Judge Rejects Garamendi’s Regulations for Prop. 103 : Insurance: Ruling is sharp setback to commissioner. Rebates are likely to be smaller and further delayed.

In a stunning setback for Insurance Commissioner John Garamendi, a Superior Court judge on Friday rejected his regulations for implementing Proposition 103, the sweeping insurance rate rollback initiative, ruling that they are unconstitutional.

The decision, in a challenge by 20th Century Insurance Co. of Woodland Hills, means that the bulk of the rebates that consumers voted themselves in the 1988 initiative will be further delayed and may be far smaller than expected. It also throws into question the state’s ability to regulate rates.

Judge Dzintra I. Janavs in Los Angeles Superior Court ruled that Garamendi lacked the authority to limit all insurers to a 10% maximum rate of return, which was the heart of his plan for putting Proposition 103 into effect. Instead, Janavs, in her 85-page decision, agreed with 20th Century that each insurer is entitled to an individual hearing to determine its fair level of profit.

Declaring, “I was not elected to surrender,” Garamendi said he would appeal the ruling to the California Supreme Court.

“If the decision in the 20th Century case is allowed to stand, it won’t be until some time in the 21st Century, if ever, that consumers will see their 1989 refunds,” he said in a statement Friday night.

“This decision effectively guts Proposition 103’s control over premiums, which was the whole point of the initiative,” said a shocked Harvey Rosenfield, whose Voter Revolt organization spearheaded Proposition 103 against intense opposition from the insurance industry.

Garamendi swept into office in 1991 as the state’s first elected insurance commissioner largely on the strength of his promise to force insurers to comply with Proposition 103, which called for a 20% across-the-board reduction in property and casualty insurance rates, plus rebates of any excessive premiums earned between Nov. 8, 1988, and Nov. 8, 1989.

In a lawsuit brought by insurers, the California Supreme Court ruled that the initiative was constitutional but that insurers were entitled to a reasonable return.

Garamendi interpreted 10% as being fair and drafted regulations to implement the initiative. In October, 1991, he froze insurance rates and ordered 20th Century and 13 more of the state’s largest insurers to pay rebates totaling more than $1.5 billion to policyholders. So far, three companies have complied with the order and returned about $200 million.

The order was challenged by 20th Century, however. It is the first insurer to get this far in the legal process.

Marketing its policies directly to consumers, without sales agents, 20th Century is a low-overhead, high-profit insurer. Its profit ratio has averaged more than 20% over the last decade, peaking at 32.5% in 1989.

As one of the country’s most efficient insurers, 20th Century argued that it was unconstitutionally penalized by Garamendi’s 10% profit cap.

Under any regulatory scheme, companies “have a right to a rate of return that you could have earned in an investment of similar risk,” said Wynne S. Carville, a lawyer for 20th Century.

But when Garamendi adopted the 10% profit cap, Carville said, zero-risk U.S. Treasury bills were yielding 8%, and low-risk public utility companies were earning 13% profits. Insurance companies in general are riskier than utilities, he added, and 20th Century in particular--confined to one state and two lines of coverage--is riskier than the average insurer.

Therefore, 20th Century argued, any formula that limited it to a return that was even lower than a low-risk utility was unconstitutionally confiscatory.

Janavs agreed, saying that Garamendi’s formula was inconsistent with the Supreme Court’s ruling entitling insurers to a reasonable rate of return.

In a statement Friday, 20th Century said it was “pleased that this judicial review has found inequity in the application of an average industrywide rate of return to 20th Century. . . . We have contended that a fair rate of return cannot be derived from a broad-based national average because of the company’s extremely fast rate of growth, low expense ratio and highly efficient operations.”