Proposition 103 Ruling: A Pyrrhic Victory

And so the big news of the day is that the constitutionality of last November’s Proposition 103 has been upheld by California’s Supreme Court. Or has it? A closer reading of the opinion shows that the justices--even though they found the 20% rollback permissible--refused to allow insurance companies to be hammered into bankruptcy, regardless of how laudable the initiative’s goal. The court also selectively upheld various provisions of the proposition to allow several loopholes significant enough to drive an uninsured truck through.

The voters got their rate rollback but only for the time that it will take an insurer to run over to the commissioner’s office and file an application for higher rates--and immediately begin charging them. Because even though the court found the rollback constitutional, it said that the allowable rates must be “fair and reasonable,” which means a fair rate of return.

Even after Nov. 8, when rates must be approved by the commissioner before they can be charged, the commissioner can approve an interim rate pending her final decision. So voters are cautioned not to make that down payment on the vacation they were going to pay for with their insurance premium refunds. You’ll be needing that money shortly.

So what if we aren’t going to get the refund? The insurers have to renew our policies. Yes, that’s what the court said--unless, of course, there is a “substantial increase in the hazard insured against,” in which case the court said, they don’t have to renew. And when the insurer does renew, it is “guaranteed fair and reasonable rates,” according to the court. In other words, it has to renew but not necessarily at the same price.

Well, it still looks like we’ve got the insurers where we want them--they can’t leave the state. Or can they? The court said that they can leave California as long as they follow the steps set out in the state Insurance Code. In fact, the court said Proposition 103 recognizes the possibility that insurers may withdraw from some insurance markets.

But if the insurers stick around, we have this consumer advocacy corporation that will go after them. Wrong again--the court threw that out because it violates the state Constitution.

Well, how about getting a refund from some of those so-called old obscene profits? I don’t think so, because the court said: “profits from the past cannot be used to sustain confiscatory rates for the future . . . no case supports an unreasonably low rate of return on the ground that past profits were excessive.”

So what do we have after this “victory for consumers?” Beginning in November of this year, we’ll have a new way of regulating insurance rates called “prior approval,” which means that the Department of Insurance will have to substantially increase its staff to handle all the applications for rate increases. According to the legislative analyst, for the first full year (1989-90), an additional 300 people and $15 million to $16 million will be required to implement Proposition 103. And as the analyst points out, the money for all this comes from “fees levied on insurance companies, brokers and agents.” Since these are legitimate costs of doing business, they can be included in the premium rate base. In other words, our rates will increase because of our consumer victory. But it’s good for employment in the commissioner’s office.

And so after this agony that began last November, the problem is still with us. Insurance prices are still pretty much as they have been and will stay there until someone challenges them. At which time they will be vigorously defended by the insurers in both administrative and judicial hearings.

What have we learned? For one thing, we’ve learned that we should examine our consumer advocates to see if they know very much about what they are trying to do. In the case of Proposition 103, it was clear early on that drafters Harvey Rosenfield and Ralph Nader were ignorant of the biggest consumer vs. insurer issue around at the time--the practice of insurers denying or delaying claims in bad faith. In 1979 the California Supreme Court said that both first- and third-party claimants could sue the insurer under the unfair-claims statutes and were not limited solely to a complaint to the commissioner. In 1988 our new court overturned that decision and destroyed the most effective sanction consumers had against insurers. Although another of last November’s ballot measures, Proposition 100, would have restored the right to sue for unfair claims practices, Proposition 103 was conspicuously silent on the issue.

After Proposition 103’s tortuous trail through the initiative process, the election and the courtroom, Rosenfield and Nader must feel like Epirus’ King Pyrrhus after his victory over the Romans in 279 BC. After winning the battle at a cost of the lives of most of his men, Pyrrhus was heard to remark something like “One more victory like that and I’ll lose the war.”