State High Court OKs Insurance Reform Rules : Prop. 103: Justices clear way for more rebates to policyholders. But industry challenges could delay refunds.


The California Supreme Court on Thursday unanimously upheld Insurance Commissioner John Garamendi’s rules for enforcing Proposition 103, clearing the way for possibly $1 billion in additional refunds to an estimated 14 million insurance policyholders.

The 7-0 decision by the largely conservative court rejected a constitutional challenge to Garamendi’s rules by Woodland Hills-based 20th Century Insurance Co. and affirmed the commissioner’s wide-ranging authority to set rates as he sees fit and apply a single rate-setting standard to all companies.

But California policyholders may not get their rebates immediately, in part because insurers could contest the amounts that Garamendi orders them to pay--a process that could drag on for months. Also, Garamendi’s successor--to be elected in November--could change the rules.

Thirty-five companies have voluntarily paid more than $800 million in rebates to 7 million customers, with individual rebates from some of the biggest companies averaging between $100 and $300 per policyholder.


Among the holdouts are two of the state’s three largest insurers: State Farm Mutual Automobile Insurance Co., which has been ordered to rebate $235 million, and Farmers Insurance Group, which has not received a specific rebate order.

Thursday’s ruling reversed a February, 1993, decision by a Los Angeles Superior Court judge. The higher court’s ruling is the biggest milestone in the legal fight that began Nov. 9, 1988, one day after voters approved Proposition 103, which called for auto, homeowners and commercial property insurers to roll back their rates by 20% from 1988 levels and refund one year’s “excess premiums” to consumers.

“What we have here is a unanimous decision by a court that is not exactly renowned nationwide for its wild-eyed, liberal interpretations in property rights cases,” said Fredric D. Woocher, one of Garamendi’s outside lawyers in the case.

Woocher said that the strength of the ruling and its reliance on federal precedents diminishes the likelihood that 20th Century could successfully appeal to the U.S. Supreme Court.


Company President James Curley said 20th Century has not decided whether to appeal.

About 670 insurers in the state have not yet paid rebates, with their obligations totaling a combined $1 billion, according to Garamendi’s office. Insurance industry observers voiced skepticism that the remaining rebates will ultimately reach anywhere near $1 billion.

“Let’s put it this way: I wouldn’t spend it,” said Tom Aceituno, chief counsel for the Assn. of California Insurance Companies, the industry’s oldest and largest trade group in California.

Aceituno noted that the companies that have voluntarily settled with Garamendi and paid their rebates ended up paying far less than what the commissioner had originally ordered. Allstate Insurance Co. paid $110 million in rebates, less than half the $243 million in Garamendi’s 1991 order. Aetna, ordered to pay $137 million, rebated $31 million.


Thursday’s ruling, written by Justice Stanley Mosk, requires 20th Century to pay California customers $119 million in auto and homeowners premium refunds, plus interest. But 20th Century, crippled by an estimated $685 million in claims costs from the Jan. 17 Northridge earthquake, may be unable to afford that much.

Garamendi acknowledged the carrier’s financial problems in a news conference Thursday and said that his staff has begun reviewing “how and when they will be able to pay.”

He added: “I’ll promise you this: The policyholders will get their money before the shareholders.”

Stock of the insurer’s parent company, 20th Century Industries, lost 50 cents a share to close at $16.375 Thursday in trading on the New York Stock Exchange.


Garamendi said that most other insurers have set aside reserves to cover their rebate liability and he doubted that any carrier’s financial health would be threatened by paying the rebates.

He also said he would quickly set his sights on the biggest Proposition 103 holdout: State Farm. As soon as Thursday’s decision takes effect--30 days from now--Garamendi said he would have State Farm representatives in a hearing room to determine their final rebate amount.

State Farm indicated Thursday that the hearing may be contentious.

“We still believe that we owe no rollback, even under the terms of the commissioner’s regulations,” staff attorney Judith Mintel said. “Our greatest concern is how much of this ruling will apply in the future.”


What State Farm and other carriers find ominous in the decision is that it upholds the commissioner’s right to focus on insurers’ profits rather than their prices. The court said Garamendi’s approach in ordering rebates--limiting carriers to a 10% maximum rate of return--did not amount to confiscation, in violation of the 5th Amendment’s “taking” clause.

If Garamendi or his successors extend that principle to future rate-setting by putting an across-the-board cap on insurers’ allowable profits, it would dampen competition, insurance industry observers say.

Twentieth Century has long been known for having the cheapest rates--and some of the highest profits--of any large California insurer. The company says the secret is paring down overhead by selling directly instead of through a large and expensive sales force.

But if such practices are not rewarded with higher profits, what is the point of trying so hard to keep costs down, asked Gary Fontana, a lawyer for 20th Century. “If you punish people for being efficient, they will go elsewhere.”


Harvey Rosenfield, author of Proposition 103, said “the question is not whether 20th Century was the low-cost insurer,” but whether they should have had even lower rates.

Rosenfield, who joined Garamendi in the news conference at the Insurance Department’s Downtown Los Angeles headquarters, said: “You’re going to hear a lot of complaining and threats that California is once again a bad place to do business.” But ultimately, he said, few companies will abandon the largest insurance market in the United States.

The mechanism for implementing Proposition 103 is in Garamendi’s regulations. But because they are regulations, not laws, his successor elected in November will have wide latitude to change them, which could delay rebates or affect the amounts paid.

State Sen. Art Torres (D-Los Angeles), the Democratic nominee to succeed Garamendi, said he supports Garamendi’s approach and would continue it if elected. Torres said that in future rate-setting, he would try to keep insurers from passing on to policyholders such expenses as political contributions and punitive damages assessed in lawsuits.


Torres’ opponent, Assemblyman Charles W. Quackenbush (R-Cupertino), said: “The industry must stop fighting 1988’s battles and move forward.” He urged insurers to “sit down immediately” with Garamendi, resolve the remaining rollback questions and send out the checks.

He said his administration would focus on the factors that drive auto insurance costs upward, such as insurance fraud, uninsured motorists and unreasonably high court verdicts.

CONSUMER IMPACT: What the ruling means for policyholders. D1