Standard of Insurance Rollbacks Suggested : Prop. 103: Judge’s recommendations would mean companies might not be liable to rebate any of the 20% reduction from 1987 rate levels.


Insurance Commissioner Roxani Gillespie on Monday released an administrative hearing judge’s official recommendations for a rate-of-return standard for insurance companies that apparently would mean very few premium rollbacks for California ratepayers under Proposition 103.

But even before consumer leaders began blasting the recommendations of Judge William J. Fernandez, whose removal from the matter they already had demanded, Gillespie tersely noted in a statement that she has up to 100 days to review Fernandez’s opinion and render her own decision on the standards involved.

Some department sources have indicated that Gillespie might make her decision in as little as 30 days. The commissioner is under pressure because her rollback decisions already have been delayed six months beyond the Nov. 8, 1989 deadline she had originally set for making them.

Fernandez, who presided over months of Insurance Department hearings called by Gillespie, said in a 27-page opinion that, as far as Proposition 103 rollbacks are concerned, the annual rate of return standard ought to be 13.2%.


If adopted by Gillespie, that would mean the state’s insurance companies would not be liable to rebate to their customers any of the 20% rollback from 1987 rate levels prescribed by Proposition 103, if they were determined to have received less than a 13.2% return in 1988-89 on all their applicable lines of insurance combined.

For the Insurance Department’s future approval of new rates, Fernandez recommended a variable scale for rate of return, depending on each company’s circumstances, ranging from 11.2% to 19%.

Originally, last summer, Gillespie had said she would set an overall fair rate of return standard of 11.2%. However, since then, she has indicated that she might accept a higher figure.

First reaction from insurance company lawyers to Fernandez’s recommendations Monday was mildly favorable, although the companies had called for an annual rate of return ranging from 16% to 21%.

Kent Keller, a lawyer for Travelers and other companies, said the companies had not received what they wanted on the rollback standards, but he said that on two readings of Fernandez’s opinion, he believed the judge had been reasonable, with some ambiguities.

But consumer leaders and Atty. Gen. John K. Van de Kamp reacted with outrage.

Van de Kamp said Fernandez’s opinion “could just as well have been written by the insurance companies” and “would be a disaster for the consumers of California and a betrayal of the voters who enacted Proposition 103.” He said that profit margins, under some accounting stratagems, could actually exceed 35% under the standards Fernandez recommended.

Robert Gnaizda, counsel for a coalition of 15 minority and low-income groups, said he hoped the recommendations would be ignored by Gillespie.

“Overall, this pro-insurance decision is a repudiation of the laudable spirit of Proposition 103 and encourages insurance industry greed,” he said.

Gnaizda and Van de Kamp were among those who a few weeks ago demanded Fernandez’s removal as hearing judge on grounds of a conflict of interest involving the judge’s wife, who works for a law firm that defends insurer interests.

Both Gillespie and Fernandez contended there was no conflict and Gillespie went along with Fernandez’s decision not to remove himself. Fernandez’s wife, Judith Fielding, said that her income and that of her husband are not commingled, and pointed out that he had presided over trials in which judgments were delivered against companies her firm had represented.

In other parts of his recommendations Monday, Fernandez:

Declared that insurance company political contributions, lobbying expenses and charitable contributions ought to be excluded and disallowed from expense claims the company made as part of the calculations going into gauging fair rate of return.

Indicated, however, that executive salaries, no matter how high, should not be disallowed in the calculations.

Contended that each company is different and no one standard would suffice by which the Insurance Department should approve future rates, thus justifying the variable 11.2% to 19% standard for the future.