Proposition 33: A Corporation’s Abuse of the Citizen’s Initiative System

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If you ever needed a case study in how one rich individual can buy a law that favors his auto insurance business while screwing consumers, Proposition 33 would fit the bill perfectly. It’s such a bad apple that other insurance companies, not exactly known for their pro-consumer attitudes when it comes to making money, won’t even support this law. Not that they wouldn’t benefit, but they’re embarrassed by its audacity.

But, in an election year where corporations have been declared as people,  the spinmeisters are filling the airwaves telling us that “wet” is “dry” and empty chairs are stand-ins for honest discussion, anything’s possible, including the prospect that Prop 33 will pass come November. Come, jump in the car with me as we take a spin down history lane to see just how we’ve arrived at this juncture…

As we all know, the automobile is King in California. Sprawling cities, long commutes and an ever growing web of freeways all give testament to our car-centretric culture. And the business of selling people stuff to keep that way of life going is necessarily huge. The Golden State’s 33 million plus vehicles, when they aren’t clogging up the junction of Interstates 805 and 5, need fuel, parts, accessories and insurance. It’s a mammoth industry.

A byzantine rate system gets fixed

Twenty four years ago (1988) voters in California, fed up with spiraling costs for auto insurance and a rate system used by the companies that was so byzantine that even insurance agents couldn’t explain why and how rates were set, passed Proposition 103, which regulated the auto insurance industry’s ability to set premiums. In 1986 alone, prior to the acts’ passage, automobile insurance premiums in California increased by 22%, while the consumer price index increased 3.1%.

After Prop 103 passed, despite insurance companies spending over $80 million to defeat it, insurers could only factor in years of driving experience, the number of miles a motorist drives annually and the driver’s safety record when determining the cost of a policy.  It also required companies to justify and gain approval for rate increases. The sky didn’t fall, insurers kept making nice profits, and consumers saved some dough.

Mercury Insurance, one of the heavyweights in the State’s auto insurance industry, figured out what they thought was a loophole in the law and began charging customers surcharges based on interruptions in coverage—a gimmick that preyed upon a unique interpretation of the rating factors reported to the State Insurance Commissioner.

An insurance mogul’s quest to undo the will of the people

In 2001, a group of plaintiffs prevailed in a class action lawsuit against Mercury Insurance for violating Proposition 103, when the State Insurance Commissioner ruled the company stretched its interpretation the rules and was in violation of Insurance Code section 1861.01. Undaunted by their legal defeat, the company and its founder George Joseph embarked on what has turned out to be a more than decade long quest to undo the will of the people.

One year later, Mercury reportedly donated a total of $895,000 to more than two-thirds of the legislature — the exact amount of legislators needed made to override the portion of Proposition 103 that they’d been found in violation of the previous year.  While there was public outrage over this blatant attempt at vote buying, the California legislature passed the measure. However, Mercury’s campaign angered then Governor Gray Davis, who ultimately vetoed the bill.

The company refused to concede defeat, donating over $100,000 to Gov. Davis prior to and $175,000 after he signed the legislation they were seeking the following year.  Consumer Watchdog and a coalition of consumer, taxpayer and civil rights organizations filed suit at the Los Angeles Superior Court on October 15, 2003, asking to have the legislation invalidated as unconstitutional. The Superior Court, as well as the appellate court, ultimately ruled in favor of the consumer groups.

In 2010, the company and its founder spent over $16 million promoting the Continuous Auto Insurance Discount Act, known as Proposition 17, with language virtually identical to SB841, the law that had been struck down by the courts. Despite its huge financial advantages, Prop 17 was defeated at the polls.

Try, try, again. Sooner or later those suckers will fall for it

You’d think that after all those setbacks the company and its founder would learn to live with the law, as GEICO, Allstate, Progressive and most of the other big players in California’s auto insurance industry have refused to support Mercury’s dogged crusade to undo the will of the voters back in 1988. But you’d be wrong.

This year, George Joseph, the 375th richest man in America, is personally financing Proposition 33, known as the 2012 Automobile Insurance Discount Act. His support adds up to $8.2 million, or 99.4% of the total donations received by the initiative’s committee, according to the California Secretary of State’s website.

The “new” initiative is fundamentally the same as the last effort, with some prettied up language about exempting military service members from penalties/surcharges.California’s ailing Republican Party is enthusiastically backing the bill, especially since they received a $1 million donation from Joseph.

Juan Vargas, insurance industry ‘toady’

Most importantly, the committee promoting this measure is trumpeting its “bi-partisan” support, having reeled in insurance industry toady Juan Vargas as their “Democratic” supporter. Seriously folks, one look at this guy Vargas’ campaign contribution reports would convince even the most skeptical observer that he’s ready, willing and able to do the industry’s bidding.

Once again, the Consumer Watchdog Campaign is in the forefront of spreading the word about this billionaire insurance baron’s ballot measure. Their logic is simple: this measure would subject millions of Californians, regardless of political party, to a 40% surcharge on auto insurance or an increase as much as $1,000/year. Oh, and it would have the effect of de-regulating the industry, so we could all go back to paying higher rates like back in the good old days.

Sometimes these wingnuts that scream about de-regulation would like us to forget that government regulation of businesses, and especially the insurance industry, has come about due to bad behavior in the form of gouging consumers.  In case I haven’t made the case here that Mercury and its Chairman might be bad actors, let me also tell you about the 2006 lawsuit (settled quietly, thank you) that accused the company of training employees to mistreat customers during the claims handling process. And then there’s their December 2011 request to raise insurance rates by $89 million — an increase that was deemed too excessive. The facts, duh, didn’t support the request.

Consumers have saved more than $62 billion

Lest we forget, Proposition 103, the 1988 measure that “regulated” the industry, has saved auto insurance policyholders more than $62 billion since its enactment, according to a study by the Consumer Federation of America.

Let’s close this saga out by quoting from a recent editorial in the Mercury News urging voters to oppose this blatant attempt to buy a law:

Californians should prepare to hear a lot of ads in the coming weeks claiming that Proposition 33 will allow insurance companies to give a “continuous coverage” discount to new customers who, for whatever reason, want to switch from one insurer to another. But Proposition 33 would actually allow insurance companies to substantially increase rates for drivers whose insurance has lapsed for 90 days or more. That practice was outlawed by the 1988 initiative, with good reason.

Since California requires car owners to have insurance coverage, insurers would have drivers whose insurance lapsed over a barrel if the law changes. Proponents of Proposition 33 say that won’t happen because competition between insurers would be too fierce. But before Proposition 103 was passed, there were all kinds of examples of insurers gouging drivers in this manner.

It’s too bad it’s so easy for wealthy individuals and corporations to abuse the state’s initiative process. But voting this turkey down once should have been enough. Let’s hope a landslide vote this time around does the trick.

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