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California voters have a basic question to answer when deciding Proposition 33, a self-interested initiative funded by billionaire George Joseph, founder of Mercury General Corp. Should Mercury and other auto insurance companies be allowed to charge higher rates for people who are new to auto insurance, or are re-entering the auto insurance market after having dropped coverage?
The answer should be a resounding no.
Current law seeks to ease the entry of people new to auto insurance and the re-entry of others who have gone off insurance for a time. In today's harsh economy, many drivers are looking for ways to cut expenses, and unfortunately may eliminate auto insurance.
We should not change state law in a way that would discourage motorists from buying insurance. Nor should we encourage them to drive uninsured, which costs all of us.
For the last 24 years, Mercury has been trying to change the law so that it could offer discounts for "continuous coverage" if motorists want to switch insurers. Such a change could help Mercury lure other customers from other companies.
But any discount for some motorists requires a rate increase for others. For example, assume the base rate for 100 policyholders is $1,000 – allowing the insurer to collect $100,000 to cover losses, expenses and reasonable profit. If 80 motorists get a 10 percent "continuous coverage" discount, the insurer collects $900 from each, a total of $72,000. That means the insurer must collect $28,000 from the 20 motorists who don't get the discount – $1,400 each. That's a giant surcharge.
That's one reason why voters in 1988 passed Proposition 103, which expressly forbids insurers from using "the absence of prior automobile insurance coverage" as a factor in offering discounts or setting rates.
Ever since, Mercury has been trying to undo the law.
In 2003, Mercury donated $673,000 to state politicians, and got the Legislature to pass Senate Bill 841 to allow insurers to offer discounts to motorists previously insured by any insurer. As a lure, the company included two exemptions: Motorists could qualify for a discount if their lack of prior coverage was not more than 90 days in five years, or was due to active military duty. A month after Gov. Gray Davis signed the bill into law, Mercury donated $175,000 to help him fight his 2003 recall.
A court overturned that law, saying that one of the fundamental purposes of Proposition 103 was "elimination of discrimination against previously uninsured drivers and the promotion of 'fair, available, and affordable' automobile insurance so that the previously uninsured could enter the ranks of the insured."
Mercury came back with Proposition 17 in 2010, adding a third exemption: Drivers could qualify for a discount if they were a child living with a parent who was eligible for the discount. Voters weren't fooled and rejected it by a margin of 52 percent to 48 percent.
Now Mercury founder Joseph is back with Proposition 33. His consultants have have added yet another sweetener. Drivers could qualify for a discount even if they had dropped coverage for as long as 18 months because of a layoff or furlough.
But the downside remains clear as the attorney general's office notes in the official summary: Proposition 33 "will allow insurance companies to increase cost of insurance to drivers who have not maintained continuous coverage."
That would mean higher costs for graduating students buying coverage, anyone newly obtaining an auto, city dwellers who haven't owned a car but now live in an area without mass transit, anyone who decided not to drive for more than three months to save money.
Californians added the initiative to the California Constitution in 1911 as a way for voters to reduce the domination of corporate interests over the political process.
Don't let George Joseph hijack that process to advance narrow economic agendas. Voters said no to Mercury in 2010, and should say no again on Proposition 33.