Wave of high fees forecast
Consumer advocates warned Thursday that a legal victory by the Automobile Club of Southern California could spur other insurers to charge customers steep fees for paying their bills in installments.
The issue, the subject of several lawsuits, has prompted a bill in the state Legislature and has come under scrutiny from the California Department of Insurance.
Critics say the installment fees are sometimes not fully disclosed to policyholders until they get a first bill. The Auto Club charges the highest installment fees, an amount that could increase the cost of a $2,000 annual premium by more than $100.
The Auto Club’s fees run as high as 18% of a policyholder’s unpaid balance. State Farm Mutual Auto Insurance Co., Farmers Insurance Group and other major insurers charge more modest, flat fees. USAA, the state’s ninth-largest auto insurer, collects no fees from policyholders who pay in installments.
On Wednesday, the Auto Club prevailed in a challenge to its installment fee plan when the California Supreme Court refused a plaintiffs’ petition to review an appeals court decision.
The 4th District Court of Appeals ruled in March that the Auto Club’s installment fees represented “the time value of money” and were not premiums subject to regulation by the Department of Insurance. Rather, the fees compensated the insurer for income it would have received if the customer had paid a lump sum and the insurer had been able to use or invest that money.
Attorney Lauren Willis, who teaches consumer law at Loyola Law School in Los Angeles, said the Auto Club decision could send installment payment fees “spiraling out of control,” much as an array of unregulated fees has raised the cost of using credit cards in recent years.
Consumers can have difficulty comparison-shopping and “finding out what the real price is going to be” when insurers tack fees onto the basic premium, Willis added.
The Auto Club, the state’s fourth-largest auto insurer, says it has been forthright with its 1 million customers when it comes to explaining installment fees. The club has the right to collect the full premium from a customer at the start of the policy, and if someone chooses to spread out payments, there’s an additional fee, said Alice Bisno, the club’s vice president of government affairs.
Two other major insurers, Farmers and State Farm, could decide to switch to the Auto Club percentage-fee system if they lose pending lawsuits challenging the legality of their current system of charging flat fees for each installment payment, said Timothy Blood, who represents policyholder plaintiffs in both cases.
Harvey Rosenfield of the Foundation for Taxpayer and Consumer Rights in Santa Monica said, “I predict that we’ll see abuse crop up everywhere.”
Rosenfield said he now was looking to California Insurance Commissioner Steve Poizner to use his regulatory powers to crack down on insurers, if he deems their installment payments excessively high.
“Eighteen percent appears to me to be excessive,” said Gary Cohen, the commissioner’s general counsel. Cohen suggests that his department still has the authority to limit installment fees when it approves insurance companies’ rate proposals. That position is likely to be challenged in court by insurers, now that the Supreme Court has declined to review the Auto Club case.
Meanwhile, the insurance industry is backing a bill that would render the ongoing lawsuits moot and perhaps prevent insurers from losing millions of dollars in legal judgments.
Trade groups representing most major insurers want legislators to pass a measure specifying that installment fees are not premiums and, therefore, not subject to state regulation. The bill won easy passage from the Senate Banking, Finance and Insurance Committee. However, it stalled in the Rules Committee after opposition arose from consumer groups and trial attorneys.
But the bill’s author, Sen. Mark Ridley-Thomas (D-Los Angeles), says his measure is intended to ensure that people who buy expensive insurance policies can continue to pay on installment plans. He said he also wanted to clarify the “inconsistency and uncertainty” surrounding the legality of installment payments and protect insurers from lawsuits.
The issue was at the center of a series of lawsuits filed against insurers in 2004 by San Diego firm Lerach Coughlin alleging that the companies violated state law by not including the cost of installment payments in premiums quoted to customers.
The suits also contend that insurers double-charge their customers by folding the cost of administering an installment program into rates approved by the Department of Insurance; then, they add a second fee on policyholder bills for performing that same service.
In a San Diego case now under appeal, a state trial court judge ordered Farmers to pay $115 million in damages.
Insurance companies should be limited to charging nominal fees for people who pay their bills in installments, said Amy Bach, executive director of United Policyholders, a San Francisco consumer group.
“People have to buy this product,” Bach said. “If they can’t afford to pay in a lump sum, insurance companies shouldn’t get to charge whatever usurious installment payment they want just because they have people over a barrel.”
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By the numbers
Auto insurers charge different fees if you pay in installments rather than a lump sum. Here’s a comparison of total costs for a $2,000 premium that is spread over the maximum number of payments allowed by the insurer:
Automobile Club of Southern California
Fee: 18% on first $1,000 of outstanding balance, 12% on the remaining balance; spread over 9 payments
Total cost: $2,000 policy + $102 (18% interest on first $1,000, 12% on remaining balance ) = $2,102
Farmers
Fee: $5 to $8 per installment
Total cost: $2,000 + $60 ($5 x 12 payments) = $2,060
State Farm
Fee: $1 to $3 per installment
Total cost: $2,000 + $12 ($1 x 12 payments) = $2,012
Allstate
Fee: $2.50 to $3.50 per installment
Total cost: $2,000 + $30 ($2.50 x 12 payments) = $2,030
21st Century
Fee: $4 per installment
Total cost: $2,000 + $32 ($4 x 8 payments) = $2,032
USAA
Fee: No fees for installment payments
Total cost: $2,000
Sources: Companies surveyed
