Legislature Can’t Limit Initiatives, Court Says : Law: State justices say lawmakers acted illegally in exempting some insurance companies from Prop. 103.

Curtailing the Legislature’s power to weaken voter initiatives, the California Supreme Court ruled Thursday that state lawmakers acted illegally by exempting some insurance companies from regulation under 1988’s Proposition 103.

Rejecting arguments by former Gov. George Deukmejian, who had appointed four of the justices, the high court said the Legislature cannot amend the insurance reform initiative under the guise of clarification except in ways that would further the measure’s purpose.

“The voters intended that Proposition 103 have broad applications to various types of insurance,” the court wrote. “Limiting the scope of the initiative by excluding some forms of insurance would not further the purposes of Proposition 103’s broad reform. . . .”

The unanimous ruling paves the way for about $100 million in premium rollbacks to companies and individuals with surety company policies. These companies, which provide completion bonds to movie studios, construction contractors and others as well as offering bail bonds, performance bonds and license and permit bonds, will now be regulated under Proposition 103.

But the court’s decision will have repercussions beyond the insurance industry. The justices sent the Legislature a message that it cannot tinker with initiatives unless voters clearly authorized the changes.

“This goes way beyond Proposition 103,” said Santa Monica lawyer Michael J. Strumwasser, who argued in support of the initiative for Insurance Commissioner Charles Quackenbush. “What this means is that initiatives that have been passed and that will be passed in the future are not vulnerable to Legislative reversal.”

The court, in an opinion written by Justice Ronald M. George, said that upholding the Legislative exemption would have frightened future initiative sponsors into adding language forbidding any amendments by the Legislature.

Proposition 103 contained a provision allowing the Legislature to make changes as long as they reflected the intentions of the measure. Such provisions, included in most initiatives, are intended to give the Legislature the opportunity to make minor, technical corrections of drafting errors or respond to changed circumstances.

“In the absence of effective judicial review,” George wrote, “drafters of future initiatives might well feel compelled to withhold such Legislative authority completely, lest even the most limited grant of authority to amend be used by the Legislature to curtail the scope of the initiatives.”

Consumer activist Harvey Rosenfield called the court’s decision the “sweetest victory of all.” A trial court had upheld the Legislature’s right to exempt certain insurance companies from regulation, and a Court of Appeal had reversed that ruling.

Consumer activists were nervous when the Supreme Court agreed to review the case, fearing the conservative justices might clear the way for the Legislature to pass even more amendments that would weaken consumer protections in the measure.

“‘The Supreme Court’s decision sends a message to the Legislature loud and clear: Keep your dirty hands off the people’s initiative process,” Rosenfield said.

The court’s decision appears to have invalidated another Legislative exemption that was not at issue in the case. In addition to exempting surety companies, lawmakers removed from regulation financial guaranty insurance, which is purchased to protect against interest rate movements and other financial risks, and credit insurance against unusual high default rates.

Rosenfield had tried unsuccessfully to persuade four justices to abstain from the case because they were appointed by Deukmejian, who as a private attorney was representing a surety company as a friend of the court. Deukmejian also signed the law granting surety companies the exemption.

The insurance industry also hired former Supreme Court Justice Otto Kaus, who now practices in Los Angles, to prepare the written arguments given before his former colleagues.

Jubilant over the unanimous ruling, Rosenfield praised the justices he once accused of conflict of interest for giving the “initiative process a very powerful shield of protection.”

But Los Angeles lawyer Curtis A. Cole, representing Amwest Surety Insurance Company in the case, said the industry does not even know who should receive the refunds.

He cited the case of a contractor who remodels a house and includes in his cost a completion bond. Does the contractor receive the refund, Cole said, or the homeowner who paid for it as part of the remodeling?

“Who gets the benefit of the rollback now?” he asked. “The surety industry is going to have to sort this thing out.”

He also complained that the court failed to establish a clear standard it intends to use to review Legislative amendments to ballot initiatives. The high court has suffered from strained relations with the state Legislature, which controls its funding, and the justices seemed anxious to show they were not usurping Legislative authority.

“I think the court went out of its way” to avoid antagonizing lawmakers, said Strumwasser, Quackenbush’s lawyer.

If upheld by the court, initiative sponsors probably would have discontinued allowing for Legislative amendments, he said. That would have made it impossible to fine-tune laws without going to voters a second time.

California is the only state in the country with a Constitution that prohibits Legislative amendments of ballot measures unless authorized by voters in the measures themselves.

Richard Wiebe, a spokesman for Quackenbush, declined to estimate the amount of rollbacks expected. But he called the decision a “victory” for consumers and the initiative process.

Rosenfield noted that much will depend on how tough Quackenbush wants to be in seeking rollbacks. “It will put Quackenbush in a funny position,” the consumer activist said. “If he sides with the insurance industry, he hurts businesses that have to purchase this kind of insurance and who are overcharged for it.”