Court Asked to Limit Insurer’s Right to Fold

The California Supreme Court, reviewing a key issue arising under Proposition 103, was asked Tuesday by a state attorney to sharply limit the right of an insurer to stop providing auto insurance in the state.

The lawyer asked the justices to uphold an order by state Insurance Commissioner Roxani M. Gillespie allowing a firm to leave California only after it finds another company to assume all obligations to current policyholders.

State Deputy Atty. Gen. Randall P. Borcherding said the aim of the initiative and other state laws is to provide “continuous coverage” for policyholders. He ridiculed the suggestion that the insurers in the case--four subsidiaries of the Travelers Indemnity Co.--would not be able to find reinsurers following passage of the sweeping rate-cutting measure.

“Travelers, in fact, may be able to make a lot of money by selling its business to another insurance company,” Borcherding said during an hourlong hearing before the court.

But a lawyer for Travelers argued that Gillespie’s order violated a company’s basic right to cease doing business and that it should be struck down as invalid.

“If this right isn’t fundamental, what does this say about the state of California?” asked Kent Keller, a Los Angeles attorney. “Have we reached the point where the only way we can provide insurance is to close our borders to escape?”

Instead, Keller said, the commissioner should establish a joint insurance underwriting authority to serve customers of firms that withdraw. “She says we must buy our way out of California, and we say no,” he said.

The justices heard arguments in a widely watched case that is expected to set important legal guidelines for determining when an insurer can leave the state rather than continue business under the changes mandated under Proposition 103. A decision is expected in 90 days.

The initiative, passed a year ago, called for dramatic reductions in insurance premiums and a series of regulatory reforms in the industry. Among other things, insurers were barred from canceling auto policies unless there is fraud, failure to pay a premium or a “substantial increase” in the insured risk.

The day before the 1988 election, the four Travelers subsidiaries in the case sought to withdraw from the auto insurance business in California and began notifying their 22,000 customers in the state that their policies would not be renewed. Two months later, Gillespie issued an order barring the cancellations unless the companies got other firms to reinsure the policyholders. Travelers agreed to continue the policies while it challenged the validity of the order in court.

On May 4 in a separate case, the justices upheld the validity of most of the initiative but held that insurers are still entitled to a fair profit under the measure’s regulatory scheme. Hearings began last month on how such calculations will be made.

The court also held that the non-renewal provisions of the measure applied to policies existing before the election but noted that insurers still were free under the initiative to cease doing auto insurance in the state. Left unclear was what companies like Travelers must do before they could legally withdraw.

In briefs filed with the justices, attorneys for Travelers argued that Gillespie’s order placed the companies in a “Catch 22” situation by forcing them to find another insurer who would assume the obligation to renew policies “in perpetuity” under the non-cancellation provisions of Proposition 103.

In effect, Travelers said, Gillespie was violating the companies’ constitutional right to due process. Under the order, the firms said, there could never be a “withdrawal” because each time an insurer quit in California, another would have to assume its policies and the sharp restrictions against cancellation.

In reply, attorneys for Gillespie argued that her order was merely aimed at the orderly and efficient withdrawal that provided safeguards for a company’s policyholders.

Travelers’ claim that it would never be able to cease business was incorrect and based on “pure speculation,” the state lawyers said. The high court’s guarantee of a “fair rate of return” for insurers under the initiative had reduced the likelihood that a withdrawing firm could not find reinsurers willing to take over its policies, the state said.