Justices to Review Assigned-Risk Insurance Ruling

The state Supreme Court, entering a high-stakes legal row involving Proposition 103, agreed Wednesday to decide whether insurers may impose a major rate increase on assigned-risk auto policies to cover escalating costs of the program.

In a brief order, the justices said they will review a ruling by a state appeals court overturning a 112% increase ordered by a Los Angeles judge to meet a $600-million annual deficit in the assigned-risk plan, the last resort for drivers who cannot obtain regular insurance.

The appellate panel said state authorities could require insurers to absorb the costs of the assigned-risk program or pass them on to regular policyholders. The panel acknowledged that insurance companies are entitled by law to a “fair rate of return.” But, it said, that means a profit on an insurer’s overall business--not on the assigned-risk plan.

The insurance companies appealed to the high court, contending that it was illegal to force insurers to impose inflated rates on regular policyholders to subsidize the program. Proposition 103, the insurance reform initiative adopted in 1988, bars rates that are “excessive, inadequate or unfairly discriminatory,” the insurers argued.

Wednesday’s order granting the review was signed by Chief Justice Malcolm M. Lucas and Justices Edward A. Panelli, Armand Arabian and Marvin R. Baxter--the minimum number for review by the seven-member court. No date for hearing arguments was set.

The high court’s intervention set the stage for an important test of the authority of the state insurance commissioner. It came as the Legislature is considering proposals that would make the assigned-risk program self-sustaining and as insurers, in a more recent case, are asking for an even higher rate increase of 160%.

Meanwhile, an interim increase of 85% in assigned-risk premiums granted last year by then-Insurance Commissioner Roxani Gillespie will remain in effect. As a result of that increase, premiums have exceeded $1,000 a year in some urban areas and applications for assigned-risk policies have declined substantially. The new commissioner, John Garamendi, has left the increase intact--but if the high court gives the commissioner broad power, he could set a different rate, his attorneys said.

Wednesday’s action was hailed by Stephen J. Feely, chairman of the California Automobile Assigned Risk Plan Advisory Committee. Feely called the appellate court ruling “one of the most unfortunate examples of judicial legislation in California history”--one that placed a “hidden tax” on millions of motorists to subsidize low rates for bad drivers in the assigned-risk program.

Fredric D. Woocher of Santa Monica, an attorney for Garamendi, said that although the commissioner supported the appellate decision, he welcomed high court review of the issue. “We are confident that when the court has all the information it will uphold the commissioner’s authority to shape assigned-risk rules and rates in a way that fulfills the law’s purpose,” Woocher said.

Mark Savage of Public Advocates Inc., representing a coalition of minority and low-income groups, said the coalition would seek to intervene in the case to urge the high court to bar high rates for program participants. “Otherwise our clients will not be able to afford any insurance,” Savage said. “And then what’s going to happen is that middle- and upper-class drivers will have to pay more through uninsured-motorist rates. . . . Subsidizing the (assigned-risk) program is better than paying the full bill.”

Under the assigned-risk plan, all state auto insurers are required to accept a portion of the drivers who cannot obtain regular coverage. For many years, premiums imposed on high-risk drivers under the plan exceeded those in the regular market. But in recent years, regulators have refused rate increases to cover growing assigned-risk program costs and the plan has operated at a large deficit. At one time, about 1 million drivers participated in the plan--but that number has reportedly dropped sharply. About 13 million motorists have regular coverage.

In 1989, insurers asked Gillespie for the 112% increase in assigned-risk rates. Gillespie denied the request, saying that insurers were not entitled to break even in the program and that such an increase would make coverage unaffordable for the plan’s low-income participants.

Los Angeles Superior Court Judge Miriam A. Vogel, now a state appellate justice, ordered the 112% increase, saying that the state must allow rates that would cover costs. A state Court of Appeal in Los Angeles, in an opinion by Appellate Justice Earl Johnson Jr., set aside the increase in April, saying that there was no legal requirement that the program be self-sustaining.

In their appeal to the high court, lawyers for the insurers argued that the voters, in passing the sweeping provisions of Proposition 103, intended to reduce insurance premiums through cost-based rates. Under the appellate ruling, either policyholders or insurers would be forced to subsidize the assigned-risk program, resulting in higher and non-cost-based rates, they said.

Attorneys for Garamendi urged the high court to leave the appellate ruling intact. Gillespie properly considered the affordability of assigned-risk coverage, the lawyers said, and approving a sharp increase in rates would result in more and more drivers simply going without coverage.