Amwest Is Focus of Insurance Reform Battle : Litigation: Surety bond firm, with ex-Gov. George Deukmejian playing a role, goes before the state Supreme Court in bid to win exemption from Proposition 103.
After more than five years of legal wrangling, an obscure company is taking center stage in the high-stakes battle over insurance reform in California.
Since voters passed Proposition 103 in 1988, auto and property insurance heavyweights such as 20th Century and State Farm have been the most visible challengers of the measure that sought to rebate 20% in premiums to policyholders. Meanwhile, the Proposition 103 case of Amwest Insurance Group Inc., which deals in the esoteric world of surety bonds, got little attention.
But last month, the California Supreme Court agreed to hear the Woodland Hills company’s suit, which seeks to exempt the surety business from Proposition 103. Amwest has become the litmus test for the 120 or so firms in the state that write surety bonds, although it may be a year before the court reaches a decision in the Amwest case.
Amwest’s case has even taken on political overtones. Former Gov. George Deukmejian, a Republican who appointed five of the seven Supreme Court justices and is now a lawyer in private practice, is working for Surety Co. of the Pacific (SCP), based in Northridge. In January, Deukmejian filed a letter on behalf of SCP, which is an “amicus,” or friend of Amwest, before the court agreed to hear the Amwest case.
“This case is starting to pick up momentum like a snowball in terms of notoriety,” said Larry Rothstein, an attorney for Amwest. “I think it’s going to be one of the most watched cases in recent memory.”
Richard H. Savage, who founded Amwest and now runs the company with his son John, is a bit wary of the notoriety. He estimates that the case has so far cost Amwest about $200,000 in legal fees. But the 74-year-old company chairman put the legal case simply: “It’s economic survival.”
Surety insurance is when a contractor buys bonds from a company like Amwest as a guarantee that a contract--whether to paint a post office or build an office complex--will be completed. Amwest generally charges a premium of 1.5% to 2.5% of the bond amount. If the contractor can’t finish the job, the surety company has to either give the contractor more money or hire another one.
According to the Department of Insurance, the Proposition 103 initiative could require those surety companies operating in California to refund retroactively up to $100 million in premiums to customers. Amwest, which did about 28% of its business in the state in 1993, questions that figure.
John Savage, Amwest’s president, figures that the maximum surety industry rebate is $60 million. As for Amwest, “we don’t want to write a million-dollar check,” he said.
Whatever the exact liability, the Savages claim that their bottom line would be seriously affected. Once losses and expenses are added up, the company’s profit margin is only 4 cents for every $1 of premiums. “If you’re going to reduce gross income by 20%, we’ll be losing money,” Richard Savage said.
With their 40% ownership of Amwest’s stock, the Savage family also has a personal interest in the outcome of their Proposition 103 case. At a recent price of $14 a share, their Amwest stake is worth about $13 million.
From the beginning, the crux of Amwest’s lawsuit has been that surety companies should not be liable to pay anything in the first place. Surety firms, the plaintiffs argue, should have been exempted from the initiative like other forms of business insurance such as workers’ compensation insurance.
With Amwest and four other surety firms lobbying, the Legislature passed a bill in 1990 amending Proposition 103 to exclude surety from its provisions. Voter Revolt, the consumer group that sponsored the initiative, stepped into the case and countersued Amwest. The amendment, the group argued, was unconstitutional as it did not “further the purposes” of Proposition 103.
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In January, an appeals court agreed with Voter Revolt and struck down the 1990 surety amendment. Now the Supreme Court has agreed to review that decision and, according to legal experts, the key issue will be whether the Legislature has the constitutional authority to tinker with an initiative that has already passed.
“If the (state) Supreme Court reverses the lower court . . . within a year, all of 103 will be repealed,” predicted Voter Revolt’s Harvey Rosenfield, chief author of the measure. Saying it is outraged by Deukmejian’s involvement in the case, Voter Revolt is considering “options” to ensure an impartial review.
Richard Savage went into business quite late in life after surviving fights of a different sort. A radar controller in the South Pacific during World War II, he went on to work in law enforcement, fighting crime with the Palo Alto police force, California Highway Patrol and Justice Department’s narcotics force.
He founded Amwest in 1975 as a bail bond agency, a field he was familiar with from his law enforcement days. But he soon diversified into other forms of surety bonds, notably those required by contractors working for government agencies.
In 1988, after several years of rapid growth, Amwest was writing premiums of $36 million, while profits had climbed to $3.6 million, up from $258,000 in 1980. The company, which went public in 1985, was well on the way to opening offices in all 50 states.
Since those heady days, growth has slowed.
In 1993, Amwest grossed $57.7 million in premiums and made a profit of $3.8 million, including its investment income. In the extremely fragmented surety market in California, it is an undisputed leader. According to the A. M. Best rating company, it was the third biggest surety firm in the state in 1992 with a market share of 5.3%, trailing only Reliance and Fireman’s Fund.
By comparison, SCP wrote $6.8 million in premiums in 1992 in California, its only market, giving it a market share of 2.2%. The company mainly writes bonds that contractors need so they can be licensed in California.
When the measure rolling back insurance rates was passed by a narrow margin in November, 1988, Amwest wasted no time in challenging it.
“We filed suit the day after the election,” John Savage recalled. “We knew the bill had a pretty good chance of passing and the lawsuit was prepared months in advance.”
According to some observers, it was a typically bold step. “If Amwest hadn’t done it, it’s problematical any (surety firm) would have done it, at least not that early,” said Gerry Desmond, a lobbyist for the Assn. of California Surety Cos.
As the current case makes its way through the Supreme Court, Amwest claims that it is trying to steer clear of the political fray. Both Savages stressed that they want the case decided “on a rational basis” and that it was Surety Co. that brought Deukmejian on board--SCP’s chairman, William Erwin, was a leading contributor to the former governor’s campaigns.
“If Surety Co. wants to employ their own counsel, there’s nothing we can do about it,” Richard Savage said. “We had no input at all.”
But Amwest is still happy to serve as point man, however controversial the case may get. “It has to do with being in control of your fate,” John Savage said. “We control the actual litigation with our attorneys. We know the points we want to get heard are being heard.”
“The only downside,” he added, “is we end up paying more money” to lawyers.
