Prop. 103 Ruling Isn’t a Total Victory

Almost six months after California voters shocked the insurance industry by passing Proposition 103 to curb car and property insurance rates, the California Supreme Court has unanimously ruled that the proposition is largely constitutional on its face. However, despite this apparent victory, the people of the state still will not obtain the immediate benefits they voted for.

The court did not hand the insurance companies a total loss; in fact, in crucial respects the insurance companies have much to celebrate in the ruling. By holding that Proposition 103 is largely constitutional on its face, the court left in place the requirement that rates be set by examining the insured’s driving record, the number of miles driven and years of driving experience. Many drivers will see a benefit from the “good driver” rates established in the proposition. The court also left intact the enhanced powers of the insurance commissioner to review and approve rates in advance and the requirements that will force insurance companies to disclose more information in order to justify rate increases. Further, the court did not touch the provisions that allow banks to take a more active role in writing insurance than they had been allowed in the past. All told, the decision should lead to some limited rate relief in future years.

Although there is a measure of victory for the people of the state, the court’s ruling has also made Proposition 103 much less powerful than in its original form. The court approved the most prominent feature of Proposition 103--the immediate rollback of rates to a level that is 20% below those prevailing in November, 1987. However, it also unanimously held that the companies must be allowed to make a fair profit.

Moreover, the court invited insurance companies to file rate-increase applications with the insurance commissioner under the new “good driver” rules. Until Nov. 8, rate increases could go into effect until the commissioner determines the increases are too high; after Nov. 8, new rates will not go into effect until the commissioner approves them, the court ruled. The effect is that for a few months, at least within limits, insurance companies will be able to charge what they want in advance. It will be up to the insurance commissioner to use her powers wisely to keep rates within reasonable limits.

The court also took away what could have been a significant bulwark against unfairly high insurance rates when it struck down Proposition 103’s provision for the formation of a consumer advocacy corporation. The nonprofit corporation would have advocated the interests of insurance consumers in any forum, most particularly the rate hearings that are now required under Proposition 103. The court felt that there was a risk that this new group would seek to obtain some special privilege not afforded other organizations. Thus, one powerful watchdog over the insurance commissioner has been eliminated for now.

What’s next on the legal front? The insurance companies may well choose to seek relief in the U.S. Supreme Court. The companies likely would essentially reprise their strategy, which is to assert that what remains of Proposition 103 violates the federal constitutional protection against the taking of property without due process of law. This avenue holds some promise; however, the state Supreme Court seems to have worked not to lean too far toward either side. Making it possible to circumvent the immediate rollback probably eliminates a large part of the insurance companies’ potential argument under federal law.

In all, the court has come up with a balanced response to Proposition 103. The insurance companies have escaped what they saw as the most draconian provision of the proposition--the immediate rollback of rates without hope of relief--and for the time being can charge what they deem to be proper rates, subject to possible refunds.

What have the people of the state received? Insurance companies will have to change their practices and justify their rates in ways that they never did before. Over time, insurance buyers should benefit from the increased scrutiny and competition the court left intact.

What did the people lose? They probably will not get any benefit from the temporary rollback of rates, which is what most voters expected above all else. What is perhaps more significant is the loss of a state-sanctioned consumer watchdog.

Overall, responsibility for implementing Proposition 103 now rests on the insurance commissioner. The people will have the opportunity to judge her performance fairly soon--Proposition 103 provides for an elected commissioner. Perhaps that provision, left standing by the court, will prove ultimately to be the most important protection for the people of California.