Travelers Defies Prop. 103 With No-Renewal Notices

At least one insurer, Travelers Corp., is continuing to send notices to its auto policyholders that it will not renew their policies, becoming possibly the first company openly to defy provisions of Proposition 103 since they became effective Wednesday.

State Insurance Department officials said Friday that Travelers’ actions may be illegal and could be challenged by the department, but Travelers contended that its actions are legal.

Although Travelers has a relatively small number of auto policies in California, its actions may be the most direct attack on the proposition’s provision restricting the right of firms to refuse to renew existing auto policies.

That provision, some industry officials say, is one of Proposition 103’s most critical and far-reaching requirements, possibly as important as the required 20%-plus rate rollbacks.

An official prominent in the insurers’ campaign organization this fall pointed out this week that the rollbacks only last for a year at the most, but the other provisions are permanent.

“Companies are concerned that if they offer a new policy now, they may be locked into it,” said Allen Katz, an attorney leading the insurance industry’s legal effort to get the state Supreme Court to declare Proposition 103 unconstitutional. “Each company must evaluate whether it wants to take that risk on additional business.”

Proposition 103 allows firms to stop selling new auto policies. But it prohibits insurers from canceling or refusing to renew existing auto policies, except in cases where customers don’t pay premiums or commit fraud or misrepresentation, or if there is a “substantial increase in the hazard insured against.” (These clauses don’t apply to homeowner policies, however.)

That provision was designed to prohibit auto insurers from discriminating against certain customers by refusing to offer them renewals.

As many as 67 insurers, including Allstate Insurance and Mercury Casualty, have at some point suspended sales of new policies since passage of Proposition 103 on Nov. 8. But while several companies, including Fireman’s Fund, also threatened to stop renewing existing policies as well, Travelers is believed to be the only company that is making good on that threat.

The state Supreme Court on Wednesday lifted a stay freezing implementation of virtually all provisions of Proposition 103--including those affecting non-renewals--making them effective until the high court rules on the overall constitutionality of the initiative.

Accordingly, state Insurance Department officials said Friday, any non-renewal notices sent out by Travelers since Wednesday may be considered illegal and possibly subject to fines, court orders or other enforcement actions. Notices sent out before Wednesday also could be illegal, if it is determined that the lifting of the state Supreme Court’s stay makes Proposition 103’s provisions effective retroactive to Nov. 8, the officials said.

“We will be challenging any company that endeavors to cancel or non-renew for any reasons other than those given in Proposition 103,” said David R. Langenbacher, chief of the department’s underwriting services bureau.

However, Travelers spokesman Scott Bushnell said Friday that the firm is continuing to send non-renewal notices to those of its 24,000 auto policyholders in California whose insurance is up for renewal, regardless of whether they are good or bad drivers. The company also is not renewing its 45,000 homeowners policies.

Bushnell contended that the firm’s actions were legal on grounds that it filed to withdraw its license to offer personal auto insurance in California on Nov. 7, the day before Proposition 103 was passed by the state’s voters. Therefore, provisions of the initiative don’t apply to Travelers, he said.

“We believe that Proposition 103 does not apply to contracts issued prior to its passage,” Bushnell said, quoting a statement issued by Travelers’ legal department.

However, James W. Holmes, staff counsel for the state Insurance Department, said Friday that even if Travelers filed to withdraw from the market before the passage of 103, it still must comply with the initiative’s provisions, as well as previous state insurance laws kept intact by the proposition.

Those laws require firms to transfer existing policies to other insurers before they can pull out, Holmes said. Therefore, he argued, Travelers can leave the state if it renews existing policies and then transfers them to other insurers.

Consumer advocate Harvey Rosenfield, leader of the fight for Proposition 103, agreed with the state’s interpretation of the law. “If they (Travelers) haven’t complied with the laws to leave, therefore they technically are still present in the state, and they have to renew everything,” he said.

However, both industry officials and regulators said that other aspects of the non-renewal provisions are unclear and will need to be formally interpreted and defined, presumably by the state Insurance Department.

George Joseph, chief executive of the Mercury group of companies, said the provision allowing for cancellation or non-renewal of policies in the event of a “substantial increase in the hazard insured against” is extremely vague.

“What’s ‘substantial increase in the hazard?’ ” Joseph asked. “Is it seven or eight accidents? Is it three or four? Is it one? We don’t know.”

For the time being, he said, Mercury has not changed its non-renewal policies, but it fears litigation may be needed to clarify this point.

Another company, State Farm, which had been refusing to renew some policies as part of its normal business pattern of weeding out hazardous drivers, said Friday that it is suspending such non-renewals until it can get the non-renewal clause of Proposition 103 further interpreted.

State Farm is the largest seller of auto insurance in California. The second-largest, Farmers Insurance, also said Friday that it sent a cautionary directive to its regional offices telling them to be sure to comply with the non-renewal clauses.