insurance Commissioner Roxani Gillespie said her department will continue to enforce existing laws requiring all companies planning rate increases of more than 10% to submit them for review.

The Insurance Department will then “monitor” the increases to be sure that they comply with general requirements of Proposition 103 that rates not be “excessive, inadequate or unfairly discriminatory,” she said.

Still, Reid McClaren, Gillespie’s counsel, said that if companies can show that claims and other expenses have risen dramatically--as many companies have been claiming--they will be justified in imposing big rate increases.

Most companies contacted Thursday were extremely vague about any plans they might have to raise rates.

Stanley Zax, chief executive of the Zenith National Insurance Co., said this week that his company would be justified right now, based on its claims costs, to take a 28% increase. But he stopped short of saying it would do so.

Rick Dinon, a spokesman for 20th Century, said the company had imposed a substantial rate increase in May and “part of the reason it was substantial was that we wanted to avoid having to take another rate increase in the next six-month cycle.”

The new cycle has recently begun without any increase being imposed. “But I am not at liberty to discuss whether there might be an increase in the future,” he said.

A State Farm agent, who asked that he not be identified, said: “The company has been telling us they have lost great amounts of money in auto insurance. If it’s within the legal boundaries . . . I know they’re going to raise rates.” But he said no announcements had been made yet, not even to the company’s agents.

Officials of Allstate Insurance, Mercury Casualty, GEICO, United Service Auto Assn., Aetna Life & Casualty and Farmers Insurance said they have made no changes in rates or practices since the court action.

Other challenges could emerge that could freeze or defeat some or all of the provisions that have been cleared by the court.

Joe Annotti, a spokesman for the Independent Insurance Agents and Brokers of California, said that his group is considering taking legal action to stop the banks from selling insurance.

And regulations to clear the way for rebates and kickbacks could take weeks or months to write.

Times staff writer Bill Sing contributed to this story.