Critics Say Initiative Hits Some Motorists Too Hard

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California’s third-largest auto insurance company says it’s just trying to give consumers a break by pushing a ballot initiative that could significantly change the way drivers are charged for their coverage.

But consumer groups say that Proposition 17, which would allow insurers to set their rates partly based on how long drivers have had continuous coverage, could push auto rates higher for a large number of drivers — including military personnel who often let their insurance lapse when they are transferred.

Proposition 17 is proving to be one of the most contentious battles on the June ballot, pitting Mercury Auto Insurance, which has spent $3.5 million on the initiative, against Santa Monica’s Consumer Watchdog, the group that was instrumental in creating 1978’s landmark Proposition 103, which regulated the way insurance is priced in the state.

Consumer Watchdog has accused Mercury of running a deceptive political campaign.

Coby King, senior vice president at Mercury, said his company is trying to clean up some elements of Proposition 103. He said Proposition 17 is meant to “allow companies to be more competitive and drivers to get more competitive pricing.”

Proposition 17 is the culmination of a long-standing battle that Mercury has waged against Proposition 103’s provisions.

Under Proposition 103, insurers are required to base their auto rates largely on drivers’ safety records, the number of miles they drive each year and the length of time they’ve been driving, as well as any other factor that can be “shown scientifically to have a substantial relationship to the risk of loss.”

Insurers are barred from basing rates on how long customers have maintained coverage, though they can offer “loyalty discounts” to long-term policyholders.

Mercury has gone to Sacramento and the courts to try to gain the right to use continuity of insurance payments as a method for setting rates. It helped push a law through the Legislature in 2002, only to see it vetoed by then-Gov. Gray Davis. A second version made it past Davis’ desk, but the courts ruled that it violated Proposition 103.

Mercury said its proposition would be akin to allowing customers to keep their loyalty discounts when they move to another insurer.

But the proposition mentions nothing about transferring loyalty discounts. Instead, it lets insurers offer a discount to any customer who has continuously been insured for five years, with lapses in coverage — including missed payments — totaling no more than 90 days.

“How would a transfer of a loyalty discount even work?” asked Doug Heller, Consumer Watchdog’s executive director. “If one of your customers gets a $100 loyalty discount from a company like State Farm, but another customer gets a discount of $5, what are you going to do?”

Ken Mays, an insurance broker in Oceanside, said he thinks the law would be good for consumers.

“To me, this is all about lower rates and more competition among consumers,” said Mays, who sells policies from Mercury and other companies.

But when an insurance company offers discounts to some customers, it almost always has to raise rates for others, said Darrel Ng, spokesman for the California Department of Insurance. Under state law as well as standard insurance industry practice, rates are considered as a “zero-sum game,” Ng said.

As a result, even though a large number of customers would get lower rates through Proposition 17, many other customers would have to pay higher rates. Critics say that would include new drivers; people who were late on their car payments or temporarily suspended insurance coverage for economic or health reasons; and military personnel who were transferred to out-of-state bases and stopped paying insurance because they no longer used their cars. (The bill does make provisions for overseas transfers.)

In states that allow insurers to take such factors into account, there are sharp divergences in the premiums Mercury charges.

In Texas, for instance, a driver of Toyota Corolla with medium insurance coverage and a record of continuous payments would pay $747 per year. The same driver would pay $991 if he or she let the policy lapse while on military assignment. Someone who previously did not need coverage because he or she did not own a car would pay $1,303.

“That could include people who have temporarily decided to telecommute or use the bus instead of drive,” Heller said. “Or people who have lost their jobs during the recession and sold their cars to make ends meet.”

A recent insurance industry report said 9 percent of Americans have stopped driving during the recession.

It is the perceived threat to veterans that has caused the most consternation among critics. United Services Automobile Association, which specializes in military families, became the first insurer to oppose Proposition 17 last week.

“Military life is substantially different than civilian life,” said Michael Mattoch, chief legislative counsel at USAA. “With all the numbers of times people get moved around the country, there are dozens and dozens of times that somebody might inadvertently let their policies lapse. That doesn’t mean that they’re irresponsible. They’re doing their duty to their country. But they could get pounded by this kind of law.”

Mays, who has a number of Marine clients from Camp Pendleton, said that if military customers or anybody else has problems with being hit with rising rates under Proposition 17, he or she could just seek out a cheaper carrier.

But Heller said that if the past is any indicator, most insurers would shift to using continuity of coverage.

During a brief period in the 1990s when there was some dispute about the meaning of Proposition 103, a number of insurers — including Mercury, Allstate, the Auto Club and Progressive — used it as a criterion for setting rates until the practice was halted by the courts.

Mattoch added that the requirements of military life would make it harder for enlisted personnel to seek out alternate insurance if their rates suddenly shot up. “Quite frankly, they’ve got other priorities right now,” he said.

Consumer Watchdog
Consumer Watchdog
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