State Court Upholds Prop. 103 : Key Parts of Measure OKd, Including Rate Rollback : But Insurers Win Major ‘Fair Return’ Concession

The California Supreme Court on Thursday unanimously upheld the major provisions of Proposition 103, the sweeping initiative aimed at reducing spiraling insurance rates and imposing broad new controls over the insurance industry.

But while the justices left intact the measure’s far-reaching 20% rollback and freeze on automobile and property insurance rates, they made an important concession to insurers by allowing exceptions for companies that can show the rate cuts prevent them from earning a “fair and reasonable” return.

As a result, lawyers for the industry predicted that many firms would resist the rate cutbacks mandated under the initiative, hoping to win approval for higher premiums from the state insurance commissioner.

Industry Attack Rejected

The court rejected most of the industry’s concerted legal attack on the initiative and refused the insurers’ pleas to strike down the whole measure because some parts were found unconstitutional.

Other portions of the November ballot initiative that were left intact by the court are likely to have wide, long-term impact.

The measure establishes an elected insurance commissioner with power to review rate increases in advance, allows banks to sell insurance, eliminates the industry’s exemption from state anti-trust laws and requires that auto rates be set primarily by driving records instead of residence.

The climactic decision, ending months of uncertainty about the constitutionality of the measure, will affect millions of Californians holding auto and property policies and hundreds of insurers. The industry had said that if the rate rollbacks were upheld, it would cost insurers more than $4 billion a year in premium reductions.

The ruling also came as something of a surprise from a newly aligned court regarded as far more sympathetic to business than its liberal predecessor led by former Chief Justice Rose Elizabeth Bird. The court’s 59-page opinion was written by its most liberal member and most frequent dissenter, Justice Allen E. Broussard.

The decision was hailed by sponsors as a big victory for policyholders and one likely to inspire similar reform efforts in other states.

“This is an incredible day for consumers,” said Joseph W. Cotchett, the Burlingame attorney who represented Voter Revolt, the group that sponsored the measure along with consumer advocate Ralph Nader.

“This cuts across virtually every household in the state,” the lawyer said. “But this is only the tip of the iceberg. From here the movement will go across the country and for the first time, insurance companies will have to be responsible to the public, like any other business.”

Harvey Rosenfield, the young lawyer and consumer activist who drafted Proposition 103 and chaired the drive for its enactment, expressed gratification that the court had upheld most of it, but promised to put political pressure on state Insurance Commissioner Roxani Gillespie and others in power to see that it is fully implemented. He contended that some rollbacks and rebates should be immediate.

“In every case where the commissioner refuses to order the rebates where they are warranted, we will litigate it,” said Rosenfield. “Every insurance consumer’s refund is now in the hands of the commissioner, and I doubt she will block the will of the people.”

Atty. Gen. John K. Van de Kamp, the main state official defending the measure in court, also praised the ruling. “The game may not be over, but we’ve just hit an inside-the-park home run for consumers,” he said. “This decision rewrites the rules between Californians and their insurance companies. It should be the end of sky-high, take-it-or-leave-it rate increases.”

However, insurance industry attorneys said the decision establishes an important right for individual insurers to seek relief from the rollbacks--and to do so before they have to reduce premiums.

“We believe we prevailed on what to us was the heart of our case--that the rollbacks, with no chance to achieve an adequate return, were unconstitutional,” said Allen M. Katz of Los Angeles, a lawyer for the insurers.

‘Really Misleading’

“It is really misleading to say everyone’s going to get a 20% rollback,” he said. “The court has said you don’t get a rollback if the insurer can show it’s not fair and reasonable. And I expect a lot of companies are going to be able to show that’s the case.”

Darrel J. Hieber of Los Angeles, another attorney for the industry, said the ruling represented “neither a victory nor a loss” for insurers. “The court has said that insurers, like any other business, are entitled to a fair return. If they are not getting it, they’re entitled to immediate relief.”

