Court Rejects Insurance Industry’s “Free Speech” Challenge to Prop 103 Regulation

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Sacramento, CA – The Sacramento Superior Court has rejected an attack by Mercury and other insurance companies on state regulations that prevent insurance companies from making their policyholders pay for non-insurance expenses like political lobbying and sporting event sponsorships.

The regulation is part of the landmark Prop 103 insurance reform initiative that has saved California drivers $102 billion since 1988, according to the Consumer Federation of America. The insurers had argued that the regulation limiting the amount of advertising costs insurers can include in premiums is invalid because the First Amendment gives them the right to force their customers to cover the costs of those kinds of corporate speech.   

“The court’s ruling upholds the regulation prohibiting insurers from charging consumers higher premiums to cover the costs of all their exorbitant advertising campaigns – including plastering sport venues with their company logo,” stated Pamela Pressley, Consumer Watchdog's Litigation Director. “The decision properly applies 1st Amendment law and recognizes that the state has a substantial interest in ensuring that insurance rates are not excessive.”

Read the court’s final ruling here:

Mercury Sues to Avoid Rate Decrease Also Upheld

In 2013, Consumer Watchdog challenged Mercury’s application for an overall 8.8% rate increase on its homeowners insurance line; after a public hearing, Mercury’s request was rejected by an administrative judge, and the Commissioner ordered Mercury to reduce its overall rates by 5.4% – saving policyholders over $16 million in annual premiums. Mercury then filed suit, arguing that the Prop 103 rate regulations were unconstitutional because they denied the company a fair profit. In a ruling in June 2014, the Superior Court upheld the 5.4% reduction.  

Mercury had also tried to sneak into its rate increase nearly a million dollars worth of political contributions Mercury made to its ballot propositions (including over $300,000 in 2010 to its failed Prop. 17 campaign) and payments to lobbyists. Such pass-throughs are barred by the law, and the Commissioner refused to allow Mercury to make its policyholders pay for advertising expenses totaling $83 million, including its sponsorship of the Mercury Open tennis tournament. The court also upheld that decision.

Read the court’s June 2014 order here:

Other Insurers Jump Into Fray

Six insurance company lobbying groups representing virtually all property-casualty insurers selling homeowners and auto insurance in California –State Farm, Farmers, Allstate, Progressive, Liberty Mutual, and Nationwide – intervened in the lawsuit, joining Mercury’s attack on the regulations and the limit on the kinds of advertising expenses that can be passed through to policyholders, claiming the limit deprived insurance companies of their free speech rights.

The Court's ruling today decisively rejects the insurance industry’s arguments that limiting the amount of insurance advertising costs they can foist on their customers infringes on their 1st Amendment rights.  The court’s ruling states:

"[T]he government has an interest in ensuring that regulations governing rate setting … recognize the “reasonable cost of providing insurance."

"…[A]lthough some types of advertising could be excluded under the regulation (such as event sponsorship unrelated to a specific insurer), this potential exclusion does not render [the regulation] more extensive than necessary to serve the government’s interest in ensuring that insurance rates are neither excessive nor inadequate."

Mercury’s String of Court Losses Continues

Today’s court decision is the latest in a series for Mercury, which has repeatedly been caught and sanctioned by regulators and the courts for overcharging customers in violation of California’s consumer protection laws.

On January 9, the Insurance Commissioner fined Mercury $27 million – the largest penalty ever assessed against an auto insurance company in California – for adding illegal fees to the premiums it charged for a ten-year period. Mercury will now go to trial on whether it also engaged in false advertising. Mercury faces significant penalties as well as suspension of its license to do business in California in that phase of the case. Read more about that here:

Proposition 103 and the Prior Approval Rate Regulations

Proposition 103, approved by voters despite an $80 million industry campaign, requires auto, home and business insurance companies to open their books to public scrutiny and justify rate changes before they take effect. The California Supreme Court unanimously upheld the law and the rate review regulations in 1989 and 1994, respectively. According to a November, 2013, report by the Consumer Federation of America, the Proposition 103 prior approval regulations have saved California motorists $102 billion since the measure passed in 1988 – approximately $8000 for every family in California.  California’s average auto insurance premium was lower in 2010 than in 1989, the report found – the only state in the nation where premiums went down.  Read the CFA report here:

Challenges brought by Consumer Watchdog to proposed insurance rate hikes that were found to be excessive have saved consumers over $3 billion over the last decade:

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Harvey Rosenfield
Harvey Rosenfield
As Consumer Watchdog's founder, Harvey Rosenfield is one of the nation's foremost consumer advocates. Trained as a public interest lawyer, Rosenfield authored Proposition 103 and organized the campaign that led to its passage by California voters in 1988 despite over $80 million spent in opposition (still a record).

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