PERSPECTIVE ON AUTO INSURANCE : Garamendi Dishes Up a Wreck : Prop. 103 languishes as Garamendi plays into industry hands, backing a no-fault idea that can only raise prices.
Insurance Commissioner John Garamendi’s endorsement of no-fault auto insurance is a betrayal, witting or unwitting, of the voter initiative that created his office.
For three years, the insurance industry has waged a campaign to undo Proposition 103 and replace it with no-fault, the industry’s shield against real reform. Garamendi has given insurers a huge boost.
Unlike 103, which cuts rates by limiting the insurance industry’s profiteering, waste and inefficiency, no-fault would confer even greater riches on insurers. Under no-fault, both the accident victim and the person who caused the accident receive compensation, each from his or her own insurance company.
Even the insurance industry’s legendary ability to manipulate numbers cannot conceal the result. The cost of paying both parties lifts rates, sometimes through the roof. This is true even though no-fault allows insurers to restrict compensation to accident victims. Insurers love no-fault because it allows them to demand higher rates from state regulators. Premiums are up to 40% higher in states that have no-fault than in states without it, according to a 1985 federal study.
The industry-sponsored legislation endorsed by Commissioner Garamendi is a particularly deceitful version of no-fault. Insurers say they can sell the policy for $325 per year--for the first year only. (After that, no promises.) This marketing ploy has bought the support of several organizations representing low-income people. But because the proposal offers minuscule benefits--$15,000 in medical care and lost wages--virtually all middle-class motorists would be forced to buy additional liability and collision insurance to protect themselves against drivers with minimum or no coverage. Garamendi’s own internal studies confirm that, for the average policyholder, no-fault will increase premiums.
Insurance companies spent $70 million attempting to defeat Proposition 103 in 1988 and pass a no-fault proposal. The insurers resoundingly lost--75% of the voters rejected no-fault. Ever since, the insurers have tried to win from the politicians what they lost at the ballot box. Since 103 passed, the industry has spent another $21 million (not including campaign contributions or court costs!) to lobby state officials against implementation of Proposition 103 and in favor of no-fault.
Big bucks aren’t the only weapons in the industry’s arsenal. In a cynical politicization of the courts, insurance companies have filed hundreds of lawsuits to prevent Proposition 103’s reforms from taking effect. After tying upthe initiative in legal challenges, the industry now argues that the delays prove 103 can’t work and that no-fault is the solution. Though the voters know who’s to blame, this circular logic has won support from editorial boards and pied-piper politicians. Indeed, Garamendi barely mentioned 103 when he announced that California desperately needs auto insurance reform, and that no-fault is the answer. It was as if 103 had never passed.
Another industry tactic has been to flagrantly disobey key provisions of Proposition 103, improperly raising premiums despite a rate freeze and refusing to sell policies to good drivers. While Garamendi has issued the stringent rate regulations called for by 103, he has done little to punish violators. In June, when Allstate complained that it was the only company obeying 103’s anti-redlining requirement, Garamendi curiously excused Allstate from compliance rather than crack down on the others. Consumers are abused, confused and angry.
That’s exactly what the industry wants. Just three weeks after 103 passed, the insurers’ chief political consultant argued in a secret memo that the industry could eventually undermine 103 and pass no-fault, but “only if events create an unstable environment where the Auto Insurance System is in continuing turmoil.” Garamendi played into the industry’s blackmail strategy when he proclaimed that no-fault was essential to prevent chaos in the auto insurance marketplace next year.
Garamendi’s first eight months in office seemed to signal an auspicious start for the state’s first elected insurance commissioner. High-profile pronouncements against the industry and his rush to protect policyholders of the insolvent Executive Life Insurance Co. suggested an aggressive and ambitious politician who would make good on his promise to make Proposition 103 work. But Garamendi’s sudden reversion to no-fault--without even making it contingent on industry compliance with 103--raises serious doubts about his true intentions.
The voters elected Garamendi to deliver Proposition 103’s 20% rollback, elimination of territorial rating and other reforms. We’re still waiting.
