Mercury General Accused of Using Deceptive Ads
State regulators are accusing subsidiaries of Mercury General Corp., California’s No. 4 auto insurer, of defrauding consumers by misrepresenting its premiums, widely advertised as low.
An enforcement action filed late Tuesday by the Department of Insurance is the latest twist in a long-running legal and legislative battle over a disputed sales practice that has already landed Mercury in hot water.
The state alleges that three Mercury subsidiaries violated insurance laws between July 1996 and April 2003 by converting most of their company agents in California into independent brokers. The brokers could charge their own service fees that pushed premiums above levels approved by the Insurance Department, the state alleges, violating state law.
The fees, which industry experts say have ranged from $15 to $200 per policy, meant Mercury was claiming in advertisements that its premiums were lower than they really were, regulators allege.
Mercury Chief Executive George Joseph denied the state’s charges, contending the firm had always been truthful when explaining its rates.
“People who purchase a Mercury product and pay a fee do it because they are getting a lower rate,” he said. “If a broker is going to save them $200 a year and is charging them a $100 fee, that’s a good buy for them.”
The Insurance Department’s action follows an April 2003 ruling by a San Francisco County Superior Court judge that found that Mercury broke the law by blurring the line between agents and brokers. Mercury is appealing the ruling while backing a bill in the Legislature that could help clarify the issue.
The dispute over how to classify brokers and agents is about more than semantics and could spell the difference between proper marketing and alleged misrepresentation of the actual premiums paid by car owners, the Insurance Department said.
According to state insurance law, agents are supposed to represent the company, and brokers represent buyers and shop around for the best deal from numerous insurers.
“There is a legal test to determine what is a broker and what is an agent,” said Gary Cohen, the department’s top lawyer. “My understanding is that Mercury had a lot of agents and started calling them brokers, but nothing changed in respect to what they were and what their function was.”
Mercury, by advertising lower rates but not disclosing brokers’ fees, gave itself an advantage over the competitors it featured in ads, the state said.
“By not representing the broker fees in advertisements, [Mercury] willfully misrepresented the actual price insurance consumers could expect to pay for insurance ... and thus deceived and misled consumers,” the department said in its complaint.
The complaint, which orders Mercury to appear at an administrative hearing, asks for a civil penalty of $10,000 for every instance that the company used comparative advertising in a newspaper or a mailer.
Pending an appeal, Mercury is complying with the April 2003 court ruling, which came in a lawsuit filed by private attorneys under the state’s unfair competition law. Mercury changed its print ads to notify potential customers that brokers may charge fees and has given brokers the option of becoming agents.
Mercury’s general counsel, Douglas Hallett, contends the company has no control over whether brokers charge fees. However, he said the extra charges sometimes made Mercury’s premiums more expensive than those of rivals selling through agents or directly to the public by phone or the Web.
Insurance Department figures show that a middle-aged Westwood couple with clean driving records and driving a minivan would save $105 with Mercury compared with other leading insurers, even after paying a $75 broker fee for a six-month policy. But the same couple would pay $32 more if they lived in Santa Monica.
