In a sign the 2012 insurance wars have begun, a consumer group that routinely seeks to block rate increases has accused auto insurance giant Mercury General of illegally passing onto consumers the cost of its 2010 ballot measure campaign.

Consumer Watchdog is seeking to block a Mercury subsidiary's request to raise rates on its auto insurance policies by an average of 6 percent, a move Consumer Watchdog says will cost consumers nearly $89 million.

A challenge submitted to the state Department of Insurance earlier this month alleges that the company violated voter-approved auto insurance regulation laws by failing to disclose $16 million the parent company spent to support Proposition 17, an unsuccessful 2010 initiative to allow insurers to consider coverage history when setting premiums. Consumer Watchdog led the fight against that measure, arguing that it would result in higher rates for motorists who had a lapse in coverage.

Company officials deny the allegation.

The latest tangle comes as the auto insurance industry is gearing up for another try at persuading voters to pass an auto rate initiative similar to the one that failed in 2010, arguing that the change would allow companies to offer loyalty discounts to motorists who want to change plans. While Mercury General does not plan to contribute directly to the measure, which is sponsored by the American Agents Alliance, company President George Joseph has already contributed $8 million to the campaign to qualify the initiative for the ballot. Consumer Watchdog has filed its own rate regulation measure that includes a provision to prevent companies from raising premiums because of coverage history.

"It's wrong for any insurance company in California to pass on its political contributions or fines or lobbying costs, but its quadruply wrong for a company that claims it's going to the ballot to save people money," said Consumer Watchdog President Jamie Court.

State law prohibits auto insurance companies from including the cost of political contributions, as well as spending on lobbying, excessive compensation and fines, as expenditures for the purpose of setting rates. A filing submitted by Mercury Insurance to state regulators discloses $8 million in excessive executive compensation and bad faith judgments but does not list the political contributions made by Mercury General Corporation.

Mercury, which says the rate hike is needed to cover increased claims and repair costs, maintains that it complied with the filing requirements. Robert Houlihan, the company's chief product officer, argued that the political spending does not need to be reflected in the rate review process because the campaign spending came from the parent company, not the subsidiaries seeking the increase.

"Any political contributions, in this case, they're always handled at the holding company level. There's no adjustment needed because it was never incorporated in the expenses of the insurance companies," he said in an interview.

Consumer Watchdog Executive Director Douglas Heller dismissed that explanation as "absurd."

"The whole point of this regulation is to prevent insurance companies from using our money to pay for their political games and the idea that well, the money that we transfer from our policyholders to the holding company can then be spent is just absurd," he said. "The holding company is a shell for holding the assets that policyholders pay in. It's a shell game and it would be a mistake to let insurance companies just move our premiums into another ledger and then use it for political expenses."

The Department of Insurance does not comment on pending rate requests or cases. Larry LaStofka with the department's rate regulation branch said while filers are typically responsible for reporting excluded expenditures incurred by the parent or holding company, some companies are structured in a way that does not require such disclosure.

If the department determines that Consumer Watchdog has sufficient cause to have its challenge heard, the issue could be settled with additional information or an agreement between the parties. If no agreement is reached, a hearing will be scheduled in front of an administrative law judge.