Garamendi Acts Swiftly, Orders Rate Freezes

Within moments of being sworn in Monday as the state’s first elected insurance commissioner, John Garamendi imposed a freeze on some future rate increases and said he will leave it in effect until state-regulated companies start paying Proposition 103 rollbacks.

Garamendi’s declaration, however, does not mean that consumers will get the full 20% rollback of 1989 premiums originally mandated by Proposition 103, or even that auto insurance policyholders will escape the increases approved in the last two weeks by former commissioner Roxani Gillespie.

But any future rate increases requested by state-regulated lines of insurance will be subject to Garamendi’s new order, he said. “Proposition 103 will be fully implemented--and fast,” Garamendi pledged in his inaugural speech before an enthusiastic audience in a crowded state Senate chamber, where he had served as a Democratic lawmaker for 14 years.

“No company will be granted a rate increase until its rollback liability has been determined and legal challenges to that rollback have abated,” he declared. “Rates will remain frozen until the insurance companies’ flood of lawsuits has receded, the regulatory waters part and a steady stream of refund checks is flowing.

“No, I don’t think I’m Moses,” Garamendi said. “But neither are insurance company balance sheets a sea of red ink. Rollbacks are the law and they will be paid.”

Garamendi’s freeze is broader than the one imposed on auto insurance by Gillespie in October, 1989. Also frozen are homeowners’ insurance and many lines of business insurance. Health and life insurance, whose rates are not regulated by the state, are not included.

The state Supreme Court ruled nearly two years ago that the rollback percentages would have to be reduced or nullified for insurers if, by granting them, they would not realize a fair rate of return on their business. Garamendi, therefore, will still have to calculate just how much of a rollback, if any, he will order from individual companies.

The round of auto insurance rate hikes approved by Gillespie, affecting one-third or more of the state’s insured drivers, apparently will still go into effect, Garamendi indicated. Those customers will be getting notices of increases for months to come, depending on their position in the billing cycle, despite the freeze.

Reflecting their understanding that some increases will still go through, the first reaction from insurers to the Garamendi freeze Monday was fairly calm.

Noting, for example, that State Farm had a rate of return less than the 11.2% profit standard set by Gillespie and therefore would not have to give a rollback at all, a State Farm attorney said, “I’m not sure how his speech changes things as far as our company is concerned.”

Gillespie set regulations mandating that any company that earned less than 11.2% in 1989 would not have to give a rollback and she stated that, in setting new rates, she would allow companies an annual rate of return ranging from 11.2% to 19%.

There were reports that Garamendi could scrap these standards as early as today. Although that would not affect rate increases already granted by Gillespie, the new commissioner has scheduled Sacramento and Los Angeles news conferences to make additional announcements this morning.

Garamendi expressed contempt for Gillespie’s administration in his inaugural address, calling it “inept” and “inconsistent,” and asserting that Gillespie had ignored the will of the voters as expressed in Proposition 103.

By contrast, he said, “I intend to seize this opportunity to demonstrate to the people of the state that their government is responsive to them, that it can operate efficiently, and that it will use its moral and legal authority to level the playing field between powerful institutions and ordinary folks who need a helping hand.”

To this end, Garamendi declared:

* He will radically step up investigation and resolution of consumer complaints against the insurance industry. “We will aggressively publicize transgressors, so consumers are aware of who to avoid, and we will initiate proceedings to pull the licenses of persistent violators.”

* Through installation of a 900 line to provide rate comparisons to callers, he will let consumers know which companies are offering the lowest rates for various kinds of coverage and tell them who is offering coverage they do not need.

* In regulating health insurance, he will “stop the shameful industry practice of dumping sick patients and insuring only those who are healthy” and he will seek legislation to provide medical coverage to those with pre-existing illnesses.

* He will work with the governor and the Legislature to develop an affordable low-cost auto insurance policy providing basic coverage for all, as well as to institute affordable health insurance. “I detect a sense of urgency among my former colleagues in the Legislature on both of these issues,” he said.

Garamendi concluded his speech by saying he believes that conflicting interests that have clashed in the past may now be ready to compromise.

“Many company executives, brokers, agents, and yes, even lawyers, are fair-minded, reasonable people who want to make the system work for the benefit of all California,” he said. “It is in that spirit of cooperation that I assume this office.”

Official reaction to the new commissioner’s remarks was fairly positive on all sides.

Harvey Rosenfield, author of Proposition 103, said he considered Garamendi’s inauguration “Day 1” for his measure. “Voters couldn’t ask for any more than he has committed to,” he said.

Tom Conneely, president of the Assn. of California Insurance Companies, the industry’s leading Sacramento lobby, said he was pleased that Garamendi had talked about a spirit of cooperation. “We are ready to engage in discussions in that spirit,” he said.

Unofficial reaction was a little more skeptical. “I don’t believe he can accomplish one-fourth of what he said he would do,” said one state senator’s aide, who is familiar with the insurance industry. “But knowing Garamendi, I’m confident he will try.”

BACKGROUND

Harvey Rosenfield and Ralph Nader’s Proposition 103, one of five insurance reform initiatives on the 1988 ballot, was the only one adopted. But the next day many insurance companies sued to invalidate it. The state Supreme Court upheld most of the measure in May, 1989, but changed some of its terms, including the standards for awarding rate rollbacks. Then-Insurance Commissioner Roxani Gillespie promised to make rollback decisions for all companies by November, 1989, but left office this week without making a single such decision.