Rebater Shunned, Garamendi Says

State Insurance Commissioner John Garamendi on Thursday accused five life insurance companies of illegally refusing to do business with an agent who rebates part of his commissions to consumers.

The action represents Garamendi’s first attempt to enforce the law that made such discounting legal in California. Rebating became legal under one of the provisions of Proposition 103, the 1988 insurance rate rollback referendum.

Proponents of rebating say that if the practice were widespread, it could save California consumers as much as $600 million a year on life insurance alone.

But they charge that the industry so effectively discourages rebating that it remains virtually unknown in California more than four years after it became legal.

The insurers Garamendi cited Thursday are Metropolitan Life Insurance Co., Prudential Insurance Co. of America and three units of Transamerica Life Cos.: Transamerica Life & Annuity Insurance Co., Transamerica Occidental Life Insurance Co. and Transamerica Assurance Co.

Garamendi said the companies violated the state’s Unfair Practices Act by refusing to do business with San Diego agent Mark K. White because of his policy of rebating 50% or more of his sales commissions.

The companies were ordered to appear before an administrative law judge in San Diego on Aug. 16 to determine whether their actions were “unfair and/or deceptive.”

The insurers declined to comment specifically on White’s case but said there are pitfalls involved in rebating.

James M. Jackson, a Transamerica Life vice president, said the company discourages its agents from rebating because of potential tax and discrimination problems. Policyholders who receive rebates may be required to pay taxes on them, he said.

Moreover, under the Unfair Practices Act, it is illegal for an insurer to sell differently priced policies to consumers who represent the same level of risk, Jackson said. If one person buys a policy at full price and a second person with identical risk factors buys a similar policy at a discount, the first person might be considered a victim of discrimination, he said.

Transamerica has been discussing such issues with the state Insurance Department for four years and was surprised at Thursday’s action, Jackson said.

“We felt the issue was taken care of,” he said.

“We are aware of the California law and we think we are complying,” a Prudential spokesman said.

Metropolitan issued a statement that said, in part: “Rebating is clearly not in the consumer’s best interest. Among other things, rebating means that the consumer’s insurance premiums will depend on the particular agent selling the policy . . . (and) on whether the consumer is in a position to bargain for a rebate.”

Florida is the only other state that permits rebating. Most states outlawed rebating around 1900 because large insurers were using the practice to drive smaller firms out of business.