After Donating More Than $770,000 to California Politicians During 2005-06, Company Once Again Asks Lawmakers to Defy the Law

Santa Monica, CA — California consumers would pay tens of millions of dollars in extra fees for auto insurance under legislation backed by Mercury Insurance Co., which seeks to overturn a court decision barring such charges as unlawful, consumer advocates with the nonpartisan Foundation for Taxpayer and Consumer Rights (FTCR) said today. The group filed a petition with the California Department of Insurance last week to join the Department’s formal action against Mercury for these illegal fees; FTCR will demonstrate that Mercury willfully violated the law and should be subject to, potentially, hundreds of millions of dollars in fines.

The bill, SB 975 (Senator Ron Calderon – Montebello), is sponsored by Los Angeles-based Mercury, whose CEO George Joseph is a master of Sacramento’s pay-to-play politics, according to FTCR. One of the most aggressive and prolific political donors in Sacramento, Mercury‘s “bi-partisan” contributions of approximately $770,000 in 2005 and 2006 include $225,000 to the California Democratic Party and $100,000 combined to the state Republican Party and Governor Schwarzenegger. Bill author Calderon received the legal maximum of $6,600 from the insurer.

SB 975 is Mercury‘s attempt to overturn a court decision the company lost in October 2004 — Krumme v. Mercury. In that case, the California Court of Appeal in San Francisco upheld the trial court’s decision, finding that:

Mercury agents were illegally charging auto insurance customers broker fees in addition to standard agent commissions; and
Mercury ran a deceptive advertising campaign that hid the true costs of Mercury insurance.

Mercury‘s marketing material 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 customers would face if they chose Mercury over another insurer that did not allow such fees. This practice was found to be deceptive and illegal and was barred by the court.

“Mercury insurance marketing strategy — advertising low priced policies — is built around the ability to hide fees from consumers who are comparing prices with other companies,” said FTCR’s Executive Director Douglas Heller. “The company has flooded the Capitol with campaign contributions over the past few years and is now asking Sacramento politicians to authorize Mercury‘s deception and raise auto insurance rates in defiance of the law and recent court rulings.”

Download a complete memo on the bill and the history of Mercury’s illegal broker fees.

SB 975 is apparently intended to allow Mercury to evade the court ruling and authorize its agents to double charge customers, collecting both the agent commission and a broker fee, increasing policyholder costs by as much as $250. The proposed legislation attempts to blur the distinction between insurance agents, who are obligated to represent the interests of insurance companies, and insurance brokers, who work for customers and not insurance companies.

The proposed law would also subvert Proposition 103‘s requirement that all rates be approved by the Commissioner. Under that 1988 insurance reform initiative approved by voters, insurers must receive approval of their total proposed rates from the commissioner. The Department of Insurance is currently prosecuting a regulatory enforcement action against Mercury — in which FTCR has formally asked to join — for charging broker fees that were in excess of the rates approved by the Commissioner and for charging its policyholders unfairly discriminatory rates by charging brokers fees in varying amounts. Mercury faces potential fines in the hundreds of millions of dollars.

The Department revived the prosecution in 2004 under former Insurance Commissioner John Garamendi after his predecessor, Chuck Quackenbush, ordered Department lawyers to drop plans for a similar prosecution in 2000. Two weeks after Quackenbush cancelled that prosecution, Mercury contributed $50,000 to his campaign committee.

Since the Krumme lawsuit was filed against Mercury in 2000, Mercury has sponsored a series of bills to reduce or eliminate the distinction between agents and brokers in hopes of legitimizing the company’s deceptive practice of imposing unregulated fees. Previous versions of the proposal have been opposed by both Republican and Democratic Insurance Commissioners. In 2000, the Department of Insurance opposed that year’s version of the Mercury legislation, authored by Senator Calderon’s brother then-Assemblyman Thomas Calderon, arguing that the proposal would allow Mercury and its agents to “misinform consumers; shield the insurer from the acts of its agent; and permit circumvention of rate regulation requirements.”

“Mercury wants lawmakers to allow the company to overcharge customers by giving its agents an exemption from the rules of the insurance game decided by voters,” said Heller. “The Calderon bill should be known as the ‘Higher Insurance Premiums Act of 2007’ and it should be rejected.”

SB 975 is not the first time Mercury has sought to buy its way out of its lawbreaking. In addition to the 2000 contribution to Quackenbush, Mercury made dozens of contributions in 2002 and 2003 as it lobbied lawmakers and then-Governor Gray Davis to enact legislation (SB 841-Perata) permitting insurance companies to issue surcharges against previously uninsured motorists. Such surcharges are illegal under insurance reform law Proposition 103. Like SB 975, the 2003 bill was designed to immunize Mercury from a pending lawsuit for violation of Proposition 103. Like SB 975, Mercury made massive donations to California politicians and their causes ($895,000) during the bill’s consideration. During that time, Mercury‘s donations to groups associated with the bill’s author Senator Don Perata subsequently became an issue in an FBI investigation of Perata. The bill was later invalidated by the California courts as an illegal alteration of voter approved Proposition 103, after two years of litigation.

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The Foundation for Taxpayer and Consumer Rights (FTCR) is California’s leading public interest watchdog. For more information visit us on the web at: http://www.ConsumerWatchdog.org.