Shadows of a California ‘Insurance Crisis’ Yet to Come

On Election Day, Californians hit the insurance industry with what it is calling “a wrecking ball” by passing Proposition 103.

Having spent more than $50 million in an unsuccessful television ad campaign to defeat the measure, the insurance companies are not giving up. While the public relations war is still going on with stories appearing daily about insurance companies threatening to stop doing business in the state, insurance industry lawyers are also taking the fight to the courts. The day after the election, industry lawyers filed briefs with the California Supreme Court asserting that more than $10 million a day in insurance premiums and the very solvency of many companies were at stake unless Proposition 103 was overturned.

If upheld, Proposition 103 will require that the rates on all property/casualty insurance, such as motor vehicle, fire and liability policies, be immediately reduced 20% from the levels prevailing on Nov. 8, 1987. (In November, 1989, “good drivers” will get an additional 20% discount off motor-vehicle rates.) The insurance companies will not be able to raise their rates without the prior approval of an elected insurance commissioner, who usually will have to hold public hearings in advance of approval. In addition, the companies will no longer enjoy exemption from the antitrust laws of the state. Finally, Proposition 103 will mandate creation of a nonprofit corporation to represent the interests of consumers. The corporation will have the right to communicate with policyholders by sending notices with every policy or bill that the insurance companies mail out. It is not surprising that insurance companies are resisting these changes in their business as usual.

The insurance companies have made a number of arguments to the Supreme Court to convince it to strike down Proposition 103, relying heavily on the court’s 1976 treatment of a Berkeley rent-control ordinance that was also adopted by the ballot initiative process. Like Proposition 103, the Berkeley ordinance provided for automatic and substantial rollbacks of rents and required landlords to seek relief from a rent-control board on a unit-by-unit basis. The court found that ordinance to be invalid on its face because “its terms will not permit those who administer it to avoid confiscatory results in its application.”

Based on that decision, the insurance industry contends that Proposition 103 will lead to confiscatory results in two ways: The initiative imposes confiscatory rate standards by automatically rolling back rates to a level 20% below that prevailing one year ago without regard for a fair return to any insurance company, and the rate-review procedures will be so cumbersome and slow that prompt rate relief will be impossible. The industry contends that this will be especially true when the insurance companies flood the insurance commissioner with thousands of applications to increase all the rates that were rolled back automatically.

Those defending Proposition 103 undoubtedly will respond that ballot initiatives are to be liberally construed; in the past, the court has said that it will make every effort to uphold initiatives that are approved by the voters. In a 1984 case, which upheld a revised version of Berkeley’s rent-control law, the court noted that ballot initiatives do not have to guarantee private companies a specific standard of profit, or “fair return,” in order to survive a challenge to the facial validity of the law. (However, it is questionable whether Proposition 103, which permits relief in the first year only to insurance companies that are “substantially threatened with insolvency,” qualifies as an appropriate measure of “fair return.”)

The defenders will also attempt to preserve as much of Proposition 103 as possible by pointing out that it permits invalid portions to be severed from the rest of the law. For example, the insurance companies have not attacked the provision that ends the industry’s exemption from antitrust laws.

Even if the Supreme Court rejects all of the contentions of the insurance industry, consumers may still not reap the benefits of Proposition 103. If the companies do not prevail in the courts, they will certainly turn to the Legislature. Proposition 103 provides that it can be amended “to further its purposes” if a statute is passed in each house of the Legislature by roll-call vote, with two-thirds of the membership concurring. It is anybody’s guess whether the legislators will be persuaded by the insurance company lobbyists to reverse the electorate’s wishes, despite the Supreme Court’s rejection of the insurance industry’s legal attacks.

Finally, the insurance companies could always try the initiative process themselves and once again spend huge amounts of money, this time to persuade the voters to reverse Proposition 103. If it comes to that, it is not hard to predict that the consumers of insurance in this state will have to endure an “insurance crisis” as the prelude to the campaign to change the minds of the voters.

Only one thing is certain now. It will be a long time, if ever, before the people of California get the benefits they voted for in Proposition 103.