Auto Club Will Issue Insurance Rebate Checks
The Automobile Club of Southern California Wednesday became the first auto insurer to yield to Insurance Commissioner John Garamendi’s Proposition 103 rebate orders, agreeing to refund about 11% of the 1989 premiums paid by each of its 500,000 policyholders.
The surprise decision by the Auto Club, the state’s fifth-largest auto insurer, came a week after Garamendi ordered 14 major companies to refund $1.5 billion to their customers, and sent shock waves through the insurance industry.
Several big companies issued testy statements in response. But one major insurer, USAA, disclosed Wednesday it was willing to enter into talks with Garamendi on rebate amounts.
Under the plan announced Wednesday, the Auto Club said it will mail out checks totaling more than $80 million to its customers who were policyholders in 1989. The checks will be sent by the end of November, Auto Club officials said.
Garamendi allowed the Auto Club to claim another $24 million already paid in dividends to policyholders as part of the insurer’s total rebates, which will average about $204 per customer.
The Auto Club’s total rebate of $104 million announced Wednesday was less than the $117.9 million Garamendi had ordered the insurer to rebate last week.
But Deputy Insurance Commissioner Steven Miller said Auto Club executives had contended that certain expenses should be taken into account, and that Garamendi agreed to adjust the rebate amount.
A jubilant Garamendi, appearing beside Auto Club President Thomas V. McKernan in a press conference at the company’s Los Angeles headquarters, printed a large “PAID” beside the Auto Club’s position on a chart of 14 companies ordered to make rebates last week.
The commissioner said the Auto Club “deserves great praise,” and he added: “I call upon the consumers of California now to rise up and demand their refunds” from the companies that have not yet agreed to pay them.
Proposition 103 author Harvey Rosenfield celebrated the Auto Club decision at his offices with champagne, but warned Garamendi against further compromises of rollback amounts.
McKernan said the Auto Club agreed to make the refunds because it is time the insurance industry puts the fractious issue of Proposition 103 rollbacks behind and pursue fundamental reform--such as a switch to no-fault insurance, which he said would sharply reduce rate increases in the future.
Garamendi said he believes the broader “auto reform effort is absolutely critical,” and if the Legislature fails once again to enact it, he pledged “to do my best to put an initiative together” for the 1992 ballot that would call for no-fault. He said he believes that Gov. Pete Wilson “will be there too” to support such an initiative.
Proposition 103, passed narrowly by California voters in 1988, originally mandated a one-year 20% rollback of auto, homeowners, commercial and many other insurance rates from 1987 premium levels. The state Supreme Court limited rollbacks to those that did not deprive a company of a “fair rate of return” as calculated by the insurance commissioner.
Garamendi’s rollback orders last week were based on his calculations of the fair rate of return. With three years’ passage of time since Proposition 103 was voted in, the rate rollbacks are being returned to consumers in the form of rebates.
McKernan, under gentle prodding from Garamendi, said he believes other companies should join the Auto Club and give rebates now, rather than continuing a three-year court fight to avoid making the refunds called for by Proposition 103.
Within hours, a USAA spokesman declared, “We’re attempting to meet with the (Insurance) Department to discuss our rollback obligation.”
Several other companies or their lawyers issued curt statements that suggested the Auto Club, a company legally owned by its own policyholders rather than a stock company owned by shareholders, was in a different category that enabled it to make refunds more easily.
“Structurally, the Auto Club is a very different type of organization--owned by its members--than we are,” said 20th Century spokesman Rick Dinon. “Beyond that, we have no comment or reaction.” 20th Century has already asked Garamendi for an administrative hearing to challenge its $106.4-million rollback order.
Farmers spokesman John Millen, noting that Farmers has not yet received a rebate order from Garamendi, remarked acidly, “If the Auto Club feels it charged excessive rates and wishes to refund, that’s up to them. . . . We have charged fair and reasonable rates and therefore we don’t feel we will be subject to any rollbacks.”
Insurance Department aides, however, have said Farmers will eventually get a rollback order, as will many other companies, in a second round of orders planned by the end of the year.
McKernan did not suggest in his announcement that the Auto Club felt it had charged excessive rates. He merely remarked that the company had sufficient reserves to be able to make the refunds without endangering itself financially, and he said the company has no immediate plans to seek a rate increase for the future, although it probably will eventually.
Several knowledgeable sources within the industry suggested Wednesday that a few companies will now follow the Auto Club lead, but that most won’t.
Kent Keller, a lawyer for many of the companies that have been fighting the Proposition 103 rollbacks in court, said, “I would suspect there will be other companies that do something now, but I would be surprised if the gang of 14, now 13, (who got Garamendi’s orders last week) pays.”
Another industry source, who declined to be identified, said that while the Auto Club has not been politically active within the industry and considers itself somewhat apart, its decision to pay up still could have an important effect.
“When a major player pulls his chair away from the table, everybody else will start working around,” he said.
