The following op-ed (Part 1) by Harvey Rosenfield, the founder of Consumer Watchdog and the author of Proposition 103, was published in The Daily Journal of Los Angeles on Monday, November 15, 2010. Part 2 will be published on November 16, 2010.
Can the California Insurance Commissioner or one of his staff authorize an insurance company to break the law, so that the company is immune from a civil suit for illegal surcharges?
According to Division Three of the 2nd District Court of Appeal, the answer to this question is yes. Its decision last month in MacKay v. Superior Court (21st Century Ins. Co.) 188 Cal.App.4th 1427 is the latest in a decades-long campaign by the insurance industry to win from the judicial branch what it lost at the ballot box when California voters passed insurance reform Proposition 103.
If MacKay stands, the regulatory process established by California voters in 1988 to prevent insurance companies from engaging in unfair practices and charging excessive rates will become a shield in the hands of the industry to evade accountability in the courts. This is hardly what angry voters intended when they changed the Insurance Code 22 years ago.
Prior to Proposition 103, the Insurance Code gave the Commissioner "exclusive jurisdiction" over complaints about the industry's rates or practices. The McBride-Grunsky Insurance Regulatory Act of 1947 permitted insurers to engage in collusive rate-setting practices that would ordinarily violate the antitrust laws. It also explicitly immunized the industry from civil actions challenging its rates or underwriting practices.
The result: California's insurance marketplace was like the Wild West. Prices fluctuated wildly, precipitating destabilizing crises in the market for medical malpractice insurance in the 1970s and for auto and business insurance in the mid-1980s. Insurers also instituted a variety of discriminatory practices, like redlining and territorial rating. The courts, applying the McBride Act's immunity provisions, repeatedly refused to entertain suits challenging the industry's rates and practices.
A particularly outrageous industry tactic gained infamy after the California Legislature in 1984 made automobile insurance mandatory. Motorists applying for coverage for the first time were rejected, or else subjected to staggering surcharges, simply because they were not previously insured – even if they were good drivers. The Supreme Court focused on this Catch-22 in a case brought by civil rights groups. But in its 1987 decision, the Court concluded that the plaintiffs had to take their case to the legislative branch. (King v. Meese (1987) 43 Cal. 3d 1217.)
The voters did so. Proposition 103, approved in November 1988 despite the industry's record $80 million campaign against it, established a stringent system that regulates auto, home and business insurance rates. It has saved California motorists alone over $62 billion since its passage, according to the Consumer Federation of America.
The measure also created a new set of procedures that regulate the underwriting criteria, known as "rating factors," that insurance companies apply to a particular motorist to determine the premium they will pay. One rating factor is specifically barred: consideration of a motorist's history of prior insurance coverage. (Insurance Code Section 1861.02(c).)
The Proposition 103 voters were acutely aware that the complex reforms they were enacting would only be effective if they were properly enforced, and that the insurance industry could be counted on to resist their implementation. The experience under the previous system also cautioned against sole reliance on an administrative agency, especially one that would be responsible for monitoring thousands of filings submitted by hundreds of property-casualty insurers each year under the new regulatory regime. Even a well-funded Department of Insurance would be unable to catch and prosecute every violation of the state's insurance laws.
So the voters enacted multiple mechanisms to protect their reforms. First, they made the new regulatory process transparent: they gave consumers the right to access all information filed by insurers, to participate in the commissioner's approval process, and to request hearings on rates. (Sections 1861.05-9.) Second, they made the commissioner an elected position, accountable directly to the voters. Finally, they tore down the McBride era "exclusive jurisdiction" wall, repealing most of the industry's authority to engage in collusive activity and mandating that state laws, including the antitrust laws, the Unfair Competition Law and the Unruh Civil Rights Act, apply to the industry (Section 1861.03(a)).
Most important, Californians gave themselves the unconditional right to invoke these laws in the courts for violations of Proposition 103. As I wrote in these pages in July, 1988, Proposition 103 "provides individual consumers with the absolute right to go to the Department of Insurance or the courts should insurance companies fail to comply with their responsibilities." Section 1861.10(a) reads:
Any person may initiate or intervene in any proceeding permitted or established pursuant to this chapter, challenge any action of the commissioner under this article, *and enforce any provision of this article.
This expansive and unconditional language grants consumers the right to initiate "proceedings," whether administrative or civil, for the purpose of "enforcing" its provisions.
Regaining its immunity from civil suit has been a high priority for the industry.
One would have thought the state Supreme Court settled the issue in 1992. In a case brought by the attorney general against Farmers Insurance for violating the ban on consideration of prior insurance and other Proposition 103 provisions, Farmers tried to resurrect the Department's "exclusive jurisdiction" to argue that the suit had to be dismissed. But the Supreme Court rejected the argument, noting that "'alternative' or 'cumulative' administrative and civil remedies are made available" by Proposition 103. (Farmers Insurance Exchange v. Superior Court (1992) 2 Cal.4th377.)
Undeterred, the insurers have waged a relentless fight for immunity in the appellate courts, based on the argument that two provisions of the 1947 McBride Act override the provisions of Proposition 103. The present battleground is the 2nd District Court of Appeal, where a number of lawsuits challenging unlawful industry practices have been addressed.
Most of the cases arise from practices first adopted by automobile insurance companies after they funded the election of Chuck Quackenbush to the Commissioner's office in 1994. In 1996, insurers got Quackenbush to approve a new rating factor – "failure to comply with the financial responsibility laws" – that was an obvious surrogate for the prohibited consideration of whether the motorist had been previously insured. After Consumer Watchdog and other citizen groups filed suits, the San Francisco Superior Court ordered Quackenbush to put an end to this subterfuge.
But the evasions continued. Some insurers began imposing an "accident verification surcharge" upon applicants who had not been previously insured. Other insurers began to misapply an authorized rating factor, "persistency." The defendant in MacKay employed both of these gambits.
Despite regulations issued by the Commissioner to foil these schemes, the insurers persisted. Invoking the authority of Section 1861.10(a), Consumer Watchdog filed several lawsuits to enjoin the practice and recoup the surcharges for policyholders, as did private plaintiffs, who sued Mercury Insurance Co., State Farm, Farmers and 21st Century. The insurance companies quickly asked the courts to dismiss these cases on the ground that the Insurance Code barred such lawsuits – as if Proposition 103 had never passed.
Harvey Rosenfield, the founder of Consumer Watchdog, is the author of Proposition 103.