Justices Hear Debate on Prop. 103, Appear Divided

Members of an apparently divided state Supreme Court sharply questioned a battery of attorneys Tuesday in an exhaustive and highly charged debate over the constitutionality of Proposition 103, the sweeping insurance reform initiative approved by voters last November.

From the often-spirited questions by the justices, there appeared to be significant division within the court on the multitude of issues that have arisen in the case.

The court’s two most liberal members--Justices Stanley Mosk and Allen E. Broussard--closely interrogated the insurance industry’s lawyer as he attacked the validity of the measure. But perhaps its most conservative member, Justice Marcus M. Kaufman, peppered the measure’s defenders with a series of questions, expressing doubt that insurers could be required to provide policies at a loss.

Other justices were less aggressive, but no less intent, in their own questioning of the lawyers in the case. But it was far from clear what the outcome will be when the court issues a decision.

The 90-minute argument took place in the most far-reaching case to come before the newly aligned court since the departure of Chief Justice Rose Elizabeth Bird and two other court members, who were defeated in the fall, 1986, election.

The decision will affect millions of Californians holding auto, casualty and property insurance. At stake is an estimated $4 billion in premium reductions under the measure, along with broad new governmental control over an industry that has been relatively unregulated in the past. The case has drawn nationwide attention, because similar regulatory proposals are being considered in 17 other states.

The dispute has also focused new attention--and potentially conflicting pressures--on the seven justices. As a generally conservative court, it might be expected to side with business, in this instance the insurance industry. But the justices also might be inclined to defer to the will of the voters, another course often taken by conservative courts.

The hearing took place in a jam-packed courtroom, filled to its 102-seat capacity with lawyers, legislators, officials and reporters. Proceedings were televised to an overflow audience outside, as well as the nearby Capitol.

Earlier Ruling Possible

The justices, under newly adopted internal procedures, are due to issue a ruling within 90 days. But with the case already under consideration by the court for four months, an earlier decision may be forthcoming.

The lawyer leading the attack on the measure said the initiative was laden with invalid provisions and must be struck down by the court in its entirety.

“Proposition 103 was drafted in a hasty manner and in total disregard for the constitutions of both the state of California and the United States,” said Frank Rothman, a Los Angeles attorney representing the insurance industry. “It should not have been submitted to the voters.”

Defenders of the measure countered that the dramatic rate rollbacks and other provisions were a lawful way of curtailing runaway insurance costs. If any portion is struck down, they said, the rest of the initiative should remain in effect.

‘Cried Out for Reform’

“The voters have clearly expressed their outrage over the insurance crisis,” said state Atty. Gen. John K. Van de Kamp, making a rare personal appearance before the court. “The voters found that the current system of non-accountability and non-regulation, of special legislative privileges and corporate collusion, cried out for reform.”

Joseph W. Cotchett, a Burlingame lawyer representing sponsors of the initiative, implored the justices to allow most of the measure to take effect, even if some parts were invalidated.

Speaking expansively as though he were addressing a jury, Cotchett told the court: “If you find the rollback discriminatory, that can be ‘severed out,’ ” he said. “You could still have a very good and workable insurance reform package enacted into law.”

Under the initiative, insurance rates would be reduced 20% below their November, 1987, levels and held in place until November, 1989, with exceptions allowed only when an insurer shows a “substantial threat of insolvency.” After that period, any rate increases would be subject to approval of an elected state insurance commissioner.

Details of Provisions

Other provisions would sharply limit auto policy cancellations and non-renewals; base auto insurance rates more on drivers’ records and less on where they live; allow banks to sell insurance; remove insurers’ exemption from state antitrust laws, and establish a nonprofit, independent corporation to advocate consumer interests.

Insurance companies filed suit challenging the initiative the day after the Nov. 8 election, charging that it was unconstitutional on several grounds. In December, the justices agreed to hear the insurers’ challenge, but allowed the measure to take effect except for the rate rollbacks and creation of a consumer advocacy corporation.

Rothman argued that the consumer advocacy provision conflicted with constitutional prohibitions against the creation of private corporations by initiative and thus should not even have gone on the ballot.

The rate rollback, reduction and freeze, he said, were virtually unprecedented in the law and denied insurers their right to a fair return on their policies. Procedures for obtaining an exception to the cutbacks were too cumbersome and time-consuming to provide effective relief, he said.

And if the rate cutbacks are struck down, the entire measure must be invalidated, Rothman contended. Sponsors had offered the voters a “free lunch” of popular but legally invalid rollbacks with the aim of achieving enactment of other less-noticed provisions, he said.

“It was an effort to bait and switch,” Rothman said. “They offered the California public something very appealing and exciting--a 20% decrease in insurance rates--and said that it wouldn’t cost the voters a penny. Meanwhile, there were other parts of the initiative that remained effectively hidden.”

Mosk and Broussard pressed the attorney with questions, suggesting that it should be up to the industry to demonstrate factually that the rollbacks were confiscatory. But Rothman responded that the rate reduction process was unconstitutional on its face and should be struck down now.

Two other attorneys, representing the American Council of Life & Health Insurance of America and the Independent Insurance Agents and Brokers of California, joined Rothman in urging the court to declare the initiative invalid.

Van de Kamp, named as a defendant in the suit, told the court that the initiative was a valid attempt to combat “sloth, waste and inefficiency” in the insurance industry.

Kaufman vigorously questioned the attorney general, suggesting that under the initiative’s procedures, it might take years for an insurance company to obtain relief from sharp cutbacks in rates.

“Would it be legal to force companies to offer policies below cost for up to six years?” Kaufman asked. Van de Kamp replied that it was “inaccurate” to suggest that rate relief could not be expedited by both the insurance commissioner and, if necessary, the courts.

Kaufman also sharply interrogated Karl M. Manheim, a Loyola Law School professor defending the initiative.

“How can the state of California require an insurance carrier to provide insurance at less than its cost?” asked the justice. The professor replied that the court should allow such a provision to take effect as a “rational” attempt to curtail rates, while allowing insurers an opportunity to challenge the rollbacks later as excessive.