Justices Hear Oral Arguments in Prop. 103 Insurance Case

The California Supreme Court on Tuesday heard oral arguments in a case considered crucial to the fate of Proposition 103, the 1988 insurance rate rollback initiative. Both sides emerged from the one-hour hearing predicting victory, but the session itself did little to reveal the court’s view of the high-stakes case.

The case represents 20th Century Insurance Co.’s challenge to state Insurance Commissioner John Garamendi’s order that the Woodland Hills-based insurer refund $78 million plus interest (a current total of about $120 million) in “excess” 1989 premiums to about 900,000 California policyholders.

Garamendi expressed confidence that the high court will reverse a Los Angeles Superior Court ruling last year that his order breached 20th Century’s constitutional right to earn a fair profit.

“I think it’s clear from their questions that the justices found our procedures are in line with the Constitution,” Garamendi said after the session. He considered the case important enough that he attended the hearing in person, even though Tuesday was Election Day for the primary in which he was a Democratic candidate for governor.

Proposition 103 required a one-year, 20% rollback of property- casualty insurance rates, but the Supreme Court--in a separate 1989 case--ruled that an insurer could not be held to that 20% standard if the result would be “confiscatory” in its particular case.

Much of the subsequent legal wrangling has revolved around how to define confiscatory. 20th Century argues that in its case, anything below a 20% return on equity would be confiscatory.

Garamendi maintains that the 10% rate of return he set for the whole industry is a fair standard and that the more than 400 insurers affected by Proposition 103 should not be entitled to case-by-case exemptions.

Garamendi said a favorable ruling would pave the way for an estimated $1.5 billion in rebates to policyholders, beyond the nearly $800 million that insurers have already rebated.

But in 20th Century’s case, it is doubtful whether even a complete victory for Garamendi would result in anything like $120 million in rebates. The company had more than half its capital wiped out by an estimated $600 million in losses from the Jan. 17 Northridge earthquake, and it is doubtful whether it could afford any substantial rebate today.

In fact, 20th Century’s attorney, Gary L. Fontana, said after the court hearing that if the company had paid the original rebate when ordered, it probably wouldn’t have survived the earthquake.

The small appeals court chamber in the Ronald Reagan State Office Building in Downtown Los Angeles was packed for the arguments, and the overflow of spectators watched on video monitors in a downstairs auditorium.

The justices have 90 days to issue a ruling.

The court typically prepares tentative decisions even before hearing oral arguments, but Fontana said the justices’ questions made him conclude that they are still wrestling with the issues and may take the full 90 days.

Garamendi’s attorney, Michael Strumwasser, said he thought the questions indicated that the justices were comfortable with the issues and would rule soon, perhaps within 30 days.

Fontana said that if 20th Century were to lose on all counts, it would appeal the case to the U.S. Supreme Court.