California Department of Insurance Notice of Noncompliance v. Mercury Insurance Company
Consumer Watchdog Joins Insurance Commissioner’s Complaint Against Overcharges by Mercury Insurance Company
UPDATE: Mercury Tries to Keep Agency Report from Public
California Department of Insurance, Consumer Watchdog Prosecuting Mercury Insurance for Charging Motorists Auto Insurance Premiums in Excess of Rates Approved by the Commissioner
In February, 2004, the California Department of Insurance (CDI) filed an administrative noncompliance complaint against Los Angeles-based Mercury Insurance Co. for "willfully misrepresent[ing] the actual price insurance consumers could expect to pay" for auto insurance, charging premium in excess of the rates approved for Mercury by the Insurance Commissioner, and willfully subjecting consumers to unfair rate discrimination in violation of Proposition 103, the California insurance regulation law that requires companies to obtain the approval of the Commissioner for the rates and premiums they charge consumers, and that prohibits unfairly discriminatory charges.
Consumer Watchdog requested the right to participate in the case and was granted intervention in May 2007; Consumer Watchdog is working closely with the Department in prosecuting in the action.
The CDI proceeding stems from a civil suit brought against the company for permitting its insurance agents to charge consumers undisclosed "broker" fees that were added to the price of insurance that was quoted in advertising. In a 2004 decision by the California Court of Appeal (Krumme v. Mercury Insurance Co.), the court determined that:
* Mercury’s insurance agents were illegally charging auto insurance customers by adding broker fees in addition to standard agent commissions; and
* Mercury ran a deceptive advertising campaign that did not disclose the unlawful fees, thus advertising a lower price than people ended up having to pay.
Mercury’s advertising and marketing materials urged prospective customers to compare Mercury’s rates with those charged by other insurers, such as State Farm, but did not disclose the extra "broker" fees that customers would face if they chose Mercury over another insurer.
The court determined that this practice ran afoul of California’s false advertising laws (Bus. & Prof. Code, § 17200 and 17500). The court further concluded that "because broker fees may be charged only by bona fide brokers, not persons and firms claiming to be brokers that are in reality appointed agents, the brokerage fees collected by Mercury’s "brokers" were illegal." These practices were found to be deceptive and illegal and were barred by the court. (Mercury later attempted to pass legislation in Sacramento that would have legalized its conduct; that legislation was defeated, but a bill sponsored by insurance agents passed weakening consumer protections in this area.)
The Department is seeking a fine against Mercury of $10,000 for each policy that included an illegal "broker" fee charged by one of Mercury’s agents. The charging of these illegal fees began in 1996, according to the agency’s complaint. Based on the findings in the civil court case, Mercury could be forced to pay hundreds of millions in fines to the state.
The Department’s action against Mercury was initially delayed in order to allow related litigation against Mercury’s agent, Auto Insurance Specialists (AIS), to proceed in civil court. AIS ultimately settled that litigation in October 2008, paying about $20 million in refunds to policyholders who paid the extra "broker" fees for Mercury policies. AIS has historically sent 90% of its auto policy business to Mercury. AIS’s business grew to a full 20% of Mercury’s California auto insurance premiums, accounting for $400 million in annual premium out of Mercury’s $2 billion total. Simultaneously with the AIS settlement, Mercury bought AIS for $120 million. Mercury has appointed AIS, now its subsidiary, as its agent.
The Department’s case against Mercury was scheduled to go to a hearing before an Administrative Law Judge in the Fall of 2009. However, Mercury’s lawyers are engaged in tactics intended to delay and derail the hearing on the merits.
UPDATE Mercury Tries to Keep Agency Report from Public
Mercury is trying to block the introduction of evidence, contained in a report prepared by the Department of Insurance, that the company engaged in a variety of illegal actions, claiming that the evidence is not relevant. As the Department of Insurance put it in its brief urging that the evidence be admitted: "Mercury’s lengthy history of serious misconduct, and its attitude – contempt towards and/or abuse of its customers, the Commissioner, its competition, and the Superior Court – are all relevant to determining the penalty needed to best ensure the protection of the public from future violations and wrongdoing."
Further, the Department stated, "Among Department [of Insurance] staff, consumer attorneys, and consumer victims of its bad faith, Mercury has a deserved reputation for abusing its customers and intentionally violating the law with arrogance and indifference."
On November 12, 2009, Consumer Watchdog and the Department of Insurance filed a joint motion asking the Administrative Law Judge to order a procedure that would allow the case to proceed to trial more expeditiously. A hearing on the joint motion is scheduled for January, 2010.