Senate Panel Backs Bills to Punish Balky Insurers

Over the protests of insurers, a state Senate committee on Wednesday approved legislation that would severely punish insurance companies that refuse to renew auto policies or that switch their clients into related firms charging more for the same coverage.

The Senate Insurance, Claims and Corporations Committee, chaired by Sen. Alan Robbins (D-Van Nuys), also approved a bill drawn from the defeated trial lawyer initiative, Proposition 100, that would establish an office of insurance consumer advocate within the state Department of Justice.

Approval of the bills was the first action taken by lawmakers on the issue of auto insurance since voters narrowly passed Proposition 103. The Ralph Nader-backed initiative on the November ballot was intended to reduce premiums and impose stringent regulations on the insurance industry.

It was clear from the statements and actions of lawmakers that the election has changed the politics of insurance in the Legislature.

Insurance lobbyists, who complained the bills would chase business out of California, were given a polite hearing. But their arguments were rejected out of hand. That is a far different reception than they were afforded prior to the measure’s passage, when the insurance lobby was generally able to block measures considered threatening to the industry’s financial health.

Although several members of the committee voiced reservations about the bills, their votes in favor of it showed a desire to respond to the public unrest that resulted in passage of Proposition 103 without waiting for the state Supreme Court to make a final ruling on the initiative’s constitutionality.

“The voters spoke, and they wanted a change,” declared Republican Sen. James W. Nielsen of Rohnert Park, vice chairman of the committee and among those who expressed some discomfort with the bills. Later, Nielsen lectured an insurance lobbyist, saying, “I don’t think you will be able to sell anyone on the notion that insurance companies are in (financial) trouble.”

The bills were drafted in response to reports immediately after the election that some insurers were refusing to write new policies and instead were sending applicants to affiliated companies where premiums were often 20% to 40% higher. Among those is State Farm, California’s largest seller of auto insurance.

In other cases, companies refused to renew policies, although nearly all relented and are once again offering to write policies.

The bill prohibiting arbitrary policy cancellation was drafted by Robbins to deal with Travelers Insurance, the only major insurance company that still refuses to renew policies for an estimated 23,000 California drivers.

Robbins’ bill, approved on a vote of 6-2, would force Travelers or other companies to renew policies and refund higher premiums paid by their former policyholders who had obtained coverage elsewhere. Violators would also be forced to pay a penalty equal to half the premiums charged in the preceding year on all policies that were canceled.

State Farm lobbyist Gene Livingston said the penalties would only increase the losses insurance companies are experiencing and drive them out of the market. “These penalties are Draconian,” Livingston told the panel.

Robbins countered that “hanging would be Draconian. The gas chamber would be Draconian. But we’re talking about insurance companies with tens of millions of dollars of premiums. . . . You need these penalties if you are going to achieve the proper results.”

The bill prohibiting insurance companies from boosting premiums by sending new applicants to affiliated companies was approved on a vote of 6-3 after Senate President Pro Tem David A. Roberti (D-Los Angeles), the measure’s author, told committee members they have a duty to “ensure the will of the people, as expressed by Proposition 103, is enforced.”

Companies that violate the prohibition or change their underwriting standards to increase rates more than 5% for new applicants would be liable for civil damages and face revocation of their licenses to do business in California.

Roberti’s second bill establishing a consumer advocate within the Department of Justice was attacked by insurers as unnecessary and an assault on voters who turned down the concept when they rejected Proposition 101. But Roberti and consumer group representatives said it was crucial that an advocate be on hand during the period when the new initiative is being put into force.

In another development Wednesday, lawyers for state Controller Gray Davis filed a brief with the state Supreme Court in support of Proposition 103.

Davis, the only statewide officeholder to support the measure before its passage in the Nov. 8 election, contended that “the will of the people is entitled to great deference” and the high court ought to let the whole initiative to take effect, including its 20% premium rollbacks.

The state controller’s lawyers, however, pointed out that the way the initiative is worded the rollbacks are less sweeping than they would appear to be since they do not have to be given on each policy until that policy comes up for renewal, and then are effective only until Nov. 8, 1989. On that date, insurance companies could apply for permission to increase the rate.

A policyholder, they said, would not get a rollback until the policy came up for renewal. If the renewal date is not until May, for example, the policyholder would pay the old rate until that time.

“Therefore, the income stream of insurers will not be a drop of 20% for one year since policies will come up for renewal throughout the year and would not be subject to the rate rollback until such time,” they said.

The temporary reduction in prices “should also be viewed in the context of the extraordinary growth in premiums paid to fire and casualty insurers over the last several years,” Davis’ brief said.