Both lawyers said no decision had been made yet on whether to seek review of Thursday’s ruling before the U.S. Supreme Court.

Under the initiative, auto and property insurance rates are to be reduced 20% below their level of November, 1987, and held in place until November, 1989. But under the court’s ruling, insurance companies can seek relief from the insurance commissioner and, in the interim, charge a higher rate. But they will have to refund, with interest, any premiums collected that exceed the rate ultimately approved.

Rate Hike Provision

After next November, as required under the initiative, insurers must submit rate increases in advance for approval by the insurance commissioner, who is required to bar any rate that is “excessive, inadequate or unfairly discriminatory.” The commissioner’s office becomes elective in 1990.

The justices struck down the element of the measure’s rate-setting process that allowed exemptions only if an insurer could show a “substantial threat of insolvency.” Such a strict standard for exceptions would raise the risk that the across-the-board rate slash would prove “confiscatory” for some insurers, violating their property rights under state and federal constitutions, the court said.

Denying a fair return to insurers might be permissible in an emergency, the justices said, but only on a temporary, short-term basis.

“The asserted rise in insurance rates, rendering insurance unavailable or unaffordable to many, is not a temporary problem,” Broussard wrote. “It is a long-term, chronic situation which will not be solved by compelling insurers to sell at less than a fair return for a year.”

Severing a Standard

But even though the “threat of insolvency” standard is unconstitutional, violating the right to due process of law, it still can be “severed,” or separated, from the rest of the rate-setting provisions, allowing them to remain in effect, the court said.

“The remainder of the initiative, after deleting the insolvency standard, would likely have been adopted by the people . . . ,” Broussard wrote. “The voters who enacted Proposition 103 would presumably prefer rate setting and regulation under the balance of the initiative to the method of setting insurance rates which existed before the initiative was enacted.”

Until now, insurance rate changes have not been reviewed by state authorities until after they have taken effect--and the scope and frequency of such reviews have been limited.

The court also upheld a provision forbidding insurers to cancel or fail to renew existing policies, except for non-payment of premiums, fraud or a “substantial increase” in the insured risk.

Contention Rejected

The justices rejected insurers’ contentions that those restrictions violated constitutional protections against impairing the obligation of contracts.

In this instance, the impairment is “relatively moderate and restrained,” still allowing insurers to refuse renewal in some limited circumstances, the court said. And the measure also permits unsatisfied insurers to simply withdraw from the California market if they wish, provided they follow state procedures for doing so, the court added.

The court agreed with industry attorneys that another provision of the initiative, creating a nonprofit, private corporation to advocate consumer interests, was invalid under the state Constitution, which forbids an initiative from naming a private corporation to perform any function.

But the justices said again that this invalid provision could be separated from the rest of the initiative. “The consumer-advocacy provision is clearly not essential to the initiative’s purpose and structure,” Broussard said.

Issue Set Aside

The court, for the moment, set aside another issue raised in the industry’s challenge--the validity of a provision requiring the State Board of Equalization to increase tax rates on insurers to make up for decreased tax revenue from premiums reduced under the measure.

Industry lawyers argued that only the Legislature can alter tax rates set by the Constitution. But the justices said that the Constitution also bars courts from deciding the issue until after the taxes are actually paid. Insurers may later renew their challenge, the court said, but if the tax provision is then ruled invalid, such a ruling will not affect the rest of the initiative.

The court also turned aside the contention that the wide-ranging measure--including everything from premium rate reductions to repeal of a law barring banks from selling insurance--violated a constitutional provision limiting initiatives to a “single subject.”

“All of the provisions of Proposition 103 relate generally to the cost of insurance or the regulation thereof, and all . . . at least arguably will help to achieve the goal of making insurance more affordable and available,” Broussard wrote.

Joining the opinion were Chief Justice Malcolm M. Lucas and Justices Stanley Mosk, Edward A. Panelli, David N. Eagleson, Marcus M. Kaufman and John A. Arguelles, who retired March 1 but continued to participate in the case by special assignment.