Ruling Could Affect Assigned-Risk Hikes : Insurance: The Court of Appeal says firms have no right to make a profit or recover costs on those auto policies. An 85% rate increase was granted last September.

A state Court of Appeal decision holding that insurers are not entitled to make a profit--or even necessarily recover costs--on assigned-risk auto policies has raised questions about the validity of an average 85% assigned-risk rate increase granted last September by then-Insurance Commissioner Roxani Gillespie.

Steven Miller, an aide to new Insurance Commissioner John Garamendi, said Monday the ruling means that Garamendi could lower Gillespie’s rate increase, although there is no indication that he will do that.

Last September’s rate increase, which sent the minimum state-required liability insurance soaring to at least $1,000 annually in urban areas, has caused thousands of additional drivers to abandon insurance, insurers have said. Applications for assigned-risk policies have declined since last fall from 5,500 a day to 1,000.

Under the assigned-risk system, drivers who are unable to obtain coverage in the regular market are assigned to companies in proportion to each company’s share of the statewide auto insurance business. Insurers say that even with the huge rate increase, they continue to lose money on such policies, passing on the costs in some instances to regular policyholders.

The Court of Appeal decision, rendered last week by Justices Earl Johnson and Mildred Lilley, with Justice Fred Woods concurring in a separate opinion, explicitly states that regulators are authorized to allow regular policyholders to subsidize assigned-risk policies, making up any shortfall the insurers incur in handling assigned risk. The court said it is only a company’s entire business that is entitled to a fair rate of return.

Two bills are pending in the Legislature that would require the assigned-risk system to break even. If passed, these would probably require even higher assigned-risk prices.

It would appear that subsidies for assigned-risk customers make all other auto insurance policies more expensive, but that is not necessarily the case. If assigned-risk rates are so high that many drivers drop that insurance, other customers end up paying more in uninsured motorist premiums. Either way, the regular customer may pay.

The Court of Appeal decision was strongly criticized by Stephen J. Feely, past president of the assigned-risk governing board, who charged that it allows Garamendi “unfettered discretion in assessing hundreds of millions of dollars in a new tax to be paid by good drivers throughout the state.”

The court expressed no sympathy with insurers’ assertions that it took took too long--two years--for Gillespie to grant the rate increase.

“If the blame for delay in the rate-making procedures lies anywhere, it lies with the insurance industry, which has deluged the commissioner with lawsuits challenging virtually every step taken toward the implementation of Proposition 103,” Johnson’s opinion said.